Thursday, September 25, 2008
Last major investment banks change status
By MARTIN CRUTSINGER
Mon Sep 22, 2008
It was the end of an era on Wall Street as the Federal Reserve granted permission for the last two major investment banks — Goldman Sachs and Morgan Stanley — to become bank holding companies in order to stay in business.
The Fed announced late Sunday evening that it had approved the request, which will allow Goldman and Morgan Stanley to create commercial banks that can take deposits, bolstering the resources of both institutions.
The change is the latest seismic shift on Wall Street as the financial system tries to cope with mounting problems that began more than a year ago with the subprime mortgage crisis.
The Fed had originally said Sunday night that the change in status from investment banks to bank holding companies would not take place for five days, pending review on antitrust grounds. The Fed announced Monday, however, that after discussions with the Justice Department, the status change for both institutions could take place immediately.
After weekend meetings where the Treasury Department, Fed and congressional staff ironed out the program's details, Sen. Christopher Dodd said Monday it's equally important to act responsibly as it is to move quickly on the legislation needed to stabilize the country's troubled financial markets.
Dodd, chairman of the Senate Banking committee, said on CBS's "The Early Show" that many members of Congress believe a legislative relief package also should be tailored to protect taxpayers in the best way possible.
Democrats in Congress said they will add provisions in the bailout measure to protect people in danger of losing their homes and measures to cap executive compensation at firms who get to unload their bad mortgages debt onto the government.
But the proposal is still expected to win quick congressional passage because both parties are concerned about the adverse reaction in financial markets should the measure look like it is being delayed.
The Fed's board of governors granted the investment banks' requests by unanimous vote during a late Sunday meeting in Washington.
The change of status means both companies will come under the direct regulation of the Fed, which oversees the nation's bank holding companies. The banking subsidiaries of the two institutions will face the stricter regulations that commercial banks are required to meet. Previously, the primary regulator for Goldman and Morgan Stanley was the Securities and Exchange Commission.
Shares of both institutions had come under pressure ever since the bankruptcy filing last week by investment bank Lehman Brothers and the forced sale of investment bank Merrill Lynch to Bank of America.
Three people familiar with the matter said Monday that Japan's largest brokerage Nomura Holdings is buying Lehman's Asian assets. Britains Barclay's Bank received bankruptcy court approval early Saturday morning to purchase Lehman's North American brokerage operations.
Shares of Morgan Stanley rose 3.5 percent on word of a possible investment by a Japanese bank while Goldman's fell 3.6 percent in afternoon trading on Monday. Overall, U.S. stocks pulled back Monday. In early afternoon trading, the Dow fell 245.71, or 2.16 percent, to 11,142.73. Broader stock indicators also declined.
Investors feared that the last remaining independent investment banks would not be able to survive in their current form, especially after hedge funds saw some of their funds at Lehman Brothers frozen as part of its bankruptcy. There had been speculation that both institutions would be acquired by commercial banks, whose ability to take deposits would give them a stable source of funding.
In the surprise announcement late Sunday, the central bank said Goldman and Morgan Stanley would be allowed during a transition period to get short-term loans from the Federal Reserve Bank of New York against various types of collateral.
The decision means that Goldman and Morgan Stanley will be able not only to set up commercial bank subsidiaries to take deposits, giving them a major resource base, but they will also have the same access as other commercial banks to the Fed's emergency loan program.
After the collapse of Bear Stearns and its forced sale to JP Morgan Chase last March, the Fed used powers it had been granted during the Great Depression to extend its emergency loans to investment banks as well as commercial banks. However, that extension was granted on a temporary basis.
Bailout CEOs who refuse pay cuts unpatriotic - Frank
Tue Sep 23, 2008
NEW YORK - Wall Street titans who refuse to take a pay cut to join a proposed $700-billion U.S. financial system bailout were "selfish and unpatriotic", a senior Democrat said on Tuesday.
House Financial Services Committee chairman Barney Frank said he doubted the legislation would pass the Democrat-controlled Congress without including limits on compensation for executives of firms offloading bad assets.
The financial crisis has become the No. 1 issue in campaigning for the Nov. 4 U.S. presidential election, and with many members of Congress also vying to retain their seats, lawmakers are reluctant to merely rubber stamp the Bush administration's plan.
The Massachusetts Democrat was responding to Treasury Secretary Henry Paulson's assertion that limits on compensation could discourage companies from joining what would be the largest government bailout in U.S. history.
"What he is saying here is, this program that they think is very important, we need it to get the economy out of the doldrums, but if it is going to nick them of a couple of million of the millions that they already have, they are going to boycott it," Frank told CNBC.
"I hope they are not that selfish and unpatriotic," he said. "This is going to be a hard sell to a lot of elected officials even with this."
Paulson last week called for the creation of a massive government war chest to take illiquid assets off the books of banks and other firms in the hope of unclogging credit markets choking on mortgage-related debt.
"The question is does he want this package passed or not," said Frank.
Democrats, who control both chambers of Congress, want more taxpayer protections, help for home owners facing foreclosure, limits on compensation for executives of firms offloading bad assets and greater oversight of the program, which would give the Treasury secretary nearly unfettered powers.
"You can't have these situations where if the investment pays off, the CEO makes money, but if it doesn't pay off he goes home and has a nice dinner and makes no penalty," Frank said. "People who have gotten themselves into some trouble and need federal help, they have no right to expect that there won't be some compensation numbers," he added. (Reporting by Jason Szep; Editing by Tim Dobbyn)
Paulson warns: No limits on CEO pay
By Barry Grey
23 September 2008
Speaking on the “Fox News Sunday” program, US Treasury Secretary Henry Paulson opposed proposals from some Democrats as well as Republicans that the Bush administration’s plan for a massive taxpayer bailout of the most powerful banks and financial institutions include provisions limiting the pay of CEOs whose companies benefit from the government handout.
Paulson, the former CEO of Goldman Sachs whose wealth is estimated at $700 million, argued that including any such provision would result in banks refusing to participate in the program.
As the New York Times reported Monday, “Mr. Paulson said that he was concerned that imposing limits on the compensation of executives could discourage companies from participating in the program.
“’If we design it so it’s punitive and so institutions aren’t going to participate, this won’t work the way we need it to work,’ Mr. Paulson said...”
Working people who are being told by both parties that they will have to foot the bill for the biggest corporate bailout in world history—estimated by the government at $700 billion, a conservative figure that underestimates the actual cost of the plan—should consider the implications of Paulson’s statements.
He, President Bush and other political figures in both parties are insisting that quick Congressional passage of the bailout scheme is critical to averting an economic and social calamity at least as great as the Great Depression of the 1930s. There is, they insist, no time to discuss, debate, or even think.
The universal mantra is the need for all Americans to “come together,” put aside their partisan differences and personal interests and accept the need for “sacrifice” in support of the common good—which just happens to coincide with the interests of Wall Street and the multi-millionaires and billionaires who control it.
But Paulson, in his weekend television appearances, was obliged to implicitly acknowledge that there is one segment of society that is not prepared to sacrifice a dime and will not hesitate to throw the country into a depression, if the alternative is the slightest diminution in its seven- and eight-figure compensation packages.
In spite of his intentions, Paulson’s comments demonstrate the utter fraud of the claims that the plan to place the national wealth at the disposal of Wall Street is driven by concerns for the well-being of the American people. His remarks reveal the most basic truth about American society: The interests of the overwhelming majority of the people are entirely subordinated to the money-mad strivings of a financial aristocracy.
The plutocrats call the shots. They determine public policy. They exercise an absolute veto on all decisions taken by the government, which is, in the final analysis, an instrument for the defense and advancement of their narrow and socially destructive interests.
The constant invocations of patriotism are purely for public consumption—a means of blinding the people to the class relations that dominate America.
The logical conclusion that flows from Paulson’s own statements on CEO pay is that the greatest problem the country faces is the very class he defends and embodies—the American capitalist class. Its removal through the independent political and revolutionary mobilization of the working class is the precondition for a rational and democratic solution to the crisis.
Ohio senator: Phones 'ringing off the hook' against bailout
A key quote in this morning's Senate hearing about the Paulson bailout is worth repeating. This comes from Ohio Sen. Sherrod Brown, a Democrat:
"Like my colleagues, my phones have been ringing off the hook. The sentiment from Ohioans about this proposal is universally negative."
Not "overwhelmingly negative." Not "deeply suspicious." Not "extremely upset." Universally negative.
I'll state the obvious: Members of Congress aren't generally in the habit of passing historic and spectacularly unpopular legislation five weeks before election day. Republicans in Congress hate this bill, and I'm unconvinced the Democrats in Congress will take a bullet, figuratively, for the most unpopular president since the final days of Nixon. (Trivia: Henry Paulson worked in the Nixon administration.)
