Monday, October 6, 2008
The Paulson Plan for Survivor Bias by 'London Banker'

As I re-post this from The RGE Monitor, markets are crashing in Asia, Russia, and Europe. It is clear from the conference call transcript below that market participants who are not insiders with the Bush Admin. and may not receive "survivor bias" are reacting very negatively Friday and Monday. These are certainly interesting times. Thanks to David of Kauai and RGE Monitor, or I wouldn't know what is going on.

From: http://www.rgemonitor.com/financemarkets-monitor/253850/financial_eugeni...
"Financial Eugenics: The Paulson Plan for Survivor Bias" by London Banker

"As I write this I don’t know the outcome of the attempt to ram through legislation for looting the US Treasury of $700 billion before the end of the Bush administration. I suspect that Congress will force the passage of the bill in some form because the media and political narrative on the necessity of the measure is unremitting and so horribly biased.

No alternatives will be considered.

No constraints on the unilateral executive authority of Hank Paulson will be considered.

No assurances that funds will be used to unlock credit markets or promote lending to the real economy (as opposed to the financial robber barons) will be considered.

Instead, the bill will get laden with an additional 300 pages of pork to sway the dissenters, adding to the tab imposed on the American taxpayer.

Having listened to all 42 minutes of the late night Treasury briefing of investment banks on Sunday, there is no doubt in my mind that this legislation represents the sort of federal largesse for Goldman Sachs, Morgan Stanley, Citibank and JPMorgan Chase that the Iraq war provided for Halliburton and Blackwater.

The most cynical moment in the call is when the Treasury official confirms, ”our preference would be to help the healthy banks become even healthier” rather than helping troubled banks or illiquid banks.

America is now a centrally planned economy where the Treasury will determine which firms survive and prosper through allocation of scarce capital to an undercapitalised financial sector.

Clearly what is going on here has nothing to do with kick starting the credit markets or stabilising the equity markets or restoring depositor confidence in banks. (Treasury official: “No provision in the legislation that mandates re-lending.”) What is going on here is a blatant attempt to provide government funds to a select cadre of firms (not all banks) which are chosen to be the survivors feasting off the carcasses of their less fortunate and less well-connected brethren as the downturn intensifies in the years to come.

The crash in equities will still happen. The debt deflation of the economy leading to mass commercial and consumer credit defaults will still happen. The collapse of many national, regional and local financial institutions will still happen. The bankruptcy of many municipalities and shortfalls in state budgets will still happen.

This bill is about engineering survivor bias to friends of the Bush administration so that they profit disproportionately from the collapse of these markets using the funds provided by the taxpayer via the unreviewable and unconditional authority of the Secretary of the Treasury.

The basic plan is to set up a federal money laundering operation. Bad assets come in, get laundered by the Treasury and put in a new AAA “wrapper” (as it’s termed on the call), and good assets go out, issued as Treasury guaranteed securities. Whether the final value of the legislation this week is $700 billion or $150 billion is irrelevant as long as the laundering operation can accommodate the throughput, as that number is only a cap on total extensions at any one time.

The SEC will support the plan and survivor bias by relaxing FASB 157 on mark to market accounting. If there is no agreement on what an asset is worth, it is worth whatever the firm holding it says in its Level 3 accounts or the Treasury Secretary accepts in buying it.

The Federal Reserve will support the plan by relaxing the definition of “control stake” in US banks and bank holding companies to allow secretive cabals to hold through private equity and offshore hedge funds. No one knows the beneficial owners of these ill-transparent private equity investors, and so it is the ideal way to reward loyal and helpful insiders, legislators and officials – as well as cede further ownership of American assets to foreign stakeholders who would be politically unacceptable if publicly acknowledged. Many foreign creditors are irate at the losses their funds, banks and pensioners have sustained from investments in the United States, and this plan provides a secret way to buy them off and keep them lending and investing as their own economies are roiled by the deflation to come.

For the past year the survivor bias has been orchestrated from the Federal Reserve, with its extension of innovative credit facilities and selectively engineered rescues or forced mergers. That has been very useful, but that well is now dry. The Fed has no more good assets to trade for the bad assets the banks can offer. And the supply of bad assets just keeps growing as market illiquidity spreads further from the core of the mortgage backed securities market. Instability is now leading to a realistic threat that the Fed and Treasury could lose control of the deflationary process.

Part of the reason the Paulson Plan is so attractive is that it recapitalises the Fed by promoting the unwinding of repos and lending facilities which left the Fed holding toxic assets. As the repos and credit facilities gradually unwind, these toxic assets can now be taken back by the banks and exchanged for good cash. The Fed gets its balance sheet Treasuries and cash back to restore its flexibility to intervene anew.

Favoured private equity and insiders who swap US dollars for equity in the banking system will presumably be aware of the survivor bias being engineered on their behalf. Sovereign wealth funds, investment funds and private equity investors ripped off in the first round of recapitalisation may be willing to come back in once it is clear to them that the next round will benefit from official favouritism. Warren Buffett’s timely stake in Goldman Sachs is clearly linked to his confidence the Paulson Plan will benefit them disproportionately.

A factor which is probably critical but has received little discussion is that literally thousands of Bush administration apparatchiks will need jobs come January, and a fair selection of GOP House and Senate legislators and their aides too. What better way to enahance their CVs in their final months in power than to distribute $700 billion or so in pre-Christmas largesse to the most remunerative employers in the world? And what better way to ensure the corporate largesse is returned to the GOP to win back the White House and Congress in 2012 as the recession fuels public anger?

And then there is a huge arbitrage opportunity as well so that everyone makes money. According to the conference call, the pricing on offer from the Treasury will be a bit below Level 3 pricing. The toxic assets will be repackaged and resold with a new AAA wrapper, possibly priced well below what the Treasury paid, assuring a huge profit on both immediate liquidation by the banks and ultimate maturity by investors. The Fed gets its cash and Treasuries back; the banks make huge profits; the foreigners and off-shore tax avoiders get disguised ownership of the American financial system; the taxpayer gets ripped off. What’s not to love?

Think back to Fisher’s Theory of Debt Deflation in Great Depressions. Dollars become “bigger” as deflation takes hold because each dollar can buy more assets as assets deflate. That means that as these clowns crash the markets, their $700 billion of liquid cash funnelled to their friends and recycled through the Treasury laundrymat can progressively buy up the rest of the pieces on the gameboard at low discount prices. Game over with those who caused the crash and robbed the bank winning.

Deflation is going to happen – globally. Either we can use the course of deflation to shape healthy economies that will provide growth and employment and productive returns on investment in future, or we can allow deflation to further enrich those miscreants whose irresponsible policies led to the violent financial collapse we are about to experience.

There is a fundamentally healthy economy in America – somewhere underneath all the financial excess and chicanery and all the financial/oil/military/healthcare/developer corruption of local, state and federal politics. It will be a painful and slow process to kill off the metastasising cancerous growths on the economy, but if Americans achieved that, they could embrace a healthier and more productive and more prosperous future.

I would like to believe Americans expressed the courage to change over last weekend when they 25 to 1 rejected an unconstrained and unconditional bailout of Wall Street in favour of cold turkey deleveraging of the economy. I wish I could believe that it mattered in the political calculus, but the result of the House vote on the bill will tell us that.

Fight the survivor bias. It’s not your survival they’re engineering."

----------------------------------------------------------
Treasury Conference Call on Bailout Bill to Analysts

If you want to get some insight into how Paulson would like to try to enact the new "$700 Billion Bailout," and how that may be altered, read the following:

From: http://www.nakedcapitalism.com/2008/09/mussolini-style-corporatism-in-ac...
[There are two very interesting audio files via the above link]
Monday, September 29, 2008
Treasury Conference Call on Bailout Bill to Analysts (Updated)

"Various readers wrote us, and it was confirmed by a detailed report on the call at DealBreaker, that the Treasury Department held a conference call this evening for analysts on the bailout bill. A memo was evidently sent to SIFMA members; others may have been contacted by other means. But the report I got from one person who was on the call was the the questions came from financial services industry members. In other words, this was most assuredly not intended to be a call open to the public at large. If anyone from the media or other member of the great unwashed was listening in, it was by accident.

This is simply scandalous. To have a group of interested parties get a privileged briefing by government officials on a matter of keen public interest flies in the face of what a democracy is supposed to be about. The proper method would either be a published FAQ on the Treasury website or a briefing with the media included. But why should I be surprised? Favoritism has been a staple of the Bush Administration.

There is a live blogging recap at DealBreaker. Someone who was on the call is going over his notes and other recaps on the Web and sending me his version, which I hope will add some color. Check back for that update.

Update: Here are the notes promised. Calculated Risk had put up the conference call number. so some of this is the listener's notes, some are hoisted from CR. They are admittedly skeletal at points, but track and enhance the live blogging report at DealBreaker. You can download a torrent for the call here, which I intend to do post haste and will amend the post accordingly. I've included the long form notes below, but some items jump out:

1. The tranching is a mere formality, and the Treasury boys as much as said so. They could take the $700 billion max as soon as the bill has passed,

2. However, they do not plan any action immediately, will wait a couple of weeks. They want to focus their efforts on stronger companies but also made noise about protecting the financial system. This, by the way, is the Japanese convoy system all over.

3. There seemed to be a lot of tap dancing about what price they will pay for assets and no straight answer about their policy on warrants. They did say that if the amount sold was greater than $100 million, they would take warrants. FYI, the current draft allows them to pay up to the price at which the assets were initially booked (yikes) . I wonder if this is obfuscation, if they have an idea of what the plan to do but will not admit it in any public forum.

4. As the person who listened to the call stressed, DealBreaker wasn't clear on the bifurcated process. If you come to the Treasury and you are in trouble, you get reamed. Bear/AIG style treatment, execs probably fired. But if you participate on a voluntary basis, the intent is to make it very user friendly. That is consistent with Paulson's position during the negotiations.

