The Weekend Economist September 19-21, 2008

[Demeter]

In which we debate if all the laws have been suspended (except gravity) and for how long.

Welcome to the WE, where those who haven't had enough get their fill. Post early and often, drop in and catch up, and let the good times roll down the hill and into the bayou....

If you are hopelessly addicted to horror and suspense, this is YOUR home base! Enjoy!

For the terminally morbid, here are the Futures:

U.S. FUTURES &
MARKETS INDICATORS>
NASDAQ FUTURES-----------------------------S&P FUTURES



If there is any call for other data, I will endeavor to supply it!

[Demeter]

1. Morgan Stanley in talks with CIC

http://www.ft.com/cms/s/0/f563019c-8595-11dd-a1ac-0000779fd18c.html


By Francesco Guerrera and Henny Sender in New York

Published: September 18 2008 16:35 | Last updated: September 18 2008 19:45

Morgan Stanley is in talks to sell a stake of up to 49 per cent to China Investment Corp, the state investment fund, as part of the Wall Street firm’s efforts to ensure its survival and reverse a slump in investor confidence.

People close to the discussions said the investment bank’s top management preferred a stake sale to CIC to a merger with Wachovia, the troubled US lender that approached Morgan Stanley on Wednesday. They added that talks with CIC, which bought a 9.9 per cent stake in Morgan Stanley in December, were advanced but no deal had been clinched yet.

Morgan Stanley’s frantic attempts to find a partner come as its shares have been hammered by concerns over its ability to survive as one of the last two large investment banks. The stock, which has fallen 71 per cent over the past year, was down 30 per cent at $14.79 at lunchtime in New York.

Morgan Stanley executives believe that a tie-up with the cash-rich CIC, which was given $200bn (€139bn) to invest by the Chinese government last year, could help it to restore investors’ faith in its business.

They argue that the backing of CIC ought to reassure the market that Morgan Stanley has adequate resources to survive the current turmoil.

However, the sale of a large stake in a blue-chip Wall Street firm to a Chinese state-owned entity could cause a political backlash in Washington, especially if the alternative of an all-American merger with Wachovia is on the table.

Both Morgan Stanley and Gao Xiqing, CIC president, declined to comment.

Mr Gao arrived in San Francisco on Monday, en route to Aspen for a conference organised by the private equity mogul Teddy Forstmann. While on the West Coast, Mr Gao was scheduled to see Morgan Stanley executives in hastily arranged meetings, according to people close to the situation.

Meanwhile, John Mack, Morgan Stanley’s chairman and chief executive, tried to reassure worried employees at an emergency “town hall” meeting on Thursday morning.

He confirmed reports that the firm was in talks with Wachovia and others and said that its ties with CIC had turned into a “true strategic relationship”, according to people who attended the meeting.

However, he told staffers that exploratory talks held on Wednesday with Vikram Pandit, the former Morgan Stanley banker who now runs Citigroup, had led nowhere as the two executives agreed that a possible combination made little sense.

Mr Mack’s remarks came on a day when thousands of employees could exercise their right to sell shares.

He told employees that while he and other senior executives did not intend to sell, he could understand why they might choose to.

Shares in Goldman Sachs, the other large independent US investment bank, were down 12.8 per cent at midday in New York amid short-selling by hedge funds and other investors concerned about the viability of its business model.


THIS REMIND ANYONE OF AGATHA CHRISTIE'S MYSTERY NOVEL, VARIOUSLY KNOWN AS "TEN LITTLE INDIANS" OR "AND THEN THERE WERE NONE"?

[Tansy_Gold]

76. Can someone explain to me. . .. .

Morgan Stanley is, I presume, sitting there with a bunch of "assets" on its books that are, well, to put it gently, worth diddly point squat. These assets are on their books through EVERY fault of their own. Over the past several years they have merrily bought these assets, usually with borrowed money, and then they have used these assets as "collateral" to borrow more money and buy more "assets."

Have I got it right so far?

Now, it doesn't make a whole lot of difference what these "assets" consist of if they aren't worth anything anyway, but I'm guessing that a lot of them are airy fairy funny munny assets with real short names spelled in all capital letters: CDOs, SIVs, CDSs and so on.

As with all classic Ponzi schemes, MS had to keep reeling in suckers, er, investors so they could continue to pay the existing investors -- which included their own officers and brokers and other smart guys.

What happened was that the well ran dry. Or at least the conventional well. Because the rest of the economy was kind of based on a similar Ponzi scheme -- let's ditch dirty old manufacturing and ship the jobs somewhere else and reap the profits and never mind all the little people who are out of jobs -- when all the little people were no longer able to feed the monster at the bottom, the bottom started to fall out. The mortgages couldn't be paid, so the investors who had "bought" those mortgages weren't getting their cut, and then the next level of investors who bought more of those tranches (hey! let's make up words! No one will know they don't mean anything!) until finally, the whole scheme began to collapse.

As the top of the pyramid began to sway dangerously and the 1%ers began to fear for their billions, they looked for a new source of funding. There was no possibility of saying hey, we fucked up and we're really penniless because that simply Is Not Done.

But the bailout money had already gone to Bear Stearns and Lehman and Frannie, so Morgan Stanley is now looking to sell themselves to the devil rather than admit their mistake.

They would rather sell their worthless empty corporate soul to what essentially amounts to the Government of China.

Talk about trading with the enemy!

Have I got it wrong? Is this not what is happening? And is our congress going to allow it to happen?

Probably.


And I am probably


Tansy Gold

[Demeter]

81. All Too Probable, Tansy

and to top it off, the govt. is "buying" all those worthless pieces of paper, claiming that "some day" they will be worth real money again. I'd believe it if they were buying actual mortgages, but the derivatives will never be worth anything....

[Tansy_Gold]

84. My point exactly.

I mean, you could almost make some kind of justification and say they're buying a pig in a poke because they feel sorry for the poke-holder or something, but they KNOW the derivatives are worthless. And unless and until the REAL economy gets resuscitated -- real jobs for real people -- NOTHING is going to work, is it?

Sheesh. Can you tell it's been a rough week-end? (And it's only Saturday!)



TG in AJ

[Hugin]

95. I'm glad you're around to say what I'm thinking. nt

[Tansy_Gold]

104. LOL -- well, at least we can still THINK

:hi:


I think (pun intended) it was Robert Jay Lifton in an interview on NPR a couple years ago who said that people tend to get into a kind of group-think mindset when they remain in a particular environment, to the point that they become completely blind to any other perspective. The discussion then had to do with high-ranking military personnel who lived a kind of 24/7 pro-"military-as-solution-to-everything" existence that provided them with only one viewpoint's input, and specifically then on the Iraq situation. Only after they moved outside that environment -- and I believe Anthony Zinni was the example cited -- were they able to get the multiple-viewpoint input that allowed them to make more rational decisions.

Paulson & Bernanke et Cie. are not getting any other input. Everything that's getting to them, and therefore everything that's coming out of them, is informed by their environment. It's entirely, without exception, framed by a "we have to save Wall Street and the brokers and the bankers and the rest of 'our' folks." There's no input on the fate, feelings, and futures of the other 379,995,000 of us.

For instance, has anyone worked up a model, computer or otherwise, of what would happen if Bear Stearns had just failed? What dominoes would it have taken with it, and how much better off or worse off would the world economy be? What about Lehman and Merrill and even Frannie?

What would happen if we "sacrificed" the multi-billion-dollar fortunes of the richest 1000 people who made their fortunes off hedge funds and CDOs and CDSes, etc? After all, we have a government that does not hesitate to sacrifice 5000 mostly American lives in the pursuit of victory in Iraq and considers it a bargain. Is it any less patriotic to go to the people whose greed directly caused this catastrophe and demand that they give back all the stolen loot? I mean, it's not like we're going to kill them or even put them in jail. They just have to put the money back.

The question remains, of course, how do they do that, especially if the money never existed in the first place. Well, what would happen, seriously, if they took their write-downs, canceled the CDS insurance contracts, decided it was all just a game, and started over? Is that possible? Is there a way to do it? (Does that put AIG back in business?)

The REAL economy -- not the computer-model financial one that doesn't grow any food or manufacture any widgets or provide any real services -- is the one that matters. Unless the bail-out addresses that -- and I doubt it will -- nothing's going to change. Will the bail-outs fix the system? No, because they aren't addressing the problem. It's like bailing out a leaking boat; if you don't plug the leak, you're not making any difference and the boat's gonna sink eventually anyway.

Those of us here on the bottom of the Ponzi pyramid have little leverage. And yes, pun most assuredly intended. If we work for wages, we have little to no control over how our taxes are taken from our paychecks or what taxes are tacked onto the purchases we make of goods and services. Most of us don't have the financial wherewithal to buy gold or silver as heges against inflation. There's not enough gold and silver to go around anyway; most of us will end up relying on the existing monetary system. So we're screwed. And what is our only other real hedge against individual and personal catastrophe? It's to establish our own nano-economies of the old-fashioned sort: providing real goods and services. Growing our own food. Making our own clothes. Sharing homes. Exchanging essential services like roof or auto repair for food or clothing or whatever. And it seems to me that that alternative is the perfect illustration of what's necessary on the larger levels, from micro through macro.

But what do I know? :shrug: Well, I'm beginning to think I know a lot more than Paulson and Bernanke and some of the other idgits who are setting policy. For one thing, I know my model works in the real world, outside the electronic wizardry of a computer.

An old joke -- There are only 10 kinds of people in the world: Those who understand binary and those who don't.


Off to labor at my just-under-subsistence gig,

Tansy Gold

[Hugin]

119. Is this in your journal?

Should be. :)

[Tansy_Gold]

120. I always forget about that.

I'll add it. Thanks!

:hi:

[Hugin]

126. I tried to update my Simulacrum last week.

I hadn't added new numbers since the Bear-Stearns Scandal.

The device is hopelessly broken now and getting worse.

It keeps talking about faeries, stardust and remote beaches. I think it has gone (like I should go) to it's "Happy Place".

The Mechanism's last predictive event saw the Republicans choking to death on worthless cash. The only good news it
delivered was that everyone else died laughing at them.

Nothing, but, static and white-noise now.

[Demeter]

2. Buffett in $4.7bn deal for Constellation

http://www.ft.com/cms/s/0/eaa7ad30-8594-11dd-a1ac-0000779fd18c.html


By Julie MacIntosh in New York

Published: September 18 2008 16:32 | Last updated: September 18 2008 16:32

Warren Buffett has made his first move in response to the latest round of credit market turbulence by agreeing to buy $4.7bn Constellation Energy Group, a US power company whose shares have been hammered over fears of a lack of liquidity in its commodities trading business.

MidAmerican Energy, a holding company of energy assets that is majority-owned by Mr Buffett’s Berkshire Hathaway, agreed on Thursday to buy Constellation for $26.50 a share – at less than half the company’s market value a week ago. Constellation had been scrambling since Tuesday to find a buyer or secure an emergency capital infusion, once it became clear it might be unable to convince investors that its commodities trading operations and creditworthiness were stable.

It had looked likely on Wednesday morning that MidAmerican would buy Constellation. But momentum swung later in the day toward a $500m capital infusion from EDF, the French power group that owns a 9.51 per cent stake in Contstellation, a source close to the process said.

State-controlled EDF, which first bought a stake in Constellation as part of a joint venture deal reached in 2007, had also considered an all-out purchase of the company after doubling its stake in the company last week. But EDF said on Thursday that “conditions are not met” for an all-out deal to buy Constellation.

“I think it was a decision by Constellation’s board at the end of the day that MidAmerican was a better deal for them,” one person close to the matter said. “It’s a huge vote of confidence. Warren Buffett is a value investor, and he saw value.”

Constellation said it will issue $1bn of preferred equity to MidAmerican at a yield of 8 per cent as part of the deal.

The boards of directors of MidAmerican and Constellation have approved the transaction, but the companies have not yet signed a definitive agreement. The deal was announced to the markets as early as possible in order to calm Constellation’s investors, who had driven its share price down nearly 60 per cent this week.

The approach seemed to work, at least by mid-day Thursday, as the decline in Constellation’s shares stabilised and the company traded up a fraction of a percent at $24.99 per share.


CUE THE MUSIC FROM "JAWS"

[Demeter]

3. Five banks exploring WaMu records

http://www.ft.com/cms/s/0/8324772c-85af-11dd-a1ac-0000779fd18c.html


By Saskia Scholtes in New York

Published: September 18 2008 20:19 | Last updated: September 18 2008 23:53

Five banks have come forward to evaluate Washington Mutual’s financial records as part of an auction process run by WaMu’s adviser, people familiar with the matter said on Thursday.

WaMu shares rose 14 per cent on Thursday after news it had put itself up for sale. The five banks that have looked through the WaMu materials include JPMorgan Chase, Wells Fargo, Citigroup, HSBC and Banco Santander, the people familiar said. It was unclear whether any of them intended to make an offer for WaMu. Goldman Sachs is conducting the auction for Seattle-based WaMu, which is the sixth largest US bank, with $310bn in assets...JPMorgan made an offer for WaMu this spring but was rebuffed. JPMorgan may be waiting to see whether the auction heats up before determining whether to bid for WaMu’s assets now or try to buy pieces of the bank more cheaply later, sources close to the matter said. ...If the auction does not draw interest, Goldman may have to evaluate other options for the bank. These could include raising capital by selling off the attractive assets, which would still leave WaMu holding the mortgage portfolio, or raising fresh capital to allow the bank to stand alone – a challenge in the current climate.

[ozymandius]

4. Should you need any other reason to despise Gramm and McCain...

McCain and the Meltdown

By Froma Harrop

"The fundamentals of our economy are strong," John McCain said as Wall Street went into white-knuckle panic over diving investor confidence. Does he believe that? It doesn't really matter, because the Republican has outsourced his economic policy to the ideologues whose opposition to regulations brought the financial markets to their knees.

McCain's former economic adviser is ex-Texas Sen. Phil Gramm. On Dec. 15, 2000, hours before Congress was to leave for Christmas recess, Gramm had a 262-page amendment slipped into the appropriations bill. It forbade federal agencies to regulate the financial derivatives that greased the skids for passing along risky mortgage-backed securities to investors.

And that, my friends, is why everything's falling apart. That is why the taxpayers are now on the hook for the follies of Fannie Mae, Freddie Mac, Bear Stearns and now the insurance giant AIG to the tune of $85 billion.

.....

Another Gramm contribution was the "Enron loophole," which prevented federal oversight of Enron's electronic energy trading. Such favors proved very expensive to consumers but profitable to the Gramms. Enron CEO Ken Lay chaired Gramm's 1992 re-election campaign, and wife Wendy Gramm spent years on the Enron board, earning as much as $1.8 million, according to Public Citizen, a consumer advocate.

http://www.realclearpolitics.com/articles/2008/09/mccain_and_the_meltdown.html

[ozymandius]

5. U.S. regulators close W. Va bank; 12th to fail

WASHINGTON (Reuters) - Regulators closed on Friday Ameribank Inc, which became the 12th bank failure this year as the struggling economy and falling home prices take their toll on financial institutions.

http://www.reuters.com/article/governmentFilingsNews/idUSN1939567120080919

Cost: $42 million

[Demeter]

7. Good Catch, Ozy!

Glad to see that business is back to usual already! :sarcasm:

[Demeter]

6. Blast From The Past: Last Wednesday, to Be Precise!

http://www.ft.com/cms/s/0/8058d308-84d3-11dd-b148-0000779fd18c.html

Panic grips credit markets
By Krishna Guha in Washington, Michael Mackenzie in New York and Gillian Tett in London

Published: September 17 2008 18:23 | Last updated: September 18 2008 00:01

The panic in world credit markets reached historic intensity on Wednesday, prompting a flight to safety of the kind not seen since the second world war.

Barometers of financial stress hit record peaks across the world. Yields on short-term US Treasuries hit their lowest level since the London Blitz, while gold had its biggest one-day gain ever in dollar terms. Lending between banks, in effect, stopped.


EDITOR’S CHOICE
Full coverage: Global financial crisis - Sep-16US Daily View: An extraordinary flight to safety - Sep-16Editorial Comment: Changing the rules of the game - Sep-17Roger Altman: Modern history’s greatest regulatory failure - Sep-17John Gapper: This greed was beyond irresponsible - Sep-17Kenneth Rogoff: America will need a $1,000bn bail-out - Sep-17Speculation mounted that the Federal Reserve, which refused to cut rates on Tuesday, could be forced into an embarrassing U-turn or might further expand its market liquidity operations.

The $85bn emergency Fed loan for the troubled insurance group AIG, announced on Tuesday night, failed to curb the surge in risk aversion. Instead, markets were hit by a fresh wave of anxiety.

One cause for fear came when shares in a supposedly safe money market mutual fund fell below par value – or “broke the buck” – owing to losses on debt in Lehman Brothers, which filed for bankruptcy protection on Monday. This raised the risk that retail investors in other such funds could panic and pull out their money.

All thought of profit was abandoned as traders piled in to the safety of short-term Treasuries, with the yield on three-month bills falling as low as 0.02 per cent – rates that characterised the “lost decade” in Japan. The last time US Treasuries were this low was January 1941.


Shares in the two largest independent US investment banks left standing – Morgan Stanley and Goldman Sachs – fell 24 per cent and 14 per cent, respectively, as the cost of insuring their debt soared, threatening their ability to finance themselves .

Morgan Stanley was holding preliminary merger talks with Wachovia, a troubled regional lender, and could approach other banks and look at other options in the coming days, people familiar with the situation said. Washington Mutual, another regional lender, has hired Goldman Sachs to contact potential buyers.


HBOS, a leading UK mortgage lender pressed into sales talks by the government after its share price halved this week, agreed to a £12bn takeover by Lloyds TSB.

A key measure of fear in the fixed-income markets - the so-called Ted spread, which tracks the difference between three-month Libor and Treasury bill rates - moved above 3 per cent, higher than the record close after the Black Monday stock market crash of 1987.

US authorities fired back with the Treasury announcing it was borrowing $40bn to give to the Fed to use for its emergency lending – in essence removing balance sheet constraints on the size of this assistance.


The Securities and Exchange Commission announced new curbs on short selling.

Some analysts have criticised US authorities for adopting an arbitrary approach to rescues - saving AIG, but not Lehman - that was impossible for investors to predict and therefore did not boost confidence.

The S&P 500 fell 4.7 per cent, led by a 8.9 per cent slump in financials. Equity volatility was near its highest level since March. The dollar fell against other major currencies.

Gold benefited from safe-haven buying, with prices rising 11.2 per cent to a three-week high of $866.47 a troy ounce.

Andrew Brenner, co-head of structured products and emerging markets at MF Global, said: “It feels like no one wants to take anyone’s credit...it feels like we are on a precipice.”

VARIOUS SUPPORTING LINKS AT ORIGINAL

[Demeter]

8. A Mark Fiore Perspective

http://www.markfiore.com/fundamentals_0

My favorite political animator addresses the economy.

[Demeter]

9. Benjamin R. Barber: The Fiscal Meltdown Reveals the Democratic Deficit

http://www.huffingtonpost.com/benjamin-r-barber/the-fiscal-meltdown-revea_b_127715.html?view=screen


I participated last Monday night in the BBC "Economist Debates" on the economic meltdown broadcast from the heart of the City, London's financial district. Nearly all of the CEOs, financial consultants and bankers on our over sized debate panel echoed the media coverage, treating the crisis as a technical problem, a puzzle economists had to solve. The market paradigm within which the crisis unfolded is taken for granted and solutions are sought within the paradigm.

But the problem is the paradigm of four decades of a Reagan/Thatcher privatization ideology that has insisted government can do no right and markets can do no wrong. We now have had forty years of old Republicans and New Democrats, Bill Clinton included, old Tories and new Labor, Tony Blair included, all conspiring to deregulate media, deregulate banks, deregulate the financial industry and get government out of the way of the market's invisible hand. In their foolish assault on 'big government' and 'welfare bureaucracy' and in their political campaigns against Washington, these representatives of the democratic process have in fact undermined democracy and made war on the very spirit of the commonweal.

Government is us: the political arrangements we forge in order to be able to do together the many public things we cannot do one by one; the deliberative processes we establish so that public policy will reflect public goods rather than private preferences. The Washington against which we rail is also us, the political home of those we choose to represent us, like Senator McCain, and yes, Senator Obama...But a seductive market ideology has talked us out of our citizenship, talked us into believing that all that is demanded from us as citizens can be achieved by us as consumers. Hence, voting has become a form of shopping, elections a version of American Idol.

Yes, there is to be sure a technical issue in the crisis: it's called leveraging and it is a the very foundation of the banking system. Leveraging is what allows banks to put your deposits to work by reinvesting most of them and keeping only a small percent on hand for depositors wanting their money back. But for a system of leveraging to work there must be transparency, full disclosure and a reasonable limit on just how much leveraging is permitted. Normally, governments establish and enforce transparency and limits...But not in the age of free market dogmatism, not under conditions of exuberant deregulation. At the heart of the market ideology is a demand that democratic oversight be withdrawn. The buying and selling of paper is to be left to the whims of private actors who often are as economically ignorant as those ordinary mortgage holders who get stiffed when the original variable rate mortgages get sold and then screwed again when the banks that sell this dubious paper go under and are bailed out by mortgage holders as taxpayers.