Watching the Paulson-Bernanke hearing on CNBC, this struck me as news: the suggestion by Sen. Charles Schumer (D-N.Y.) that instead of granting one giant bailout, Congress might instead break it into smaller pieces, giving the administration permission to begin buying securities, but with an initial budget of far less than $700 billion. In other words, let the Treasury go out and buy $50 billion or so worth of mortgage securities and see how it works before granting the authority to spend a trillion dollars or so.
Posted by Peter Viles on September 23, 2008 in bailout
A $1.8 Trillion Bailout: Where the Money's Going
21 Sep 2008
The U.S. Treasury Department is working through the weekend with Congress to craft a plan to spend as much as $700 billion to absorb bad mortgages and other assets from bank or other institution balance sheets to keep the financial system from collapsing.
The move comes close on the heels of an $85 billion Federal Reserve rescue of American International Group and the Treasury's takeover of housing finance firms Fannie Mae and Freddie Mac .
The Treasury plan, which follows a new federal guarantee for money market fund holdings, would push Washington's potential bailout tab to $1.8 trillion.
Following are details of actions, proposals and amounts:
—Up to $700 billion to buy assets from struggling institutions. The plan is aimed at sopping up residential and commercial mortgages from financial institutions but gives Treasury broad latitude.
—Up to $50 billion from the Great Depression-era Exchange Stabilization Fund to guarantee principal in money market mutual funds to provide the same confidence that consumers have in federally insured bank deposits.
—The Fed committed to make unspecified discount window loans to financial institutions to finance the purchase of assets from money market funds to aid redemptions.
—At least $10 billion in Treasury direct purchases of mortgage-backed securities in September. In doubling the program on Friday, the Treasury said it may purchase even more in the months ahead.
—Up to $144 billion in additional MBS purchases by Fannie Mae and Freddie Mac.The Treasury announced they would increase purchases up to the newly expanded investment portfolio limits of $850 billion each. On July 30, the Fannie portfolio stood at $758.1 billion with Freddie's at $798.2 billion.
—$85 billion loan for AIG, which would give the Federal government a 79.9 percent stake and avoid a bankruptcy filing for the embattled insurer. AIG management will be dismissed.
—At least $87 billion in repayments to JPMorgan Chase for providing financing to underpin trades with units of bankrupt investment bank Lehman Brothers . Paulson said over the weekend he was adamant that public funds not be used to rescue the firm.
—$200 billion for Fannie Mae and Freddie Mac. The Treasury will inject up to $100 billion into each institution by purchasing preferred stock to shore up their capital as needed. The deal puts the two housing finance firms under government control.
—$300 billion for the Federal Housing Administration to refinance failing mortgage into new, reduced-principal loans with a federal guarantee, passed as part of a broad housing rescue bill.
—$4 billion in grants to local communities to help them buy and repair homes abandoned due to mortgage foreclosures.
—$29 billion in financing for JPMorgan Chase's government-brokered buyout of Bear Stearns in March. The Fed agreed to take $30 billion in questionable Bear assets as collateral, making JPMorgan liable for the first $1 billion in losses, while agreeing to shoulder any further losses.
—At least $200 billion of currently outstanding loans to banks issued through the Fed's Term Auction Facility, which was recently expanded to allow for longer loans of 84 days alongside the previous 28-day credits.
Saturday, September 20, 2008
NY Times Makes a Funny
From David Herszenhorn at the NY Times:
$700 Billion Is Sought for Wall Street in Massive Bailout
The ultimate price tag of the bailout is virtually impossible to know, in part because of the possibility that taxpayers could profit from the effort, especially if the market stabilizes and real estate prices rise."
I hope you laughed. I did. A little gallows humor.
And, yes the cost is still unknown, but there is no way that the taxpayers will profit. My initial estimate is that the direct costs of the Paulson plan will be $700 billion to taxpayers. That is about double the cost of the S&L crisis (compared to GDP).
Why $700 billion?
The plan only limits the Treasury to "$700,000,000,000 outstanding at any one time", so the total purchases can exceed $700 billion. In fact, every time the Treasury sells some securities, they will probably plow the net proceeds back into more troubled assets until the entire $700 billion is gone.
Think of a drunk gambler at a slot machine. He starts with $100 and slowly loses. Every now and then he wins some money, but he keeps putting the coins back into the slot until he has lost everything. That is how this plan will work.
Unless there is a dramatic changes, there will be no upside participation in the financial companies for taxpayers, and the taxpayers will recapitalize the banks by, in Krugman's words, "having taxpayers pay premium prices for lousy assets".
Note: I believe a Reverse Dutch Auction is inappropriate for these assets (it won't lower the price much). This is because these auctions only work when the sellers have very similar goods to sell. In this case, if the asset class is defined broadly, then the characteristics will vary too widely been assets, and the Treasury will just end up buying the worst available assets.
And, if the asset class is defined narrowly, there won't be enough sellers for a reverse Dutch Auction to work.
What was billed as a "Federal Bailout" was nothing less than a bloodless coup. The Wall Street Gang had taken over the White House and control of Washington. Congress promised not to resist, and pledged to pass legislation as demanded.
Warning that America's financial system was perilously close to collapse unless immediate action was taken, economic martial law was declared.
The American people were told that from this day forward, they would be responsible for paying off the bad debt from any failing private financial enterprise deemed "too big to fail."
Treasury Secretary Henry Paulson, spearheading the coup, sought unrestricted authority to spend the nation's money as he saw fit. The first order of business by the Economic Czar was to take trillions of dollars of bad debt from crumbling investment banks and insurance companies and transfer it to the backs of already debt-burdened citizens.
"We're talking hundreds of billions," said Paulson, former CEO of Goldman Sachs, one of the "too-big-to-fails." Within days of the takeover, the number jumped into the trillions. This will put a "significant amount of taxpayers' money on the line," he said.
Quick & Clean
In simple language, with cameras rolling, in broad daylight, the American public was robbed blind. This wasn't a magic show. There were no hidden tricks or sleights of hand. "We want this to be clean, we want this to be quick," demanded the Economic Czar.
"We need to get this done quickly, and the cleaner the better," intoned President Bush, with the urgency of his "smoking gun that could come in the form of a mushroom cloud" logic he used as a pretext to invade Iraq. "The risk of not acting would be far higher," Bush said, promising to "work with Congress to get a bill done quickly."
Having accurately forecast the current financial debacle, we confidently now forecast that taking swift action will prove - as it did in Iraq - far more catastrophic than allowing Wall Street to suffer the consequences of its greed and mismanagement.
Presidential candidate Barack Obama promised to "fully support" the plan and called on Congress to take "immediate action." Republican challenger John McCain said he would further review the proposal while Congressional leaders from both parties have signed on with their support.
Americans were told they would have to pay to rescue the very companies whose unregulated greed, fraud and recklessness had created the crisis in the first place. Considered "nobodies" by the authorities, the people had no voice and had no choice.
"I know of nobody who is arguing over the amount of money or even about that the secretary ought to have the authority to purchase these toxic instruments, these bad debts,'' bowed Senator Christopher Dodd, the Democratic chairman of the Banking Committee.
Publisher's Note: If you are a "nobody" who cares about "the amount of money," and does not believe "the secretary ought to have the authority to purchase these toxic instruments," take action NOW. While signing petitions or calling the White House or Washington representatives often proves fruitless, in this emergency we suggest you call, write, pester, hound, and protest.
Call your newspaper, radio and TV stations. Talk to reporters covering the "DC Heist." Tell them what you think and what you want. Write editorials. Use the Internet as a call to action. Use your imagination, wits and common sense to have your voice heard and make your will known. Until Congress votes on the plan, it is not yet a fait accompli. Tell them if they vote "yes," you'll vote "no."
Trendpost: While the transfer of "toxic instruments" from private firms to the national debt will enrich those companies that once had owned them, the measures taken will do nothing to keep the sinking US economy from going under.
The biggest casualty, besides indentured American servants held responsible for paying off the debt, is the US dollar. The greenback's getting slaughtered on the foreign exchanges and gold prices, the safe-haven commodity, are once again soaring. As we previously forecast, we are still predicting "Gold $2000."
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Publisher, The Trends Journal
Telephone: 845.876.6700 - Ext. 4
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Trends Research P.O. Box 660 Rhinebeck, NY 12572
Congress is on the brink of making a one-sided deal to give George W. Bush a blank check to bail out his pals - offering nearly (or perhaps more than) a trillion taxpayer dollars to Wall Street to cover its bad debts. That works out to somewhere between $2000 and $5000 from every American family. So what do the taxpayers get in return?