5. The exec comp provisions sound like a joke, They DO NOT affect existing contracts, they affect only contracts entered into during the two years of the authority of this program and then affect only golden parachutes. More detail on that point, but I don't need more detail to get the drift of the gist.

Further below are the notes, admittedly somewhat cryptic at points, but hopefully helpful. But if you have time, listen to the download. Be warned I may revise and add to the post once I have done so.

Update 12:30 AM: Have queued up recording of conference call but not yet listened to it. But reader and sometime contributor Lune provides a useful take. Hoisted from comments:

1) If even the Treasury is saying tranching is a formality, then it really is nothing. Not sure why Dems fought so hard for a fig leaf.

2) Waiting a couple of weeks because no one has any idea when or where the next bomb will blow up. In other words, all their doomsday scenarios about Black Monday were B.S. They screamed the check had to be written by Monday, but now they're saying they actually have a few weeks before they need to cash it. Plus, this will allow them to "seek guidance" from GS, JPM, and other selfless public servants about where the money should be funneled.

3. The tap dancing is because they don't want it to get out that they'll be giving a sweetheart deal. The public won't be following each individual transaction to see exactly what price is being paid. So ridiculously overpriced asset sales can be hidden in the details, and by the time some reporter (or blogger :-) combs through and analyzes the transactions, the deed will have been done. But if Paulson makes a statement that assets will be bought at par before the bailout's even begun, that will be reported and might kill the deal.

4. In other words, we need to sweeten the pot to encourage banks to come "voluntarily". Pardon my ignorance, but why the hell should we be begging banks to borrow from us? I thought a bailout should be the absolute last option for a bank. I.e., it should be so unpalatable, so unprofitable for a bank and its executives that they exhaust every private means of survival before coming for their public "reaming". I wonder if foreclosed homeowners would rate their foreclosure process as "user friendly."

5. Of course the exec comp provisions are a joke. Who do you think is going to be hiring all those banking cmte staffers and newly retired congresspeople next year during the inevitable post-election turnover? Do you really think they're going to vote to limit their salaries? Remember that for lots of people on the Hill (including elected reps), govt work is merely time you spend accumulating credentials in preparation for your real life's work in the vastly richer private world.

Taxpayer losses: "golly, let's just pray to Jesus and hope he'll make sure that in a few years our country won't be bankrupt."

Oversight: "let's appoint a committee which will file toothless reports that no one will ever read."

I'm glad to see that while much time was spent in Exec comp. and tranching kabuki theater, the real points of protection of taxpayer losses and implementation of new regulation seem to be afterthoughts."

"This is an audio recording of the conference call with the US Treasury Department, giving information for financial analysts (about 800 people were in this conference call) regarding the planned financial bailout legislation. Apologies for the audio quality - it was recorded using a mini digital recorder, half with the microphone and half with an inductive pickup. The first minute or so is cut off (we were too slow!), but the rest is intact through the end.

*update: now also posted on youtube in five parts*

Memo found at: http://dealbreaker.com/2008/09/treasury-to-hold-conference-ca.php

MEMORANDUM

TO: SIFMA Government Reps Committee

FR: SIFMA Washington Office

DA: September 28, 2008

RE: Conference Call w. Treasury / 9:00 PM TONIGHT

At 9:00pm tonight, Sunday, September 28th, there will be a call with Treasury officials to discuss the Troubled Asset Recovery Plan. This call is specifically for analysts. Please distribute ASAP to analysts in your firm who might be interested in participating. We have also distributed this call notice through various SIFMA Committees to solicit analyst participation."

Please find the conference call information below:

Date: Sunday, September 28th
Time: 9:00PM ET
Toll-free Dial-in: 1-866-843-0890
Entry Code: ******** "

"The notes on the call per our helpful anonymous reader (and former investment banker, it turns out) [Live blog of the conference call below]:

"Draft bill is very positive for both markets and our companies"

Much explanation of Executive Comp

Residential and commercial mortgages. But very importantly, it can be any asset.

Excited about ability to guarantee assets in exchange for a guarantee fee.

Sought as much authority and as much flexibility as possible.

Eligibility: as broad participation by institutions as possible. The more participation, the more effective it will be. Want banks of all sizes or any financial institution that has a meaningful presence in the US to be interested and enthusiastic.

Purpose is to help private sector clean up their balance sheets.

Highest priority: make sure it works, will attract companies to participate. Warrants and exec comp. were very highly negotiated.

still listening ...
some1 09.28.08 - 9:14 pm #

Warrants:

Direct purchases from failing institution e.g. Bear Stearns, AIG, F&F: will do the same thing, take maybe 79.9% equity.

Market mechanism: Congress wanted taxpayer benefit in upside. Sell warrants for assets over $100M, but the amount of warrants is still TBD. WE want healthy institutions to participate so it should not be punitive.
some1 09.28.08 - 9:17 pm #

Exec comp.

Most difficult part of negotiation.

Direct deal: fire the management, like AIG etc.

Market mechanism: if sell over $300M into fund, some exec comp limits come with it. For 2 years, the firm could not enter into NEW contracts including golden parachute, for involuntary departure. And lose some deductibility.

We feel really good that we have encouraged healthy institutions to participate, not just bailouts of sick institutions.
some1 09.28.08 - 9:22 pm #

Clawback of taxpayer losses:
1. it's a long way out, "a lot can happen in that time"
2. it's targeted at all financial institutions, not just participants! (that means it will never happen)3. would need more congressional and presidential action to implement this.
some1 09.28.08 - 9:24 pm #

Oversight (Bob Hoyt)
1. Financial Stability Oversight Board
2. General Accountability Office and Comptroller
General managing purchase auctions
3. Special Inspector General
4. Congressional Oversight Panel
5. Reporting provisions
some1 09.28.08 - 9:27 pm #

Tranching of $700B (I didn't know that was a limit)

Entire 700B is appropriated entirely by the act, no further appropriation necessary.

Tranching: first $250B
Then Secretary determines that more is needed and tells Congress, another $100B
Then Secretary determines that more is needed and Congress has 15 days to refuse, the remaining $350B
No time limits. Can request all the tranches at once, no need for delays.
some1 09.28.08 - 9:29 pm #

More about tranching:

To block the last $350B, Congress has to say no. Then the President can veto that. To override that veto, Congress needs 2/3 majority.

ALL of that must happen within 15 days, otherwise the money goes out.

Can't the President wait and veto it with one minute left in the 15 day?

RTC had to go back to Congress. Kudos for making this program much EASIER!
some1 09.28.08 - 9:32 pm #

Price: not a fire-sale price, not an outrageous price, a "fair" price. Firms might get a price higher than their current mark.

(Congress will be voting on this, with this aspect totally undetermined.)
some1 09.28.08 - 9:35 pm #

Not trying to maximize return to the taxpayer, but to provide liquidity to the system as a whole.
some1 09.28.08 - 9:39 pm #

They will prefer to help healthy banks become even healthier, as opposed to rescuing a failing bank, because the healthy bank is more likely to relend into the system.

They expect that the exec. comp. limits won't constrain the healthy banks, since they are so light.
artichoke 09.28.08 - 9:43 pm #

xIt will take several weeks, before any assets can be bought, to hire asset managers and get systems up and running.

(They're going to let the weak banks fail, then help the rest.)
artichoke 09.28.08 - 9:45 pm #

No provision to mandate re-lending.

Stuff that is still to be determined, will be issued as "guidelines" therefore exempt from discussion and comment period.

About 800 people on the call.
some1 09.28.08 - 9:47 pm # "

Topics: Banking industry, Credit markets, Regulations and regulators
Posted by Yves Smith at 12:21 AM

Aloha, Brad

Sunday, October 5, 2008
The economist who forecasted all of this...in 2006

"The claim by the Fed and Treasury that spending $700bn of public money is the best way to recapitalise banks has absolutely no factual basis or justification. This way of recapitalising financial institutions is a total rip-off that will mostly benefit - at the huge expense of the US taxpayer - the common and preferred shareholders and even unsecured creditors of the banks." -- Nouriel Roubini, professor of economics at NYU Stern School of Business

First, for who is Dr. Nouriel Roubini, see: http://en.wikipedia.org/wiki/Nouriel_Roubini

And: "Dr. Doom" By STEPHEN MIHM August 15, 2008 New York Times

"On Sept. 7, 2006, Nouriel Roubini, an economics professor at New York University, stood before an audience of economists at the International Monetary Fund and announced that a crisis was brewing. In the coming months and years, he warned, the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession. He laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt. These developments, he went on, could cripple or destroy hedge funds, investment banks and other major financial institutions like Fannie Mae and Freddie Mac.

The audience seemed skeptical, even dismissive. As Roubini stepped down from the lectern after his talk, the moderator of the event quipped, “I think perhaps we will need a stiff drink after that.” People laughed — and not without reason. At the time, unemployment and inflation remained low, and the economy, while weak, was still growing, despite rising oil prices and a softening housing market. And then there was the espouser of doom himself: Roubini was known to be a perpetual pessimist, what economists call a “permabear.” When the economist Anirvan Banerji delivered his response to Roubini’s talk, he noted that Roubini’s predictions did not make use of mathematical models and dismissed his hunches as those of a career naysayer.

But Roubini was soon vindicated. In the year that followed, subprime lenders began entering bankruptcy, hedge funds began going under and the stock market plunged. There was declining employment, a deteriorating dollar, ever-increasing evidence of a huge housing bust and a growing air of panic in financial markets as the credit crisis deepened. By late summer, the Federal Reserve was rushing to the rescue, making the first of many unorthodox interventions in the economy, including cutting the lending rate by 50 basis points and buying up tens of billions of dollars in mortgage-backed securities. When Roubini returned to the I.M.F. last September, he delivered a second talk, predicting a growing crisis of solvency that would infect every sector of the financial system. This time, no one laughed. “He sounded like a madman in 2006,” recalls the I.M.F. economist Prakash Loungani, who invited Roubini on both occasions. 'He was a prophet when he returned in 2007.'"...[Rest of article]

Youtube and Google have a lot of good videos on Dr. "Nouriel Roubini" Here are just a few:
http://alohaanalytics.blogspot.com/2008/10/economist-who-forecasted-all-...