...

What does this all mean for the crisis? It means that the way out lies not just through technical fixes or pumping public money into failing banks and insurance companies. It means reasserting our rights as citizens to regulate the market. It means insisting we will not support the new 'socialism of risk' unless we also share in the profits (that's another way to reduce taxes!) In short, it means consumers must become citizens again, reclaiming their democratic right to fiscal transparency, political oversight and market regulation. It means the public sector must come back not just in the default mode when the private sector fails, but actively and constructively so that the public weal takes precedence over private interests in good times as well.

Such an arrangement has a name: democracy. The crisis will have been worth it if we finally learn this lesson.

[Demeter]

10. MAN UNITED....

http://www.motherjones.com/kevin-drum/2008/09/man_united.html


Now that you, the American taxpayer, more or less own insurance giant AIG, it turns out that you, the American taxpayer, are also the principal sponsor of Manchester United, thanks to a four-year, $100 million sponsorship deal signed in 2006...

[UpInArms]

11. (Hedge Fund) Reserve seeks to halt fund redemptions; investors flee

http://www.reuters.com/article/bondsNews/idUSN1942314320080920?sp=true

BOSTON, Sept 19 (Reuters) - U.S. money-market fund firm The Reserve, whose main fund three days ago sank below the crucial $1 level and sparked an industry crisis, said on Friday two of its funds have sought regulatory relief to halt redemptions as investors rushed to withdraw their money.

The Reserve said it has filed, on behalf of the Primary Fund and the U.S. Government Fund, an application with the U.S. Securities and Exchange Commission (SEC) seeking an order to be allowed to suspend investor withdrawals or delay redemptions.

This will give it breathing room to sell the funds' securities in an orderly way in a tough market and pay investors, New York-based The Reserve said. The SEC intends to recommend the issuance of such an order, it added.

"The funds' investment adviser is unable to dispose of securities to fund redemptions without impairing the net asset value of each fund," the company said in a statement.

On Tuesday, the Primary Fund, one of the oldest and biggest money-market funds, said its shares fell below the $1 level to $0.97 due to losses on debt issued by Lehman Brothers Holdings Inc (LEH.P: Quote, Profile, Research, Stock Buzz)(LEH.N: Quote, Profile, Research, Stock Buzz).

It was the first time in 14 years a U.S. money-market fund had fallen to below $1 a share, known commonly as "breaking the buck". These funds are regarded as super-safe vehicles and are supposed to maintain their $1 a share par value.

The fund, whose chairman Bruce Bent is known as the "father" of the industry after creating the first money-market mutual fund in 1970 with a partner, saw its assets tumble to $23 billion by Tuesday from $62 billion on Monday morning.

...more...

somehow I just can't muster up any empathy tonight :shrug:

[Demeter]

12. Ban on Short-Selling Will Hurt Rather Than Help Broker-Dealers

http://www.nakedcapitalism.com/2008/09/ban-on-short-selling-will-hurt-rather.html


New measures to shore up the markets are coming so fast and furious that it is becoming hard to keep track of them. What most people do not realize is that they produced some not-very-pretty unintended consequences. As we discussed (courtesy reader Lune) at the time:

1) Congress raises conforming limits on Fannie/Freddie to help unfreeze the mortgage market. Result: agency spreads skyrocket, bringing down Bear and a host of hedge funds. Mortgage markets still remain frozen.

2) Fed opens TSLF to unfreeze mortgage market. Result: Carlyle goes bankrupt as people rapidly arbitrage the difference between holding MBS in firms that can and can't access the new credit facility. Mortgage markets remain frozen.



(CARLYLE WENT BANKRUPT??!!! HOW DID WE MISS THAT?)


Note the spike in agency spreads and bankruptcy of Carlyle helped precipitate the run on Bear.

In fact, as Richard Bookstaber discussed at length in his book, Demon of Our Own Design, this sort of unintended consequence is precisely what you'd expect to see in a tightly coupled system, such are our financial system. Tight coupling occurs when processes move from step to step so rapidly that intervention is well-nigh impossible. Bear Stearns and Lehman are classic examples. A downgrade of their debt beyond a certain level meant that their counterparties could no longer trade with them, because that exposure would get them downgraded too. Thus a move (or threatened move) beyond a trigger point kicked off a sequence of unstoppable events.

One possible consequence is that hedge funds forced to exit positions by the SEC ban on short-selling might take losses big enough to lead to a run of the fund, forcing liquidation of positions. That rapid selling could produce distressed prices, and in a worst-case scenario, brokers could take losses if collateralized positions fell in value and hedge funds were unable to meet margin calls.

Note Morgan Stanley and Goldman are far and away the biggest prime brokers.

John Hempton sets forth another unintended consequence which is more certain to happen and broader in its impact and puts none to fine a point on it in his post title, "SEC Tries to Bankrupt Wall Street":

Last I looked when I was short a stock, the broker borrowed the stock (yes, Virgina you do get a borrow) and sold it. They then had cash. That cash was not available to me - it was pledged to whoever provided the stock to remove or reduce the risk that the stock won't be returned.

That means it is generally available to the broker (who will generally lend me the stock from their inventory or margin or prime broker clients).

Now there are a few hundred billion of short-sales out there. Probably more than normal - but a lot in almost all markets. And those short sales produce cash balances of a few hundred billion, most of which are available to Wall Street brokers. If you ban short-selling those balances will taken away from Wall Street brokers.

That would be rather unpleasant. Last I looked the debt market was skittish and was hardly going to replace that money.

So I conclude that the SEC in their "infinite wisdom" are going to stick the knife into Wall Street and bankrupt the lot of them. For political optics. So they can be seen to be doing something about short-selling.

The only reason the damage might not be as broad-scale as Hempton fears is that the "temporary" ban is on shorting financial stock. Oh wait, financial represented (until they started hitting the rocks) 40% of S&P earnings.

And there is something far simpler that the SEC could do. Just re-implement the uptick rule (it means you can short only when the last sale price was above the immediately prior sale). That rule comported itself well for over 50 years but for some unfathomable reason (no doubt at the behest of Wall Street) was eliminated by the SEC.

[progressive_realist]

35. The law of unintended consequences

Seems certain to operate here. I'm not a finance expert, but isn't short selling an integral part of many hedging strategies? If the market keeps falling, what are investors' remaining downside protections?

Add to that the fact that short selling also involves counter-party buying and it seems this might reduce volumes and increase volatility in the markets.

Lastly, this probably trashes a great many of the risk management models in use by hedge funds and others. While the quants can probably burn the midnight oil over the weekend and get functional replacements by next week, the new models will be untested and un-vetted by regulators.

I have no idea what next week will bring, but I anticipate completely new problems emerging from this week's "solutions".

:hide:

[Tansy_Gold]

77. It was only one segment of Carlyle. A mortgage-related

arm or something. Not the whole kit and kaboodle.

I don't remember the details but it was a couple months ago.



TG

[Ghost Dog]

96. It was Carlyle Capital Corp, an Amsterdam-based fund

of Carlyle's:

Amsterdam-listed Carlyle Capital said on Thursday it has defaulted on $16.6 billion of debt and was unable to reach a deal with lenders.

It said on Wednesday that talks with lenders deteriorated after a decline in the value of its mortgage investments, which it said would result in margin calls of $97.5 million on top of the $400 million it was already facing.

Carlyle Capital's counterparties for its repurchasing agreements at the end of 2007 were Bank of America, Bear Stearns, BNP Paribas, Calyon, Citigroup, Credit Suisse, Deutsche Bank, ING, JP Morgan, Lehman Brothers, Merrill Lynch and UBS, according to its latest -- and only -- annual report.

/... http://www.reuters.com/article/businessNews/idUSN1651831320080317?sp=true

[Tansy_Gold]

105. I knew someone would find it!

Muchas gracias, amigo!

[Demeter]

129. Darn! And I Had My Hopes Up!

[Demeter]

13. Arianna Huffington: How Obama Can Demonstrate Real Leadership on the Economic Crisis

Watching John McCain thundering against Wall Street greed is like tuning into to the old Lawrence Welk show to find him doing a polka version of a hard-core rap song ("A-one and a-two, motherfucker!").

Speaking yesterday outside an auto plant in Grand Rapids, Michigan, McCain read his populist rhetoric -- "These workers here are the best in the world. They are the backbone and foundation of our economy." -- with a robotic cadence dripping with inauthenticity.

Wall Street is melting down, and McCain and the GOP have no credible response. When your erstwhile economic guru, Phil Gramm -- a man whose 1996 run for the presidency McCain chaired, and who appears to remain influential behind-the-McCain-campaign-scenes -- is Patient Zero of this killer economic epidemic, it's pretty hard to suddenly start channeling Upton Sinclair.

McCain is so clearly clueless on this issue, the current battle over who is best suited to deal with the financial crisis should be a rout. And, so far, Obama has shown not just an incomparably greater grasp of the situation and substantive policies to deal with it, but a real fire in the belly in going after McCain's vulnerable flank.

But for Obama to show the kind of transformational leadership the crisis demands, he needs to do what so many of his critics have chided him for not doing: take a stand that puts him at odds with the establishment of his own party. He did it in 2002 with the war in Iraq. He can do it in 2008 with the economy.

He needs to start by making sure that the economic advisers he turns to extend beyond those he had on a conference call on Monday -- Robert Rubin, Lawrence Summers, Laura Tyson, and Paul Volcker. It's great to include graybeards who have been through crises before, but he needs to go beyond the two Treasury Secretaries who were complicit in the 1990s deregulation orgy that has led to so many of the problems we are now seeing. And he needs to make it clear that the Clinton-era Democrats who put the interests of Wall Street ahead of the interests of Main Street are not going to be the primary voices he listens to.

Rubin and Summers played a pivotal role in dismantling banking regulations like the Glass-Steagall Act of 1933, FDR's pivotal banking legislation designed to constrain the power of Wall Street, and make the activities of the banking industry more transparent. It specifically kept commercial banks separate from their investment banking cousins -- and had long been the Moby Dick of the banking industry, the elusive prey the financial industry Captain Ahabs were determined to harpoon. Consequences be damned.

Phil Gramm, then chairman of the Senate banking committee, did the heavy lifting, and John McCain was an ardent supporter of the deregulation, but Rubin and the Clintonites were certainly up to their eyeballs in pushing legislation gutting so many of the regulations designed to bring accountability to our complex free market system. These bills included the the Financial Modernization Act, which obliterated Glass-Steagall; and the Commodity Futures Modernization act, which gave us unregulated trading of derivatives and the kind of credit default swaps that threaten our economy -- both signed into law by Bill Clinton.

Speaking at a large rally in Las Vegas on Wednesday, Obama declared: "we can't steer ourselves out of this crisis if we're heading in the same disastrous direction. We can't steer ourselves out of this crisis using the same old map, we can't steer ourselves out of the crisis if the new driver is getting directions from the old driver, and that's what this election is all about."

Bull's-eye. Now he needs to make sure the old drivers in his own party don't have their hands on the wheel -- or are the loudest of his backseat drivers -- as the nation navigates this rocky financial road and charts a new direction.


AS A NOTE: NPR TODAY CITED A REPORT THAT GLASS-STEAGAL WAS UNNECESSARY, THAT DIVERSIFIED BANKS WERE MORE ABLE TO WEATHER THE CRISIS OF THE GREAT DEPRESSION, ETC ETC. SINCE MY FATHER WAS BORN IN THE DEPRESSION, I HAVE NO CLUE AS TO WHETHER THERE'S ANY FACT BEHIND SUCH A NOTION. THE COINCIDENCE OF REMOVING GLASS-STEAGAL AND THE BUSH DEPRESSION COULD BE JUST LUCK, BUT....

[RUMMYisFROSTED]

19. Rubin and Summers are catching a lot of shit lately.

Probably rightfully so.

[Joe Chi Minh]

71. Bull's-eye to bull's-eye. Good find.

I get a grim laugh out of remembering the way you and one of the other financial mavins here greeted each other in the morning some days ago, and immediately asked each other how you'd slept that night; and was puzzled about your interest in insomnia. When the penny eventually dropped, it was worth wait! It must have been very spooky knowing all those things, when so few of the rest of us had much of an idea - even in the general terms we can understand.

[Demeter]

14. US to Implement "Temporary" Backstop to Money Market Funds (Updated)

http://www.nakedcapitalism.com/2008/09/us-to-implement-temporary-backstop-to.html


Oh boy, bye bye the US AAA rating (at some point, not due specifically to this move, but from the philosophy it represents) and the dollar. The financial markets are simply too large for the US taxpayer to stand behind them all, but that isn't going to prevent the authorities from trying. And like the Term Auction Facilty, expect it to be some time before this "temporary" guarantee is reversed....

Update 8:25 AM: Here is the Treasury press release. Money market funds must pay a fund to receive the guarantee. Presumably, who pays the fee will not be disclosed (the powers that had to create the Term Auction Facility, which does not reveal who its users are, to overcome the stigma of accessing the discount window). But will money market funds sign up on a large scale basis? Funds that are part of fund families may deem it cheaper to absorb losses than pay the fees. This move may be directed at stand-alone money funds like Reserve.

In other words, like the recently passed $300 billion housing bill that is widely anticipated to have considerably less takeup than its maximum amount, this may expose the Treasury less that it appears to. However even though the press release says the backup will exist for the next year, expect it to be renewed.

From the press release

The U.S. Treasury Department today announced the establishment of a temporary guaranty program for the U.S. money market mutual fund industry. For the next year, the U.S. Treasury will insure the holdings of any publicly offered eligible money market mutual fund – both retail and institutional – that pays a fee to participate in the program.

President George W. Bush approved the use of existing authorities by Secretary Henry M. Paulson, Jr. to make available as necessary the assets of the Exchange Stabilization Fund for up to $50 billion to guarantee the payment in the circumstances described below....

The Exchange Stabilization Fund was established by the Gold Reserve Act of 1934. This Act authorizes the Secretary of the Treasury, with the approval of the President, "to deal in gold, foreign exchange, and other instruments of credit and securities" consistent with the obligations of the U.S. government in the International Monetary Fund to promote international financial stability. More information on the Exchange Stabilization Fund can be found at http://www.treas.gov/offices/international-affairs/esf/.

A look at the balance sheet of the Exchange Stabilization Fund shows that it had assets of $47.9 billion as of its fiscal year ended September 30, 2007.

In other words, the Treasury had some spare cash sitting around it could deploy for this purpose. Clever.

Update 8:50 AM: Oh, there are more dollar signs this move than just the Treasury deploying assets from an idle fund. Bloomberg reports "Fed to Help Meet Fund Redemptions, Buy Agency Debt ":

The Federal Reserve said it will lend to banks to meet demands for redemptions from money-market mutual funds and plans to buy agency debt from primary dealers to aid financial-market liquidity.

The Fed will extend loans to banks to purchase ``high- quality'' asset-backed commercial paper from money market funds, the Fed said in a statement in Washington. The loans will be at the discount rate, the Fed said. The rate is currently 2.25 percent. The Fed didn't provide a size for either initiative....

The central bank said it will buy short-term discount notes issued by Fannie Mae, Freddie Mac and the Federal Home Loan Banks ``to further support market functioning.''

From the Fed's press releases (here and here):

The Federal Reserve Board on Friday announced two enhancements to its programs to provide liquidity to markets. One initiative will extend non-recourse loans at the primary credit rate to U.S. depository institutions and bank holding companies to finance their purchases of high-quality asset-backed commercial paper (ABCP) from money market mutual funds. This should assist money funds that hold such paper in meeting demands for redemptions by investors and foster liquidity in the ABCP markets and broader money markets.

To further support market functioning, the Federal Reserve also plans to purchase from primary dealers federal agency discount notes, which are short-term debt obligations issued by Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.....

Similar to secondary market purchases of Treasury securities, purchases of Fannie Mae, Freddie Mac and Federal Home Loan Bank debt will be conducted with the Federal Reserve’s primary dealers through a series of competitive auctions via the Desk's FedTrade system. A series of purchase operations are planned over the next several weeks.

The ABCP market went into serious contraction in the first acute phase of the credit crisis (September-August 2007) and has continued contracting since then. Wonder why it is a focus now. Is this to keep the auto loan and credit card receivables market going? Informed readers are encouraged to speak up.

[Demeter]

15. Why Have the Government Bailouts Involved Only a 79.9% Equity Position? by Adam Levitin

http://www.creditslips.org/creditslips/2008/09/why-have-the-go.html


A small but unexplained detail in the federal government's nationalization of Fannie, Freddie, and AIG has been that the deals have been structured so that the Fed or Treasury ends up owning no more than 79.9% of the nationalized entities' stock (or having warrants that, if exercised, would produce the same result). So what is the source of the 79.9% threshold? Why didn't the government do a 99.99% dilution of shareholders (and thereby a full de facto taking)?

It turns out that the explanation is not related to 80% being the threshold before the Fed/USG would have to carry the entities on their own books. Federal Accounting Standards are silent on the issue, but the Congressional Budget Office is already treating Fannie/Freddie like USG assets/liabilities (consistent with GAAP).

Instead, the explanation is tax. Section 163 of the Internal Revenue Code generally provides that interest paid on debt is tax-deductible for federal income tax. But there's an exception. If the interest is paid on a loan from an entity that controls 80% or more of the voting power and value of a corporations' total shares, then the interest is not tax-deductible. Fannie and Freddie are generally tax-exempt. They are, however, subject to federal income tax. AIG, of course, has no tax-exempt status, whatsoever.

Because the bailout deals were structured so that the Fed or Treasury will make sizable loans to the nationalized entities, they had to be careful not to reach the 80% threshold, lest the nationalized entities (which still pay taxes) lose their tax deduction for the interest paid on the Fed/Treasury loans (LIBOR +850 on $85BN for AIG--that's a lot of interest).

Of course, one might well ask why the Treasury would want to ensure Fannie and Freddie have a deduction--that just means less revenue for the government, right? I'm not sure of the answer to this--I think there are several possible explanations, but none is overwhelming. Nonetheless, the tax explanation seems to fit better than any other.

[Demeter]

28. Henry Paulson’s Frankenstein

http://dealbook.blogs.nytimes.com/2008/09/17/henry-paulsons-frankenstein/


This is how a federal bailout works these days.

The government purchases 79.9 percent of the company in question. It can’t be more than that, because if it goes over the magical number of 80 percent, the company’s debts are then required to be consolidated onto the federal government’s balance sheet. Keeping it at 79.9 percent allows the government to maintain the fiction that it is still not responsible for the company’s solvency.

The purchase isn’t even a purchase of the stock of the company. Rather, it is a purchase of warrants giving the federal government the right to buy some number of shares. This permits the federal government to further claim that it doesn’t even have an ownership interest.

Meanwhile, the necessary debt funding is placed at a politically appropriate level. The debt can’t go too high in the capital structure of the company being rescued, because that might cause more turmoil or tick off foreign buyers.

Rather, the debt must go in just right, like porridge — enough to knock out the security holders it is politically acceptable to dilute (usually preferred and common stock holders) but to keep other interests happy.

Then you probably want to replace management; after all, they are the ones who got you into this mess. (It will be even better if the government actually takes a stab at fighting moral hazard by stripping the executives of their pay packages.)....




Steven M. Davidoff, writing as The Deal Professor, is a commentator for DealBook on the legal aspects of mergers, private equity and corporate governance. A former corporate attorney at Shearman & Sterling, he is a professor at the University of Connecticut School of Law. His columns are available at The Deal Professor blog

[Demeter]

16. The Swedish banking crisis response - a model for the future?

YVES OF NAKED CAPITALISM SAID:

"The only successful example of dealing with a financial crisis is Sweden, which did not try to prop up troubled banks, but instead nationalized them, wiping out equity, brought in new top executives, and recapitalized them. The cost of failure was high to the incumbents and the solution was comprehensive, not piecemeal."


HERE IS A DETAILED ARTICLE ABOUT THAT DEAL:


http://www.creditwritedowns.com/2008/08/swedish-banking-crisis-response-model.html

... today's global banking crisis has some historical precedents worthy of comparison. In particular, I looked at the Japanese bailout schemes from their housing bubble to see if there was anything there to learn. Unfortunately, the Japanese experience leaves doubts as to whether government intervention is helpful or harmful.

There are other examples, however. The Nordic model is a particularly useful one to look at as we move forward. Sweden's Central Bank Chairman Bäckström shared some of his insights from that experience some eleven years ago in a speech to a Federal Reserve symposium that is available on the Swedish Riksbank website. This is a brilliant piece of work.

Below are a number of snippets with my usual commentary.




First a word of thanks to the Federal Reserve Bank of Kansas City for the invitation to discuss the financial problems Sweden went through in the early 1990s. I shall also try to draw some conclusions from our experiences that may be relevant for other countries.

Before I came to Sveriges Riksbank I was state secretary at the Ministry of Finance and involved among other things in the management of Sweden's financial crisis. While there had, of course, been a good many indications of mounting problems, I was personally made formally aware of the acute and severe financial crisis by a phone call. At the beginning of October 1991 I had been in the job just a few days when I got a call from the head of the Financial Supervisory Authority (banking supervision in Sweden is performed by this authority, not by the central bank). He wanted to inform the Government that a large Swedish bank had more than exhausted its equity capital and would have to go bankrupt if a reconstruction could not be arranged.