Nothing. No new regulation or oversight to help avoid this kind of crisis in the future. No public interest givebacks to help people whose homes are in the hands of the banks. Perhaps most shockingly of all, the taxpayers get absolutely no share in the profits if and when these finance giants bounce back, even though we are now assuming a great deal of the risk.
This is worse than a bad deal - this isn't a deal at all. This is a blank check to some of the richest companies in the world.
I just signed a petition calling on key members of Congress to impose a few sensible conditions to this bailout in order to protect the American people -- I hope you will too.
Please have a look and take action.
"Fear not the path of truth for the lack of people walking on it." Robert F. Kennedy
The Moral Hazards of This Week's Events
by Jack Crooks
I applaud you if you've made it through this past week with only a few scratches and bumps in your trading account. I know for a fact that plenty of traders got their lunch handed to them.
Thanks to what I call the "visible hand" theory of central banks and the U.S. Treasury, times like these make it even harder to get positioned and stay positioned without being whipsawed.
So without trying to pump too much analysis and too many forecasts into your head while the markets still seek out direction, let's do two things today:
1. Go over the initiatives taken this week to stabilize financial markets, and
2. Discuss the moral hazard tightrope that the Federal Reserve and U.S. Treasury are walking.
Week in Review: The Markets' Wild Ride
If you have money on the line in these markets, then you know it's been a less-than-pleasant week of trading. There have been wild ups and downs. There have been more swings than you could find on the neighborhood playground. There has been a steady, if not growing, stream of worry. And there has been an equally steady stream of intervention hoping to relieve such concerns.
If you didn't have a chance to keep up with how things played out from day to day, let me do a quick and dirty recap:
Sunday: The Federal Reserve pumped a bunch of money into the system, increased the amount it will provide in its lending facilities and further liberalized the collateral it will except in exchange for loans.
Monday: Lehman Brothers declared bankruptcy. Bank of America took control of Merrill Lynch. And AIG's fate hung in the balance.
Tuesday: The Federal Reserve denied the markets a much anticipated interest rate cut. Instead, it followed with a two-year, $85 billion loan to bail out AIG.
Wednesday: The Treasury announced a finance program where it would auction off Treasuries, separate from what it already offers. The proceeds will go to the Federal Reserve to use for "initiatives."
Thursday: Central banks around the globe decided to join the party. They declared efforts to pump nearly $250 billion into the global system to avert a financial train wreck.
Henry Paulson spearheads a new $1.2 TRILLION bailout initiative.
Friday: We learned of a new initiative, spearheaded by Treasury Secretary Henry Paulson, to put together $800 billion in a new-fangled institution and $400 billion more at the FDIC. The money will be used to take crappy assets off troubled balance sheets and grease up money markets.
Prior to this week, steps taken to stabilize the market were considered ineffective. By the looks of it, though, this week's actions tell me these guys don't want to fail in their efforts to restore order ... again. But the condition of credit markets is far from cured.
Plus, there's another issue that the Fed and Treasury might have to wrestle with down the road ...
Moral Hazard: It Isn't Their Problem Anymore; It's Ours
"We cannot protect all risk in the market, and we should not do it at the risk of the taxpayer."
— Richard Shelby, Alabama Senator
"Moral Hazard" is a pair of buzz words circling lunch tables, office cubicles and board rooms around the world. Why? Simply because the Fed and Treasury are taking matters into their own hands, trying to put an end to the losses wreaking havoc on the global financial system.
Taxpayers could be left footing the bill.
However, what scares me about these interventions is that some could create a humongous burden on the taxpayer.
The two-year $85, billion loan from the Fed to AIG this week is an attempt to provide a controlled environment to deal with the pain, spare the financial system from the effects of extreme counterparty risk, protect the real economy and keep the bill off the taxpayer.
So what if the burden of this financial mess doesn't end up in the taxpayers' lap? Could there still be moral hazard?
Because what kind of precedent is being set? These are banks and institutions that took on toxic derivatives and securitized debt. They fattened up when times were good, but come crying for help now that the going has gotten tough. How many more will follow expecting the same treatment?
Perhaps this is the real issue.
P.S. For regular updates on the currency markets, remember to check out my blog at: http://blogs.moneyandmarkets.com/blog/currency-corner.
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Paulson Commits Trillions of Tax Payer Dollars to the Mother of All Bailouts
Stock-Markets / Government Intervention
Sep 19, 2008
Just three days ago, after looking at the prospect of bailing a string of distressed financial institution in the country, the government seemingly drew a line in the sand, and refused to bail out Lehman Brothers. The authorities clearly saw Lehman’s demise as a trial balloon to see how the markets would react if the government stayed on the sidelines. That trial balloon quickly turned into the Hindenburg. Immediately reversing course, the Government has decided to go “all in” and bail out every institution with financial exposure to U.S. mortgages.
Simply put, Americans will not be allowed to visibly suffer losses after the greatest asset bubble in U.S. history. But make no mistake, the losses are real and Americans will pay one way or another.
Moving beyond the guided munitions of selective bailouts, the Government is now trying the financial equivalent of carpet bombing (for AIG, Merrill Lynch, and especially Lehman Brothers, this gives new meaning to being a day late and a dollar short). To continue with the military analogies, Paulson's bazooka turned out to be a nuclear tipped ballistic missile.
By committing trillions of tax payer dollars (not the “hundreds of billions” that Paulson predicts), the plan will save commercial and investment banks from certain bankruptcy. In his statement today, Paulson made clear that Congress must pass new legislation to allow the Government to acquire even those loans too poorly collateralized to currently qualify for GSE or FHA absorption. The losses baked into these mortgage products, which Wall Street has been reluctant to even estimate, will now be borne wholly by taxpayers.
In his press conference, Paulson assured us that this plan was designed to safeguard our savings. But in typical government fashion, the plan will have the reverse effect as savings is wiped out through inflation. He also claims that the plan will safeguard home equity by keeping real estate prices high. Since when did high home prices become a strategic national priority? If the plan succeeds, the gains for home sellers will simply be matched by losses for homebuyers, who end up paying inflated prices, and taxpayers, who get stuck with the losses when those buyers default.
Paulson’s distress and confusion was clearly evident when he fielded questions from reporters. The first asked Paulson to describe his fears regarding the probable economic consequences of government inaction. Paulson provided no answer and promptly exited stage right.
When the U.S. government owns all mortgages, the real estate market will be completely subject to political, rather than financial, concerns. Will foreclosures be outlawed? Will loan term easements and principal reductions become standard campaign issues?
While it is dizzying to predict how this plan will be implemented, it is fairly simple to foresee the macroeconomic consequences. The U.S. dollar will be shattered beyond repair. The government simply has no means to make good on the trillions of new liabilities. Interestingly, while both Paulson and President Bush acknowledge that the plan will put “significant amounts of taxpayer dollars on the line,” they did not mention any tax increases. Given the politics, no such move is forthcoming. The printing press is their only solution.
The government has also decided to insure all money market funds, adding trillions more in unfunded liabilities to the Federal balance sheet in the blink of an eye. Of course, since bad real estate loans are not the only toxic assets on the balance sheets of financial institution, we will also need to absorb other classes of asset-backed securities, such as those backed by credit card debt and auto loans. So while the move ensures that depositors will not lose money, is does insure that the money itself will lose value. Is the trade-off really worth it? Washington thinks so.
Further, since I assume the plan will apply to all mortgage debt, U.S. taxpayers will also be on the hook to bail out foreign institutions that loaded up on the financial sludge. However, once the government takes them off the hook, do not expect them to re-invest the windfall back into other U.S. dollar denominated assets. This get-out-of-jail free card will likely scare them straight. The global mass exodus from the U.S. dollar and Treasury debt is about to begin: do not get caught in the stampede.
Although gold initially sold off as the apparent need for a financial safe haven ebbed, look for a spectacular rally to commence as its traditional role as an inflation hedge returns with a vengeance.
For a more in depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar denominated investments, read my new book “Crash Proof: How to Profit from the Coming Economic Collapse.”
By Peter Schiff
Euro Pacific Capital
More importantly make sure to protect your wealth and preserve your purchasing power before it's too late. Discover the best way to buy gold at www.goldyoucanfold.com , download my free research report on the powerful case for investing in foreign equities available at www.researchreportone.com , and subscribe to my free, on-line investment newsletter at http://www.europac.net/newsletter/newsletter.asp
Treasury Seeks Authority to Buy Mortgages Unchecked by Courts
By Alison Fitzgerald and John Brinsley
September 21, 2008
(Bloomberg) -- The Bush administration sought unchecked power from Congress to buy $700 billion in bad mortgage investments from financial companies in what would be an unprecedented government intrusion into the markets.