Dr. Nouriel Roubini on the Bailout:

Dr. Nouriel Roubini early this year before Congress:

Dr. Nouriel Roubini good three part interview:
Part 1: http://www.youtube.com/watch?v=51SxmcaKJIw
Part 2: http://www.youtube.com/watch?v=8nCdLs7l4D4
Part 3: http://www.youtube.com/watch?v=BmiBV3o80bk

Dr. Roubini has one of the best economics webpages on the Internet at:
http://www.rgemonitor.com/roubini-monitor/253853/financial_and_corporate...
"Financial and Corporate System is in Cardiac Arrest: The Risk of the Mother of All Bank Runs" Oct 3, 2008 See all blog comments

"It is now clear that the US financial system - and now even the system of financing of the corporate sector - is now in cardiac arrest and at a risk of a systemic financial meltdown. I don’t use these words lightly but at this point we have reached the final 12th step of my February paper on “The Risk of a Systemic Financial Meltdown: 12 Steps to a Financial Disaster” (Step 9 or the collapse of the major broker dealers has already widely occurred).

Yesterday Thursday a senior market practitioner in a major financial institution wrote to me the following:

Situation Report: So far as I can tell by working the telephones this morning:
LIBOR bid only, no offer. Commercial paper market shut down, little trading and no issuance. Corporations have no access to long or short term credit markets -- hence they face massive rollover problems. Brokers are increasingly not dealing with each other. Even the inter-bank market is ceasing up.

This cannot continue for more than a few days. This is the economic equivalent to cardiac arrest. Then we debated what is necessary to restart the system.

I believe that the government will do another Hail Mary pass, with massive guarantees to the short-term commercial credit system and wide open short-term lending by the Fed (2 or 3 times expansion of the Fed balance sheet). If done on a sufficient scale this action will probably work for a while. But none of these financial measures affects the accelerating recession -- which will in turn place more pressure on the financial sector.

Another senior professional in a major global financial institution wrote to me:

Today, in our trading room, I could see the manifestations of a lending freeze, and the funding hiatus for banks and companies, with libor bid only, the commercial paper market closed in effect, and a scramble for cash - really really scary.

Do you think this is treatable without a) a massive coordinated liquidity boost and easing of monetary policy and b) widespread nationalisation of some banks, gtess to others AND a good bank/bad bank policy where some get wiped along with their investors? The Treasury Tarp plan is an irrelevance if we are at a major funding crisis.

And to confirm the near systemic collapse of the system of financing of both financial firms and corporate firms Warren Buffett declared yesterday, as reported by Bloomberg:

...the U.S. economy is ``flat on the floor'' after a cardiac arrest as companies struggle to secure funding and unemployment increases.
``In my adult lifetime I don't think I've ever seen people as fearful, economically, as they are now,'' Buffett said today in an interview with Charlie Rose to be broadcast tonight on PBS. ``The economy is going to be getting worse for a while.' …The credit freeze is ``sucking blood'' from the U.S. economy, Buffett said.

We are indeed at the cardiac arrest stage and at risk of the mother of all bank and non-ban runs as:

- The run on the shadow banking system is accelerating as: even the surviving major broker dealers (Morgan Stanley and Goldman Sachs) are under severe pressure (Morgan losing over a third of its hedge funds clients); the run on hedge funds is accelerating via massive redemptions and a roll-off of their overnight repo lines; the money market funds are experiencing further withdrawals in spite of government blanket guarantee.

- A silent run on the commercial banks is underway. In Q2 of 2008 the FDIC reported $4462bn insured domestic deposits out of $7036bn total domestic deposits; thus, only 63% of domestic deposits are insured. Thus $ 2574bn of deposits were not insured. Given the risk that many banks – small, regional and national – may go bust (as even large ones such as WaMu and Wachovia went recently bust) there is now a silent run on parts of the banking system. Deposit insurance formally covers only deposits up to $100000. Thus any individual, small or large business and/or foreign investor or financial institution with more than $100000 in a FDIC insured bank is now legitimately concerned about the safety of its deposits. Even if as likely the deposit insurance limit will be temporarily raised to $250000 by Congress there will still be a whopping $1.9 trillion of uninsured deposits (or 73% of total deposits); thus, a huge mass of uninsured deposits will remain at risk as even small businesses have usually more than $250K of cash while medium sized and large firms as well as any domestic and foreign financial institution or investor with exposure to US banks has average exposure in the millions of dollars. Particularly at risk are the cross border mostly short term interbank lines of US banks with their foreign counterparties that are estimated to be close to $800 billion.

- A run on the short term liabilities of the corporate sector is also underway as the commercial paper market has effectively shut down with little trading and no issuance or rollover of such debt while corporations have no access to long or short term credit markets and they are therefore facing massive rollover problems (over $500 billion of rollover of maturing debts in the next 12 months). Indeed, the market for commercial paper plummeted $94.9 billion to $1.6 trillion for the week ended Oct. 1 (and down over $200 billion in the last three weeks). Especially banks and insurers were unable to find buyers for the short-term debt: financial paper accounted for most of the decline, plunging $64.9 billion, or 8.7 percent in the last week; but now even non-financial corporations are also experiencing a severe roll-off in the CP market. Discount rates for investment-grade non-financial commercial paper spiked to 599bp for 60 day maturities. More companies are borrowing against or tapping their revolving credit lines. This is largely due to the dislocation caused in the money markets by the failure of Lehman and the subsequent withdrawals from money market funds, which are some of the biggest providers of liquidity in the short term funding/commercial paper. Even the largest corporations are at severe stress: AT&T last week was forced to rely on overnight funding for its treasury operations, as lenders were unwilling to provide more long term financing due to fears in money market funds over investor redemption. The CEO said “It’s loosened up a bit, but it’s day-to-day right now. I mean literally it’s day-to-day in terms of what our access to the capital markets looks like,’’ Things are much worse for non-investment grade corporations and for small and medium sized businesses. As reported today by Bloomberg: Almost 100 U.S. corporate treasurers gathered for an emergency conference call yesterday to warn each other that banks are using any excuse to charge more to renew lines of credit. ``Capital is fleeing to safety,'' said Edward E. Liebert, treasurer of Rohm & Haas Co., who took part in the 90-minute call organized by the National Association of Corporate Treasurers. ``Interbank lending is not free-flowing any more,'' said Liebert, 56, chairman of the Reston, Virginia-based trade group. One bank charged a participant in the call 80 basis points to renew a routine $25 million credit line, according to Liebert, who wouldn't identify the speaker or the company. Rohm & Haas, based in Philadelphia and rated BBB by Standard & Poor's, is paying 8 basis points for a $750 million revolving line of credit provided by 13 banks, the treasurer said. A basis point is 0.01 percentage point. As the U.S. House of Representatives prepares to vote on a $700 billion bailout bill passed by the Senate, global credit markets are being squeezed by banks afraid to lend to each other and to even some investment-grade corporate clients. Treasurers are struggling to keep credit lines open so they can pay employees, fund pension benefits and purchase raw materials. ``The banks are really starting to play hardball,'' said Jeff Wallace, managing partner at Greenwich Treasury Advisors, a financial consultant in Boulder, Colorado. ``They don't want to give out any more money to people because they don't have enough capital”. Banks are demanding renegotiation of interest charges or lending terms when ``routine'' amendments are requested on lines of credit, said Thomas C. Deas Jr., treasurer of Philadelphia- based FMC Corp. and an association board member.

- The money markets and interbank markets have shut down as - despite the Senate passing the bail-out bill - yesterday USD Overnight Libor was still at 268bp after reaching an all-time high of 6.88%; the USD 3m Libor-OIS spread widened to record 270 basis points; EUR 3m LIBOR-OIS spread is at record 130bp; the TED spread is at record 360bps (TED was 11bps one month ago); Money and credit markets are dysfunctional also in emerging markets ; and agency bond spreads are also at highs again.

So we are now facing:

- a silent run on the huge mass of uninsured deposits of the banking system and even a run on some insured deposits are small depositors are scared;

- a run on most of the shadow banking system: over 300 non bank mortgage lenders are now bust; the SIVs and conduits are now all bust; the five major brokers dealers are now bust (Bear and Lehman) or still under severe stress even after they have been converted into banks (Merrill, Morgan, Goldman); a run on money market funds restrained only by a blanket government guarantee; a serious run on hedge funds; a looming refinancing crisis for private equity firms and LBOs);

- a run on the short term liabilities of the corporate sector as the commercial paper market has totally frozen (and experiencing a roll-off) while access to medium terms and long term financings for corporations is frozen at a time when hundreds of billions of dollars of maturing debts need to be rolled over;

- a total seizure of the interbank and money markets.

This is indeed a cardiac arrest for the shadow and non-shadow banking system and for the system of financing of the corporate sector. The shutdown of financing for the corporate system is particularly scary: solvent but illiquid corporations that cannot roll over their maturing debt may now face massive defaults due to this illiquidity. And if the financing of the corporate sectors shuts down and remains shut down the risk of an economic collapse similar to the Great Depression becomes highly likely.

So what needs to be done?

Even several hundreds of billion dollars in emergency liquidity support to the financial system by the Fed and other central banks in the last week alone have not been enough to stop the seizure of liquidity in interbank markets and the shut down of financing for the corporate sector as counterparty risk is now extreme (no one trusts any more in this crisis of confidence even the most reputable and trustworthy financial and corporate counterparties).