While working at the Ministry of Finance on the initial problems in the banking sector we started to study historical and international records of financial crises. Irving Fisher's well-known paper in Econometrica, "The Debt-Deflation Theory of Great Depressions," from 1933 provided inspiration. We also came across a new volume, The Risk of Economic Crisis, edited by Martin Feldstein and containing interesting contributions by, among others, Benjamin Friedman, Paul Krugman, Lawrence Summers and our chairman today, E. Gerald Corrigan.


The conclusion from these sources was that a fall in asset prices, such as we had in Sweden, may create problems for private sector balance sheets, affect the supply of credit and result in payment system disturbances. Step by step this may affect spending decisions by households and firms, thereby impinging on general economic activity. A destabilised financial system can bring the economy into what Fisher termed "debt deflation", that is, a situation where the financial crisis may become very serious and protracted.

Thus it was important both to avoid a widespread failure of Swedish banks and to bring about a macroeconomic stabilisation. The two are interdependent. The collapse of much of the banking system would aggravate the macroeconomic weaknesses, just as failure to stabilise the economy would accentuate the banking crisis.
Here, Bäckström has set the scene. Basically, he outlines why central bankers fear deflation more than inflation -- because of its negative effect on the banking system and credit as the real burden of debt increases. Below, he outlines what happened in Sweden. Note, the key role that de-regulation played in the Swedish problems. De-regulation, while helpful in theory, often lets animal spirits run wild and leads to bubbles.

The Swedish crisis - what happened?
The economic problems in Sweden in the early 1990s should be seen in their historical context. For several reasons, economic growth in Sweden has been relatively weak ever since about 1970. Following the collapse of the Bretton Woods system the creation of a stable macroeconomic environment turned out to be difficult. Wage formation functioned badly, fiscal policy was unduly weak and this was gradually compounded by structural problems.

Credit market deregulation in 1985, necessary in itself, meant that the monetary conditions became more expansionary. This coincided, moreover, with rising activity, relatively high inflation expectations, a tax system that favoured borrowing, and remaining exchange controls that restrained investment in foreign assets. In the absence of a more restrictive economic policy to parry all this, the freer credit market led to a rapidly growing stock of debt (Fig.). In the course of only five years the GDP ratio for private sector debt moved up from 85 to 135 per cent. The credit boom coincided with rising share and real estate prices. During the second half of the 1980s real aggregate asset prices increased by a total of over 125 per cent. A speculative bubble had been generated.

The expansion of credit was also associated with increased real economic demand. Private financial saving dropped by as much as 7 percentage points of GDP and turned negative. The economy became overheated and inflation accelerated. Sizeable current-account deficits, accompanied by large outflows of direct-investment and other long-term capital (once exchange control had been finally abandoned in the late 1980s), led to a growing stock of private sector short-term debt in foreign currency.

Step by step the Swedish economy became increasingly vulnerable to shocks. During 1990 matters came to a head. Competitiveness had been eroded by the relatively high inflation in the late 1980s, resulting in an overvalued currency. This caused exports to weaken and meant that the fixed exchange rate policy began to be questioned, leading to periods with relatively high nominal interest rates. Moreover, the tax system was reformed in order to reduce its harmful economic effects but this also contributed to higher post-tax interest rates. Asset prices began to fall and economic activity turned downwards. Between the summers of 1990 and 1993 GDP dropped by a total of 6 per cent. Aggregate unemployment shot up from 3 to 12 per cent of the labour force and the public sector deficit worsened to as much as 12 per cent of GDP. A tidal wave of bankruptcies was a heavy blow to the banking sector, which in this period had to make provisions for loan losses totalling the equivalent of 12 per cent of annual GDP.
Below is the core of the regulatory response. I will highlight the key passages in bold.


Looking back, one can see that in the course of the crisis the seven largest banks, with 90 per cent of the market, all suffered heavy losses. In these years their aggregate loan losses amounted to the equivalent of 12 per cent of Sweden's annual GDP. The stock of non-performing loans was much larger than the banking sector's total equity capital and five of the seven largest banks were obliged to obtain capital contributions from either the State or their owners. It was thus truly a matter of a systemic crisis.

In connection with a serious financial crisis it is important first and foremost to maintain the banking system's liquidity. It is a matter of preventing large segments of the banking system from failing on account of acute financing problems.

In September 1992 the Government and the Opposition jointly announced a general guarantee for the whole of the banking system. The Riksdag, Sweden's parliament, formally approved the guarantee that December. This broad political consensus was I believe of vital importance and made the prompt handling of the financial crisis possible.

The bank guarantee provided protection from losses for all creditors except shareholders. The Government's mandate from Parliament was not restricted to a specific sum and its hands were also very free in other respects. This necessitated close cooperation with the political opposition in the actual management of the banking problems. The decision was of course troublesome and far-reaching. Besides involving difficult considerations to do, for example, with the cost to the public sector, it raised such questions as the risk of moral hazard.

The political system concluded that in the event of widespread failures in the banking system, the national economy would suffer major repercussions. The direct outlays in connection with the capital injection into the banking sector added up to just over 4 per cent of GDP. However, it is now calculated that most of this can be recovered.

One way of limiting moral hazard problems was to engage in tough negotiations with the banks that needed support and to enforce the principle that losses were to be covered in the first place with the capital provided by shareholders.

A separate authority was set up to administer the bank guarantee and manage the banks that landed in a crisis and faced problems with solvency, though the crucial decisions about the provision of support were ultimately a matter for the Government. A clear separation of roles was achieved between the political level and the authorities, as well as between different authorities. Naturally this did not preclude very close cooperation between the Ministry of Finance, the Bank Support Authority, the Financial Supervisory Authority and the Riksbank.

It was up to the Riksbank to supply liquidity on a relatively large scale at normal interest and repayment terms but not to solve problems of bank solvency. Collateral was not required for the loans to banks, neither intraday nor overnight. The banking system was free to obtain unlimited liquidity by drawing on its accounts with the central bank. The bank guarantee meant that the solvency of the Riksbank was not at risk. In order to offset the loss of foreign credit lines to Swedish banks, during the height of the crisis the Riksbank also lent large amounts in foreign currency.

Banks applying for support had their assets valued by the Bank Support Authority, using uniform criteria. The banks were then divided into categories, depending on whether they were judged to have only temporary problems as opposed to no prospect of becoming viable. Knowledge of the appropriate procedures was built up by degrees, not least with the assistance of people with experience of banking problems in other countries.

The Swedish Bank Support Authority had to choose between two alternative strategies. The first method involves deferring the reporting of losses for as long as is legally possible and using the bank's current income for a gradual write-down of the loss making assets. One advantage of this method is that it helps to avoid the bank being forced to massive sales of assets at prices below long run market values. A serious disadvantage is that the method presupposes that the bank problems can be resolved relatively quickly; otherwise the difficulties compound, leading to much greater problems when they ultimately materialise. The handling of problems among savings and loan institution in the United States in the 1980s is a case in point. With the other method, an open account of all expected losses and writedowns is presented at an early stage. This clarifies the extent of the problems and the support that is required. Provided the authorities and the banks make it credible that no additional problems have been concealed, this procedure also promotes confidence. It entails a risk of creating an exaggerated perception of the magnitude of the problems, for instance if real estate that has been taken over at unduly cautiously estimated values in a market that is temporarily depressed. This can lead, for instance, to borrowers in temporary difficulties being forced to accept harsher terms, which in turn can result in payments being suspended.

The Swedish authorities opted for the second method: disclose expected loan losses and assign realistic values to real estate and other assets. This method was consistent with other basic principles for the bank support, such as the need to restore confidence. Looking back, it can be said that in general the level of valuation was realistic.




Conclusion
This is an immense task that the Swedes took on. Their entire banking system was effectively insolvent. Yet, they were able to fashion a workout scheme that had bi-partisan political support, did not unfairly reward shareholders, dealt with moral hazard, separated regulatory and workout roles so as to reduce conflicts of interest, and that quickly wrote down valuations and liquidated the bad debts as opposed to dragging the process out. The Swedish authorities should be especially commended for dealing with the liquidity and solvency concerns simultaneously, while keeping moral hazard to a minimum.

I thoroughly suggest you read this memo, save it and pass it on to your local elected official. It should be mandatory reading for the BoE, the Fed, the ECB and key government officials in he UK, US, Ireland, and Spain where the magnitude of the housing bubble is largest. See the link below for the full article.

Why this plan has not been more widely discussed remains a mystery.

Source
The Swedish Experience, Riksbankschef Urban Bäckström, Federal Reserve Symposium, 27 Aug 1997

[Demeter]

17. How Wall Street Lied to Its Computers By Saul Hansell

http://bits.blogs.nytimes.com/2008/09/18/how-wall-streets-quants-lied-to-their-computers/?dbk


So where were the quants?


That’s what has been running through my head as I watch some of the oldest and seemingly best-run firms on Wall Street implode because of what turned out to be really bad bets on mortgage securities.

Before I started covering the Internet in 1997, I spent 13 years covering trading and finance. I covered my share of trading disasters from junk bonds, mortgage securities and the financial blank canvas known as derivatives. And I got to know bunch of quantitative analysts (”quants”): mathematicians, computer scientists and economists who were working on Wall Street to develop the art and science of risk management.

They were developing systems that would comb through all of a firm’s positions, analyze everything that might go wrong and estimate how much it might lose on a really bad day.

We’ve had some bad days lately, and it turns out Bear Stearns, Lehman Brothers and maybe some others bet far too much. Their quants didn’t save them.

I called some old timers in the risk-management world to see what went wrong.

I fully expected them to tell me that the problem was that the alarms were blaring and red lights were flashing on the risk machines and greedy Wall Street bosses ignored the warnings to keep the profits flowing.

Ultimately, the people who ran the firms must take responsibility, but it wasn’t quite that simple.

In fact, most Wall Street computer models radically underestimated the risk of the complex mortgage securities, they said. That is partly because the level of financial distress is “the equivalent of the 100-year flood,” in the words of Leslie Rahl, the president of Capital Market Risk Advisors, a consulting firm.

But she and others say there is more to it: The people who ran the financial firms chose to program their risk-management systems with overly optimistic assumptions and to feed them oversimplified data. This kept them from sounding the alarm early enough.

Top bankers couldn’t simply ignore the computer models, because after the last round of big financial losses, regulators now require them to monitor their risk positions. Indeed, if the models say a firm’s risk has increased, the firm must either reduce its bets or set aside more capital as a cushion in case things go wrong.

In other words, the computer is supposed to monitor the temperature of the party and drain the punch bowl as things get hot. And just as drunken revelers may want to put the thermostat in the freezer, Wall Street executives had lots of incentives to make sure their risk systems didn’t see much risk.

“There was a willful designing of the systems to measure the risks in a certain way that would not necessarily pick up all the right risks,” said Gregg Berman, the co-head of the risk-management group at RiskMetrics, a software company spun out of JPMorgan. “They wanted to keep their capital base as stable as possible so that the limits they imposed on their trading desks and portfolio managers would be stable.”

One way they did this, Mr. Berman said, was to make sure the computer models looked at several years of trading history instead of just the last few months. The most important models calculate a measure known as Value at Risk — the amount of money you might lose in the worst plausible situation. They try to figure out what that worst case is by looking at how volatile markets have been in the past.

But since the markets were placid for several years (as mortgage bankers busily lent money to anyone with a pulse), the computers were slow to say that risk had increased as defaults started to rise.

It was like a weather forecaster in Houston last weekend talking about the onset of Hurricane Ike by giving the average wind speed for the previous month.

But many on Wall Street did even worse, as Mr. Berman describes it. They continued to trade very complex securities concocted by their most creative bankers even though their risk management systems weren’t able to understand the details of what they owned.

A lot of deals were nonstandard in many ways, “so you really had to go through the entire prospectus and read every single line to pick up all the nuances,” Mr. Berman said. “And that slows down the process when mortgage yields looked very attractive.”

So some trading desks took the most arcane security, made of slices of mortgages, and entered it into the computer if it were a simple bond with a set interest rate and duration. This seemed only like a tiny bit of corner-cutting because the credit-rating agencies declared that some of these securities were triple-A. (20/20 hindsight: not!) But once the mortgage market started to deteriorate, the computers were not able to identify all the parts of the portfolio that might be hurt.

Lying to your risk-management computer is like lying to your doctor. You just aren’t going to get the help you really need.

All this is not to say that the models would have gotten things right if only they were fed the most accurate information. Ms. Rahl said that it was now clear that the computers needed to assume extra risk in owning a newfangled security that had never been seen before.

“New products, by definition, carry more risk,” she said. The models should penalize investments that are complex, hard to understand and infrequently traded, she said. They didn’t.

“One of the things that has caused great pain is complex products,” Ms. Rahl said.

That made me think back to some of the great trading debacles of the last century, such as the collapse of Askin Capital Management, a hedge fund that fell apart because of complex mortgage security investments gone bad. Wasn’t the moral of those stories that you shouldn’t put your money (or your client’s money) in something you didn’t understand? Furthermore, even if you are convinced you do understand it, you’re not going to be able to sell it when you need the money if no one else does.

“In some ways there is nothing new,” said Ms. Rahl, who helped investigate what went wrong at Askin. “The big deals are front-page news, then they go into the recesses of people’s memories.”

And, ultimately, the most important risk-management systems are the ones that have gray hair. “It’s not just the Ph.D.’s who must run risk management,” Ms. Rahl said. “It is the people who know the markets and have lifelong perspective.” And at too many firms it is those people who failed to make sure the quants really did their jobs.

[Demeter]

18. Greenspan’s sins return to haunt us By David Blake

http://www.ft.com/cms/s/0/32b85c72-859b-11dd-a1ac-0000779fd18c.html



Back in 2002, when his reputation as “The Man Who Saved the World” was at its peak, Alan Greenspan, former chairman of the Federal Reserve, came to Britain to pick up his knighthood. His biggest fan, Gordon Brown, now the UK prime minister, had ensured that the citation said it was being awarded for promoting “economic stability”.

During his trip, Mr Greenspan visited the Bank of England’s monetary policy committee. He told them the US financial system had been resilient amid the bursting of the internet bubble. Share prices had halved and there had been massive bond defaults, but no big bank collapses. Mr Greenspan lauded the fact that risk had been spread, using complex derivative instruments. One of the MPC members asked: how could this be? Someone must have lost all that money; who was it? A look of quiet satisfaction came across Mr Greenspan’s face as he answered: “European insurance companies.”

Six years later, AIG, the largest US insurance company, has in effect been nationalised to stop it blowing up the financial world. The US has nationalised the core of its mortgage industry and the government has become the arbiter of which financial companies should survive or die.

Financial markets have an enormous capacity for flexibility, but market participants need to be sure that there are rules, and a referee willing to impose them. Permanent damage has been done to the financial system, despite the extraordinary measures of Messrs Henry Paulson, the US Treasury secretary, and Ben Bernanke, the Fed chairman, to address the problems that stem from the actions of their predecessors. As Mr Paulson has suggested, he is playing a hand dealt by others.

Many blame the Greenspan Fed for this mess. They are right, but not for the reason often cited. It is unfair to say low interest rates are to blame. In the past decade, there is no evidence the US suffered from excessive growth leading to inflation. The economy needed low interest rates and a fiscal stimulus to avoid a severe recession. The Fed was right to do its bit.

Where Mr Greenspan bears responsibility is his role in ensuring that the era of cheap interest rates created a speculative bubble. He cannot claim he was not warned of the risks. Take two incidents from the 1990s. The first came before he made his 1996 speech referring to “irrational exuberance”. In a Federal Open Market Committee meeting, he conceded there was an equity bubble but declined to do anything about it. He admitted that proposals for tightening the margin requirement, which people need to hold against equity positions, would be effective: “I guarantee that if you want to get rid of the bubble, whatever it is, that will do it.” It seems odd that since then, in defending the Fed’s inaction, he has claimed in three speeches that tightening margins would not have worked.

The second incident stems from spring 1998 when the head of the Commodity Futures Trading Commission expressed concern about the massive increase in over-the-counter derivatives. These have been at the heart of the counter-party risk in the crisis. Mr Greenspan suggested new regulation risked disrupting the capital markets.

At the turn of the millennium, with no move to tighten margin requirements, a feedback loop sent share prices into orbit. As prices rose, more brokers were willing to lend to buy more shares. As share prices went up the buying continued, until the bubble burst. To create one bubble may be seen as a misfortune; to create two looks like carelessness. Yet that is exactly what the Greenspan Fed did.

Bruised by stock market losses, Americans bought houses. The mortgage industry used securitised bonds to ensure that the people who initiated the mortgage did not worry about getting paid back; risk was packaged and sold to others. This time Mr Greenspan did not just stand aside. He said repeatedly that housing was a safe investment because prices do not fall. Home owners could wait out any downturn. Is it any surprise that so many people thought if the world’s financial genius held this view it must be all right?

Even as things went completely wild, Mr Greenspan dismissed those who warned that a new bubble was emerging. It was just a case of a little “froth” in a few areas. Later, after waiting until 2007, two years after he left office, he conceded that “froth” had been his euphemism for “bubble”. “All the froth bubbles add up to an aggregate bubble,” he told the Financial Times.

This time, as with the equity bubble, the mistake was not to set interest rates too low; it was to stand back as wildly imprudent policies were pursued by mortgage lenders. Indeed, any lender would have been encouraged by his words in April 2005: “Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in subprime mortgage lending.” Well, he was right about the rapid growth in subprime lending.

Mr Greenspan was in charge of supervising and regulating much of the banking industry for two decades. The Fed says it is responsible for ensuring “safe and sound banking practices”. It is right that other regulators should have stepped in, too – the US regulatory structure has not kept pace with market changes . But given the Fed’s institutional importance and Mr Greenspan’s personal stature, does anyone doubt that the Fed could have used its limited powers to ensure a closer examination of what was going on?

Mr Greenspan realises that something big has happened and describes it as a “once in a hundred years” event. But then, you do not get Alan Greenspans coming along every day.

The writer is an executive in an asset management company. He writes in a personal capacity

[Demeter]

20. How SEC Regulatory Exemptions Helped Lead to Collapse

http://bigpicture.typepad.com/comments/2008/09/regulatory-exem.html

The losses incurred by Bear Stearns and other large broker-dealers were not caused by "rumors" or a "crisis of confidence," but rather by inadequate net capital and the lack of constraints on the incurring of debt.

--Lee Pickard, former director, SEC trading and markets division.

>

Is Financial Innovation just another word for excessive and reckless leverage?


Apparently so.

As we learn this morning via Julie Satow of the NY Sun, special exemptions from the SEC are in large part responsible for the huge build up in financial sector leverage over the past 4 years -- as well as the massive current unwind

Satow interviews the above quoted former SEC director, and he spits out the blunt truth: The current excess leverage now unwinding was the result of a purposeful SEC exemption given to five firms.

You read that right -- the events of the past year are not a mere accident, but are the results of a conscious and willful SEC decision to allow these firms to legally violate existing net capital rules that, in the past 30 years, had limited broker dealers debt-to-net capital ratio to 12-to-1.

Instead, the 2004 exemption -- given only to 5 firms -- allowed them to lever up 30 and even 40 to 1.

Who were the five that received this special exemption? You won't be surprised to learn that they were Goldman, Merrill, Lehman, Bear Stearns, and Morgan Stanley.

[antigop]

60. And Donaldson came in as SEC Chairman in 2003,right?

http://www.sec.gov/about/commissioner/donaldson.htm

William H. Donaldson became the 27th Chairman of the U.S. Securities and Exchange Commission on February 18, 2003.

[antigop]

61. Donaldson blamed focus on short-term earnings

http://financialweek.com/apps/pbcs.dll/article?AID=/20080917/REG/809179981/1036

Speaking today at Bloomberg News headquarters in New York City, Mr. Donaldson said “the excessive focus by too many corporations on achieving short-term results, fanned by the practice of ceding to demands for regular guidance and forecasting, such as quarterly results, certainly is one of the root causes for some of the problems we face today.”

He joined members of the CFA Institute, Business Roundtable, Aspen Institute and other groups calling for an end to quarterly earnings guidance, which he said is a “ridiculous game” that “threatens to undermine our economic future.” Aspen last summer put out a series of principles that called for an end to short-term guidance.

Hmmm...so the blame game continues?

[Demeter]

21. Bernanke: "We Have Lost Control"

YVES OF NAKED CAPITALIST

The Chicago Tribune, in a truly remarkable story with an anodyne title, "Economist recounts talk with Fed chairman" (hat tip reader Dwight who pointed to Michael Panzner) contains this stunner:

"Ben, you are playing a very unique role in world economic history," {economist David< Hale recalled telling Bernanke, an expert in the Great Depression. "You are the first central bank governor of the United States to preside over a recession with no decline in commodity prices."[br />
Bernanke could hypothetically limit inflation in commodities by raising interest rates, a policy that would restrict the flow of money but potentially lead to an avalanche of bank failures. At a financial conference in Florida on Tuesday, Hale, a Chicago-based economist for investment managers, hedge funds and multinational companies, paraphrased the Fed chairman's response.

"We have lost control," said Hale, quoting Bernanke. "We cannot stabilize the dollar. We cannot control commodity prices."