Through his plan, Treasury Secretary Henry Paulson aims to avert a credit freeze that would bring the financial system and the world's largest economy to a standstill. The bill would prevent courts from reviewing actions taken under its authority.
``He's asking for a huge amount of power,'' said Nouriel Roubini, an economist at New York University. ``He's saying, `Trust me, I'm going to do it right if you give me absolute control.' This is not a monarchy.''
As congressional aides and officials scrutinized the proposal, the Treasury late yesterday clarified the types of assets it would purchase. Paulson would have authority to buy home loans, mortgage-backed securities, commercial mortgage- related assets and, after consultation with the Federal Reserve chairman, ``other assets, as deemed necessary to effectively stabilize financial markets,'' the Treasury said in a statement.
The Treasury would also have discretion, after discussions with the Fed, to make non-U.S. financial institutions eligible under the program.
The plan would raise the ceiling on the national debt and spend as much as the combined annual budgets of the Departments of Defense, Education and Health and Human Services. Paulson is asking for the power to hire asset managers and award contracts to private companies. Most provisions of the proposal expire after two years from the date of enactment.
A failure by the government to support the U.S. financial system could lead to ``a depression,'' Senator Charles Schumer, a New York Democrat told reporters yesterday. ``To do nothing is to risk the kind of economic downturn this country hasn't seen in 60 years.''
The Treasury is seeking authority to step in as buyer of last resort for mortgage-linked assets that few other financial institutions in the world want to buy, following government takeovers of mortgage giants Fannie Mae and Freddie Mac and insurer American International Group Inc.
``Democrats will work with the administration to ensure that our response to events in the financial markets is swift,'' House Speaker Nancy Pelosi said in a statement.
The majority party will seek to reduce mortgage foreclosures and create ``fast-track authority'' for an overhaul of financial regulation, Pelosi said. Democrats will ensure ``the government is accountable to the taxpayers in any future actions under this broad grant of authority, implementing strong oversight mechanisms.''
The proposal will include curbs on executive pay for the companies whose assets the government will be buying, Steve Adamske, a spokesman for Representative Barney Frank, said yesterday in an interview.
Democrats also will include a plan to stem foreclosures, which may involve tapping the loan-modification abilities of the Federal Housing Administration, the Federal Deposit Insurance Corp., and Freddie Mac and Fannie Mae, Adamske said. Frank, a Democrat from Massachusetts, is chairman of the House Financial Services Committee.
``The consequences of inaction could be catastrophic,'' Senate Majority Leader Harry Reid said in a statement.
``While the Bush proposal raises some serious issues, we need to resolve them quickly,'' he said. ``I am confident that, working together, we will.''
House minority leader John Boehner, an Ohio Republican, said yesterday he is reviewing the proposal but didn't say whether he was inclined to support it.
``The American people are furious that we're in this situation, and so am I,'' Boehner said in a statement. ``We need to do everything possible to protect the taxpayers from the consequences of a broken Washington.''
Congress, which may pass legislation as soon as Sept. 26, needs to ``make sure there are protections built in for taxpayers,'' said Schumer, a New York Democrat on the banking committee. Lawmakers should ensure ``taxpayers who gave the money will be put ahead of the stockholders, bondholders and others.''
Paulson is seeking an expansion of federal influence over markets that hasn't been seen since the Great Depression, said Charles Geisst, author of ``100 Years of Wall Street'' and a finance professor at Manhattan College in New York.
Geisst likened the plan to the Reconstruction Finance Corp., which was chartered by Herbert Hoover in 1932 with the goal of boosting economic activity by lending money after credit markets seized up.
President George W. Bush said he called leaders in both houses of Congress and ``found a common understanding of how severe the problem is and how necessary it is to get something done quickly.''
``This is going to be a big package because it's a big problem,'' Bush said following a meeting with Colombian President Alvaro Uribe at the White House. ``We need to get this done quickly, and the cleaner the better.''
Democratic presidential nominee Barack Obama said in a radio address that he ``fully supports'' Paulson and Fed Chairman Ben S. Bernanke's efforts to stabilize the financial system. The plan, however, should benefit both main street and Wall Street, he said.
Republican Presidential nominee John McCain ``looks forward'' to reviewing the proposal while focusing at least in part on ``minimizing the burden on the taxpayer,'' said Jill Hazelbaker, communications director for the McCain campaign.
Ban Legal Challenges
The ban on legal challenges of actions by Treasury is ``distasteful, it's unfortunate and it's bad precedent, but this is an emergency and you have to act,'' said Jerry Markham, a law professor at Florida State University and author of ``A Financial History of the United States.''
``What you don't want happen is to have lawsuits that will slow things down and cause problems,'' he said.
The proposal would raise the nation's debt ceiling to $11.315 trillion from $10.615 trillion and require the Treasury secretary to report back to Congress three months after Treasury first uses its new powers, and then semiannually after that.
Paulson would gain discretion to act as he ``deems necessary'' to hire people, enter into contracts and issue regulations related to a revival of U.S. mortgage finance, according to a three-page proposal. The Treasury would ``take into consideration'' protecting taxpayers and promoting market stability.
The Treasury may hire managers to purchase the assets through so-called reverse auctions, seeking the lowest prices, Treasury said yesterday. The document specifies that Treasury may buy only assets issued or originated on or before Sept. 17.
The House will pass legislation to implement the plan by the end of this week, and the Senate will act soon after, Frank said on Sept. 19 in an interview on Bloomberg Television's ``Political Capital with Al Hunt.''
Bush said yesterday he's unconcerned that the price tag on the package may seem high.
``I'm sure there are some of my friends out there that are saying, `I thought this guy was a market guy, what happened to him?''' the president said. ``My first instinct was to let the market work, until I realized, while being briefed by the experts, how significant this problem became.''
The Bush administration seeks ``dictatorial power unreviewable by the third branch of government, the courts, to try to resolve the crisis,'' said Frank Razzano, a former assistant chief trial attorney at the Securities and Exchange Commission now at Pepper Hamilton LLP in Washington. ``We are taking a huge leap of faith.''
MARKETS WERE 500 TRADES FROM A MELTDOWN
By MICHAEL GRAY
September 21, 2008
The market was 500 trades away from Armageddon on Thursday, traders inside two large custodial banks tell The Post.
Had the Treasury and Fed not quickly stepped into the fray that morning with a quick $105 billion injection of liquidity, the Dow could have collapsed to the 8,300-level - a 22 percent decline! - while the clang of the opening bell was still echoing around the cavernous exchange floor.
According to traders, who spoke on the condition of anonymity, money market funds were inundated with $500 billion in sell orders prior to the opening. The total money-market capitalization was roughly $4 trillion that morning.
The panicked selling was directly linked to the seizing up of the credit markets - including a $52 billion constriction in commercial paper - and the rumors of additional money market funds "breaking the buck," or dropping below $1 net asset value.
The Fed's dramatic $105 billion liquidity injection on Thursday (pre-market) was just enough to keep key institutional accounts from following through on the sell orders and starting a stampede of cash that could have brought large tracts of the US economy to a halt.
While many depositors treat money market accounts as fancy savings accounts, they are different. Banks buy a variety of short-term debt, including commercial paper, with the assets. It is an important distinction because banks use the $1.7 trillion commercial-paper market to fund their credit card operations and car finance companies use it to move autos.
Without commercial paper, "factories would have to shut down, people would lose their jobs and there would be an effect on the real economy," Paul Schott Stevens, of the Investment Company Institute, told the Wall Street Journal.
Cracks started to show in money market accounts late Tuesday when shares in one fund, the Reserve Primary Fund - which touted itself as super safe - fell below the golden $1 a share level. It had purchased what it thought was safe Lehman bonds, never dreaming they could default - which they did 24 hours earlier when the 158-year-old investment bank filed Chapter 11.
By Wednesday, banks sensed a run on their accounts. They started stockpiling cash in anticipation of withdrawals.
Banks, which usually keep an average of $2 billion in excess reserves earmarked for withdrawals, pumped that up to an astounding $90 billion by Wednesday, Lou Crandall, chief economist at Wrighton ICAP, told The Journal.
And for good reason. By the close of business on Wednesday, $144.5 billion - a record - had been withdrawn. How much money was taken out of money market funds the prior week? Roughly $7.1 billion, according to AMG Data Services.
By Thursday, that level, fed by the incredible volume of sell orders pouring in from institutional investors like pension funds and sovereign funds, had grown to $100 billion. It was still not enough to stem the tidal wave.