Thus, emergency times where we are at risk of a systemic meltdown require emergency measures. These include the following six ideas:

- A temporary six-month blanket guarantee on all US deposits (not just those below $250k) combined with a rapid triage between insolvent banks that should be quickly closed and distressed but solvent – conditional on liquidity and capital injections – banks that should be rescued. To stop the silent run on the banking system you do need now such blanket guarantee on all (insured and uninsured) deposit regardless of their size. To minimize lender moral hazard from such action the blanket guarantee needs to be followed by a very rapid triage and shut-down of insolvent institutions to prevent such institutions from gambling for redemption, i.e. acquiring more deposits and making even more risky loans. To limit such moral hazard distortions one can also limit the extended guarantee only to current deposits: i.e. any new deposit above a $100k limit will not be insured. Of course all the currently uninsured deposits of such insolvent institutions will need to be made whole once such banks are shut down (otherwise the run on uninsured deposits would continue and accelerate). Once the rotten apples (insolvent banks) that are infecting the good apples (the solvent banks) are eliminated the blanket guarantee will be lifted as the uninsured depositors of surviving banks can be assured that the remaining banks (the good apples) will not go bust. Currently the silent run is triggered by investors and depositors not knowing which banks will go bust and which will survive as the bad apples are mixed in the same dark basket together with the good apples. The extra fiscal cost of bailing out the uninsured depositors of failed banks can be addressed with FDIC recapitalization or an increase in deposit insurance premia or by whacking further unsecured creditors of failed banks (as the government should have first claim on the remaining assets of failed banks if uninsured depositors are made whole in such banks). Anything short of this blanket guarantee cum triage will not be enough as the silent run on the banks will soon become a roaring tsunami of an open run. Solution a la Korea 1997 - where the cross border interbank run was solved via a bail-in rather than a bailout of the foreign cross border interbank creditors of Korean banks via an effectively forced conversion of short term interbank lines into one to three years claims guaranteed by the Korean government – would be too risky as such effective capital controls and coercive stretching of maturities of cross border interbank lines would dramatically scare foreign investors placing funds in US banks.

- Extension of the emergency liquidity support of the Fed (both TSLF and PDCF) to a broader range of institutions in the shadow banking system, especially those directly providing credit to the corporate sector. The TSLF and PDCF are already available to some non banks (the broker dealers that are primary dealers of the Fed). But two of such broker dealers are gone (Bear and Lehman) and the other three are under stress. Goldman Sachs, Morgan Stanley, the other primary dealers and the banks that have access to the TSLF and PDCF (and discount window) have massively used these facilities in the last few weeks; but they are hoarding such liquidity and not relending it to other banks, to the thousands of the other members of the shadow banking system and to the corporate sector as they need such liquidity and don’t trust any counterparty. Thus the transmission mechanism of credit policy (the non-traditional Fed liquidity lines) is completely shut down now. Thus, on an emergency basis the TSLF and PDCF need to be extended to other non-bank financial institutions, especially those directly providing credit to the corporate sector such as non-bank finance companies and leasing companies. To ensure that this liquidity support is effective the Fed may require the borrowing institutions to maintain their level of exposure to the corporate sector (avoid the roll off of commercial paper, of short term credits to corporate and alike). A similar requirement may need to be imposed on all other financial institutions (banks and non bank primary dealers) that are now shutting down or rolling off their exposure to the corporate sector. Of course a crucial triage of the corporate sector is also necessary: those firms that would have ended up into Chapter 11 or 7 even under less extreme financial conditions should not be rescued and thus allowed to go into bankruptcy court.

- Some members of the shadow banking system will not receive such liquidity support of the Fed (hedge funds and private equity funds) as – fairly or unfairly - there is no political sympathy for such institutions. This means that the demise of hundreds – and possibly thousands – of hedge funds will occur as redemptions and roll off of overnight repo financing for leveraged investments will cause a massive liquidity – and thus solvency – crisis for such institutions. If hundreds of smaller hedge funds collapse the systemic consequences would be limited (even if in the aggregate hedge funds provide significant financing to the corporate sector). If larger and systemically important hedge funds were at risk of failing the Fed will have to engineer a massive private sector bail-in of such hedge funds (a larger scale rescue a la LTCM) where the prime brokers of such funds are forced to maintain repo exposure to such funds rather than be allowed to shut off such exposure. This is a radical suggestion but the alternative of a Fed liquidity bailout of systemically important hedge fund is not politically feasible given the little sympathy that such funds enjoy in Congress. The refinancing crisis of private equity firms and their LBOs is a longer fuse run as covenant-lite clause and PIK toggles will postpone such financing crisis but make the harder the fall as zombie corporations that postpone restructuring will have a bigger collapse once the financing crisis eventually occurs. But since many of these LBOs should have never occurred in the first place any financing crisis for such buy-outs should be dealt with in bankruptcy court; no public funds should be used to rescue such LBOs and the reckless private equity firms that designed such schemes.

- Direct lending to the business sector from the Fed via extension of the PDCF and TSLF to the non financial corporate sector. This could include Fed purchases of commercial paper from corporations and other forms of financing of the short term liabilities of the Administration to small businesses secured in appropriate ways. Given the collapse of the corporate CP market and the banking system reluctance to provide loans to the corporate sector (credits lines are being shut down) the only alternative to the Fed becoming directly the biggest emergency bank for the corporate sector would be to force the banking system to maintain its exposure to the corporate sector, possibly in exchange for further Fed provision of liquidity to the banking system. The former option may be better than the latter to deal with the looming illiquidity of the corporate sector.

- Have a coordinated 100bps reduction in policy rates by all major advanced economies central bank and, possibly, even some emerging market economies central banks. While this policy rates may not directly resolve the insolvency issues in financial markets and in the corporate sector it may ease liquidity pressures and it would signal that global policy makers are serious about addressing together this most extreme liquidity and financial crisis. Also, some of the radical policy actions that have been suggested here for the US will most likely need to be undertaken also by European policy makers as the liquidity and credit crisis is now becoming global.

- Radically redesign the Treasury TARP rescue plan – possibly after its necessary approval today - to make it effective, efficient and fair. This implies that in addition to a more limited government purchase of toxic assets, you need: a) an emergency triage between insolvent and illiquid and undercapitalized but solvent banks should be made; b) a sharp reduction of the mortgage debt burden of the insolvent household sector; c) and a recapitalization of solvent banks to be done via public injection of preferred shares and matching contributions by current shareholders of the banks. Financial markets have already voted no to this plan (that is flawed in its current form) yesterday when after its passage in the Senate US and global equity markets plunged another 4% while money markets and credit markets seized up even further.

The suggested policy actions are extreme and radical but the times and conditions in financial markets and the corporate sector are also extreme. Thus, to avoid another Great Depression radical and unorthodox policy action needs to be taken now both in the US and in other advanced economies as the credit crisis and liquidity crisis is now becoming virulent even in Europe and other advanced economies. This credit crisis is both a crisis of confidence and illiquidity and a crisis of credit and solvency. But while the insolvent institutions should go bust we have now reached a point where many financial institutions and now non financial firms may become insolvent because of pure illiquidity; and this would lead to an extremely severe economic contraction similar to an economic depression rather than a mild recession. At this point the US, the advanced economies (and now likely even some emerging market economies) will experience an ugly recession and an ugly financial and banking crisis regardless of what we do from now on. What radical policy action can only do is preventing what will now be an ugly and nasty two-year recession and financial crisis from turning into a systemic meltdown and a decade long economic depression. The financial and economic conditions are extreme; thus extreme policy action is needed now to save the global economy from an ugly depression." -- [Featured Blog Comments: “From HK, I can concur with what the good Doctor is saying. The market conditions today are as bad as I have ever seen it (and this includes the Asian... more ” By Wolf in the Wilds 10-03-2008].

Lastly for now, a recent editorial by Dr. Roubini on forbes.com:
http://www.forbes.com/opinions/2008/10/01/goldman-morgan-run-oped-cx_nr_...
"Next: The Mother Of All Bank Runs?" by Nouriel Roubini 10.02.08

"It's plain that the current financial crisis is worsening in spite of--or perhaps because of--the Treasury rescue plan.

The strains in financial markets are becoming more, rather than less, severe in spite of the nuclear option of a $700 billion package: Interbank spreads are widening and are at a level never seen before; credit spreads are widening to new peaks; short-term Treasury yields are going back to near-zero levels as there is flight to safety; credit default swap (CDS) spreads for financial institutions are rising to extreme levels as the ban on shorting of financial stock has moved the pressures on financial firms to the CDS market; and stock markets around the world have reacted very negatively to this rescue package.

Financial institutions in the U.S. and in advanced economies are going bust. In the U.S., the latest victims were Washington Mutual (the largest U.S. savings and loan) and Wachovia (the sixth largest U.S. bank). In the U.K., after Northern Rock and the acquisition of HBOS by Lloyds TSB, you now have the bust and rescue of Bradford & Bingley; in Belgium you had Fortis going bust and being rescued over the weekend; in Germany, Hypo Real Estate, a major financial institution near bust, has also needed rescue.

So, this is not just a U.S. financial crisis. It is a global crisis hitting institutions in the U.K., the Euro-zone and other advanced economies (Iceland, Australia, New Zealand, Canada etc.).

The strains in financial markets--especially short-term interbank markets--are becoming more severe in spite of the Fed and other central banks having injected $300 billion of liquidity in the financial system last week alone, including massive liquidity lending to Morgan Stanley and Goldman Sachs.

In a solvency and credit crisis that goes well beyond illiquidity, no one is lending to counter-parties as no one trusts any counter-party (even the safest ones), and everyone is hoarding the liquidity that is injected by central banks. And since this liquidity goes only to banks and major broker-dealers, the rest of the shadow banking system has no access to this liquidity as the credit transmission mechanisms are blocked.