I cannot stress how shocking this statement it is. The Federal Reserve, with a mere $900 billion dollar balance sheet, thought it could control, or even seriously manipulate, the currency and commodities markets? JP Morgan's footings are nearly twice as large. The Fed simply is not a big enough actor to have that sort of impact.

The fact that the Fed chair knows so little about market that he ever harbored the delusion that he could control them means he is even less knowledgeable than I feared.

[DemReadingDU]

22. You just bought yourself a country. Congratulations.

9/19/08
from ilargi at http://theautomaticearth.blogspot.com/

largi: You just bought yourself a country. Congratulations. Yes, don the party hats!! Bring out the 'easy' dancing girls! You know you want to, and by Jolly and Jove, we all know you deserve it. Well done. Who'd have ever thunk?

Of course, like everyone else, you had your hopes and dreams as a kid, but feel free to admit it, you never thought you’d make it this far. Plus, it’s not just any country you bought, either: it gets better all the time: you thought you were buying America, but you got something much much better: you are now the proud owner of Bulgaria-on-the-Hudson.

While you’re enjoying your new riches and dancing stark naked in the streets, and good on you, mate, don’t forget to start drinking. I know it’s early, but trust me here, this is a special occasion. Very special. In fact, I strongly suggest you get as drunk as you possibly can, and as fast as humanly possible. Don’t bother with beer or some girly bubbly, this time around you got to hit the harder stuff. Trust me. And stop worrying about the hangover: your new country doesn’t either. You acquired a faith-based casino.

When I think you’re hammered enough not to feel much of anything anymore, when you're soundly immune to any and all kinds of pain and reality, I’m going to have to fill you in on a few marginal details that are marginally wrong with your recent purchase:

1. You already owned the country.
Yes, bit of a bummer, makes you wonder where the money went that you paid for it, doesn’t it? Yeah, have a drink.
2. You can’t afford it.
Come on, you knew all along that all your plastic maxed out long ago. I suggest a scotch.
3. It’s broke.
What exactly were you thinking you would get in return for your investment? There’s nothing there. Drink, stop thinking, it’s a done deal.
4. It’s in debt so deep it’ll take the next 10 generations of your offspring to pay it off.
Yeah, I know, this one goes straight over your head, you were just planning to enjoy it for the moment, and you’re pissed to the tits anyway, so let’s move on. You do need a refill.
5. It’s full of nut cases and whack jobs.
One Flew Over The Nest, and the rest refuse to leave. That might be a bit of a downer, but I’ll let you deal with it when you get out of your stupor. Hey, you bought the place, not me.. You pour this time.
6. They have no laws
Well, they have them, but the wackos in charge change them on the fly, so that’s the same as having none. And nobody protests. Yes, that’s right, open another bottle.
7. It’s not just financially bankrupt, it’s also morally bankrupt
Look, wherever a bunch of losers manages to make everyone else pay for their losses, you can’t really keep up the pretense of any sort of moral standard, can you? I mean, I don’t know if this is oligarchy, or corporate fascism, ot just plain anarchy, but I do know it’s nothing to do with democracy. No, you're right, might as well pour me one as well. Make it a double.


The US government wants to get rid of people who call their banker friends on their greed and stupidity. Check, there go the short sellers. And they want to get rid of their banker friends’ gigantobehemoth debts. Check, the taxpayers now own them. Or will Congress vote no? Don’t hold your breath.

These guys are not trying to solve a crisis, they’re trying to keep their made men’s profits and shovel the losses into the public coffers. And you’re letting them do it. While everyone watches Sarah Palin’s blaring incompetence, the things that matter today, small things such as your children’s future, get ignored entirely. How long did you say you've been drinking?

What is short selling anyway ? Look, in our culture, vultures have a bad name, and maggots even more. But any biologist can tell you they have an essential function in nature. Without them you’d end up with a disease ridden world like you wouldn’t believe. Short sellers have that function: they clean up what dies.

Vultures spot dying animals, and circle above. Simple. Take them away, and you’re spreading disease. What the SEC did today obliterates the rules of nature as much as the rules of the market. Vultures don’t take on healthy animals any more than shorters take on healthy companies. They make sure companies can’t indefinitely fool you into thinking their alive and kicking. It’s not as if the media will let you know....

Yesterday I likened short selling to fielding a defense unit in a football game. It’s fine by me to change the rules of the game so that you play with attackers only, but you can’t do that in the middle of the game, and for one team only. That’s just sore loser territory, and it kills the game, and nobody will come, so you have no ticket or TV sales, and then you have no team left, nor a game.

What will happen is easy to predict: stocks will rise for a few days, perhaps spectacularly. Everyone who’s short financials has to cover their shorts, hence buy the stocks. When that’s all done, there’ll be a long eery silence, with hardly any trading, and dead hedge funds plastered all over the place. But the losers won’t have to show their dirty underwear, at least for now.

You know, I think maybe I should start drinking myself, instead of trying to assess what is going on here. I mean, what are we talking about when all the rules can be changed and turned on their heads from one moment to the other, just to make sure a bunch of fat assed born losers don’t have to pay their losses? Whatever I say can be useless in five minutes. It’s a nice day out, I’ll grab a bottle and a glass and sit in the garden. This stuff makes me despair.

It’s declaring war on your own people.

several related articles...
http://theautomaticearth.blogspot.com/2008/09/debt-rattle-september-19-2008-you-just.html



9/18/08 and here is what ilargi said last night

Ilargi: The world becomes a crazier place by the minute these days. Hot darn, I figured I could get some down time tonight, with the Dow up 3.86%. You think? Damn you, Hiwwawy Cwinton!!

The nuttiest plan in centuries comes out of the SEC this evening, and while it remains to be seen whether it’ll be given a chance at survival, it’s so far out there, out of anywhere including the left field recently discovered in Andromeda X, that I need to write this.

There’s a strong competitor for most stupid idea of the millenium in the plan for a repository for "all the bad debt" on Wall Street. I’ll address that tomorow. But jeez, what is this, a competition for the most gloriously braindead award?

The SEC wants a ban on all short selling of stocks. Which means that the stock market as it functions now is dead, gone, over, and pining for the fjords.

Mind you, the reason is glaringly obvious: every single financial institution on the bleeping planet is being shorted these days. And no, you’re right, they don’t like that. Well, unless they can short the neighbour while they themselves survive.

Why are they being shorted? Because they are dying of a terminal affliction. And that means there’s money to be made in betting against them. Just like there’s risk-bearing money in buying stocks you think will do well, but the 180 degree opposite. Two sides of the same coin. In fact, can you still sell any stock that you are losing money on if the SEC gets its way?

So what do you do when someone’s dying, and you don’t want anyone to know? You close the doors. Check. Prop up the corpse. Check. Photoshop. Check.

If this Martian idea gains favour, stocks will go through the roof of the roof of the roof. For a few days. Everyone who’s short out there, and there’s zillions of them, will have to cover, and still lose their shorts and shirts and socks and pants.

And when that is done, stocks will seek and find bottoms and gutters that you never even imagined existed. Nobody will buy anything anymore. And then they will come up with a way to make you pay for it all. Nah, they wouldn’t do that, would they?

It’s like fielding a foorball team, but being forced to play without the defense.

Even that is possible right now. Know why? The party under attack is Goldman Sachs. That's why.

and a few related articles...
http://theautomaticearth.blogspot.com/2008/09/mayday-martians-have-landed.html

[Demeter]

24. Perhaps, Having Bought It From the Pirates

We can now drive them out of business and out of our country. And repudiate the fraudulent bills they think we are going to pay. Tit for tat.

[DemReadingDU]

25. Click the links to see the pictures

9/18/08
National Photo Co. Naked Shorts 1919
Washington, D.C. Chorus girls at Sidney Lust's Leader Theater
http://theautomaticearth.blogspot.com/2008/09/mayday-martians-have-landed.html



9/19/08
National Photo Co. Same Shorts, But Dressed 1919
Sidney Lust girls, two of Washington, D.C., movie theater owner Sidney Lust's chorus girls
http://theautomaticearth.blogspot.com/2008/09/debt-rattle-september-19-2008-you-just.html


edit to add the lnks

[Demeter]

23. Why Wall Street is Melting Down, and What to Do About It

http://robertreich.blogspot.com/2008/09/why-wall-street-is-melting-down-and.html


... Bailouts, subsidies, and government insurance won't help Wall Street because the Street's fundamental problem isn't lack of capital. It's lack of trust.

The sub-prime mortgage mess triggered it, but the problem lies much deeper. Financial markets trade in promises -- that assets have a certain value, that numbers on a balance sheet are accurate, that a loan carries a limited risk. If investors stop trusting the promises, Wall Street can't function.

But it's turned out that many promises like these weren't worth the paper they were written on.

That's because, when the market was roaring a few years back, many financial players had no idea what they were buying or selling. Worse, they didn't care. Derivatives on derivatives, SIVs, credit default swaps (watch this one!), and of course securities backed by home loans. There seemed no limit to the leverage, the off-balance sheet liabilities, and what credit rating agencies would approve by issuers who paid them to.

Two years ago I asked a hedge fund manager to describe the assets in his fund. He laughed and said he had no idea.

This meant almost no limit to what was promised. Regulators -- Alan Greenspan in particular -- looked the other way.

It worked great as long as everyone kept trusting and the market kept roaring. But all it took was a few broken promises for the whole system to break down.

What to do? Not to socialize capitalism with bailouts and subsidies that put taxpayers at risk. If what's lacking is trust rather than capital, the most important steps policymakers can take are to rebuild trust. And the best way to rebuild trust is through regulations that require financial players to stand behind their promises and tell the truth, along with strict oversight to make sure they do.

We tell poor nations they have to make their financial markets transparent before capital will flow to them. Now it's our turn. Lacking adequate regulation or oversight, our financial markets have become a snare and a delusion. Government only has two choices now: Either continue to bail them out, or regulate them in order to keep them honest. I vote for the latter.

[Joe Chi Minh]

74. You know, I thnk there's a hidden irony here. Is it my imagination, or didn't

the Republicans - not in as many words, for sure - imply that even Bill Clinton's booming economy was a bubble waiting to burst?

I mean, I think the Clintons are locked into the right-wing paradigm, by reason of their political modus operandi - ultimately swearing fealty to Big Oil, the Military-Industrial complex and Big Business in all its worst manifestations, Freedman's surrogates. And the Neocon low-lifes understood this even then. It was their brain-child after all, with Reagan their chosen puppet.

This is not to question, still less demean, Bill Clinton's outstanding presidential qualities, given the constraints he was subject to at all times.

[Demeter]

82. It Was Greenspan's Bubble, But Yes, It Lasted Through Clinton's 2nd Term

[Joe Chi Minh]

112. Thanks for the specifics. Another one, I dare say, like Bernanke,

Nassim Taleb wouldn't trust to drive his car. Dangerous people, as he put it, not even expert in their field.

[Demeter]

128. Funny You Should Mention Driving a Car

The BBC interviewed Hank Paulson's mother, and she told the story of how he grew up on a farm, but his younger brother was the one to drive the tractor, and the one time Hank drove, he smashed it into a tree.

[Joe Chi Minh]

136. .... the icing on the cake. Good job Taleb's wit can give us some things

to laugh at.

[Demeter]

26. Treasury Secretary Paulson leads us across the Rubicon

http://fabiusmaximus.wordpress.com/2008/09/09/rubicon/


Summary: The government’s solutions to our financial crisis is creeping nationalization, as becomes more obvious wth every new step. This is history in the making, a major change in America.’s economic system — biggest since the New Deal — taking place with little public debate or consideration of the long-term effects. That this happens during an election, without becoming an issue in the election, is an irony to be enjoyed by future historians.

Things are developing as I predicted in “A happy ending to the current economic recession“ (12 February 2008). Excerpt:

There are four ways we can unwind the excess debt of American households, ending the post-WWII debt supercycle.

1. Growth: given time and rapid wage growth, the debt burden becomes manageable. We can pay it off ever more easily as incomes grow. That was the dream solution to America’s high levels of household debt and large long-term government obligations. It burst in 2000, and will not return in time to help us.

2. Inflation, reducing the real weight of our debt. This requires two things. First, real growth in wages (no signs of this). Second, either the cooperation or blindness of bond investors — they must either accept negative real after-tax yields, or remain oblivious to rising inflation. The consequences are severe if our creditors (domestic and foreign) rebel.

3. Defaults on loans, the equivalent of surgery without anesthesia — resulting in bankruptcies, homelessness, decaying neighborhoods, and bank failures.

4. Socialization of the debt. The government can spread the burden of debt in many different ways (that so many of our creditors are foreigners makes this even more attractive).

The US is already moving towards #4 through de facto nationalization of the banks, as loans by the Fed (and foreign governments) become the primary source of new capital. … A recession - especially if long and deep – will accelerate deterioration of both household and business balance sheets, forcing this nationalization process to continue. The “Japan solution” is the course of least political resistance: prop up the banks with lightly hidden government help and wait for natural forces to “heal” the economy over time.

There are many ways to socialize the debt. The government (via the Fed or the Treasury) could expand its loans to banks in both size and duration, similar to what Japan did when they re-capitalized their banks with convertible preferred stock. Or government-sponsored mortgage agencies could be the hidden hand providing support.

Bringing this up to date

Since the deleveraging cycle started in December 2006 with the collapse of many mortgage brokers, the government’s response has been small incremental steps toward #4. Now Secretary Paulson has taken the first large steps:


nationalizing the Government-sponsored Enterprises, and
announcing that the government will buy mortgage-backed securities (MBS).

The first was widely expected but still noteworthy, the government taking over the two key private financial institutions in the US. This will not cost us anything — or so say the people who have been wrong about every step of this process. It certainly puts us firmly on a road away from a free-market economic system.

The second was lost in the noise, but equally significant. We — through our government — will borrow money (mostly from foreign central banks) to buy mortgage-backed securities (MBS). We simultaneously will be debtor and creditor on the same loans, with others governments in the middle. To illustrate the result, we collectively borrow from China 4% and lend to ourselves at 6%. Nice, while it lasts.

Each step by the government is considered a big thing at that time — the various mortgage relief plans (”Project Hope”), the Q2 tax rebates, and now the nationalization of the GSE’s. All are just small steps in a larger process of unwinding the debt supercycle.

Something new in American history

Secretary Paulson has taken us across the Rubicon, as US public policy moves from the New Deal policy of macroeconomic stabilization (Main Street) to directly supporting the financial system (Wall Street). While there have been isolated instances of this in the past, the scale of this move has no precedents since the Great Depression. And in my opinion, few or no precedents including the Depression era.

Compare the costs and public benefits of this bailout with its Depression-era equivalent, the The Home Owners’ Loan Corporation (HOLC). From Wikipedia:

A New Deal agency established in 1933 under President Franklin D. Roosevelt. Its purpose was to refinance homes to prevent foreclosure. It was used to extend loans from shorter loans to fully amortized, longer term loans (typically 20-25 years). Through its work it granted long term mortgages to over a million people facing the loss of their homes. The HOLC stopped lending circa 1935, once all the available capital had been spent. HOLC was only applicable to nonfarm homes, worth less than $20,000. HOLC also assisted mortgage lenders by refinancing problematic loans and increasing the institutions liquidity. When the HOLC ended its operations and liquidated assets, HOLC turned a small profit

What next?

Like each previous step, the government assures us that this will end the crisis. Since the driver of the housing crisis is the above average rate of vacant housing units (4 -5 million surplus units), tinkering with the financial system probably will have little effect.

I suspect that the economy will continue to slow, that more businesses will fail, and that this precedent (bailing out the GSE’s) will lead to more bailouts. Once we have crossed the Rubicon, it will be difficult to change course. There might be no shortage of likely candidates, such as

the automobile manufacturers
FDIC
the holders of credit card and auto loans
The pension benefit guarantee corporation (PBGC)


Who approved this?

Note the the important aspects of this decision, true of every step in this process so far.

(1) Bipartisan, like most major policy initiatives in America.

(2) An essentially discretionary act by the Executive branch, only vaguely authorized by Congress (with little deliberation). Compare with the highly specific text of the Home Owner’s Refinancing Act which created the HOLC.

(3) Weak or no basis for these actions in the Constitution.

That is how our government works today, with the Constitution just a fading dream. Note how these momentous events have no role in the Presidential or Congressional campaigns.

Where does this end? Another excerpt from my February post

The US is already moving towards de facto nationalization of the banks, as loans by the Fed (and foreign governments) become the primary source of new capital.

… A recession - especially if long and deep – will accelerate deterioration of both households and businesses, forcing this nationalization process to continue. The “Japan solution” is the course of least political resistance: prop up the banks with lightly hidden government help and wait for natural forces to “heal” the economy over time. For Japan this resulted in a period of slow growth which began in 1989 and continues to this day.

… Rescuing the financial system would not distract the Democratic Party {and perhaps the Republicans} from its major public policy goal: nationalization of the health care sector (like that of other western nations). Together these would represent a massive expansion in the scope of the US government, a repudiation of the post-1980 bias towards private-sector solutions.

These steps are only the first phase in the end of the post-WWII economic and geopolitical regime. Looking beyond these takes us far into the unknown.

It’s all about choice. Every downturn gives us the opportunity to determine what America will become. We weigh our fidelity to our principles, our history, our forefathers — vs. our ability to collectively withstand pain (financial, social, political). These are collective decisions, because all large-scale economic events have a decisive political component.

We have an election in November. Let’s make the candidates talk about these issues. Act to make your voice heard by donating time and money to the candidates of your choice.

Please share your comments by posting below. Please make them brief (250 words max), civil, and relevant to this post. Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).

For more information about this subject SEE LINKS AT ORIGINAL ARTICLE

[Demeter]

27. National City gets approval to raise cash

http://www.rgemonitor.com/us-monitor/253597/national_city_gets_approval_to_raise_cash

While all eyes were focused on Lehman Brothers this weekend, many other players were making their moves to shore up their own balance sheets in order to avoid the critical situation which felled Lehman. Merrill Lynch is the obvious example of shrewd moves in the wake of the Lehman fallout.

However, National City Corp (NCC), based in Cleveland, OH, has made its move as well. It has received shareholder approval to raise as much as $7 billion in new capital.

National City Corp, a U.S. Midwest regional bank battered by mortgage losses, has won stockholder approval to authorize new shares to allow for a $7 billion capital infusion, the bank said on Monday.

The Cleveland-based bank said shareholders authorized an increase in the maximum shares outstanding to 5 billion from 1.4 billion. Shareholders also approved the conversion of some convertible debt into common stock, and the exercise of some warrants. These actions were related to a capital raising plan announced in April, in which National City raised dilutive capital from Corsair Capital LLC and other investors.

The new capital gives National City "the necessary flexibility to address current market challenges," Chief Executive Peter Raskind said. He added that the bank has no exposure to Lehman Brothers Holdings Inc, the Wall Street bank that filed for bankruptcy protection, and has routine derivatives contacts with Lehman's broker-dealer unit. -Reuters


The moves by National City have to be a relief for shareholders as NCC was one of the regional banks most under scrutiny for its exposure to additional real estate related losses. However, one must not this authorization is only the first step; the next step is actually getting the money.

Although the move, if completed, would mean serious dilution for National City, it would also be a relief to know that bankruptcy is less likely in the wake of the largest Chapter 11 filing in U.S. history.

[Demeter]

29. How many people have lost their jobs?

THIS IS PROBABLY A WHOLE WEEK OUT OF DATE, AND WE ALL KNOW WHAT HAPPENED THIS WEEK!!!

http://knzn.blogspot.com/2008/09/how-many-people-have-lost-their-jobs.html


According to Barack Obama, 600 thousand Americans have lost their jobs since January. Actually, he's wrong: something like 20 million Americans have lost their jobs since January. It's just that most of them found new jobs. Probably the new jobs generally weren't as good as the ones they lost. And almost certainly, more than 600 thousand of them were unable to find new jobs, because many of the new jobs created were filled by new entrants to the labor force or by people who were already unemployed when the year began.

Like almost everyone else I've ever heard, Senator Obama is making the mistake of using a net job loss figure with language that, if taken in its plain sense, clearly implies he is talking about gross job loss. And it seems to me that gross job loss is the appropriate concept: losing your job is a pretty serious bummer, even if you are able to find a new one after a few months.

There has been a lot of talk about Senator McCain and how he has been saying things that aren't true in order benefit himself politically. It turns out that Senator Obama is also (obviously unintentionally) saying things that aren't true, but in this case they benefit his opponent.

[Hugin]

30. Hello!

Stopping by to K&R... Can you believe I got flamed for K&Ring a thread in LBN on Thursday?

This place is getting creepy.

[Demeter]

33. You What?

In America, you can find anything. I guess that holds true here on DU.

Thanks for the K&R! Come back later and read a bit. There are some really informative and analytical articles this week!

[Buttercup McToots]

41. Where Prag?

Why?

[Hugin]

48. Check this out.

Okay, I saw an OP in LBN which had a piece by Mrs. Edwards talking about trying to find Trust. Pretty much
a discussion of her feelings and how she's adjusting to the things which were happening. Very typical. Nothing
inflammatory and I thought it might be of interest since it was some of the only first person dialog I'd seen on
the matter. So, I literally 'K&R'ed it with those letters in the subject line and a few words in the post saying that Mrs. Edwards had something to say... Really, I didn't put much in. It was only a K&R.