The banks knew something drastic had to be done. So did Paulson.
The injection of capital into the market was followed up by calls from Treasury Secretary Hank Paulson to major money market players like Bank of New York Mellon and State Street in Boston informing them that federal money was in the market and they should tell their clients the Feds would be back with a plan to stem the constriction in the credit market.
Paulson knew the $105 billion injection was not a real solution. A broader, more radical answer was needed.
Hours after Paulson made his round of calls to calm the industry, word leaked out that an added $1 trillion bailout of banks was being readied. Investors cheered. At about 3 p.m., news of the plans was filtering up and down Wall Street, fueling a 700-point advance in the Dow Jones industrial average through 4 p.m. Friday.
By that time, Paulson had announced the plan. It included insurance on money market accounts, a move that started in quiet Thursday morning, when the former Goldman Sachs executive saved the country from a paralyzing meltdown.
BROADCASTERS: Pull down our Steal Back Your Vote! video and audio PSAs from the likes of Jim Hightower, Robert F. Kennedy Jr., Willie Nelson and Mimi Kennedy and add it to your podcast or radio program.
Individuals: Want to add your name to the project and help us spread the word? Make a tax-deductible donation of at least $100 to sponsor the Steal Back Your Vote site and $500 to sponsor the guide itself. We'll add your name with gratitude.
Reverend Jackson has asked me to pass on these words: "We've marched too long, worked too hard, and died too young to let them steal our vote. For Dr. King, for Mandela, for Medgar Evers, for Goodman, Chaney and Schwerner - download it and fight back!"
“THEY’RE STEALING YOUR VOTE… WELL, STEAL IT BACK!”
- Willie NelsonWillie Nelson has his copy. In just days, you’ll be able to get yours, too. Sign up for updates, and we’ll let you know the moment it’s ready!
Robert F. Kennedy Jr. blew the lid off the Theft of 2004 in his masterful Rolling Stone article.
Investigative reporter GREG PALAST for BBC television exposed Katherine Harris’ “felon purge” which fixed the 2000 race.
Now Kennedy and Palast have teamed up to investigate THE THEFT OF 2008. They’ve uncovered the scheme to swipe votes by the millions.
So,what are you going to do about it?
That’s easy: STEAL BACK YOUR VOTE!
How can you do that? Easy again . . .
#1. Sign up to get updates on the Steal Back Your Vote! investigation. And be the first to find out about the release of the voter Guide by Palast and Kennedy. Illustrated by graphic gonzos Ted Rall, Lukas Ketner and Troubletown’s Lloyd Dangle.
#2. Get your organization to sponsor the Steal Back Your Vote! Campaign. There’s no charge for your group to join The Progressive Magazine, Guerrilla News Network, VoterRescue, Action Point with Cynthia Black, Air America Radio’s Clout!, Progressive Democrats of America, and the Nation Institute/Puffin Foundation.
Contact StealBackYourVote@gregpalast.com. Hell, sign on yourself Donate $100 (www.PalastInvestigativeFund.org) & get your name on the guide.
#3. Get informed - sign up to get the full story on how they’re shoplifting the White House at www.StealBackYourVote.org - via RSS, myspace, facebook or e-mail.
Watch out! Coming soon - Greg Palast and Bobby Kennedy in Steal Back Your Vote! - the Film - from the pueblos of New Mexico to Karl Rove’s emails (really!), the real scoop.
“Stories so relevant they threaten to alter history.” - Chicago Tribune.
“Twisted and maniacal!” - Hon. Katherine Harris
www.StealBackYourVote.org is a project of the non-partisan, non-profit Palast Investigative Fund.
Steal Back Your Vote!
August 29th, 2008
Palast: One out of five Colorado voters purged from voter registration
Outcome of 2008 election likely to be skewed by unethical tactics
By David O. Williams
Friday, August 29th, 2008
August 27, 2008 — Robert Kennedy Jr. had a pretty good excuse for skipping his scheduled appearance with investigative journalist Greg Palast to promote their latest project, “Steal Back Your Vote” — a report on voting irregularities and fraud in the 2008 election.
Palast, speaking at the Progressive Democrats of America gathering at a downtown Denver church during the DNC Tuesday, excused Kennedy’s absence to be with his uncle, Monday’s inspirational surprise speaker Sen. Ted Kennedy, and introduced a surprise replacement of his own, Amy Goodman of Democracy Now.
Progressive investigative journalist Goodman asked a delegate to hold up a goody bag with sponsor logo from AT&T on one side and decried the influence of big corporate money on the modern American political process.
She talked about trying to get into a delegate gathering at Mile High Stadium Monday and being denied access by towering security guards. Goodman said delegates at a corporate party are in training for just how skewed by campaign contributions politics in America have become, and added that there can be no good reasons to keep the press out, only bad ones.
“When you’ve got money saturating politics, and even if you care deeply about the public good, you’ve got to see where the money is and that’s what this is about every four years,” Goodman said. “It’s about teaching (budding politicians) big-money politics.”
Goodman said AT&T’s sponsorship of the DNC is the Democrats’ reward for refusing to block a bill several weeks ago giving telecom companies retroactive immunity for facilitating domestic spying by the feds. She also urged support of independent media during both parties’ political conventions in order to limit and expose excesses by police against protesters in Denver and Minnesota.
Palast took back the microphone to talk up his project with Kennedy, which will be the subject of a feature in a major national magazine next month and which also will be released as a 24-page comic-book-style PDF illustrated by three top political cartoonists. The report will be available on the Web site www.stealbackyourvote.org.
Palast said former Colorado Secretary of State Donetta Davidson has made the state the epicenter of the rampant practice of purging voter registration lists for alleged irregularities — a tactic now even more en vogue in the wake of new legislation backed by the Bush administration.
“Now under the Help America Vote Act the entire nation is Floridated, but the champ, [former Florida Secretary of State] Katherine Harris, ain’t got nothing on Colorado,” Palast said. “We’re sitting at purge ground zero. The reason that there’s a convention here is this is a swing state where Democrats are piling in, tens of thousands of new voters in Colorado at the top of the bucket, but at the bottom of the bucket the spread sheets are going (poof).
“What’s happening? Donetta Davidson, who had been secretary of state in the state of Colorado, removed 19.4 percent — one out of five voters in the state of Colorado, she removed their names. And what happens to Davidson as a result of this? The answer is George Bush made her head of the brand new Election Assistance Commission, where she can train all 50 secretaries of state in her purging ways. In fact, President Bush, instead of calling her chairwoman of the EAC, was going to call her the Purging General.”
Night of the Living Vote-snatchers -
from Steal Back Your Vote!
by Greg Palast
Excerpted from the Greg Palast, Rev. Jesse Jackson, and Robert F. Kennedy's comic book voter guide.
See www.StealBackYourVote.org for more.
In 2002, George W. Bush signed the Help America Vote Act.
When a Bush tells you he’s going to “help” you vote - look out!
The result: in the 2004 presidential election, over three million votes - 3,006,080 - were cast and not counted. Like, what the !@#!?
That’s from the official data from an agency created by George Bush called the “Elections Assistance Commission.” When a Bush tells you he’s going to “assist” our elections... (well, you get it).
Three MILLION ballots disappeared - Pfft!
And not just anyone’s ballots. U.S. government experts reported, for example, that a black voter’s ballot is 900% more likely than a white voter’s ballot to get “lost” in the machine. Bush fired the experts.
Three million voters went missing in ‘04 - but that ain’t nuthin’!
Law professor and voting law expert Robert F. Kennedy Jr. warns that it’s about to get a whole lot worse. Nasty new spores of the “Help” America Vote Act went into effect since the last election that have turned the process into a vicious game of “Chutes and Ladders,” with traps and tricks between you and your vote...
Example: the Republican Secretary of State of Colorado “helped” her state vote by eliminating 19.4% of the voters from the voter rolls. That’s one in five !@#$#@ voters!
Over three million missing ballots – and now the voters themselves are disappearing by the millions. Where the hell did they go?
IT’S THE DERIVATIVES, STUPID!
WHY FANNIE, FREDDIE AND AIG ALL HAD TO BE BAILED OUT
Ellen Brown, September 18, 2008
“I can calculate the movement of the stars, but not the madness of men.”