After the bust of Bear and Lehman, and the merger of Merrill with Bank of America, I suggested that Morgan Stanley and Goldman Sachs should also merge with a large financial institution that has a large base of insured deposits so as to avoid a run on their overnight liabilities. Instead, Morgan and Goldman took a cosmetic approach, converting themselves into bank holding companies as a way to get further liquidity support--and regulation as banks--from the Fed and as a way to acquire safe deposits.

But neither institution can create, in a short time, a franchise of branches, and neither one has the time and resources to acquire smaller banks. And the injection of $8 billion of Japanese capital into Morgan and $5 billion of capital from Warren Buffett into Goldman is a drop in the ocean, as both institutions need much more capital.

Thus, the gambit of converting into banks while not being banks yet hasn't worked, and the run against them has accelerated in the last week: Morgan's CDS spread went through the roof on Friday to over 1200, and the firm has already lost over a third of its hedge-fund clients together with the highly profitable prime brokering business (this is really a kiss of death for Morgan). And the coming roll-off of the interbank lines to Morgan would seal its collapse. Even Goldman Sachs is under severe stress: Most of its lines of business (including trading) are now losing money.

Both institutions should stop playing for time, as delay will be destructive: They should merge now with a large foreign financial institution, as no U.S. institution is sound enough and large enough to be a solid merger partner. If John Mack and Lloyd Blankfein don't want to end up like Richard Fuld, they should do a John Thain today and merge as fast as they can with other large commercial banks. Maybe Mitsubishi and a bunch of Japanese life insurers can take over Morgan.

The only institution sound enough to swallow Goldman may be HSBC. Or maybe Nomura in Japan should make a bid for Goldman. Either way, Mack and Blankfein should sell at a major discount before they end up like Bear and are offered, in a few weeks, only a couple of bucks a share for their faltering operation. And the Fed and Treasury should tell them to hurry up, as they are both much bigger than Bear or Lehman, and their collapse would have severe systemic effects.

When investors don't trust even venerable institutions like Morgan Stanley and Goldman Sachs, you know that the financial crisis is as severe as ever. When a nuclear option of a monster $700 billion rescue plan is not even able to rally stock markets, you know this is a global crisis of confidence in the financial system.

The next step of this panic could be the mother of all bank runs, i.e. a run on the trillion dollar-plus of the cross-border short-term interbank liabilities of the U.S. banking and financial system, as foreign banks start to worry about the safety of their liquid exposures to U.S. financial institutions. A silent cross-border bank run has already started, as foreign banks are worried about the solvency of U.S. banks and are starting to reduce their exposure. And if this run accelerates--as it may now--a total meltdown of the U.S. financial system could occur.

The U.S. and foreign policy authorities seem to be clueless about what needs to be done next. Maybe they should today start with a coordinated 100 basis points reduction in policy rates in all the major economies in the world to show that they are starting to seriously recognize and address this rapidly worsening financial crisis. -- Nouriel Roubini, a professor at the Stern Business School at NYU and chairman of Roubini Global Economics, is a weekly columnist for Forbes.com."

Well, the above economic analysis is a hell of a lot better than we have been getting in Hawaii. FYI, Dr. Roubini is allowing free subscription at his website right now.

Aloha, Brad

A quick message to let you know this important contested case docket before the Public Utilities Commission
begins tomorrow in Honolulu. At stake is Hawaiian Electric Company’s proposal to power their generators
with imported palm oil biodiesel to replace petroleum diesel. (Is that really our best choice? Do they believe that?)

I am one of a dozen witnesses called by Life of the Land to provide testimony. I encourage you to look at the volume of work done by LOL at this link: http://www.lifeofthelandhawaii.org/Biofuels_Docket.html

Life of the Land is our state’s top advocate for locally renewable energy strategies, and has been the only group
willing to sift through the bureaucratic maze of PUC rules and regulations. My hope is that each of you will consider
sending them a small check....if you can spare $10 or $20 it will make a difference! There is a Pay Pal link
on their website: http://www.lifeofthelandhawaii.org/
....or you can mail a check to the address below:
Life of the Land
76 N. King Street, Suite 203
Honolulu, HI 96817

Thank you for joining me in ways to promote local energy self-sufficiency, not more bad decisions by our
public utility, which now has us paying 43 cents/ kWh, the second highest rates in the U.S.!! (Kauai is 49 cents/kWH).

If any of you want to do more to help turn back the “palm oil pipeline” idea, please contact me directly.
Mahalo,
ROB

------ Forwarded Message
From: "Henry Curtis" <henry.lifeofthelandgmail.com
Date: Wed, 1 Oct 2008 07:16:54 -1000
To: "Henry Curtis" <henry.lifeofthelandgmail.com
Subject: palm oil hearing

Aloha,

Who: The Hawai`i Public Utilities Commission

Where: 465 S King Street, Room B-3 (Basement) (corner King, Punchbowl)

What: HECO - Imperium Biofuel Supply Contract EVIDENTIARY HEARING

When: Monday, October 6, 9 a.m -

Parties: HECO, Consumer Advocate, Life of the Land

Media Coverage: Cameras allowed in the hearing room

The Public is welcome. Arrive Early. Seating is limited.

The Issue: Should HECO power their new generator with PALM OIL, and if so, under what conditions.

In March 2005 HECO proposed powering their new Campbell Industrial Park electric generator with ethanol, then they switched to biodiesel, now they are focusing on imported Malaysian palm oil.

Life of the Land wants requirements that any imported palm oil not be done through increases in greenhouse gas emissions, exploitation of workers, and displacement of native communities. Respecting human rights is essential.

The Consumer Advocate, as usual, is a front for the utility and should be re-named the Utility Advocate.

How much will palm oil electricity cost?

Will rates rise?

Will switching from imported petroleum from 20 countries to importing palm oil from one country increase energy security?

Friday, October 3, 2008

$700 Billion Flush...Now What?

Check this out, TED spreads, indicate increased interest rates on banks lending to each other relative to short-term treasury rates, have gone up since the $700 Billion "bailout," or "flush" was passed today. TED spread is something that is not easily manipulated as other things can be, so it is a good measure of expert sentiment on global risk. Check out the following chart and set it to one day to see what happened the day the $700 Billion Flush was passed by Congress. I know it's a longshot, but I think Congress will pay at least a few cents on this coming Election Day a few short weeks away. TED spread: http://www.bloomberg.com/apps/cbuilder?ticker1=.TEDSP%3AIND

Here are some short videos of statements made in Congress today: http://alohaanalytics.blogspot.com/2008/10/700-billion-flushnow-what.htm...

The following article, esp. at the end, has some good ideas for...Now What?:
http://rushkoff.com/2008/05/03/riding-out-the-credit-collapse/
"Riding Out the Credit Collapse"
Arthur Magazine, Spring 2008

"There’s two kinds of people asking me about the economy lately: people with money wanting to know how to keep it “safe,” and people without money, wanting to know how to keep safe, themselves.

Maybe it’s the difference between those two concerns that best explains the underlying nature of today’s fiscal crisis.

Is what’s going on in the economy right now really worse than anything that’s happened in the past few decades? Are we heading towards a bank collapse like what happened in 1929? Or something even worse?

On a certain level, none of these questions really matter. Not as they’re being phrased, anyway. What we think of as “the economy” today isn’t real, it’s virtual. It’s a speculative marketplace that has very little to do with getting real things to the people who need them, and much more to do with providing ways for passive investors to grow their capital.

This economy of markets was created to give the rising merchant class in the late middle ages a way to invest their winnings. Instead of actually working, or even injecting capital into new enterprises, they learned to “make markets” in things that were scarce. Or, rather, in things that could be made scarce, like land.

That’s how speculation was born. Speculation in land, gold, coal, food…pretty much anything. Because the wealthy had such so much excess capital to invest, they made markets in stuff that the rest of us actually used. The problem is that when coal or corn isn’t just fuel or food but also an asset class, the laws of supply and demand cease to be the principle forces determining their price. When there’s a lot of money and few places to invest it, anything considered a speculative asset becomes overpriced. And then real people can’t afford the stuff they need.

The speculative economy is related to the real economy, but more as a parasite than a positive force. It is detached from the real needs of people, and even detached from the real commerce that goes on between humans. It is a form of meta-commerce, like a Las Vegas casino betting on the outcome of a political election. Only the bets, in this case, change the real costs of the things being bet on.

That’s what happened in the housing market and the credit market—which, these days, are actually the same thing. Here’s the story, in the simplest terms:

Bush’s tax cuts and other measures favoring the rich led to the biggest redistribution of wealth from poor to rich in American history. The result was that the wealthy—the investment class—had more money to invest, or lend, than there were people and businesses looking to borrow.

The easiest way to bring more borrowers into the system—and to create more of a market for money—was to promote homeownership in America. This is precisely what the Bush administration did, touting home ownership as an American right. Of course, they weren’t talking about home ownership at all, but rather pushing people to borrow money tied to the value of a house. If people could be persuaded to take mortgages on homes, real estate values would go up for those already invested (like land trusts and real estate funds) and banks would have a market for the excess money they had accumulated.

In short, there was a surplus of credit in the system. Americans were encouraged to borrow in the form of mortgages, which created demand for the credit banks wanted to sell. In many cases the credit itself wasn’t even real, but leveraged off some other inflated commodity that the bank or investor may have owned.

Banks and mortgage companies invented some really shady and difficult-to-understand mortgage contracts, designed to get people to borrow more money than they could . Banks didn’t care so much about lending money to people who wouldn’t be able to pay it back, because that’s not how they were going to earn their money, anyway. They provided the money for mortgage companies to lend, and in return won the rights to underwrite the loans when they were packaged and sold to other people and institutions.

So a bank might provide the cash for a bunch of loans, but then get it back, plus a huge commission, when those loans were packaged and sold to someone else.