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=102&topic_id=3497141&mesg_id=3497145

To which the OPer replied with some praise and sympathy for Mrs. Edwards's situation. Nothing out of the ordinary
in that.

THEN... The person with some issues pounced and it was directed at me. It had nothing to do with the OP of the thread.

I asked, why, if they didn't appreciate that type of article did they open the thread and read it. In the meantime
two other posters (the OPer and one other) had replies questioning the initial reply to my reply as well. Maybe they thought, like I did at first, that it was a misplaced reply meant perhaps for the OP topic. The reply to that
made it clear it was an attempt to stir something up with me personally and it had nothing to do with the thread
itself.

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=102&topic_id=3497141&mesg_id=3497360

So, I made one more reply and let it drop. Disruption? Personal attack? Projection? I don't know. But, it was
creepy.

[Demeter]

130. Creepy and Insanely Hostile

Probably a troll.

[Demeter]

31. McCain May Not Understand the Fundamentals, But His Lobbyist Advisors Do

http://www.buzzflash.com/articles/analysis/462


A McCain Admin Would Drill Our Economy into the Ground

by Meg White


In the second in our two-part series about the Republican ticket's economic past, we saved the best for last. As we mentioned in our first piece, Alaska Gov. Sarah Palin doesn't have a long record, but it's one that would make any economist (or working, middle class American for that matter) shake their head in disbelief. Arizona Sen. John McCain, on the other hand, has a long, rich history of either screwing up the economy or just ignoring it, hoping the problem will go away or be handled by his lobbyist friends and advisors.

We could start as early as the late 1980s with the embarrassing Keating Five incident, in which McCain used his influence in Congress to help out his friend and donor, Charles Keating, chairman of the Lincoln Savings and Loan Association. Keating spent five years in jail on corruption charges stemming from his influencing McCain and four other senators. McCain brushes off questions about the incident, saying he's paid for it and learned his lesson. It seems the lesson was "let other people handle economics. It's not that big of a deal anyhow." ....As you can see, McCain has said consistently and repeatedly that he doesn't understand economics. In an interview with the editorial board of the Sentinel Source in New Hampshire in December 2007, McCain was asked about the subprime mortgage crisis, which had just hit fever pitch in news coverage. He said he couldn't give an answer because "I don't claim to be smart enough... I‘d love to give you a solution, but I don‘t know." In a subsequent question, he said he was surprised by the subprime collapse as well as the dotcom bubble burst:

"...in all of this kind of new ways of packaging mortgages together and all, that is frankly something I don't know a lot about, but I do rely on a lot of smart people that are both in my employ and are acquaintances of mine. And most of them did not anticipate this."
The people that McCain relies upon are probably not the best for Main Street America. In fact, McCain's advisors are much more likely to have Wall street in mind when they make recommendations to the Republican presidential candidate. Let's look at some of the major players:

Phil Gramm - Up until recently, he was McCain's top economic advisor. Though kicked to the sidelines for making the campaign look bad, he's still whispering in McCain's ear. His insistence that Americans are just whining about the economy and that the economic crisis is imaginary makes it easier to understand his work to deregulate the financial system. He essentially created the Enron loophole with a last minute amendment to the 2000 Omnibus bill. The Gramm-Leach-Bliley Act in 1999 reversed key regulations in the banking industry, ushering in the current crisis.

Charlie Black - He's the chairman of the huge K-Street lobbying firm BKSH and Associates, which has clients such as AT&T and JP Morgan. He has even been quoted as saying he makes lobbying calls from the Straight Talk Express bus. Dig back much further in Black's past, and you'll find he worked for infamous dictators and despots from around the world. His firm also worked for Fannie Mae and Freddie Mac, but that's nothing new in the McCain campaign. Several others on McCain's campaign have worked for the two failed mortgage insurers that were just bailed out by the Fed, with at least 20 McCain contributors having lobbied for Freddie or Fannie.

Rick Davis - McCain's campaign manager, who co-founded a firm which lobbies for telecom giants Verizon and SBC Global, also lobbied for Freddie and Fannie.

Wayne Berman - The Co-chair of McCain's National Finance Committee has lobbied for AIG, the insurance company that was lucky enough to be bought out by the Fed this week. Surprise, surprise: he's also lobbied for Freddie and Fannie.

That is far from all the lobbyists working on McCain's campaign. In fact, of the 177 lobbyists the DNC identified as working for McCain, a Mother Jones investigation found that 83 had recently lobbied for financial institutions.

The most recent manifestation of McCain's economic problems is his stance on regulation. McCain has been calling himself "fundamentally a deregulator" and "always against regulation." But, as Rachel Maddow points out, that is just another of McCain's many recent flip flops....

[Demeter]

32. It's the War, Stupid

http://discuss.epluribusmedia.net/node/2617


...A number of folks in my neck of Virginia who voted for Bush twice and plan to vote for McCain assure me that our current economic woes are a direct result of our banks making mortgage loans to colored people. This is the same crowd that believes without hesitation that if we were to withdraw from Iraq, a haji horde numbering in the hundreds of millions would transit the oceans aboard a fleet of magic carpets, and invade and occupy America, and force all of us to do unspeakable things in unimaginable ways while we form pyramids wearing our unmentionables, or something like that.

What we're actually observing now is an ironic reversal of the strategic equation that led America to the status of global hegemon. Beginning with World War I (and arguably before that), military intervention overseas both enhanced America's place in the balance of global military power and fueled its economic engine. American has essentially maintained a wartime economy since World War II, the conflict that made the United States the military and economic leader of the free world. Throughout most of that period we have maintained a full time professional force and augmented it with reservists, militiamen, conscripts, and mercenaries. We have also maintained permanent deterrence and first response forces in Europe and Asia as a cornerstone of our Soviet containment strategy.

As a force in being, our post World War II military did a remarkable job of preventing a direct armed confrontation between the free world and the Soviet Bloc. But when we actually committed forces to combat, most notably in Korea and Vietnam, the results were, to put it kindly, disappointing. I don't say this to disparage the spirit and effectiveness of American troops in combat. Tactically, the U.S. military has been superb, but the manner in which America's political and military leaders (who at this point are virtually indistinguishable) have used it has seldom yielded favorable strategic outcomes.

General Douglas MacArthur squandered the brilliance of his amphibious landing at Inchon when he pressed too far north and goaded China into the Korean conflict. And it's more or less true that American forces were never defeated on the field in Vietnam, but so what?

Today, though they'll take all the kudos they can get over the "success" of the surge strategy in Iraq, neither General David Petraeus nor General Ray Odierno are eager to openly boast about the "victory" their elected bosses keep promising us is just around the corner. Upon taking charge of Central Command from Petraeus, Odierno cautioned that "we must realize that these gains are fragile and reversible." Odierno's starting to sound like a man watching his life pass before his eyes. As Petraeus's sidekick, he looked on as his boss created a faux peace by handing out guns and bribes like Hershey bars. Now that he's top kick, Odierno quakes at the knowledge that the bribe spigot may dry up but the guns won't go away. Odierno is also sweating bullets (heh, heh) over what he'll do when his neocon masters tell him he has to stay in Iraq and their erstwhile puppet Nuri al Maliki tells him he has to go.

Our puppets in the Bananastans aren't playing by Marquis of Queensbury guidelines either. The worst army in the world (Pakistan's, which has lost every war it ever fought) apparently kicked the best army in the world (ours) out of its country on Monday September 15. General Ashfaq Parvez Kayani, the closest thing Pakistan has to a genuine head of state, said on Wednesday September 10 that “No external force is allowed to conduct operations inside Pakistan.”

Makes you wonder why we spend more on defense than the rest of the world combined if that's all the more good it does us.

Ancient Chinese Open Secret

The Chinese are keen students of the entirely scrutable history of western civilization and know full well that the Middle East is the traditional graveyard of occidental superpowers. They have been delighted by our folly in Iraq; they're no doubt approaching orgiastic ecstasy over the prospect of America digging itself an even deeper hole in the Bananastans, a future that seems set in stone regardless of which political minstrel ingratiates his way into the Oval Office come November.

China watched with amusement for decades as the Soviet Union, with its inferior economic model, tried to compete with us in an arms race. Now, China spectates from the skybox as we pursue an arms race with ourselves and continue to depend on a form of national power that has become antithetical to our national interest.

You'll listen to the nattering class babble on the infosphere about how our present economic woes came about as a result of deregulation, and to some extent they'll be correct.

But what you'll actually be hearing is what it sounds like when your country is losing the kind of war that takes place in the brave new world order it created.



Commander Jeff Huber, U.S. Navy (Retired) writes at Pen and Sword . Jeff's novel Bathtub Admirals (Kunati Books), a lampoon on America's rise to global dominance, is on sale now. Also catch Russ Wellen's interview with Jeff at The Huffington Post and Scholars and Rogues.

[Demeter]

34. Dave Lindorff: You Can't Feel Blue About the Economy If You Want To. There Are No Blue Chips Anymore

http://www.buzzflash.com/articles/lindorff/144

AIG, the quintessential blue-chip, one of the 30 companies that compose the Dow Jones Industrial Average, a company that in 2000 boasted a market capitalization of $217 billion, making it the largest financial institution in the world, is teetering on the brink of collapse. Worth just $7 billion today, the future of what was until recently the world's largest insurance company is hanging by a thread -- that thread being the willingness of Wall Street institutions such as Goldman Sachs and Morgan Stanley, themselves facing credit issues, to come up with $75 billion in rescue loans.

It used to be that investors who were worried about financial markets, or who didn't like to take big risks, would put their money in what were called "blue chips" -- companies deemed conservative, safe investments that could weather any storm. They had names such as AT&T, General Motors, Ford, Boeing...and AIG.

Well, AT&T is a shadow of its former self, GM and Ford are both being talked of as dead men walking by analysts, Boeing is on life-support, or, since it is being propped up by its military contracts, more appropriately death support, and AIG, well, it's already got one foot in the grave.

There really are no blue chips any more. The largest companies in the world, as Enron showed, can vanish overnight in a puff of smoke. Look at Lehman Brothers. Here today, then, poof, gone tomorrow.
...So what are anxious investors to do? Clearly there are no safe harbors in the stock market, which could as easily drop 40 percent or 70 percent tomorrow as rise 3 percent. Bonds don't look much better. They may be more stable than equities, but not if the company that issues them goes bust. Then they are worthless scraps of paper, no better than the share certificates for Fannie Mae that are now being used to line cat litter boxes...Nor is it just investors who have to fear. Individuals who have tried to protect their families by purchasing life insurance policies, or who have sought to establish a secure retirement income by buying annuities from AIG, need to worry about whether the company will be around to make the payments when they or their beneficiaries need them. Sure, the states, which are responsible in the U.S. for regulating the insurance industries, for the most part have established reserve funds to backstop insurance carriers, but like the FDIC that insures bank deposits up to only $100,000, these funds generally only back the first $100,000 of insurance or annuity coverage as a "cash surrender" value, or $300,000 as a benefit payout. But those state guaranty funds were designed to protect people from failures of fly-by-night insurance operations. They are woefully underfunded for companies on the scale of AIG.

AIG is such a giant in the insurance business that as one corporate treasurer told The Australian:

"If AIG collapses, then the world doesn't have insurance."


So that's what it's coming down to. There are no Blue Chip refuges from the rolling disaster that is the U.S. economy today. And there are no easy rescues -- indeed according to one theory Treasury Secretary Henry Paulson let Lehman Brothers go bust because he knew he needed what funds the Treasury has left to try to keep AIG alive. It's all a fragile, interconnected house of cards, propped up by a residual faith among ordinary investors who, at least so far, still think it has some kind of inherent structure to it. As card after card gets pulled out of that rickety stack -- first Bear Stearns, then IndyMac Bank, then Fannie Mae and Freddie Mac, then Lehman Brothers, now perhaps AIG and Washington Mutual, a large savings institution that is on a death watch -- at some point those investors and now insurance clients, too, may all decide to take their money and go home, and the whole thing will come crashing down.

The good news is that, if the U.S. economy collapses, the Pashtun farmer in northeastern Pakistan, the Iraqi shopkeeper in Fallujah, the Iranian worker in Tehran, and the peasant in Venezuela, will no longer have to worry about being bombed or having their children mowed down by a U.S. helicopter gunship. The U.S. would no longer have the funds to pay for such foreign wars. And because a collapse of the U.S. consumer economy would also drag the rest of the world into a prolonged global slump, perhaps reminiscent of the 1930s, we might actually see a significant enough drop in carbon emissions from idled cars, factories, and power plants that the global warming catastrophe that is threatening us all will be significantly delayed, giving humanity time to come up with a serious long-term response.

DAVE LINDORFF is a Philadelphia-based journalist and columnist. His latest book is "The Case for Impeachment" (St. Martin's Press, 2006 and now available in paperback edition). His work is available at www.thiscantbehappening.net.

[Demeter]

36. Here's What Happened Wednesday!

TREASURIES-US 3-mo T-bill yield falls to 0.02 pct

http://www.reuters.com/article/bondsNews/idUSNYG00128420080917

NEW YORK, Sept 17 (Reuters) - The yield on 3-month U.S. Treasury bills <US3MT=RR> fell to 0.02 percent early afternoon New York trade on Wednesday amid investors' panicked scramble into the safe haven of ultra short-dated government securities, traders said.

The 3-month U.S. Treasury bill yield "last traded at 0.02 percent as an actual trade and may have traded negative earlier today," said Sean Murphy, Treasuries trader at RBC Capital Markets in New York, shortly after 12:30 p.m. EDT (1630 GMT).

The last time the 3-month U.S. T-bill yield was at or below zero was in January 1940, said Bryan Taylor, chief economist with Global Financial Data in Los Angeles.

Murphy cited "a flight to quality into the Treasury bill market." "People are just panicking and they just want their principal," he said.

Andrew Brenner, analyst at MF Global Inc, said the 3-month bill traded at 0.02 percent.

"Probably there's disappointment in the Fed's decision (to hold interest rates unchanged) yesterday and what's transpiring is that banks are just pulling back and not lending and not being able to get the funding they need," Murphy said.

(Reporting by John Parry; Editing by Chizu Nomiyama)

[Hugin]

43. January 1940, eh?

Someday, I'll have to research what series of events which precipitated that fall.

[Demeter]

37. New Studies Report Wide Disparity in Health Care Plans By Perry Bacon Jr.

http://voices.washingtonpost.com/the-trail/2008/09/16/new_studies_report_wide_dispar.html


Barack Obama and John McCain are both proposing more than $100 billion a year in spending for health care, but the candidates' plans have vastly different goals, and vastly different outcomes.

New studies from the nonpartisan Tax Policy Center and the policy journal Health Affairs suggest that Obama's proposal would eventually cover more than 34 million of the roughly 47 million Americans currently without insurance, while McCain's would cover at best 5 million uninsured.

Obama's plan relies on a variety of measures to reduce the number of uninsured, such as increasing the number of people in programs such as Medicaid and the State Children's Health Insurance Program, requiring all children to have insurance and offering subsidies for people who cannot currently afford insurance.

Obama's plan was crafted with the intention of creating universal health insurance, although both studies suggest some people would remain uninsured. McCain, meanwhile, touts his plan as one that will rely more on the consumer market to reform health care.

Currently, the value of a person's health care plan is not taxed, creating essentially a subsidy by the government for health care. McCain would tax health benefits while creating a $5,000 tax credit -- $5,000 for families or $2,500 for individuals -- to subscribe for insurance coverage. The studies assume that millions of Americans will use this credit to purchase health care and that some businesses will drop employees from their health insurance plans, resulting in some people losing insurance as well.

Both proposals would face an uphill climb to becoming law. Virtually all congressional Democrats are opposed to McCain's health care vision, which they believe would destroy the employer-based health care system and replace it with one that benefits the young and healthy but not people who are older or sick. (Health insurance companies charge much higher prices for people who are older or have chronic illnesses.)

With the federal budget deficit increasing and a huge list of other projects already proposed, it's not clear that a Democratic Congress would push through Obama's health-care plan either. Some congressional Democrats are already touting more modest goals, such as making sure that all children have health insurance.

[Demeter]

38. That's It for Tonight, Folks--Sweet Dreams!

Back later with more of the data dump. (My inbox is down to 27. I am never going to get to zero at this rate!)

[Dr.Phool]

39. Kick!

For the morning.

[Buttercup McToots]

40. Good Mornin`

Checking in b/4 I go round the world...
:donut:
That was some birthday yesterday...Feel kinda sick...

[Demeter]

64. Good Thing It's Only Once a Year

Gives you some time to recover! Good morning, and come back safe!

[Buttercup McToots]

42. Resolution Trust: the mother of all scams

http://subprimeshowtime.wordpress.com/2008/09/19/resolution-trust-the-mother-of-all-scams/

Resolution Trust: the mother of all scams

September 19, 2008

In what is both the single most socialist move ever made by the US government, and the biggest robbery of US taxpayer since the creation of the union, the Fed and the Treasury have quickly realized who pays the government and acted quickly to ensure the survival of all the crooks on Wall Street. If anyone was at all confused about the puppet and master relationship between big business and DC, this shocking slight of hand should leave no doubt whatsoever who’s in control.

As my good friends at the Housing Timebomb pointed out, the last time this amazing scam was pulled off was during the savings and loans crisis, and the RTC cost the taxpayer $124.6 billion, or roughly $400 for every person living in the US of A. But this meltdown makes the S&L blip look like the boom era, since we’re already $6 trillion in the hole, and that’s just the tip of the iceberg ($20,000 per person already).

What in holy hell is an RTC?
Good question. Here to explain exactly how this awesomely-constructed scam works is sparrowshead with his mad clip art skillz:



So all the banks and big companies that lost money can take all their CDOs, CDSs, subprime stuff and every other shitty investment that backfired, and stuff them into a big trash can euphemistally called a Resolution Trust Corporation. This has two huge advantages - it legally protects them from debt repayment problems and other subtle bankruptcy problems, and it shores up their balance sheets and immediately enables their share price to skyrocket now the debt has gone bye-bye.
Immediately, previously-insolvent investment banks can now go and borrow money and act like this whole business was just a meaningless, forgetful night of snorting coke from a hooker’s ass.
Now the RTC has to be supported by Uncle Sam, who basically has to put the infrastructure budget for - well - pretty much everything on hold and start printing money 24/7.
The great American taxpayer gets left by massive T-bill repayments together with a multi-trillion debt that will take generations to pay off, and the people in investment banks can start buying Ferraris, golf courses and private jets.
Now if I could use an RTC, I’d be happy.
Just to emphasize how glorious this scheme really is, think about it as if an RTC existed for your family. Here’s how it would work for mine:

I dump all my credit card debt, mortgages, car loans, college loans and every other damned rope around my neck and stick it in the RTC.
I go and get new credit cards and start all over again.
My neighbors figure out how to pay off the RTC while I can’t decide on the trim for my new Mercedes.
Moral Hazard
You’ll hear the following phrase repeatedly over the next few weeks from politicians, the Fed, the Treasury and every other scumbag out there: “We had no choice“. Bailout Bernanke has hit the motherload with this one, creating the largest taxpayer liability in the history of the planet. A few years ago, when we worried about our tiny national debt and how it affected the future economic health of the US, nobody would have even conceived of such an unethical, impracticable, socialist, dumb and downright criminal idea, that made that national debt look like an average-sized bar tab.

The frauds involved with the biggest economic con in history have gotten away with it. They have escaped the bankruptcy they created by pumping trillions onto subprime borrowers who were too stupid to realize what they doing, and who trusted lenders whose only motivation was to get them more in debt. The government has simply written a check to these guys to cover their losses so they can start all over again.

Did you vote for this? Were you asked your opinion? Who the fuck hired Bernanke? Who knows, but you were just given the biggest bill you’re ever likely to see in your lifetime. And did I mention that a substantial amount of that money is going to foreign investors who lost money on the subprime scam? Economically, the USA will never recover from this.


--------------------------------------------------------------------------------

Possibly related posts: (automatically generated)

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Entry Filed under: economy, fed, recession, subprime. Tags: fraud, bernanke, bankruptcy, subprime, economy, resolution trust, RTC, socialist, crooks, puppet, robbery, scam, meltdown, investment banks, republicans, paulson, CDO.

6 Comments Add your own
1. ardent being | September 19, 2008 at 4:55 pm
Provide a way to do a email blast to all the congressmen and house of representatives to let them know what people are thinking before RTC gets approved. RTC is bailout for all the crooks at the expense of hardworking person who chose to leave within his/her means.

2. ardent being | September 19, 2008 at 4:57 pm
Provide a way to do a email blast to all the congressmen and house of representatives to let them know what people are thinking before RTC gets approved. RTC is bailout for all the crooks at the expense of hardworking person who chose to live within his/her means.

3. sparrowshead | September 19, 2008 at 4:58 pm
Ardent Being - excellent idea. This needs to be stopped before it becomes the most damaging piece of legislation ever passed by Congress.