– Sir Isaac Newton, after losing a fortune in the South Sea bubble
Something extraordinary is going on with these government bailouts. In March 2008, the Federal Reserve extended a $55 billion loan to JPMorgan to “rescue” investment bank Bear Stearns from bankruptcy, a highly controversial move that tested the limits of the Federal Reserve Act. On September 7, 2008, the U.S. government seized private mortgage giants Fannie Mae and Freddie Mac and imposed a conservatorship, a form of bankruptcy; but rather than let the bankruptcy court sort out the assets among the claimants, the Treasury extended an unlimited credit line to the insolvent corporations and said it would exercise its authority to buy their stock, effectively nationalizing them. Now the Federal Reserve has announced that it is giving an $85 billion loan to American International Group (AIG), the world’s largest insurance company, in exchange for a nearly 80% stake in the insurer . . . .
The Fed is buying an insurance company? Where exactly is that covered in the Federal Reserve Act? The Associated Press calls it a “government takeover,” but this is not your ordinary “nationalization” like the purchase of Fannie/Freddie stock by the U.S. Treasury. The Federal Reserve has the power to print the national money supply, but it is not actually a part of the U.S. government. It is a private banking corporation owned by a consortium of private banks. The banking industry just bought the world’s largest insurance company, and they used federal money to do it. Yahoo Finance reported on September 17:
“The Treasury is setting up a temporary financing program at the Fed’s request. The program will auction Treasury bills to raise cash for the Fed’s use. The initiative aims to help the Fed manage its balance sheet following its efforts to enhance its liquidity facilities over the previous few quarters.”
Treasury bills are the I.O.U.s of the federal government. We the taxpayers are on the hook for the Fed’s “enhanced liquidity facilities,” meaning the loans it has been making to everyone in sight, bank or non-bank, exercising obscure provisions in the Federal Reserve Act that may or may not say they can do it. What’s going on here? Why not let the free market work? Bankruptcy courts know how to sort out assets and reorganize companies so they can operate again. Why the extraordinary measures for Fannie, Freddie and AIG?
The answer may have less to do with saving the insurance business, the housing market, or the Chinese investors clamoring for a bailout than with the greatest Ponzi scheme in history, one that is holding up the entire private global banking system. What had to be saved at all costs was not housing or the dollar but the financial derivatives industry; and the precipice from which it had to be saved was an “event of default” that could have collapsed a quadrillion dollar derivatives bubble, a collapse that could take the entire global banking system down with it.
The Anatomy of a Bubble
Until recently, most people had never even heard of derivatives; but in terms of money traded, these investments represent the biggest financial market in the world. Derivatives are financial instruments that have no intrinsic value but derive their value from something else. Basically, they are just bets. You can “hedge your bet” that something you own will go up by placing a side bet that it will go down. “Hedge funds” hedge bets in the derivatives market. Bets can be placed on anything, from the price of tea in China to the movements of specific markets.
“The point everyone misses,” wrote economist Robert Chapman a decade ago, “is that buying derivatives is not investing. It is gambling, insurance and high stakes bookmaking. Derivatives create nothing.”1 They not only create nothing, but they serve to enrich non-producers at the expense of the people who do create real goods and services. In congressional hearings in the early 1990s, derivatives trading was challenged as being an illegal form of gambling. But the practice was legitimized by Fed Chairman Alan Greenspan, who not only lent legal and regulatory support to the trade but actively promoted derivatives as a way to improve “risk management.” Partly, this was to boost the flagging profits of the banks; and at the larger banks and dealers, it worked. But the cost was an increase in risk to the financial system as a whole.2
Since then, derivative trades have grown exponentially, until now they are larger than the entire global economy. The Bank for International Settlements recently reported that total derivatives trades exceeded one quadrillion dollars – that’s 1,000 trillion dollars.3 How is that figure even possible? The gross domestic product of all the countries in the world is only about 60 trillion dollars. The answer is that gamblers can bet as much as they want. They can bet money they don’t have, and that is where the huge increase in risk comes in.
Credit default swaps (CDS) are the most widely traded form of credit derivative. CDS are bets between two parties on whether or not a company will default on its bonds. In a typical default swap, the “protection buyer” gets a large payoff from the “protection seller” if the company defaults within a certain period of time, while the “protection seller” collects periodic payments from the “protection buyer” for assuming the risk of default. CDS thus resemble insurance policies, but there is no requirement to actually hold any asset or suffer any loss, so CDS are widely used just to increase profits by gambling on market changes. In one blogger’s example, a hedge fund could sit back and collect $320,000 a year in premiums just for selling “protection” on a risky BBB junk bond. The premiums are “free” money – free until the bond actually goes into default, when the hedge fund could be on the hook for $100 million in claims.
And there’s the catch: what if the hedge fund doesn’t have the $100 million? The fund’s corporate shell or limited partnership is put into bankruptcy; but both parties are claiming the derivative as an asset on their books, which they now have to write down. Players who have “hedged their bets” by betting both ways cannot collect on their winning bets; and that means they cannot afford to pay their losing bets, causing other players to also default on their bets.
The dominos go down in a cascade of cross-defaults that infects the whole banking industry and jeopardizes the global pyramid scheme. The potential for this sort of nuclear reaction was what prompted billionaire investor Warren Buffett to call derivatives “weapons of financial mass destruction.” It is also why the banking system cannot let a major derivatives player go down, and it is the banking system that calls the shots. The Federal Reserve is literally owned by a conglomerate of banks; and Hank Paulson, who heads the U.S. Treasury, entered that position through the revolving door of investment bank Goldman Sachs, where he was formerly CEO.
The Best Game in Town
In an article on FinancialSense.com on September 9, Daniel Amerman maintains that the government’s takeover of Fannie Mae and Freddie Mac was not actually a bailout of the mortgage giants. It was a bailout of the financial derivatives industry, which was faced with a $1.4 trillion “event of default” that could have bankrupted Wall Street and much of the rest of the financial world. To explain the enormous risk involved, Amerman posits a scenario in which the mortgage giants are not bailed out by the government. When they default on the $5 trillion in bonds and mortgage-backed securities they own or guarantee, settlements are immediately triggered on $1.4 trillion in credit default swaps entered into by major financial firms, which have promised to make good on Fannie/Freddie defaulted bonds in return for very lucrative fee income and multi-million dollar bonuses. The value of the vulnerable bonds plummets by 70%, causing $1 trillion (70% of $1.4 trillion) to be due to the “protection buyers.” This is more money, however, than the already-strapped financial institutions have to spare. The CDS sellers are highly leveraged themselves, which means they depend on huge day-to-day lines of credit just to stay afloat. When their creditors see the trillion dollar hit coming, they pull their financing, leaving the strapped institutions with massive portfolios of illiquid assets. The dreaded cascade of cross-defaults begins, until nearly every major investment bank and commercial bank is unable to meet its obligations. This triggers another massive round of CDS events, going to $10 trillion, then $20 trillion. The financial centers become insolvent, the markets have to be shut down, and when they open months later, the stock market has been crushed. The federal government and the financiers pulling its strings naturally feel compelled to step in to prevent such a disaster, even though this rewards the profligate speculators at the expense of the Fannie/Freddie shareholders who will get wiped out. Amerman concludes:
“[I]t’s the best game in town. Take a huge amount of risk, be paid exceedingly well for it and if you screw up -- you have absolute proof that the government will come in and bail you out at the expense of the rest of the population (who did not share in your profits in the first place).”4
Desperate Measures for Desperate Times
It was the best game in town until September 14, when Treasury Secretary Paulson, Fed Chairman Ben Bernanke, and New York Fed Head Tim Geithner closed the bailout window to Lehman Brothers, a 158-year-old Wall Street investment firm and major derivatives player. Why? “There is no political will for a federal bailout,” said Geithner. Bailing out Fannie and Freddie had created a furor of protest, and the taxpayers could not afford to underwrite the whole quadrillion dollar derivatives bubble. The line had to be drawn somewhere, and this was apparently it.
Or was the Fed just saving its ammunition for AIG? Recent downgrades in AIG’s ratings meant that the counterparties to its massive derivatives contracts could force it to come up with $10.5 billion in additional capital reserves immediately or file for bankruptcy. Treasury Secretary Paulson resisted advancing taxpayer money; but on Monday, September 15, stock trading was ugly, with the S & P 500 registering the largest one-day percent drop since September 11, 2001. Alan Kohler wrote in the Australian Business Spectator:
“[I]t’s unlikely to be a slow-motion train wreck this time. With Lehman in liquidation, and Washington Mutual and AIG on the brink, the credit market would likely shut down entirely and interbank lending would cease.”5
Kohler quoted the September 14 newsletter of Professor Nouriel Roubini, who has a popular website called Global EconoMonitor. Roubini warned:
“What we are facing now is the beginning of the unravelling and collapse of the entire shadow financial system, a system of institutions (broker dealers, hedge funds, private equity funds, SIVs, conduits, etc.) that look like banks (as they borrow short, are highly leveraged and lend and invest long and in illiquid ways) and thus are highly vulnerable to bank-like runs; but unlike banks they are not properly regulated and supervised, they don’t have access to deposit insurance and don’t have access to the lender of last resort support of the central bank.”