Lots of people take out mortgages, and housing prices rise. This is used as evidence to convince more people that real estate is a great investment, and more people buy into the housing bubble. Lots of these people put little or no money down, and buy mortgages whose interests rates are going to change for the worse. But they believe the price of their home is inevitably going to go up, and pin their futures on the idea that they can refinance their mortgage before their rate changes. Since the house will be worth more, the mortgage for what they owe should be easier to get; it will represent a smaller percentage of the new total cost of the house.

Of course, this was dumb. Banks didn’t really care (because they weren’t holding the bad paper) but the people investing in those “mortgage-backed securities” were slowly getting wise to the fact that many of the borrowers were in over their heads. What to do? The credit industry went ahead and lobbied Washington to change the bankruptcy laws. While corporations could claim bankruptcy and stop paying for their retirees’ health coverage, individuals would no longer be able to claim bankruptcy, and even if they did, they would still owe their creditors the money they borrowed, forever. The credit industry spent over $100 million lobbying lawmakers for the new provisions.

Then, just like the credit industry predicted, loans start going bad. (The industry labels these loans “sub prime” because they want to make it look like the borrowers were somehow less-than-respectable people. But the term really just refers to a less-than-respectable loan.) As homeowners default on their mortgages, housing prices start to go down. This, in turn, makes it impossible for people to refinance their mortgages when they thought they would; in fact, now many homeowners actually owe more on their home than the home is worth. How can you refinance a million-dollar loan on a house that is only worth half that? You can’t, so instead you have to hold onto the variable-rate loan that you foolishly bought from the predatory lender. The rate rises higher and faster than you can pay it.

Lenders go ahead and start foreclosing on properties, kicking out the mortgage holders who can’t pay. But this creates another problem: what to do with the house? It’s not even worth the outstanding portion of the loan, in many cases. And even if they can sell it, how to distribute the money? No one even really knows whose mortgages belong to whom, as they’ve been sold as parts of packages, again and again, to different lenders, pension funds, money markets…you name it.

This leads to what became known as the “credit crunch” or “liquidity crisis.” No one feels good about lending money anymore because so much of it was tied in one way or another to these bad mortgages. The creditors don’t want to take possession of all these foreclosed homes, and they turn to the government for help.

Under the guise of helping homeowners “stay in their homes,” the government starts bandying about various “relief packages.” The Treasury department and the Fed are actually taking a two-pronged strategy towards fixing the problem. One prong is cynical PR, and the other is just plain stupid.

First, they want to create the illusion that something is being done, so they talk about “superfunds” to bail out homeowners, freezes on rate hikes, checks mailed to every taxpayer, and other useless gestures. They do all this to appease angry consumers and consumer advocates because they won’t want real lending industry regulation (like what Barney Frank and other progressives are pushing for) to gain any traction.

Second, they want to make more money available to the creditors (banks), so they can keep lending money—because this is their business. So the Fed lowers interest rates again and again. Banks get more money, and guess what? We’re back where we started: with tons of money and nowhere to invest it! By lowering the “prime lending rate,” they simply add to the surplus cash that created the problem in the first place.

Of course, both measures serve to stave off panic selling, because it seems as though something real is being done. Homeowners may get a slight delay in the paralyzing rate increases on their mortgages, giving banks and creditors the chance to make a more orderly exit. They will bail from these mortgages while selling the artificially secured credit to the likes of you and me through money market accounts and other retail products. They just need time to make sure the real losses trickle down to someone else.

And remember: this whole mortgage fiasco is just a little preview of what happens next year when the credit card industry faces the very same self-imposed “crunch.” In the case of mortgage lenders, at least the terms of the loans were disclosed. Credit card companies—which are some of the very same banks that are in the mortgage mess today—are busy rewriting their policies, increasing rates, and adding fees to the policies of people already in debt to them.

You know those little ‘inserts’ in your credit card bill? Read them, and you’ll find out, like I did, that some credit card companies have begun charging interest on your purchases from the moment you make the purchase. You pay finance charges even if you pay your whole bill every month. Most people carry big balances, so they won’t notice the additional charges, or at least that’s what the credit card companies are—quite literally—banking on.

* * *

After a certain point, consumers just won’t be able to pay their bills. Even though they’ve paid the cost of their purchases several times over, they’re simply buried in interest and interest on the interest, sometimes compounding at a rate of 30 or 40 percent per year. The creditors know this, which is why they’ve sold a lot of this debt to other banks, pension plans, money market funds…you get the picture: the kinds of places where we invest our retirement money. The banks invested in us; we were the assets. Now that we’re about to go broke, they’re busy selling us to other financial institutions in a game of musical chairs that will cost the last debtholder a lot of money. Of course, unless we can convince some foreign sheiks to buy some lousy US assets with their oil money, that last debt holder will end up being you and me.

Over the past few months I’ve spoken to top strategists at some of the biggest banks in the world, and they share my perception of the scenario. Most of them are “holding cash” as their main investment strategy, spread out over a few of the major currencies. Those making money are doing so by short-selling shares of other companies in the same finance industry that they supposedly work for.

The bigger picture, of course, is that speculation just worked too well for too long. The disparity between the market values and real values (rich people and poor people) got too large. Every asset class, even money itself, got too expensive. We became more valuable for our borrowing power than our labor—which also meant there was no way to work off our debt. Meanwhile, the people using reality as an investment vehicle have overwhelmed the real economy on which their “structured investments” are based.

Sure, this has happened before. It’s just that, traditionally, when wealth disparity got too great and there wasn’t enough money in the right places, the wealthiest bankers temporarily suspended their greed to bail out the system. Or progressive tax policies opened corporate coffers, permitting a “New Deal” that employed people while rebuilding the infrastructure required to make real things and provide real services to citizens.

Today, however, such temporary restraints on greed are systematically untenable and philosophically unthinkable. Conservatives are still so angry about New Deal reforms of the 1930s that that they have infused politics and banking with an economic ideology that sees any regulation of worker exploitation or predatory investment as anti-capitalist, anti-American, and even anti-God.

So instead we are the beneficiaries of “wink” reform: stuff that’s supposed to make us feel good while reassuring the speculators that their interests will remain paramount. A few hundred dollars mailed to every American family creates the illusion that government is lending a helping hand, but this money is not redistributing anything. It’s being taken from the same people who are receiving it, in the hope that they’ll just pump it back into the system at Wal-Mart or the Exxon station.

Whether the coming economic crisis will be deep or shallow is left to be seen. We may be at the start of the kind of depression our grandparents lived through in the ’30s, or we may simply experience what our parents lived through back in the ’70s. Foreign investment trusts may come in and buy our biggest banks and turn us into global citizens through the very World Bank policies we were hoping would turn all of them into US vassals.

Whatever the case, the best thing you can do to protect yourself and your interests is to make friends. The more we are willing to do for each other on our own terms and for compensation that doesn’t necessarily involve the until-recently-almighty dollar, the less vulnerable we are to the movements of markets that, quite frankly, have nothing to do with us.

If you’re sourcing your garlic from your neighbor over the hill instead of the Big Ag conglomerate over the ocean, then shifts in the exchange rate won’t matter much. If you’re using a local currency to pay your mechanic to adjust your brakes, or your chiropractor to adjust your back, then a global liquidity crisis won’t affect your ability to pay for either. If you move to a place because you’re looking for smart people instead of a smart real estate investment, you’re less likely to be suckered by high costs of a “hot” city or neighborhood, and more likely to find the kinds of people willing to serve as a social network, if for no other reason than they’re less busy servicing their mortgages.

The more connected you are to the real world, and the more consciously you reject the lure of the speculative ladder, the less of a willing dupe you’ll be in the pyramid scheme that’s in the process of collapsing all around us at this moment.

Think small. Buy local. Make friends. Print money. Grow food. Teach children. Learn nutrition. And if you do have money to invest, put it into whatever lets you and your friends do those things." Posted on 3 May '08 by Douglas.

Aloha, Brad

Hawaii must prepare for energy challenges
By Jim Dator and Manfred Zapka

Hawai'i is experiencing the initial stage of what may be its greatest challenge: the end of cheap, abundant, easily available oil.
How we respond will determine our future and that of our children and grandchildren and people who visit our shores.

The crisis isn't temporary — or political. Recent rapid increases in the price of oil are not temporary events that will soon pass.

While the price of oil may go down a bit for a while, it will increasingly head up sharply. We are in the initial stage of a permanent transformation of energy supplies and demand, which will result in a new world — and a new Hawai'i — in the 21st century. Even the conservative International Energy Agency, the energy watchdog for the industrial world, recently warned that 'the wheels might come off the oil supply' because of stagnating world oil supply in the face of strong and increasing demand.

Did this crisis catch us by surprise? Yes and no. Energy experts in the 1970s warned that peak oil would begin to affect us by the early 21st century. Early attempts were made with research and development of Ocean Thermal Energy Conversion (OTEC), solar, wind and geothermal energy — all potential sources we have in abundance in Hawai'i. And conservation remains the most important contribution to an energy solution that we can make.

But these efforts were largely abandoned or reduced in the 1980s when the price of oil fell sharply, making alternative energy sources appear to be uneconomical, even though the development of new sources was essential for our long-range future. As recently as 1999, oil analysts predicted a glut, with the danger of oil prices collapsing to $5 per barrel. As recently as 2003, some analysts in Hawai'i predicted oil 'as high as' $25 by 2015.

Fast forward to 2008 and we have seen oil prices pass the $150 per barrel mark, while OPEC and others speak openly about the prospect of oil prices at $200 per barrel and beyond. While the reasons for the current high oil prices are often attributed to greedy investors and windfall profits of oil companies, the fundamental reason is the growing gap between supply and demand. This will only get worse.

There are many potential alternatives to oil. But it will likely take at least 20 or 30 years — perhaps more — from the time we decide what those alternatives are to transition from oil to other sources.