4. techie | September 19, 2008 at 5:19 pm
Glad I am not living in America

5. I remember the RTC «&hellip | September 19, 2008 at 5:47 pm
<...> was an accountant for a client who became an RTC trustee and he used to tell us stories about what was going on. Later in life. I met friends who owned an oceanfront house in Indialantic, Fla., right next to a <...>

6. Whatdoiknow | September 19, 2008 at 6:51 pm
Funny, although I know very little about the stock market and investments, as soon as I saw the first article suggesting an RTC type bailout, I called it a taxpayer funded trash can. As a mobile notary, I smelled trouble in 2004, doing refi sign-ups for hundreds of Ameriquest loans as well as others here in Southern California, but I had no idea these lame ass loans were being used as collateral for investment vehicles. How do we realistically stop this mess? Can we?

[Buttercup McToots]

44. They want this thru fast...very fast...I scared I tell you...

Quote:
The nation's top economic generals pressed Congress to move with extraordinary speed -- by next week -- to authorize a plan to bail out the U.S. financial system, but are still working to iron out enormously complicated details likely to generate controversy.

[Hugin]

51. What's that expression? Bum's Rush?

Idioms: bum's rush
Forcible ejection, abrupt dismissal. For example, When Henry started shouting, the bouncer gave him the bum's rush, or Within hours of being fired, Alice was given the bum's rush. This idiom uses bum in the sense of "a vagrant or tramp."

http://www.answers.com/topic/bum-s-rush
--------------------------------------------------------------------------------

Nah, that's not quite what I was thinking of... I was thinking of the case where a confidence player is rushing
a rube through a purchase so that they aren't allowed any time to realize the ramifications and that they may
not be in the buyers best interest... Sort've like we were rushed into the War-to-nowhere.

[Hugin]

52. No, a 'bums rush' is what we need to do to Paulson, Bernake, and many others...

Can anyone help me out here?

[Hugin]

94. Railroaded!

Yes, railroaded is the term I was thinking... "Being taken advantage of"

Man, the contempt from these criminals is astounding. It never ceases and only grows.

[Karenina]

46. Great graphic there!

The piece sums it up well.

[Demeter]

65. Bernanke and Hank Did a Masterful Sell Job

and Congress actually believes that these pieces of used paper have some kind of intrinsic value that will eventually mature and repay the Treasury.

Right.

There's a bridge to nowhere they'd like to sell you, too.

[Buttercup McToots]

45. Bloomberg: Timing of taxpayer *ss-reaming

Bloomberg: Timing of taxpayer *ss-reaming

Santa Clara, CA

Note timing. House passage next week; Senate after that. Prediction: When the eye-wall of the Cat-5 deleveraging hurricane is coming in full force, they will either pass or not pass--but the effects of the hurricane will linger for quite a while. Next week: Tropical storm force winds.

http://www.bloomberg.com/apps/news?pid=2....

Quote:
Democrats Seek to Add Subprime Relief to Paulson's Rescue Plan

By Craig Torres and Dawn Kopecki

Sept. 20 (Bloomberg) -- U.S. Treasury Secretary Henry Paulson is sending a financial-rescue plan worth about $800 billion to Congress as Democrats prepare to turn it into a vehicle to help people with high-cost mortgages stay in their homes.

The Treasury will run the program to take on illiquid mortgage-related debt, with the Federal Reserve consulting on its design, officials said. Treasury aides are spending the weekend with congressional staff to negotiate a compromise that the House and Senate can vote on next week.

Paulson, Fed Chairman Ben S. Bernanke and other regulators are eager to stop a contagion of credit risk that has toppled three financial giants and forced one into a merger as capital flight began to squeeze Wall Street. Democrats are indicating they want to target relief for households by restructuring loans of struggling borrowers.

``We're going to be buying up a lot of mortgage paper,'' said House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat. ``Between Fannie Mae and Freddie now owned by the federal government and the mortgage paper we'll be acquiring here'' and the Federal Deposit Insurance Corp. running failed bank IndyMac Bancorp Inc., ``we should now be able substantially to reduce foreclosures,'' he said.

Frank said the Treasury was due to present the plan to lawmakers late yesterday.

$800 Billion

The program may be worth about $800 billion, split into $50 billion tranches, said four people briefed on drafts of the Treasury's proposal who spoke on condition of anonymity because details haven't been finalized. The funds, which would last for at least two years, will likely accept mortgage-backed securities and collateralized debt obligations, they said.

The Treasury plans to hire asset managers to purchase the assets through so-called reverse auctions, seeking the lowest prices, one of the people said. Congress will need to raise the limit for the federal debt to allow the government to borrow enough to fund the program, the person said.

Republicans warned against turning the bailout into an agenda.

``Congress and the administration must keep this plan as simple and straightforward as possible,'' said John Boehner, the leading Republican in the House. ``Loading it up to score political points or fit a partisan agenda will only delay the economic stability that families, seniors, and small businesses deserve.''

Last Resort

The Treasury is stepping up as the buyer of last resort for mortgage-linked assets that few other financial institutions in the world want to buy. To avoid giving a direct subsidy to Wall Street, officials must structure the fund so taxpayers either get fees, a high rate of interest, or some participation in the full recovery of the assets.

``Illiquid assets are choking off the flow of credit that is so vitally important to our economy,'' Paulson said yesterday at a press conference in Washington. ``As illiquid mortgage assets block the system, the clogging of our financial markets has the potential to have significant effects on our financial system and our economy.''

Senator Richard Shelby, an Alabama Republican who has advocated that markets should be allowed to penalize bad bets, warned that bailout could saddle taxpayers with large debts.

``This could be the biggest bailout in the history of the country and could ultimately cost $500 billion to $1 trillion,'' Shelby, the ranking Republican on the Senate Banking Committee, said in a Bloomberg Television interview yesterday. ``Congress is not going to rubber stamp something.''

Delinquencies Soar

Nearly one-in-10 American mortgages is delinquent or in foreclosure. The government would be buying debt backstopped by the U.S. home values that have been falling in value for eight consecutive quarters, according to the S&P Case-Shiller U.S. Home Price Index.

Senator Christopher Dodd, the Banking Committee chairman, said the plan's framers should consider the full debt load of U.S. consumers, possibly including credit cards.

``We'' have ``got some strong concerns about what's included here,'' said Dodd, a Connecticut Democrat. ``They haven't limited this conversation exclusively to residential mortgages. So I know that other securitized debt is also going to be considered.''

Investors are unlikely to tolerate partisan wrangling and brinksmanship. U.S. stocks surged in the biggest two-day global rally in history as talk of the plan began to circulate Sept. 18.

The House will pass legislation to implement the plan by the end of next week, and the Senate will act soon after, Frank said yesterday in an interview on Bloomberg Television's ``Political Capital with Al Hunt.''

Stimulus Spending

The temporary plan is likely to include a ``second stimulus'' proposal with infrastructure funds, low-income energy aid and Medicaid assistance, Frank said. Congress will begin weighing broad regulation of hedge funds, private-equity firms and investment banks when it reconvenes next year, he said.

Frank, in a separate C-Span interview, said he expects Wall Street executives to give up pay and other perks in exchange for the federal intervention.

Officials devising the plan ``need to make sure that they keep that hard-headed approach so that people are not profiting off this,'' said Martin Baily, who was chairman of the Council of Economic Advisers under Democratic President Bill Clinton.

``To some extent that's unavoidable,'' said Baily, now a senior fellow at the Brookings Institution in Washington. ``Anytime you do something like this you have the problem of bailing people out and creating moral hazard. That's the reason why you hold your nose. But it's better than the alternative.''

To contact the reporter on this story: Craig Torres in Washington at [e-mail]; Dawn Kopecki in Washington at [e-mail]
Last Updated: September 20, 2008 00:04 EDT

[Hugin]

53. Is that seriously the headline?

:rofl:

If so... I <3 Bloomberg!

[Demeter]

66. Thing Is, They're Buying the Derivatives, Not the Actual Mortgages

The mortgage MIGHT have some value, if vandals haven't ripped out the metals for salvage.

Those derivatives will never be worth anything...they are lottery tickets to a Ponzi scheme.

[fedsron2us]

145. Dervivatives and leverage are the root cause of this disaster

http://www.webofdebt.com/articles/its_the_derivatives.php

The point everyone misses,” wrote economist Robert Chapman a decade ago, “is that buying derivatives is not investing. It is gambling, insurance and high stakes bookmaking. Derivatives create nothing. They not only create nothing, but they serve to enrich non-producers at the expense of the people who do create real goods and services. In congressional hearings in the early 1990s, derivatives trading was challenged as being an illegal form of gambling. But the practice was legitimized by Fed Chairman Alan Greenspan, who not only lent legal and regulatory support to the trade but actively promoted derivatives as a way to improve “risk management.” Partly, this was to boost the flagging profits of the banks; and at the larger banks and dealers, it worked. But the cost was an increase in risk to the financial system as a whole.

Bailing the banks and other financial institutions bad bets is not going to fix this crisis since it is the whole culture of gambling using other peoples money that needs to be eradicated.

As the article states

We need a public banking system that makes a cost-effective credit mechanism available for homeowners, manufacturing, renewable energy, and infrastructure; and the first step to making it cost-effective is to strip out the swarms of gamblers, fraudsters and profiteers now gaming the system.

The current proposals from Paulson do nothing to address that issue.

[Demeter]

146. Exactly! Thanks for the link!

We've got the pieces of this puzzle, and it's not a pretty picture.

[Tansy_Gold]

150. I posted this article as a new thread topic

I came into the Stock Market Watch thread about a year ago, maybe when teh housing market started to unravel, I'm not sure exactly. But one of the main reasons I started engaging in the thread was because I knew so little about the complexities of the financial sector. I had watched the collapse of Enron and tried to figure it out, but it didn't make sense. And I thought surely there were folks in charge of things who knew a lot more than I and would see to it that we didn't have any more Enrons.

But I had worked back in the early 90s for the RTC in the unwinding of Charlie Keating's Lincoln Savings. I knew how that worked. And it looked too familiar to what was happening with Enron, with WorldCom, with the housing market. I needed to know more.

Nothing I learned from all the generous and wise and funny folks in SMW was comforting. What I had seen from the very beginning as a nefarious and dangerous ponzi scheme was pretty much described by my mentoring SMWers as a nefarious and dangerous ponzi scheme. My gut feeling wasn't wrong.

And my gut feeling continued to tell me we were in for a disaster. I'm not as bad off as some, but like many here and out in the real world, I have virtually no safety net: almost 60 with no health insurance, limited income, counting on social security but losing faith in that now. I do own my home free and clear, at least for the moment. But I'm not sure how much protection that gives me from the economic tsunami I fear is headed our way.

What I still don't understand, however, is why it would be such a disaster if the big derivative-based pyramids collapse? There's no real money in them. They serve only as conduits to take real money out of the real economy and sock it away in the back accounts of the uber-wealthy. It does not trickle down, and I find the "sympathy" expressed for all the "little people" who would lose their jobs as valets and waitresses and nannies and maid just sickening. What logic is there in propping up the obscenely wealthy so they can keep the rest of us in serfdom?

The hedge funds need to fail. All of them. They do nothing productive. They are, by their nature, parasites. They should die and the sooner the better.

The derivatives need to fail. They aren't worth anything anyway, so what difference does it make? They aren't providing jobs, they aren't growing food, they aren't paying real people's mortgages. They need to go away.

I fear, however, that they will not. I fear that the bail-out will siphon more true wealth out of the true economy, the economy that works and makes things, until the system cannot be propped up. Until it collapses and collapses so catastrophically that we enter a new kind of dark ages.

Even though it seems utterly obvious to me that our economy stands a better chance of survival if we let the parasites fail, I suspect they are too powerful and they will suck us all down the toilet with them. Like an abusive spouse who finally resorts to murder when the victim tries to flee: IF I CAN'T STEAL YOUR WEALTH, I WON'T LET YOU HAVE IT EITHER!

My mood has vacillated the past month or so, sometimes up and sometimes down. My personal life is a shambles right now, but that's only part of it. The Palin thing, the swinging polls, the fears, the hopes, the worries. Right now only two things are keeping me sane: My friend Diane :hi: who posts here only rarely but reads a lot, and the friends who live in my computer and let me play with them on DU.

Personally, I think we are in for some very very rough times, and I think they are going to be on us much sooner than we are prepared for.

Good luck to all of us.

:grouphug:


Tansy Gold

[phrigndumass]

47. Rec'ing while I can, with a promise to come back Sunday morning to read :)

:hi:

[UpInArms]

49. This one is must read! Morgan Stanley, Goldman love shorts...and hate them

http://www.reuters.com/article/ousiv/idUSN1939833320080919?sp=true

NEW YORK (Reuters) - Morgan Stanley (MS.N: Quote, Profile, Research, Stock Buzz) and Goldman Sachs (GS.N: Quote, Profile, Research, Stock Buzz) blamed short sellers for their problems this week, an interesting twist for two investment banks known for making money from short sellers and even betting on weakening shares themselves.

Shares of Morgan Stanley and Goldman took a real beating in the middle of this week. The market activity seemed to threaten Morgan Stanley's survival, forcing the investment bank to consider selling itself. If Goldman's shares had fallen long enough, it could have looked at similar measures.

But while pursuing capital, Morgan Stanley Chief Executive John Mack also lobbied the government for relief, which arrived on Friday, when the Securities and Exchange Commission took the highly unusual step of banning short-selling in 799 financial stocks, including Morgan Stanley and Goldman.

The overall market cheered the move, but some investors were not pleased.

"I did not hear the big Wall Street banks complaining until short sellers began shorting the financial stocks," said Harry Strunk, partner at Treflie Capital Management, which invests in hedge funds that short, among others.

Morgan Stanley and Goldman Sachs believe there is a difference between the shorting of their shares, and the shorting they facilitate for clients.

Both banks believe they are the victims of "bear raids," where short sellers gang up on a stock to try to push its shares lower, rather than having a considered investment thesis. Short sellers bet a company's shares will drop.

"What's happening out there? It's very clear to me -- we're in the midst of a market controlled by fear and rumors, and short sellers are driving our stock down," wrote Morgan Stanley CEO John Mack in a memo obtained by Reuters on Wednesday.

...more...

[Hugin]

54. Double standard? No wonder they act so schizoid.

:lol:

[UpInArms]

50. How AIG fell apart - good explanation of why we need to stick a fork in CDSs

http://www.reuters.com/article/newsOne/idUSMAR85972720080918?sp=true

excerpt:

Over the past few years, CDSs helped transform bond trading into a highly leveraged, high-velocity business. Banks and hedge funds found that it was much easier and quicker to just buy and sell CDS contracts rather than buy and sell actual bonds. As of the end of 2007, they had grown to roughly $60 trillion in global business.

So, what went wrong? Many CDSs were sold as insurance to cover those exotic financial instruments that created and spread the subprime housing crisis, details of which are covered here 1. As those mortgage-backed securities and collateralized debt obligations became nearly worthless, suddenly that seemingly low-risk event-an actual bond default-was happening daily. The banks and hedge funds selling CDSs were no longer taking in free cash; they were having to pay out big money.

Most banks, though, were not all that bad off, because they were simultaneously on both sides of the CDS trade. Most banks and hedge funds would buy CDS protection on the one hand and then sell CDS protection to someone else at the same time. When a bond defaulted, the banks might have to pay some money out, but they'd also be getting money back in. They netted out.

Everyone, that is, except for AIG. AIG was on one side of these trades only: They sold CDS. They never bought. Once bonds started defaulting, they had to pay out and nobody was paying them. AIG seems to have thought CDS were just an extension of the insurance business. But they're not. When you insure homes or cars or lives, you can expect steady, actuarially predictable trends. If you sell enough and price things right, you know that you'll always have more premiums coming in than payments going out. That's because there is low correlation between insurance triggering events. My death doesn't, generally, hasten your death. My house burning down doesn't increase the likelihood of your house burning down.

Not so with bonds. Once some bonds start defaulting, other bonds are more likely to default. The risk increases exponentially.

...more...

better idea:

stop selling worthless products to corporations that will default

[Tansy_Gold]

106. This is certainly not unexpected, is it????

I mean, at the end of the day, when you're selling shit like CDSes, the last guy in line is going to pay the highest price and end up with the biggest pig in the biggest poke. That's the way it's designed to work.

If AIG was stupid enough to fall for this gag, why should someone else bail them out?

Why not just declare that arm of the operation bankrubpt, put it out of business, and walk away. Then all the other businesses back down the line who bought and then sold the worthless shit would just have to write it off THEIR books and eventually we'd be back to equilibrium.


Wouldn't we?



Tansy Gold

[Buttercup McToots]

55. From Mike Morgan "Move Money to Money Markets Now "

Friday, September 19, 2008
Move Money to Money Markets Now

Before I explain the title of this blog piece,

It looks like King Henry really goofed, but we can take immediate advantage of this one.

The other day I spent a lot of time trying to figure out what to do with our cash. King Henry answered that question today. I recommend everyone move your cash from your bank accounts to higher paying money market accounts. Now that Paulson has declared the FDIC will insure all money markets, why not earn 2-3 times more interest. In fact, I never keep any money in the local bank. All of my funds are in money markets, as I have checking and credit cards tied in. Moreover, this is tied to my trading accounts as well.

Just wait until this really sinks in. If enough people realize how much better their money is with the money markets, the banks will fail from the flood of withdrawals moving to money markets. In any event, if you were worried about the $100,000 limit at banks, Paulson has declared he (we) will insure money markets for 10 times more than we are prepared to insure banks. You can keep up to one million in a money market with FDIC insurance.

Most likely tomorrow he will be offering insurance on our pets and he will be covering all losses in Vegas so the casino operators can surge higher. I heard tonight that he will also be guaranteeing the weather and personal happiness.

Seriously though . . . you are only insured for $100,000 at your bank, but now you are insured for one million in your money markets. Move your money.

[Tansy_Gold]

107. What money? n/t

.

[Mojorabbit]

154. Too late

I saw breaking news tonite on cnbc. THe insurance will only be available to those having money market funds as of the 19th of sept. They cut it off so people would not withdraw money from banks.

[Buttercup McToots]

56. Proposals for US Bad-Debt Fund Begin to Emerge

New Fund--Only Accessed by U.S.-based Institutions


Proposals for US Bad-Debt Fund Begin to Emerge

Topics:Banking
Sectors:Financial Services | BanksBy CNBC.com | 19 Sep 2008 | 07:24 PM ET Font size:

Congressional Democrats have begun to weigh in on their wishes for the bad-debt fund that the Treasury Department plans to propose, and among them is that taxpayers get a cut of any upside to the fund, CNBC has learned.

Democrats want taxpayers to share in any potential returns from the fund, which the government hopes will help financial institutions mop up toxic mortgage-backed debt, a Congressional staffer said. Taxpayers would benefit through warrants in the firms that take advantage of the fund.

Democrats also seek limits on executive compensation on firms that use the bad-debt fund.

Among other early details on the fund, according to a Treasury official who spoke with CNBC:

Hedge funds will not have access to the bad-debt fund that the Treasury Department plans to propose to Congress.

The fund will also be accessible only by U.S.-based institutions, the official said.

The forthcoming proposal envisions that Treasury will have the authority to buy illiquid securities over a two-year period, the official said. After that point, Treasury will still be able to hold the securities, but not acquire them.

Specifically, Treasury will be able to buy mortgage-backed securities, collateralized debt obligations, and whole loans.

Sources said there could be contention in Congress over whether the government will ask financial institutions taking part in the fund to cede equity.



http://www.cnbc.com/id/26796404




Aren't most of the hedgies in the cayman islands for tax purposes?

[antigop]

58. ..contention in Congress over whether to cede equity

DAMN IT! These guys are going to get a bailout and we'll get nothing except piles of debt.

[antigop]

59. Anyone want to bet that retroactive immunity will be thrown in,too? n/t

[Roland99]

57. Is this a bottle in front of me or a frontal lobotomy?

[antigop]

62. "The proposal does not specify what the government would get in return from financial companies"

http://rawstory.com/news/2008/Rescue_plan_seeks_700B_to_buy_0920.html

The plan would give the government broad power to buy the bad debt of any U.S. financial institution for the next two years. It would raise the statutory limit on the national debt from $10.6 trillion to $11.3 trillion to make room for the massive rescue. The proposal does not specify what the government would get in return from financial companies for the federal assistance.

We'll get nothing but a pile of debt, and the elimination of Social Security and Medicare.

[antigop]

63. WSJ: As Times Turn Tough, New York's wealthy economize

http://online.wsj.com/article/SB122187131490959185.html?mod=article-outset-box

A nose job in a hospital with a private nurse in attendance had been something of a rite of passage for Joan Asher's children. But when her fourth and last child was ready for her own rhinoplasty recently, Ms. Asher asked her to postpone it.

The financial markets were simply more out of whack than her 16-year-old's proboscis.

"The other noses were more prominent," the stay-at-home mother from a tony New York City suburb in Westchester County told her 16-year-old daughter. She could get hers done when things settled down.

The financial crisis on Wall Street has New York's well-to-do reeling. The people who fuel the area's economy with their spending on art, fashion, cars, restaurants, plastic surgery and other luxe goods and services are starting to cut back once-lavish budgets. As a result, those who cater to their every whim -- from nanny agencies to jewelers to yacht builders -- are seeing clients tighten their belts on expenses from the millions to the thousands.