The risk posed to the system was evidently too great. On September 16, while Barclay’s Bank was offering to buy the banking divisions of Lehman Brothers, the Federal Reserve agreed to bail out AIG in return for 80% of its stock. Why the Federal Reserve instead of the U.S. Treasury? Perhaps because the Treasury would take too much heat for putting yet more taxpayer money on the line. The Federal Reserve could do it quietly through its “Open Market Operations,” the ruse by which it “monetizes” government debt, turning Treasury bills (government I.O.U.s) into dollars. The taxpayers would still have to pick up the tab, but the Federal Reserve would not have to get approval from Congress first.
Time for a 21st Century New Deal?
Another hole has been plugged in a very leaky boat, keeping it afloat another day; but how long can these stopgap measures be sustained? Professor Roubini maintains:
“The step by step, ad hoc and non-holistic approach of Fed and Treasury to crisis management has been a failure. . . . [P]lugging and filling one hole at [a] time is useless when the entire system of levies is collapsing in the perfect financial storm of the century. A much more radical, holistic and systemic approach to crisis management is now necessary.”6
We may soon hear that “the credit market is frozen” – that there is no money to keep homeowners in their homes, workers gainfully employed, or infrastructure maintained. But this is not true. The underlying source of all money is government credit – our own public credit. We don’t need to borrow it from the Chinese or the Saudis or private banks. The government can issue its own credit – the “full faith and credit of the United States.” That was the model followed by the Pennsylvania colonists in the eighteenth century, and it worked brilliantly well. Before the provincial government came up with this plan, the Pennsylvania economy was languishing. There was little gold to conduct trade, and the British bankers were charging 8% interest to borrow what was available. The government solved the credit problem by issuing and lending its own paper scrip. A publicly-owned bank lent the money to farmers at 5% interest. The money was returned to the government, preventing inflation; and the interest paid the government’s expenses, replacing taxes. During the period the system was in place, the economy flourished, prices remained stable, and the Pennsylvania colonists paid no taxes at all. (For more on this, see E. Brown, “Sustainable Energy Development: How Costs Can Be Cut in Half,” webofdebt.com/articles, November 5, 2007.)
Today’s credit crisis is very similar to that facing Herbert Hoover and Franklin Roosevelt in the 1930s. In 1932, President Hoover set up the Reconstruction Finance Corporation (RFC) as a federally-owned bank that would bail out commercial banks by extending loans to them, much as the privately-owned Federal Reserve is doing today. But like today, Hoover’s ploy failed. The banks did not need more loans; they were already drowning in debt. They needed customers with money to spend and invest. President Roosevelt used Hoover’s new government-owned lending facility to extend loans where they were needed most – for housing, agriculture and industry. Many new federal agencies were set up and funded by the RFC, including the HOLC (Home Owners Loan Corporation) and Fannie Mae (the Federal National Mortgage Association, which was then a government-owned agency). In the 1940s, the RFC went into overdrive funding the infrastructure necessary for the U.S. to participate in World War II, setting the country up with the infrastructure it needed to become the world’s industrial leader after the war.
The RFC was a government-owned bank that sidestepped the privately-owned Federal Reserve; but unlike the Pennsylvania provincial government, which originated the money it lent, the RFC had to borrow the money first. The RFC was funded by issuing government bonds and relending the proceeds. Then as now, new money entered the money supply chiefly in the form of private bank loans. In a “fractional reserve” banking system, banks are allowed to lend their “reserves” many times over, effectively multiplying the amount of money in circulation. Today a system of public banks might be set up on the model of the RFC to fund productive endeavors – industry, agriculture, housing, energy -- but we could go a step further than the RFC and give the new public banks the power to create credit themselves, just as the Pennsylvania government did and as private banks do now. At the rate banks are going into FDIC receivership, the federal government will soon own a string of banks, which it might as well put to productive use. Establishing a new RFC might be an easier move politically than trying to nationalize the Federal Reserve, but that is what should properly, logically be done. If we the taxpayers are putting up the money for the Fed to own the world’s largest insurance company, we should own the Fed.
Proposals for reforming the banking system are not even on the radar screen of Prime Time politics today; but the current system is collapsing at train-wreck speed, and the “change” called for in Washington may soon be taking a direction undreamt of a few years ago. We need to stop funding the culprits who brought us this debacle at our expense. We need a public banking system that makes a cost-effective credit mechanism available for homeowners, manufacturing, renewable energy, and infrastructure; and the first step to making it cost-effective is to strip out the swarms of gamblers, fraudsters and profiteers now gaming the system.
Ellen Brown, J.D., developed her research skills as an attorney practicing civil litigation in Los Angeles. In Web of Debt, her latest book, she turns those skills to an analysis of the Federal Reserve and “the money trust.” She shows how this private cartel has usurped the power to create money from the people themselves, and how we the people can get it back. Her eleven books include the bestselling Nature’s Pharmacy, co-authored with Dr. Lynne Walker, and Forbidden Medicine.
1 Quoted in James Wesley, “Derivatives – The Mystery Man Who’ll Break the Global Bank at Monte Carlo,” SurvivalBlog.com (September 2006).
2 “Killer Derivatives, Zombie CDOs and Basel Too?”, Institutional Risk Analytics (August 14, 2007).
3 Kevin DeMeritt, “$1.14 Quadrillion in Derivatives – What Goes Up . . . ,” Gold-Eagle.com (June 16, 2008).
4 Daniel Amerman, “The Hidden Bailout of $1.4 Trillion in Fannie/Freddie Credit-Default Swaps,” FinancialSense.com (September 10, 2008).
5 Alan Kohler, “Lehman End-game,” Business Spectator (Australia) (September 15, 2008).
Large Hadron Collider to be turned off for two months following damage
A faulty connection between two magnets has triggered a meltdown which will delay the world’s biggest science experiment by two months, the Cern laboratory has admitted.
The fire brigade was called to the Large Hadron Collider after the fault, which sent temperatures soaring by 100 degrees celsius in a section of the 17-mile underground circuit on the Swiss-French border.
The first protons circulated in the huge collider on September 10 before an estimated television audience of one billion, and initial progress seemed to be smooth.
Last week the Welshman in charge of the collider, Dr Lyn "the Atom" Evans, told the Telegraph that he expected to collide the first particles next week, much earlier than thought. But the breakdown, at 11am UK time on Friday morning, led to the release of a ton of helium used to cool the magnets that guide subatomic particles around the machines’s circuit. Engineers had to wait for oxygen levels to return to normal before they were able to weigh up the damage.
When they did, their verdict came as a major blow. The failure will delay the process of commissioning by at least two months, said James Gillies, spokesman for Cern, the European particle physics laboratory.
"This kind of incident was always a possibility with such a unique and demanding project, that’s why we were so tense on the 10th," commented Prof Jonathan Butterworth of University College London, the UK head of the Atlas detector, which will study collisions.
"Having seen those tantalising first signs of beam in our detectors, everyone is raring to go. So it’s really disappointing, and hard for us to keep in perspective right now. "But a delay like this in a 20-year project isn’t an utter disaster and I’m sure the team at Cern will fix it, and make it more robust as they go." The explanation for the delay lies in how the giant machine relies on both the lowest temperature and the highest vacuum to collide particles – protons – at a shade under the speed of light. Liquid helium is used to cool the LHC’s so-called "superconducting magnets".
These are built from coils of special electric cable that operates in a superconducting state, efficiently conducting electricity without resistance or loss of energy, and thus offering the ability to generate vast magnetic fields. There was a faulty connection between two magnets, explained Gillies. As a result, during a power test, the high current melted the connection and helium leaked out from the magnet, which is located under the Jura mountains, and the vacuum was lost. This change, called a quench, releases stored energy.
"It seems to be the faulty connection that quenched. It stopped superconducting, which led it to heat up and melt, which in turn seems to have caused the mechanical failure that released helium," said Gillies. The massive quench took place between two focusing "quadrupole" magnets in sector 3-4 of the accelerator, which lies between the Alice and CMS detectors, the "eyes" of the machine that study collisions. As a result of the quench, the temperature of about 100 of the magnets in the machine’s final sector rose by around 100C.
One of the eight sectors of the giant machine will now have to return to room temperature and pressure for the magnet to be repaired, or even replaced, if necessary. While a repair of the magnet itself would take no more than two days, it will take "several weeks" to warm up the sector and then another "several weeks" to cool it down again, explained Gillies.