Compared with other states, Hawai'i is the most oil-dependent. Each person in Hawai'i consumes about 45 barrels, compared with about 25 in the U.S. overall. About 90 percent of all the energy consumed for electricity in Hawai'i and for ground and air transportation is petroleum based. The rest is coal and some renewable sources. On the Mainland, only 2 percent of electricity is generated by oil; in Hawai'i it is 76 percent.

Indeed, Hawai'i has recently experienced some 'shocks' that might help us understand what is still to come. The price of oil per barrel in 1999 was $12. In 2005 after Katrina hit, it reached $70. Now we have seen prices exceeding $150. Oil now costs 10 times what it did only nine years ago.

Tourism is the backbone of our economy. For years, airfares to and from Hawai'i have been comparatively cheap, per mile flown, compared with many other routes in the U.S. and elsewhere. Today, no airline flying into and within Hawai'i is profitable. Airplanes rely on jet fuel distilled from oil. While alternatives are being sought, nothing comparable to jet fuel currently exists.

At what point will it become too expensive for most of us in Hawai'i to fly interisland, much less to the Mainland? When will it become too expensive for any but the richest of tourists to visit Hawai'i? Will passenger ships pick up the slack? They, too, burn oil.

Most of the food we eat is flown or shipped in by petroleum-burning carriers; it will cost more and more every year to ship food in, and between, our islands.

Most of the goods we buy in our stores are imported. At what point will the cost of importing them become prohibitive, especially if we have little income on our own, and must compete with huge markets elsewhere in the world.

Clearly, we need to prepare. Among the things we should consider:

# We should support those politicians and businesses — and there are many in Hawai'i — who are aware of these issues and have been trying to change Hawai'i's dependence on imported oil. The public must demand solutions and support politicians who will have to make hard choices.

# Conservation is our most important and immediate action. We need to design and implement stringent conservation measures in everything we do. Every major new project in Hawai'i, whether public or private, needs to be rethought in light of diminishing energy supplies and other related energy challenges.

# We need to preserve and extend available land for agriculture, and begin to move toward greater production of local food and other products. We do not want to cut ourselves off from the American or global economy, but we do need to prepare to take care of ourselves if we have to.

We should understand that peak oil is not our only new challenge. We have similar new challenges in climate change, sea-level rise, water shortages, environmental refugees and the like. We cannot 'solve' our energy problem by making these other challenges worse.

But perhaps most important, we need to begin a discussion about how much energy we really need to live the kind of lives we want in Hawai'i. We may decide we want to use even more energy than we do now, and thus go all out to find new sources. Or we may decide that a different lifestyle is actually better for us — for our health, happiness, family and friends — and begin to move toward a bright future of greater self-reliance and interdependence. At least for the moment, the choice is ours.

Jim Dator is director of the Futures Research Center in the Department of Political Science at the University of Hawai'i-Manoa. Manfred Zapka is an engineer and energy consultant in Honolulu.
http://www.honoluluadvertiser.com/apps/pbcs.dll/article?AID=200880930031...

Join hosts Andrea Brower and Keone Kealoha this Friday, October 3rd, noon - 1pm on KKCR (91.9FM or online at kkcr.org) when we talk RE:Localization with Relocalization Network Manager Asher Miller. The Relocalization Network was created in 2003 as one of the first initiatives of Post Carbon Institute. It developed as a response to individuals' questions about how they could take action to address the implications of peak oil. They found that the most effective strategies are initiated at the community level. For this reason, Post Carbon Institute decided that establishing a network of Local Post Carbon Groups was the best way to provide concerned individuals with the support and resources necessary to coordinate effective action.

The Relocalization Network is now composed of nearly 150 Local Post Carbon Groups from all over the world that are working to prepare their communities for an energy constrained future. These groups operate autonomously, while receiving guidance, educational resources, project and technical support and electronic infrastructure from Post Carbon Institute.

More on Post Carbon Institute
More on Relocalization Network

Thursday, October 2, 2008

This is outstanding, timely analysis:

http://www.financialsense.com/editorials/engdahl/2008/1001.html
"FINANCIAL TSUNAMI: The End of the World as we Knew it"
by F. William Engdahl October 1, 2008

"The unexpected US Congress’ rejection of the Bush Administration financial rescue plan, TARP on September 29 has opened up the spectre for the first time of a 1931-style domino wave of worldwide bank failures. That is already underway across the US banking spectrum with the failure, nationalization or forced liquidation in the past two weeks of Fannie Mae and Freddie Mac, of the giant Washington Mutual mortgage lender, of the nation’s fourth largest deposit bank, Wachovia. That was on top of a wave of smaller bank failures that began with IndyMac in the spring. For some it is appealing and more simple to grasp the magnitude of these titanic events in the US-centered financial world by assuming it is all part of a pre-planned grand conspiracy by the Money Masters, what in the 1920s in the USA was termed the Money Trust, to control the entire financial world.

As the details of the present crisis reveal, there are huge ideological fault lines making for chaos and a potential meltdown of the Laissez Faire financial system. That present system, which was built on the back of Wall Street financial and banking deregulation since 1987 when Alan Greenspan, a devout follower and close friend of radical individualist Ayn Rand, became Wall Street’s man at the Federal Reserve for almost 19 years, is over now with the failure of the Henry Paulson $700 billion bailout scheme. Governments worldwide now face no alternative but to begin the painful process of putting the financial genie back in the bottle and re-regulating an out-of-control financial system. The failure of the UK Government and the US Government to address that fundamental issue is behind the present crisis of confidence.

A brief look at history

The Great Depression in Germany in 1931 began with a seemingly minor event—the collapse of a bank in Vienna, Creditanstalt, that May. For readers interested in more on the remarkable parallels between that crisis and that of today, I recommend the treatment in my earlier volume, A Century of War: Anglo-American Oil Politics and the New World Order. That Vienna bank collapse in turn was triggered by a political decision in Paris to sabotage an emerging German-Austrian economic cooperation agreement by pulling down the weakest link of the post-Versailles system, the Vienna Creditanstalt. In the process, Paris triggered a series of tragic events that led to the failure of the German banking system over a period of several weeks. The post-1919 Versailles System, much like the post-1999 US Securitization System, was built on a house of cards with no foundation. When one card was removed, the entire international financial edifice crumbled.

Then, in 1931, there was an inept Brüning government in Germany, which believed severe austerity was the only solution, merely feeding unemployment lines to pay the Young Plan German reparations to the new Bank for International Settlements in Basle.

Then, in 1931 George Harrison, a Germano-phobe, was the inexperienced Governor of the powerful New York Federal Reserve. Harrison was a member of the anglophile Skull & Bones, the elite Yale University secret society which also included George H.W. Bush and George W. Bush as initiates. Harrison, who went on to coordinate the secret Manhattan Project on the development of the Atomic bomb under fellow Skull & Bones member, War Secretary Henry Stimson, believed the crisis had started not from abroad but with German bankers trying to make a profit at the expense of others.

Within weeks of rumor and jitters, the New York Bankers Trust, ironically today a part of Deutsche Bank, announced it would be forced to cut the credit line to Deutsche Bank and by July 1931 began to pull its deposits from all big Berlin banks. Harrison insisted the Reichsbank dramatically raise interest rates to stabilize things, only turning bad into worse as a credit crisis across the German economy ensued.

The Bank of England Governor, Montagu Norman, while somewhat more supportive of Luther argued that his friend Hjalmar Schacht was better suited to manage the crisis. On July 13, 1931, a major German bank, Darmstädter-und Nationalbank (Danat) failed. That triggered a general a depositors’ run on all German banks. The Brüning government merged the Danat with a weakly capitalized Dresdner Bank, and made large state guarantees in an effort to calm matters. It didn’t.

New York Fed governor, Harrison, who was personally convinced it was a ‘German’ problem, barked orders to Reichsbank chief Hans Luther on how to manage the crisis according to archival accounts. A foreign drain on Reichsbank gold reserves ensued.

The rest is history, the tragic history of the greatest most destructive war of the 20th Century, with all the suffering that ensued. At that time in history, the American banking elite saw itself, despite a stock market crash and Great Depression in America, as standing at the dawn of a new American Century.

The decline of the American Century

Today, in 2008, some 77 years later, a German Finance Minister stands before the Bundestag announcing the end of that American Century. Today the German government encourages a fusion of Dresdner with Commerzbank. Today Deutsche Bank, which some years ago acquired Bankers Trust in New York in a merger wave, appears to be in a stronger position than its American counterparts as Wall Street investment banks, some more than 150 years old as the venerable Lehman Bros., simply vanish in a matter of days. The American financial Superpower crumbles before our eyes.

In March 2008 there were five giant Wall Street investment banks, banks which underwrote Mortgage-Backed Securities (MBS), corporate bonds, corporate stock issues. They were not deposit banks like Citibank or Bank of America; they were known as investment banks—Morgan Stanley, Merrill Lynch, Goldman Sachs, Lehman Brothers, Bear Stearns.

The business of taking deposits and lending by banks had been split during the Great Depression from the business of underwriting and selling stocks and bonds—investment banking—by an act of Congress, the Glass-Steagall Act of 1933. The law was passed amid the collapse of the banking system in the United States following the bursting of the Wall Street stock market bubble in October 1929.

That Glass-Steagall act was a prudent attempt by Congress to end the uncontrolled speculative excesses of the Roaring Twenties by New York finance. It established the Federal Deposit Insurance Corporation to guarantee personal bank deposits to a fixed sum that restored consumer confidence and ended the panic runs on bank deposits.

In November 1999, after millions spent lobbying Congress, the New York banks and Wall Street investment banks and insurance companies won a staggering victory. The US Congress voted to repeal that 1933 Glass-Steagall Act. President Bill Clinton proudly signed the repeal act with Sandford Weill, the chairman of Citigroup.