At luxury boat builder Northrop & Johnson Yacht and Ship, headquartered in the British Virgin Islands, director Kathleen Mullen says a New York investor called this week trying to put off the purchase of a more than $25 million megayacht. The client's debating whether to back out of the deal completely. He'll still have to pay 10%, Ms. Mullen says, since he'd already signed the contract. "He's undecided about what he wants to do," she says. "People have been very shaken."

[Pale Blue Dot]

67. I'll ask the "real" smartest people in the room: How much time do you think the Fed bought?

Years? Months? Weeks?

Right now, I'm so angry and frustrated - I can barely think about anything but the economy. I'm sure it's not good for my psychological well-being.

[Karenina]

69. Cassandra calling 20 October!

;-)

[DemReadingDU]

70. It seems like a Naomi Klein Shock Doctrine

Paulson, Bernanke, Bush have all known of an economic crash for a couple of years. Keep everyone else in the dark as long as possible. In the meantime, they write up the 'transfer of wealth' bailout plan. Then, when the crash is eminent, get a big meeting to unveil the 'plan' that a bailout is is necessary to prevent a collapse of the banks. Everyone is SHOCKED, and fall into the trap. The rich get the wealth, the rest of us become paupers.

I am livid! Trillions of toxic waste is about to be transferred to us taxpayers. I left messages with my Senators and Congressman yesterday that they should not vote for this bailout plan, that we taxpayers cannot afford all these bailouts.

Probably what we need is a massive protest, shut down Washington DC, but who but a handful people would show up? The majority of Americans are clueless.


oops spelling

[Dr.Phool]

75. We need a general strike.

Shut the whole frickin' country down. Invest in rope futures.

And start passing out some of those "French Revolution Severance Packages" you mentioned the other day.

[DemReadingDU]

78. yeh, general strike, shut down everything

But who would strike, people gotta watch the latest mindless program on their wide-screen TV.

[Dr.Phool]

73. I'm no expert, but I'd say days.

I think with all the short covering, you're going to see a lot of people pulling out of the market. Especially the hedge funds.

I just posted Bill Moyers interview with Kevin Phillips at #72. You get the impression that there's no optimism left. Seven sharks in the pool. They're all coming to eat us.

[Demeter]

83. A Few Days, Maybe

Until there are some jobs, real jobs, with real wages, people will continue to default on their debt.

Funding public works (infrastructure) is a start, but women need jobs, too. And older men, not up to pouring concrete, etc.

Installing solar, wind and insulation would be good.

If anybody had a production model of a fuel-efficient car (besides the foreigners) that would put people to work too.

And think of how many paper-pushers at Lehman's, etc. are now out pounding the pavement...damn few got any kind of bonus, and probably didn't save it in a liquid form anyway.

[Hugin]

85. Considering there's no way they could implement it before next year...

It's a hoax.

Or maybe they're going to try to use this 'crisis' to influence the President al elections... Naw. They'd
never do something like that. :eyes:

[Demeter]

86. Paulson Can Really Move When He Wants To--Don't Be too Sure

If Congress balks, they'll do it anyway.

But Congress bought it--
http://www.opednews.com/articles/WMDs-and-Financial-Meltdow-by-Rob-Kall-080920-801.html

WMDs and Financial Meltdown--

Related Threats? Related Dem Congress Failure? Have you seen the reports of the shocked faces of the leaders of congress when Bush's economic czars Paulson and Bernanke informed them of the deadly threat of financial meltdown the US, even the world economy faced if something dramatic was not done immediately. So they come out, shaking in their boots, telling the nation how awful thingd were, how close to the abyss we've come. Sounds too much like a WMD story to me

We have all the mainstream media breathing a sigh of relief, that un-caped Super duo of Paulson and Bernanke have saved the day. Right. Bush's chosen are doing brilliant work? And YOU trust this situation? Call me paranoid, but I don't buy it for a minute and I am super pissed that our great democratic leaders in the congress seem to have swallowed this story hook, line and sinker.

So, go ahead, watch CNN and MSNBC report how the DOW is back from the momentary drop. Listen to them tell you that e v e r y t h i n g is o k a y. Go ahead. Believe it, like you bought the WMD stories from Colin Powell.

What? You didn' buy the WMD stories? Then why would you buy the financial meltdown story?

[Dr.Phool]

89. Bush-Cheney, Poulson-Bernanke are talking to the same gullible audience.

That bought the whole WMD story in the first place. I was watching Jon Stewart interview the author of a book called "Angler" the other night. Angler was the Secret Service name for Cheney. He described how Cheney lied right to Dick Armey's face about Saddam and Al Queda, and WMD's. And Armey was talking on the record. They're lying now, and they'll keep lying.

The last thing we need now is quick, drastic action. Rome wasn't burnt in day, and breadlines won't form overnight either. The administration is going to pull a plan out that's been sitting on the shelf for a few years. Shock Doctrine style. Just waiting for the right moment. Just like the Patriot Act wasn't written overnight.

As someone posted on Friday, Elections + Fear = Stupidity.

Congress has to cancel, not postpone their recess. This is a national emergency, and we need slow, well thought out hearings and investigations to come to an intelligent solution. Everything depends on it. Now is not the time for drastic action.

The nation demands it. And the citizens deserve it.

So much for my fantasy.

[Waiting For Everyman]

91. You're right.

If it's a bad deal (as it is now) Dems shouldn't approve it. Even if they do it anyway by Executive declaration or somesuch, it wouldn't be legitimized.

That could matter later on. I think they're doing it because they feel sure that Obama is going to win, and the financials want to lock this gift to themselves in first.

If Congress doesn't approve it, then at least if McC wins somehow, he wouldn't have the sweeping powers this includes. And what if GRAMM is the next Sec. of Treasury, overseeing this? Anybody thought about that? Anybody in Congress or the media, I mean?

If Obama does win, something better than this could be done - a Home Owners Loan Corp. could be done instead of bailing out the banks. This is like ruining Johnson's Great Society with the VN War.

[Hugin]

93. Sound thinking.

Very sound.

Thanks for the post, Waiting For Everyman.

[Hugin]

92. No! Wait! Stop! Don't! There, I said it so their Mother didn't have to...

Okay... I agree there's a crisis afoot. But, for whom?

Check out these charts prepared by our own dear Talking Dog...

http://www.democraticunderground.com/discuss/duboard.php?az=show_topic&forum=102&topic_id=3494922#3495612

Look at who has the most to lose in the near term. Hint: It ain't the vast majority of us.

So, let's take our time and work this out. All we have to lose is a few oligarchs and large McDone/Republican
political donors.

As for your theory that this 'scheme' has been on the back burner for awhile, I agree.

For once... Let's do the smart thing.

"I must not fear.
Fear is the mind-killer.
Fear is the little-death that brings total obliteration.
I will face my fear.
I will permit it to pass over me and through me.
And when it has gone past I will turn the inner eye to see its path.
Where the fear has gone there will be nothing.
Only I will remain."

-- Bene Gesserit saying. "Dune Book Series" (See Greenspan, I can quote science-fiction too.)

[DemReadingDU]

68. William Greider: Paulson Bailout Plan a Historic Swindle

Just wanted to point everyone to this great post via robertpaulsen

If Wall Street gets away with this, it will represent an historic swindle of the American public--all sugar for the villains, lasting pain and damage for the victims. My advice to Washington politicians: Stop, take a deep breath and examine what you are being told to do by so-called "responsible opinion." If this deal succeeds, I predict it will become a transforming event in American politics--exposing the deep deformities in our democracy and launching a tidal wave of righteous anger and popular rebellion. As I have been saying for several months, this crisis has the potential to bring down one or both political parties, take your choice.
http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=389x4039480

[Ghost Dog]

97. Further to that: The Mother of All Frauds (Denninger):

... snip ... http://market-ticker.denninger.net/archives/587-The-Mother-Of-All-Frauds.html

Contracts can (and presumably will) be "no bid, no solicitation" and given to whomever Secretary Paulson favors, without regard to the public interest or normal competitive bidding processes. Must be nice to be a "Friend of Hank."

"In exercising the authorities granted in this Act, the Secretary shall take into consideration means for—

(1) providing stability or preventing disruption to the financial markets or banking system; and

(2) protecting the taxpayer."

Notice which comes first.

"(c) Sale of Mortgage-Related Assets.—The Secretary may, at any time, upon terms and conditions and at prices determined by the Secretary, sell, or enter into securities loans, repurchase transactions or other financial transactions in regard to, any mortgage-related asset purchased under this Act."

Having bought these securities for any price Mr. Paulson would like (and he can compel institutions to sell at his demanded price as noted above!) he can then sell those assets at any price he wishes, to anyone he wishes. It certainly is nice to be a "Friend of Hank", and it most certainly sucks if you're not.

"The Secretarys authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time"

This is clever and nobody in the mainstream media has figured it out.

If you think the cost of this bill is $700 billion, you're wrong. The cost is actually infinite and the entire bill constitutes a giant money-laundering scheme.

Paulson can (and presumably will) buy up to $700 billion of these "assets", then sell them. Let's say he decides to buy them at 60 cents on the dollar and sell them for 10. You, the taxpayer, will eat the fifty cents, for an immediate cost of $350 billion dollars.

Having done so, he is then authorized to do so again, since the $700 billion is no longer on the government's balance sheet.

In fact, he can do this without limit, other than possibly due to the federal debt ceiling, which of course Congress will raise any time we get close to it. Oh yeah, this bill does that right up front too. No need to bother with it the first time around.

Folks, $700 billion isn't even close to the total cost of this monster.

If Paulson and his successor decide to, they could literally cycle all $5.3 trillion of Fannie and Freddie's debt through this scheme, potentially sticking the taxpayer for 20% or more of the total, plus as much private debt on various bank balance sheets as they can manage to nationalize until (and possibly beyond) the point where the bond market tells him to go to hell.

Bottom line: This bill gives Paulson the ability to nationalize an UNLIMITED amount of private debt and force YOU AND YOUR CHILDREN to pay for it.

/more... http://market-ticker.denninger.net/archives/587-The-Mother-Of-All-Frauds.html

[DemReadingDU]

103. Thanks, Denniger lays it all out.

I feel ill.

[Dr.Phool]

72. Kevin Phillips on Moyers last night.

http://www.pbs.org/moyers/journal/09192008/watch2.html

I've always thought that Phillips was the best analyst and most astute observer ever.

Be scared.

:scared: :hide: :scared:

[Karenina]

80. Great interview!

[Demeter]

88. Agreed! And VERY Depressing

He sure doesn't give Obama any credit--

I may be deluding myself, but I think Obama has the smarts and integrity to do what needs to be done, and not become a plaything of Wall Street or any other street. He may need a little time to get his feet under him, but he can shoot up a learning curve, whereas most other politicians would fall rightr off (and Palin would go backwards and become stupider with time).

[Pale Blue Dot]

90. I think you're deluding yourself (but I hope I'm wrong)

Obama WILL be the next president (barring a Shock Doctrine-style coup) in my humble opinion. And while I will of course vote for him, and while I think he would be a very good president under normal circumstances, I see nothing in him or his statements or policies that leads me to believe that he is an FDR. Time will tell, I guess.

[Tansy_Gold]

108. I dunno. My brain is working in strange directions after four

hours' sleep, but I think if Obama has any real strength as a leader it may be proven to be in the area of motivating the People to do things and then to utilize the support of the general populace as leverage -- there I go with that word again :evilgrin: -- to effect change.

Much, of course, will depend on whether or not he wins and if so by what margin, as well as who he brings in on his coattails. If the Dems get a solid majority in both houses of congress, that helps. Changes in the cabinet will help. Having the bully pulpit and MAYBE an effective media presence might also help.

So it's more, I think, than just the election of one man.

Goddess help us if it's the other two.



Tansy Gold

[Demeter]

131. Sometimes, Times Make the Man or Woman

The question is: can your candidate rise to the challenges? Can this person attract and respect and identify other intelligent and ethical people to help do the heavy lifting? Can this candidate get the people's support and KEEP it through acting in their best interests?


In other words, is the candidate an antidote to Bush? The Anti-Bush?

[ozymandius]

79. What in the Hell just happened?

It's the usual question that someone asks after getting hit over the head and mugged, or if they were in the immediate vicinity of an explosion.
For the American taxpayer, both of those things happened during these past two weeks.

So many unprecedented events took place in such a short period of time that it was hard to keep up. Lots of people said lots of scary things, but few stopped to break down the most important issues, which are: a) how did we get here, b) what exactly is being done, and c) what does it all mean.

I'm going to try to help with those question.

To tell the story of how we arrived at the bailout and virtual nationalization of Fannie Mae and Freddie Mac you have to go back to March 20, when the Bush Administration decided that it was going to use Fannie and Freddie's reserve capital to bail out the entire real estate sector. The capital reserves were supposed to help in the event of a catastrophic financial event, like the meltdown of the real estate market.

"Additional capital will enable the companies to help more homeowners and will strengthen the underlying fundamentals of the mortgage market."
- Treasury Secretary Paulson

---

Let me introduce you to the concept of credit default swaps.

Basically they are an insurance policy on debt (ie bonds) that a third party sells in case the debtor defaults on their obligations.

To give you a quick and dirty explanation, Fannie and Freddie handled the largest source of debt in the entire world (ie mortgages). That makes it also the source of the largest need for insurance (ie credit default swaps) on that debt in the world. And who is going to handle all that insurance? Why the largest insurance company in the world - AIG.

Which brings us to the problem of the Fannie and Freddie bailout.

The U.S. government's seizure of Fannie Mae and Freddie Mac has triggered more than $1 trillion of credit default swaps tied to the mortgage giants.

The International Swaps and Derivatives Association said in a memo on Monday that 13 major credit default swap dealers unanimously agreed that a credit event had occurred.

By nationalizing the mortgage giants we also triggered an event that caused $1.5 Trillion in credit default swaps to be paid out to their holders, and AIG was right in middle of that.

.....

If this bailout happens, not only will it fail to rescue the financial economy (like all the bailouts that have happened so far), not only will it fail to rescue the real estate market (like all the bailouts that have happened so far), it will end up making things worse (like all the bailouts that have happened so far).

What's more, it will ensure that America's near future will end in bankruptcy and the destruction of the dollar.

http://www.economicpopulist.org/?q=content/what-hell-just-happened

[lostnotforgotten]

102. Debt - 596 Trillion Derivatives - 58 Trillion Credit Default Swaps - 2.5 Trillion Credit Card

To underscore you point on CDS.

See www.wallstreetdigest.com/hotline.php for numbers.

[Demeter]

87. "First Toxic Bank"; BBC Business Editor on the bailout

Posted by muriel_volestrangler and crossposted here:

Investors are probably right to conclude that one great source of stress will be lifted from the banking system, as and when Paulson sucks their toxic subprime loans, unsellable asset-backed securities, and radioactive collateralised debt obligations into a vast, lead-lined box financed by US taxpayers.
...
That said, the devil will be in the detail of the mechanics of the rescue. What we don't yet know, for example, is whether Paulson's First Toxic Bank - as I shall christen his vehicle for buying the stinky housing loans - will pay the written-down price for the debt, the market price (which after Lehmans collapse is lower than the written-down price) or a discount to the market price.
...
But if he bails banks out at the price of this stuff in their books or above, well that would be an acknowledgement that an entire generation of banking executives had behaved wholly irresponsibly in their lending practices for years.

Arguably, they should all be sacked and thrown on to the mercy of a jobs market made all the less kind by their own recklessness.

http://www.bbc.co.uk/blogs/thereporters/robertpeston/20...

[Karenina]

99. Fix for your link:

http://www.bbc.co.uk/blogs/thereporters/robertpeston/2008/09/true_cost_of_the_rescue.html

[Hugin]

98. Here's what should happen, but, won't...

The Democrats should very publicly put together a juicy "bail-out" (Geeze, I hate that expression already.)
bill. In it they should lump every conceivable Right-Wing bugaboo... Extension of Jobless Benefits, Increase
in the Living Wage, COLAs for Social Security, Socialized Health-care, More School Crossing Guards, Jobs Programs,
Peace Incentives, Paying our back dues to the United Nations... ALL of the things which could be done with
$700 Billion to help the common citizen of the United States, but, now will never happen due to the Welfare
Baron's Protection Act.

Pass it... and Make Bush veto it.

It's a plan which is so beautiful it makes me teary eyed.

Won't happen tho...

*sigh* Why do I even care anymore?

[Dr.Phool]

111. A sick mind is a terrible thing to waste, isn't it?

:evilgrin:

I agree wholeheartedly. If they're going to bail these pricks out, put some things in there to benefit the populace at large.

Force the repukes to show their true colors, and make Bush veto it. If nothing else, it will create a deliberative pause, where more rational minds can work on a fix.

[Hugin]

116. Good term.... 'deliberative pause'.

Henry "The Commies are comin'" Paulson, Ben "Chopper One" Bernanke, The "Drill, Baby, Drill" Congressional
Republicans, John "Did someone say Bail-out?" McCain, Sarah "Jesus is a comin' (If we make him)" Palin, and their
DNA sharing current White House occupying Banana Republican don't want as much as a line-feed's length of pause.


Somebody might figure out their scam.

Fortunately for them... Critical thinking is almost a lost art.

[Demeter]

132. Love That Term: Banana Republican!

Gonna use it all the time, until everybody does!

Destroy them with ridicule!

Banana Republican, Banana Republican, Banana Republican,

we need a smiley of a banana with the GOP emblazoned on it in red, white and blue. Or just red, deficit red.

[ozymandius]

100. Stop the mother-of-all-muggings before it starts.

(cross-posted from GD)

Paulson and Bernanke seek dictatorial power to help their pals in the banking industry. Section 8 of the Paulson plan immunizes any action by the Treasury secretary from ANY oversight.

Write your representative.

Do you think that you don't know enough about our dire situation to say something about it? Do you feel Paulson's plan and all other forms of action are flawed but just cannot say why? No worries. 'Copy-and-paste' is your friend.

Some have spoken quite eloquently about the subject here at DU. Fair use of language from economic blogs allows you to find your voice with others' help. Go here for an overview of this nonsense that will be made worse under the Paulson plan.

---

Mike Shedlock is all over this horrible Paulson proposal. Mish offers basic talking points for you to use. So does Paul Krugman.

From Mish's site:

Phone or Email your Senators today. Tell them in your own words

* Urge your senator to Filibuster any bailout legislation.
* Emphatically state you do not want a bailout of any kind for anyone.
* No Dictatorial power for Paulson or Bernanke
* Taxpayers should not have to bail out banks making bad loans
* Tell them that "The Fed" and Paulson are systemic risk".

Email AND Phone Senators Shelby, Bunning, Kyle, Hagel

Whether Senator Shelby is your Senator or not, flood him with calls and emails asking for a filibuster and to stop the insanity. Senators Shelby, Bunning, and Kyle might be sympathetic to the cause, based on past statements. I am taking a stab at Hagel.

Please email and phone the following. Specifically ask for a filibuster and tell them to vote no to any bailout.

Shelby, Richard C.- (R - AL)
110 HART SENATE OFFICE BUILDING WASHINGTON DC 20510
[phone]
E-mail: [e-mail]

Bunning, Jim- (R - KY)
316 HART SENATE OFFICE BUILDING WASHINGTON DC 20510
[phone]
Web Form: http://bunning.senate.gov/public/index.cfm?FuseAction=Contact.ContactForm

Kyl, Jon- (R - AZ)
730 HART SENATE OFFICE BUILDING WASHINGTON DC 20510
[phone]
Web Form: kyl.senate.gov/contact.cfm

Hagel, Chuck (R - NE)
248 RUSSELL SENATE OFFICE BUILDING WASHINGTON DC 20510
[phone]
Web Form: hagel.senate.gov/public/index.cfm?FuseAction=Contact.Home

Please email and phone both of your senators as well.

This Paulson plan creates systemic risk at your expense. The bet being wagered here is that emotions, not clear-headed decisions, will drive this horrible legislation. We cannot cave to fear without a world of regret being the reward.

Write your representative.

[DemReadingDU]

101. Thanks, I am stunned. speechless

I had called my Senators and Representative on Friday, but will do so again. When is the vote on this bill?

So this bill will make our Treasury Bills worthless soon? So we need to redeem them for cash before Bush's term ends?

I feel ill.

[Buttercup McToots]

110. I don't feel go either, Dem

I'm scared of tomorrow...:scared:

[UpInArms]

127. according to this chart, a banana has more worth

[Demeter]

135. Where did you get that graph?

Bet there's a great article to go with it!

[UpInArms]

143. from Ozy's post #100

http://www.economicpopulist.org/?q=content/what-hell-just-happened

[Roland99]

109. New Debt Ceiling: $11.3 Trillion.... $$$11.3 TRILLION$$$ (Nearly double its 2001 level)

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=389x4049606

[Roland99]

113. Is the proposed bailout legislation even Constitutional???

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=389x4049330


Paulson's decisions are not reviewable by any court or agency???