The magnets in that sector will have to be pre-cooled to -193.2°C (80 K, or 80 deg above absolute zero ) using 10,080 tons of liquid nitrogen, before they are filled with nearly 60 tons of liquid helium to bring them down to -271.3°C (1.9 K). The setback came just a day after the LHC’s beam was restored after engineers replaced a faulty transformer that had hindered progress for much of the past week.
Prof Brian Cox of Manchester University said: "It's disappointing of course to have to wait another couple of months for the physics to begin, but with a machine as complex as the LHC these things will happen in the commissioning stage.
"When we do wonderful and difficult things at the very edge of our capability we can't expect everything to go smoothly, but this is the price we must pay to make the most profound discoveries about our Universe."
Jad Marrouche, Imperial College London, who works on the CMS detector, said: "Having been so close to taking the first data from collisions, we are all disappointed that we will have to wait just that little bit longer.
"Preparations were gathering pace, especially with the very fast progress made by the collider team of late, so it feels a bit like there has been a false start at the 100m finals."
Mariano Rivera wants stadium bullpen mementos
By Mariano Rivera, Special to Y! Sports
Sep 20, 2008
Editor’s note: Mariano Rivera has played his entire 14-year career with the New York Yankees, appearing in 847 games and saving 480 – second-most of all-time. He spent time with Yahoo! Sports reporter Jose Mota to reflect on the closing of Yankee Stadium.
I have a plan as to which items I want to take with me after the last game. We all talk about it in the clubhouse and get a good laugh. I have every intention of taking the bench from the bullpen. This bench means a lot to me and to the members of the bullpen, it’s right in front of the mural. It’s mine.
Also I want to take a chair and the pitching rubber from the bullpen, along with plenty of dirt and grass. You know, it’s like my home, and all of these things have a special meaning to me. Some people might wonder why I’m so attached to that bench. I’m already hearing, ‘Why are you taking it?’ Man, it’s like moving from your childhood home.
I can’t think about that stadium and not think about the whole Yankee tradition, the arches, the championships, the names that built it, as they say ‘The House that Ruth Built.’ Not just him, all of the greats that laid the foundation for what is now the rich history of our team and our city, especially the Bronx. I think about all the pitchers that stepped on the mound and grinded it out, sweating. There are so many things that come to mind with all the great teams that I have been blessed to be a part of, thank God.
To be part of so many celebrations with my teammates, Mr. (Bob) Sheppard’s voice announcing my name, the music, the hot summers, the snow … so, so many things that all of sudden I realize how they’ve become part of who I am. In all of it, please let’s not forget Mr. Steinbrenner and everything he has put into making the Stadium what it became, by caring so much about the fans and the teams he put together for us. George is a huge part of Yankee Stadium.
In all of that I’ve learned to value even more the significance of wearing this Yankees uniform and the uniqueness of the die-hard fans. This building has made me stronger in every sense, there’s nothing quite like when the noise is high and the rocking atmosphere at Yankee Stadium. I’ve come to know more about its history in other events, like the Pope, boxing matches, concerts, soccer and football games, too … things I didn’t know. I also think about the tragedy of 9/11 and how close it was to here, for all of the victims and their families.
Let me share something I experienced here and that I will never forget. I see people that come to this stadium and they grind it out in their daily lives, pay their money and watch us play. It really hit home with me one day when we were playing a game and I wasn’t able to do my job. I lost the game and let so many people down, and I was very upset.
As I started to walk off the field, I noticed people gathering around a particular fan. I remember how hot it was, because this was after a mid-summer day game. This fan had suffered an apparent heart attack – the next day someone told me the person had died – and here I am so upset about a loss, still fuming, and this Yankees fan comes to the ballpark to enjoy the game and is fighting for his life in the stands. That moment still impacts me today. God showed during that time the importance of having a realistic perspective on things, especially losses. I was so miserable thinking, ‘Here I am, ticked off about a game, and yes, it is my job, but I saw this person fighting for his life, man. A life!’
I can clearly recall the successful outings and also the ones where I failed, couldn’t get the job done. Knowing that I gave 100 percent every single time out there makes me feel at peace with what I leave at the Stadium. A lot of my character has been built on that mound, not only for what I’ve been able to accomplish on the field, but also with who I’ve become as a person because of all of the tough moments.
By Dave Zirin
Dallas Mavericks All-Star Josh Howard has been raked over the coals of public opinion this week for daring to say what more than a few athletes think. He was caught on someone's cell phone camera saying that he doesn't stand for the national anthem because "I don't celebrate this [expletive]. I'm black." Judging by fan and media reaction, you would have thought he was barbecuing some bald eagle over a flaming pit of American flags. You would, given the peals of outrage, never know that there's been perhaps some more pressing news in the papers this week.
Mavericks owner Mark Cuban, to his eternal credit, has posted some of the anti-Howard emails he has received and they are the most vile, racist trash you could read outside a Klan chat room. (http://blogmaverick.com/2008/09/18/thanks-for-the-advice-on-josh/).
Many of these courageous e-bigots actually attempt to link Howard’s mini-rant to the ascension of Presidential candidate Barack Obama. Their crude threats reflect a white fear as old as the United States itself: that no matter how much blood black Americans spill for this country, their loyalties are dual and divided. It's a fear that -- in a backhanded way -- acknowledges that since racism is still so prevalent in our society, the loyalties of the descendents of slaves must be suspect. But instead of confronting the reality of racism, the e-bigots among us instead lash out in both frightening and filthy fashion.
Well, count me out. Count me out as someone who will pile on Josh Howard. Howard is someone who said, during his 2004 senior year at Wake Forest University, that the war in Iraq "was all about oil." He then saw his draft stock plummet to the point where he was picked after no-talents like Reece Gaines and Ndudi Ebe. I saw one scout even call Howard a risky pick saying that, "Anti-war views may reflect rumored erratic behavior." Count me out as someone who thinks anti-war views are erratic.
Count me out of the fraternity of sports writers who under a kabuki pantomime of liberalism will "defend Howard's right to say what he wants" and then crush him for opening his mouth. Take J.A. Adande of ESPN.com. He starts his anti-Howard piece by writing, "What makes America the best country on the planet is that you are free to stand or sit for the national anthem, to sing along or to yell in anger at the government as much as you want without getting tossed in jail for your political beliefs." What claptrap. Someone needs to send Adande a copy of the Patriot Act. Or maybe he could ask the people who attempted to exercise their Constitutional rights to “yell in anger” at the Republican National Convention in St. Paul, MN, only to be subject to "pre-emptive" raids and prison. Maybe he could ask the journalists who were beaten and arrested by police for attempting to report on it.
But then Adande continues:
"Howard, the Dallas Mavericks forward coming off a year in which he publicly admitted his penchant for smoking marijuana and defiantly partied away during the NBA playoffs, has a termite-ridden soapbox."
Yes, Howard admitted that he is an NBA player who smokes weed. Stop the presses. He also celebrated his own birthday after a playoff game. Adande must think it's a slippery slope: weed, birthday parties, treason. If Howard’s soapbox is “termite-ridden” then Adande’s platform is a house of cards.
This garbage is exactly why it's so hard to get athletes to open up about what they think. Reporters are seen as there to mock any ideas they have beyond "Drink Gatorade… and play one game at a time." Count me out of this smirking and all-too-condescending game of journalistic gotcha.
Count me out also as someone who thinks any critiques of the anthem are somehow off limits.
Count me instead as someone who has no clue why this is the only country in the world that feels to need to play the national anthem before sporting events. Count me as someone who believes that sports are beautiful but enforced nationalism before a captive audience is not. Count me as someone who resent the fact that we are raised to see sports and nationalism as inherently conjoined.
Count me as someone who will never criticize an athlete for resisting this ritual. A photo of Tommie Smith and John Carlos raising their fists during the anthem adorns my wall. I have written in defense of people like Mahmoud Abdul Rauf, drummed out of the NBA for not standing during the anthem, and Toni Smith, the former Manhattanville College basketball player who turned her back on the flag in 2003 to protest "not just the war abroad but the injustices here at home." They were right to question the assumed permanence of this exceptionally American ritual.
Fusing the anthem with sports is a practice that was started in order to build patriotic fervor during World War II. When "the good war" ended and the permanent Cold War begun, it simply never left. It is supposed to represent freedom, but, as we see with Josh Howard, it's the freedom to do little more than smile in silence.
Well, count me out.
[Dave Zirin is the author of “A People’s History of Sports in the United States” (The New Press) Receive his column every week by emailing email@example.com. Contact him at firstname.lastname@example.org.]