The man whose name is on that repeal bill was Texas Senator Phil Gramm, a devout advocate of ideological free market finance, finance free from any Government fetters. The major US banks had been seeking the repeal of Glass-Steagall since the 1980s. In 1987 the Congressional Research Service prepared a report which argued the case for preserving Glass-Steagall. The new Federal Reserve chairman, Alan Greenspan, just fresh from J.P. Morgan bank on Wall Street, in one of his first speeches to Congress in 1987 argued for repeal of Glass-Steagall.
The repeal allowed commercial banks such as Citigroup, then the largest US bank, to underwrite and trade new financial instruments such as Mortgage-Backed Securities (MBS) and Collateralized Debt Obligations (CDOs) and establish so-called structured investment vehicles, or SIVs, that bought those securities. Repeal of Glass-Steagall after 1999, in short, enabled the Securitization revolution so openly praised by Greenspan as the “revolution in finance.” That revolution is today devouring its young.

That securitization process is at the heart of the present Financial Tsunami that is destroying the American credit structure. Citigroup played a major part in the repeal of Glass–Steagall in 1999. Citicorp had merged with Travelers Insurance company the year before, using a loophole in Glass-Steagall that allowed for temporary exemption. Alan Greenspan gave his personal blessing to the Citibank merger. Phil Gramm, the original sponsor of the Glass-Steagall repeal bill that bears his name, went on to become the chief economic adviser to John McCain. Gramm also went on to become Vice Chairman of a sizeable Swiss bank, UBS Investment Bank, in the USA, a bank which has had no small share of troubles in the current Tsunami crisis.

Gramm as Senator in 2000 was one of five co-sponsors of the Commodity Futures Modernization Act of 2000. A provision of the bill was referred to as the ‘Enron loophole’ because the it was later applied to Enron to allow them unregulated speculation in energy futures, a key factor in the Enron scandal and collapse. The Commodity Futures Modernization Act, as I described in my earlier piece in May, Perhaps 60% of Today’s Oil Price is Pure Speculation, allowed investment bank Goldman Sachs (coincidentally the former bank of Treasury Secretary Paulson), to make a literal killing in manipulating oil futures prices up to $147 a barrel this summer.

Paulson’s impressive interest conflicts

The actions of Treasury Secretary Paulson since the first outbreak of the Financial Tsunami in August of 2007 have been directed with one apparent guiding aim—to save the obscene gains of his Wall Street and banking cronies. In the process he has taken steps which suggest more than a mild possible conflict of interest. Paulson, who had been chairman of Goldman Sachs from the time of the 1999 Glass-Steagall repeal to his appointment in 2006 as Treasury head, had been one of the most involved Wall Street players in the new securitization revolution of Greenspan. Under Paulson, according to City of London financial sources familiar with it, Goldman Sachs drove the securitization revolution with an endless rollout of new products. As one London banker put it in an off-record remark to this author, “Paulson’s really the guilty one in this securitization mess but no one brings it up because of the extraordinary influence Goldmans seems to have, a bit like the Knights Templar order of old.’ Naming Goldman chairman Henry Paulson to head the Government agency now responsible for cleaning up the mess left by Wall Street greed and stupidity was tantamount to putting the wolf in charge of guarding the hen house as some see it.

Paulson showed where his interests lay. He is by law is the chairman of something called the President's Working Group on Financial Markets, the Government’s financial crisis management group that also includes Fed Chairman Bernanke, the Securities & Exchange Commission head, and the head of the Commodity Futures Exchange Commission (CFTC). That is the reason Paulson, the ex-Wall Street Goldman Sachs banker, is always the person announcing new emergency decisions since last August.

Two weeks ago, for example, Paulson announced the Government would make an unprecedented $85 billion nationalization rescue of an insurance group, AIG. True AIG is the world’s largest insurer and has a huge global involvement in financial markets.

AIG’s former Chairman, Hank Greenberg—a close friend of Henry Kissinger, a former Director of the New York Fed, former Vice Chairman of the elite New York Council on Foreign Relations and of David Rockefeller’s select Trilateral Commission, Trustee Emeritus of Rockefeller University—was for more than forty years Chairman of AIG. His AIG career ended in March 2005 when AIG's board forced Greenberg to resign from his post as Chairman and CEO under the shadow of criticism and legal action for cooking the books, in a prosecution brought by Eliot Spitzer, then Attorney General of New York State.

In mid September, in between other dramatic failures including Lehman Bros., and the bailout of Fannie Mae and Freddie Mac, Paulson announced that the US Treasury, as agent for the United States Government, was to bailout the troubled AIG with a staggering $85 billion. The announcement came a day after Paulson announced the Government would let the 150-year old investment bank, Lehman Brothers, fail without Government aid. Why AIG and not Lehman?
What has since emerged are details of a meeting at the New York Federal Reserve bank chaired by Paulson, to discuss the risk of letting AIG fail. There was only one active Wall Street banker present at the meeting—Lloyd Blankfein, chairman of Paulson’s old firm, Goldman Sachs.

Blankfein later claimed he was present at the fateful meeting not to protect his firm’s interests but to ‘safeguard the entire financial system.’ His claim was put in doubt when it later emerged that Blankfein’s Goldman Sachs was AIG’s largest trading partner and stood to lose $20 billion in a bankruptcy of AIG. Were Goldman Sachs to go down with AIG, Secretary Paulson would have reportedly lost $700 million in Goldman Sachs stock options he had, an interesting fact.

That is a tiny glimpse into the man who crafted the largest bailout in US or world financial history some days ago, the failed TARP—Troubled Asset Relief Program—a proposed $700 billion financial stabilization scheme which, in Paulson’s original version would have allowed him or his Treasury successor to use $700 billion, with no oversight or accountability, to buy bad or worthless assets from financial institutions he deems worthy of help.

As respected economist, Nouriel Roubini pointed out, in almost every case of recent banking crises in which emergency action was needed to save the financial system, the most economical (to taxpayers) method was to have the Government, as in Sweden or Finland in the early 1990’s, nationalize the troubled banks, take over their management and assets, and inject public capital to recapitalize the banks to allow them to continue doing business, lending to normal clients. In the Swedish case, the Government held the assets, mostly real estate, for several years until the economy again improved at which point they could sell them onto the market and the banks could gradially buy the state ownership shares back into private hands. In the Swedish case the end cost to taxpayers was estimated to have been almost nil. The state never did as Paulson proposed, to buy the toxic waste of the banks, leaving them to get off free from their follies of securitization and speculation abuses.

Paulson’s plan, the one essentially rejected on September 29 by the House of Representatives, would have done nothing to recapitalize the troubled banks. That recapitalization could cost an added hundreds of billions on top of the $700 billion toxic waste disposal.

Serious bankers I know who went through the Scandinavian crisis of the 1990’s are scratching their head trying to imagine how crass the Paulson TARP scheme is. That politically obvious bailout of Wall Street by the taxpayers, what some refer to as ‘Bankers’ Socialism—socialize the costs of failure onto the public, and privatize the profits to the bankers—is a major factor behind the defeat of the TARP compromise version. Under Paulson’s scheme, which seems likely to get very little alteration by Congress in coming days, the Treasury Secretary, initially Paulson, would have sole discretion, with minimal oversight, to use a $700 billion check book, courtesy of taxpayer generosity, to buy various Asset Backed Securities held not only by Federal Reserve regulated banks like JP Morgan Chase or Citicorp, or Goldman Sachs, but also by hedge funds, by insurance companies and whomever he decides needs a boost.

‘The Paulson plan is unworkable,’ noted Stephen Lewis, chief economist with the London-based Monument Securities. ‘No one has an idea how to set a price on these toxic securities held by the banks, and in the present market a lot of them likely would be marked to zero.’ Lewis like many others who have examined the example of the temporary Swedish bank nationalization, called Securum, during their real estate collapse in the early 1990’s, stresses that ultimately only a similar solution would be able to resolve the crisis with a minimum of taxpayer cost. ‘The US authorities know very well the Swedish model, but it seems in the US nationalization is a dirty word.’

But there is an added element. John McCain decided to boost his flagging Presidential campaign by trying to profile himself as a ‘political Maverick’ one who opposes the powerful Washington vested interests. He flew into Washington days before the TARP was to be approved by a panicked Congress and conspired with a handful of influential Republican Senate friends, including Banking Committee ranking member, Senator Shelby, to oppose the Paulson TARP. What emerged, with McCain’s backing, was a political power play that may well have brought the United States financial system to its knees, and McCain’s Presidential hopes with it.

Power and greed are the only visible juice driving the decision-makers in Washington today. Acting in the long-range US national interest seems to have gotten lost in the scramble. As I wrote last November in my Financial Tsunami five part series on the background to today’s crisis, all this could be foreseen. It is what happens when elected Governments abandon their public trust or responsibility to a cabal of private financial interests. It will be interesting to see if anyone in Washington realizes that lesson.

Whatever next comes out of Washington, however, one thing is clear, as reflected in what German Finance Minister Peer Steinbrück told the Bundestag. This is the end of the world as we knew it. The American financial Superpower is gone. The only important question will be what and how will the alternative be."

Associated Press, Two charges against AIG’s Greenberg dropped,
Spitzer aide says four left concerning deception are ‘heart of the case’, September 6, 2006, in http://www.msnbc.msn.com/id/14704060/.

Gretchen Morgenson, Behind Insurer’s Crisis, Blind Eye to Web of Risk, The New York Times, September 28, 2008.

Nouriel Roubini, Is the Purchasing of $700 billion of Toxic Waste the Best Way to Recapitalize the Financial System?, September 28, 2008, in http://www.rgemonitor.com/

© 2008 F. William Engdahl Editorial Archive
F. William Engdahl is the author of A Century of War: Anglo-American Oil Politics and the New World Order (Pluto Press) and Seeds of Destruction: The Hidden Agenda of Genetic Manipulation, http://www.globalresearch.ca/. The present series is adapted from his new book, now in writing, The Rise and Fall of the American Century: Money and Empire in Our Era. He may be contacted through his website, http://www.engdahl.oilgeopolitics.net/.

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