[DemReadingDU]

114. Mike Whitney: Grasping at Straws

9/21/08 Mike Whitney: Grasping at Straws

The problems cannot be resolved by shifting the debts of the banks onto the taxpayer. That's an illusion. By adding another $1 or $2 trillion dollars to the National Debt, Paulson is just ensuring that interest rates will go up, real estate will crash, unemployment will soar, and foreign central banks will abandon the dollar. In truth, there is no fix for a deleveraging market anymore than there is a fix for gravity. The belief that massive debts and insolvency can be erased by increasing liquidity just shows a fundamental misunderstanding of economics. That's why Henry Paulson is the worst possible person to be orchestrating the so called rescue project. Paulson comes from a business culture which rewards deception, personal acquisitiveness, and extreme risk-taking. Paulson is to finance capitalism what Rumsfeld is to military strategy. His leadership, and the congress' pathetic abdication of responsibility, assures disaster. Besides, why should the taxpayers be happy that the stocks of Morgan Stanley, Washington Mutual and Goldman Sachs surged on the news that there would be a government bailout yesterday? These banks are essentially bankrupt and their business models are broken. Keeping insolvent banks on life support is not a rescue plan; it's insanity.

more...
http://www.informationclearinghouse.info/article20828.htm

[Tansy_Gold]

118. no shit, sherlock.

Holmes and Watson go off for a week-end camping trip. All goes well until a strange noise wakens Holmes in the middle of the night.

"Psst, Watson!" he whispers, reaching out to jostle awake his companion in the next sleeping bag. "Look at the stars! Do you know what this means?"

Watson rubs his eyes, affixes his spectacles, and looks up into the spangled sky.

"Well, sir, I see no moon, but the position of the stars tells me it must be after midnight."

"No, you fool!" Holmes growls. "It means..."

Watson interrupts, knowing he's being tested and determined for once to reach the answer before Holmes thrusts it upon him.

"Well, I can deduce that by the angle from which we are looking at the stars our direction is..."

"No, you imbecile!" Holmes is clearly furious. "It means..."

"Ah, I have it, sir!" Watson exclaims, certain he's figured it out. "There were clouds in the sky when we turned in for the night so..."

"No, you blithering idiot!" Holmes shrieks, jumping up out of his sleeping bag and kicking at the recumbent Watson. "It means someone has stolen the fucking tent!"

[Demeter]

137. Great And Unfortunately True Analogy

"Paulson is to finance capitalism what Rumsfeld is to military strategy."

[antigop]

115. Some thoughts after another restless night....

1) I'm glad Dodd is not our nominee. He's head of the Senate Banking Committee.

2) If this bailout gives unprecedented power to the Treasury and the next Treasury Secretary is Phil Gramm....

3) In a previous life I worked with large computer systems at Fortune 500 companies. I found legacy systems at these companies were quite antiquated -- some were even written in assembler language and COBOL. (Remember how COBOL programmers were in demand for the year 2000 projects?)

Now I don't know about the Fed computer systems, but I would bet the computer systems are quite old, making system changes/updates difficult. With all of the stuff going on with the Fed -- taking different forms of collateral, pumping more dollars into the system, lending to investment banks, and whatever else they are doing, I have to ask -- Who is making the changes to the computer systems to handle these changes? (I wouldn't be surprised if it's outsourced.) How are these changes to computer systems being made at such a rapid pace? And how are they even keeping track of all this?

Just some things running through my mind during the wee hours...

[DemReadingDU]

121. My previous life

I also worked on a very large legacy system, coding some Assembler, mostly PL1 and Sabre.

Interesting thoughts, Who is making the changes to these computer systems?

[antigop]

117. The Fed, now with more junk

http://financialweek.com/apps/pbcs.dll/article?AID=/20080921/REG/809199953
Treasuries accounted for 91% of the central bank’s reserves a year ago: now 48% of its coffers are filled with riskier investments

Once upon a time—just six months ago, in fact—financial services firms sank or swam on their own and the Federal Reserve had a clear mission and a nearly pristine balance sheet of safe Treasury securities.

No more.

Treasuries accounted for only half of the Fed’s $978 billion reserve balances as of Sept. 17. Of that, less than $200 billion worth remains that hasn’t yet been committed for loans, by some economists’ estimates.

Much of the Fed’s balance sheet now consists of riskier securities, some obtained as collateral from investment banks getting emergency loans and some acquired in the U.S. central bank’s bailout of American International Group and Bear Stearns. They could include junk bonds, mortgage-backed securities, credit default swaps, real estate and even equities.

To replenish the Fed’s coffers, the Treasury Department said last week it would sell securities to add $200 billion in cash.

[Demeter]

138. That's One Way to Put the Fed Out of Business!

Several diehards advocate that the Federal Reserve should cease and desist and cease to exist.

They just may get their wish. (Wouldn't that discombobulate the Rothschilds!)

[Pale Blue Dot]

122. Paulson resists calls for added help in bailout

WASHINGTON (AP) -- Treasury Secretary Henry Paulson is resisting a Democratic push to add additional help for households to the $700 billion bailout bill.

Paulson said Sunday that because financial markets remain under severe stress there is an urgent need for Congress to act quickly without adding other measures that could slow down passage.

''We need this to be clean and to be quick,'' Paulson said in an interview on ABC's ''This Week.''

Paulson resisted suggestions being made by Democrats that the program be changed to include further relief for homeowners facing mortgage foreclosures and to include an additional $50 billion stimulus effort. Some Democrats have also suggested capping compensation of executives at firms who get the bailout help.

Paulson said he was concerned that debate over adding all of those proposals would slow the economy down, delaying the rescue effort that is so urgently needed to get financial markets moving again.

''The biggest help we can give the American people right now is to stabilize the financial system,'' Paulson said.

http://www.nytimes.com/aponline/washington/AP-Financial-Meltdown.html?_r=1&oref=slogin

It doesn't make me feel good to say this, but I hate these people and their enablers with every fiber of my being.

[Hugin]

124. Seeing as they already blew the 'clean' part by playing dirty...

Why should we make it 'quick'? Maybe we want to enjoy watching them squirm. TeeVee is kind of dead and
we haven't had a televised execution in ages. :sarcasm:

[Demeter]

139. "Clean and Quick", Eh? Why Does Assassination Spring to My Mind?

Because that's what it is?

[Pale Blue Dot]

123. Paulson says foreign banks can use U.S. rescue plan

WASHINGTON (Reuters) - U.S. Treasury Secretary Henry Paulson said on Sunday that foreign banks will be able to unload bad financial assets under a $700 billion U.S. proposal aimed at restoring order during a devastating financial crisis.

"Yes, and they should. Because ... if a financial institution has business operations in the United States, hires people in the United States, if they are clogged with illiquid assets, they have the same impact on the American people as any other institution," Paulson said on ABC television's "This Week with George Stephanopolous."

Paulson was appearing on the Sunday television talk show circuit to fill in some of the details of the U.S. government plan for a sweeping bailout to mop up hundreds of billions of dollars in toxic mortgage debt.

http://news.yahoo.com/s/nm/20080921/bs_nm/financial_bailout_paulson_dc_3

:wow:

[Hugin]

125. Oh, great... Now we've become cesspit-to-the-world.

Personally, I was hoping for a more honorable epitaph for what was once the "Give us your tired, your hungry..."
land of the Free and home of the Brave.

I can't read any more. x(

[Dr.Phool]

133. Brazen Political Advertisement!

I know this isn't the appropriate spot for this, but since we're all going to hell in a handbasket anyway....

I can vouch for John, he's a very good friend of mine. I was his Deputy Campaign manager in 2006.And I still talk to him on an almost daily basis. He's the real deal. A good progressive who's right on all the issues, which explains why he doesn't get any DCCC support.

If you have a couple of nickles sitting around, he can use them to get rid of Ginny Brown-Waite. She's repuke evil incarnate.

He posted this little video on DU this morning, just for fun.


http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=385x194861

[Demeter]

140. Hearing No Objections, Consider It Acceptable!

We need all the white knights we can find in this epic crusade.

[DemReadingDU]

134. Chris Martenson: What the latest bailout plan means

Note: Chris Martenson has an excellent series of videos on the economy, 'The Crash Course'

9/21/08 What the latest bailout plan means
Now that the details are out, we can safely state that the US political and financial leadership has completely sold out the taxpayers and have done so in a manner that is startling both in its recklessness and its brazenness.

The reckless part I will spell out in the details below.

The brazen part is in how this is being spun out as if the entire plan were hatched in hurried rush, at the last minute, after events forced the issue. This is the spin, but it is completely false.

Because many financial commentators ranging from Roubini to Roach to Calculated Risk to myself foresaw these events, we can be completely confident that these events were both anticipated and planned for long in advance. The only question was how they were going to be 'sold' to the public. What better way than in the midst of a "massive financial panic" that required urgent action?

And now that the details are out, the plan is even more insidious than I ever dreamed.
.
.
So what happens when you have vague language and an unlimited budget? Fraud and self-dealing. Mark my words, this is the largest looting operation ever in the history of the US and it's all spelled out right in this delightfully brief document that is about to be rammed through a scared congress and made into law.

But certainly if the combination of vague language and and unlimited budget will create the conditions for further fraud and abuse, at least we live in a nation of "checks and balances", right?

Wrong.
.
.
This is just another straw thrown onto an already collapsed camel the confirms the fact that the US political system is broken and that the rule of law no longer applies within the US.

My final comment; if it looks like a looting operation, smells like a looting operation, and behaves just like a looting operation, it might just be a looting operation.

full article...
http://www.chrismartenson.com/blog/what-latest-bailout-plan-means/5149

[Demeter]

141. Well, Folks: I'm Quitting Early This Weekend

There's still 31 items in the inbox to survey and cull, but this thread is so rich in material that I don't want to give you indigestion! And I need to do some chores. So....

WE (Weekend Economist) now return you to your regularly scheduled Stock Market Watch Thread...but feel free to talk amongst yourselves here, if you like. And post'em if you've got them. Don't be shy.

This is an epic thread--I think we've got the latest on all the nastiness visited upon us this week and month, and filled some historical gaps, too. I grateful to all who contributed, and glad so many dropped by to peruse. See you all next week, or in passing on SMW!

Demeter

[Demeter]

142. Go See This Link!

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=389&topic_id=4047654&mesg_id=4047654


I know, I know, I'm leaving now...

[DemReadingDU]

144. more from ilargi at The Automatic Earth

Saturday 9/20/08 from ilargi

Ilargi: I seem to be a bit of a lone voice on the issue, but that doesn’t really make me less worried. Last week I wrote that the financial crisis, which is rapidly spreading towards a full-blown economic crisis, a seismic storm of category 12, could well give birth to a political crisis in the US. My question then and now: what is the legitimacy of a government that has lost control of its economy?

Sure, the Shrub Cabal has transferred enormous swaths of power and authority away from Congress and Senate, the bodies allotted these powers by the US Constitution. But one could presume that it might still be possible for the people and its elected representatives to take back at least part of them. What happens now makes me think that we may have passed all points of any return.

In a functioning democracy, the people’s representatives must be called to task for their mistakes, intentional or not, and if found lacking in judgment, step down. If that doesn’t happen, the system is hollowed out from within, and it will lose its legitimacy.

Lost among the hundreds of billion in rescue funds for financial institutions, supplied by the taxpayer, are the "reform"measures that are being considered. The core of the proposals is yet another transfer of power, this time over the financial world, in all its aspects, and on an international scale. Once again, the powers are to be taken away from the people’s representatives. This time the powers in question will be handed over to the Federal Reserve.

And that means that the status of America as a functioning democracy becomes ever more questionable. Yesterdays anouncement by the government, and the gigantic new rescue plan -the next in a by now long list- that will be unveiled within the next 72 hours, made some European leaders cast doubt on US claims of propagating a free market.

The way in which this process is undertaken can perhaps best be illustrated by the founding of the Federal Reserve in 1913. The Constitution explicitly and expressly reserves the control over the nation’s money supply to Congress. 95 years ago, an interpretation of this was accepted that stated that this meant Congress could hand over the control to whomever it pleased. And it decided, in a weird session, to cede its Constitutional power to the Federal Reserve, which was and is made up of a select group of private bankers.

But let’s seek an analogy here. Say that I have, with the consent of both teams, been named the referee in a football match. Does that imply that I have the right to, at any point during the game, hand over the whistle to the local drunk, to the coach of one of the teams, or to the town bookmaker who has vested interest in a favorable outcome? It may be a hard question to answer, but I would venture to say no such right is implied.

Ben Bernanke was not elected by the people. Yet, he will be handed (even more of) the power of the nation’s money. And power over the economy is power over the nation itself. No matter what grand plans Congress comes up with, if you refuse to fund them, they ain’t happening.

Hank Paulson was not elected by the people. If you think there’s no connection between Paulson being Goldman’s CEO for 8 years, and the fact the Goldman will now be able to bury an insane amount of toilet paper in the contaminated RTC composter that is being set up in the capital's backrooms, at the same time that shorting Goldman is banned, then I want some of the drugs you’re taking.

The members of Congress are elected. But they have no idea what is going on. The New York Times quotes even the "finance experts" among them as saying they were stunned when Ben and Hank told them about the shape of things to come. The same two dudes who until now, in every single Congressional hearing, have insisted that the economy was strong, a propaganda piece incessantly repeated by everyone involved, including Shrub.

So who do the members of Congress turn to when they have to vote on issues they don’t understand? They listen to their staff, made up to a large extent of lobbyists, who are on the payroll of the same financial institutions that Congress, see the Constitution, is mandated to regulate. And of course those lobbyists have not been elected by the people.

Shrub has asked Congress for $700 billion in additional funds to buy up worthless paper from the banks. That means that every single American hands over another $2333 dollars, and can then call themselves the proud owner of what has no value whatsoever. The idea is that, as in the original RTC set-up during the Savings and Loan debacle, the paper will eventually regain some of that value. But see, now we’re back in that faith-based casino. And call it what you will, but by now the entire world will laugh in your face if you use the term democracy to address the United States of America.

As the misery among the American people increases, you may think back of when and why I talked about a potential political crisis. It is easy to fool and manipulate a prosperous people. And as the past decade has shown, it's even easy to fool and manipulate people into thinking they're -still- prosperous. But it is an entirely different matter to convince cold and hungry people that they are warm and well-fed.

One last thought: $700 billion doesn't even begin to to buy a dent into to the "wealth" of stinking mob Kleenex that is out there. What are these guys thinking? I don't know, perhaps it's just another giving it to you piecemeal event. I sure as hell am not going to volunteer to be downwind of the smell of this operation. And I humbly suggest you don't either.

click for related articles
http://theautomaticearth.blogspot.com/2008/09/debt-rattle-september-20-2008-super.html


Sunday 9/21/08: We want this to be clean

Ilargi: Yesterday, I talked about the Constitution, in particular the question whether Congress can legally hand over powers explicitly assigned to it by the Constitution, to other parties. It did so in 1913 when it ceded the power over the nation’s money supply to the Federal Reserve.

Today, it looks like Congress is about to do it again. The wording of Hank Paulson’s plan to "save" the economy for the sake of "protecting the taxpayers" is nothing short of alarming. It is also highly doubtful if the plan is Constitutional. So once more: does Congress have the authority to go against the Constitution?

The plan that Paulson and Bush urge Congress to accept as fast as "legally" and practically possible, gives the Executive Branch, in the office of the Secretary of the Treasury, full, unlimited, and unchecked powers over the nation’s financial system, the entire economy, and even attempts to provide far-sweeping power over international finance. Of course the Treasury completely depends on the Federal Reserve to execute its policies, since only the Fed can "print" money.

Congress is side-tracked into a spectator role, and the courts of the country will not be allowed to judge the legality of any action the Secretary decides upon. The plan also implies that $700 billion will be provided "at any given time", which leaves open the possibilty of limitless funding, depending on how many "given times" there might be.

I am not a lawyer, and I have no doubt that even the most intelligent and experienced members of the legal corps will have trouble deciding on these issues. But I don’t see how there can be any doubt that the courts need to study a plan like this, before it can be implemented. The plan itself expressly states that after the fact, they are not allowed to.

I have read many smart people tackle the issue in the past two days, and the only one among them who hits the nail square on the head is Russ Winter. His contention: the $700 billion provision does not constitute a bail-out, it will be used to create a tar pit, in which financial institutions can be liquidated at will.

The Treasury and the Federal Reserve will be authorized to buy up securities and, more broadly, derivatives from failing financial institutions. Not just mortgage related paper, it can also include student loans and credit card-related "assets". It’s not confined to American institutions either, the Treasury can use US taxpayers’ money to buy virtually unending amounts of virtually valueless paper from foreign banks and governments.

Winter’s take is that what is really behind the "salvation" is an unprecedented power grab that will give the US Treasury enormous, perhaps unlimited, authority over the fate of banks, funds and other institutions, and on a global scale. The unelected "officials" who will be placed in charge, as monopolistic rulers, can pick out the banks they like, and those they don’t.

The group that Winter calls "Friends of Hank" will be saved and moreover allowed to take over, for pennies on the dollar, the assets from those that are not Friends of Hank. In fact, the Friends will not pay much of anything at all; the US taxpayer will. It may be a good time to wonder why Lehman was sacrificed mere days before a plan is announced that would have saved the firm.

So what can you expect from the people you elected (and those you will elect)? It looks like they know which hand feeds them. and it’s not yours. There is a huge threatening sign hanging over their heads that says they will be blamed for the inevitable further gutting of the economy, if they vote down the plan, or even try to change it or delay the vote.

Both presidential candidates have expressed initial support for the plan. I would think that anyone who does not try to stop this with the utmost urgency should get a total of zero votes in any upcoming election, but I'm not holding my breath.

The comments today from members of Congress are nothing more than fodder for late-night comedy.

""What we're spending our time doing now is writing language into the Treasury proposal that will beef up taxpayer protections," Steve Adamske, a spokesman for House Financial Services Committee Chairman Barney Frank, said in a telephone interview."

"Senate Banking Committee Chairman Christopher Dodd said any plan should "promote home ownership." "The stakes could not be higher, and there is no time to waste, but I am hopeful that we will be able to achieve these important objectives," Dodd, a Connecticut Democrat, said in a statement."

"Minority Leader John Boehner of Ohio, for "straightforward" legislation. "Efforts to exploit this crisis for political leverage or partisan quid pro quo will only delay the economic stability that families, seniors, and small businesses deserve," Boehner said. "I hope we all can agree that we should keep any legislation as straightforward as possible while doing everything we can to protect American taxpayers."


Many people ask you to call and write to your representatives. You might want to hold on to that money.

PS: Kudo’s also go to Karl Denninger for pointing out this beauty:

"(3) designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them;"
"That's right - every bank and other financial institution in the United States has just become a de-facto organ of the United States Government, if Hank Paulson thinks they should be, and he may order them to do virtually anything that he claims is in furtherance of this act. This might include things like demanding that a bank or other financial institution sell him its paper, even if it forces that firm to collapse and be assumed by the FDIC! "

click for related articles
http://theautomaticearth.blogspot.com/2008/09/debt-rattle-september-21-2008-we-want.html

edit for 2nd article

[UpInArms]

147. Monday Morning Futures: Dow down 201 points at 7:10 p.m. EST Sunday

http://money.cnn.com/data/premarket/

S&P 500	-11.80	1234.20	9/21 7:31pm	
Fair Value		1257.69	9/21 5:07pm
Difference*		-23.49	

NASDAQ	-18.75	1720.75	9/21 7:31pm	
Fair Value		1755.66	9/21 5:07pm
Difference*		-34.91	

Dow Jones	-201.00	11158.00	9/21 7:10pm

[antigop]

148. The shadow banking system is unravelling

http://us.ft.com/ftgateway/superpage.ft?news_id=fto092120081306481617

Last week saw the demise of the shadow banking system that has been created over the past 20 years. Because of a greater regulation of banks, most financial intermediation in the past two decades has grown within this shadow system whose members are broker-dealers, hedge funds, private equity groups, structured investment vehicles and conduits, money market funds and non-bank mortgage lenders.

Like banks, most members of this system borrow very short-term and in liquid ways, are more highly leveraged than banks (the exception being money market funds) and lend and invest into more illiquid and long-term instruments. Like banks, they carry the risk that an otherwise solvent but liquid institution may be subject to a self­fulfilling and destructive run on its ­liquid liabilities.

But unlike banks, which are sheltered from the risk of a run - via deposit insurance and central banks' lender-of-last-resort liquidity - most members of the shadow system did not have access to these firewalls that ­prevent runs.

[antigop]

149. Anyone have any idea how they arrived at a $700 billion figure?

I can't find any info as to where this number came from.

Any ideas? Any info?

TIA.

[DemReadingDU]

151. good question, curious

Maybe it could be the size of the largest tranch they might need to unload? Smaller tranches could be bundled together to unload to the Treasury, but a larger tranch might need to be kept intact?
I'm just guessing, I really don't have a clue.
:shrug:

[antigop]

152. I thought it might be the size of the Social Security Trust fund-- but I checked

and it's not.

I'm just really curious as to how they arrived at this particular number. I haven't read anything anywhere that explains how the figure was arrived at.

[antigop]

153. Federal Reserve changes status of Goldman Sachs and Morgan Stanley to bank holding companies

http://talkingpointsmemo.com/news/2008/09/last_major_investment_banks_ch.php

The Federal Reserve said Sunday it had granted a request by the country's last two major investment banks — Goldman Sachs and Morgan Stanley — to change their status to bank holding companies.

The Fed announced that it had approved the request of the two investment banks. The change in status will allow them to create commercial banks that will be able to take deposits, bolstering the resources of both institutions.