- In a recent interview with the New York Times, former
Secretary of the Treasury Paul O' Neill, was asked how the problems with
subprime mortgages could lead to a financial crisis of global proportions.
O' Neill said, "If you have 10 bottles of water, and one bottle
has poison in it, and you don't know which one, you probably won't drink
out of any of the 10 bottles; that's basically what we've got here."
-
- Bulls-eye. O' Neill's answer is the best yet
for explaining a complex situation in simple terms. The term "subprime"
is a red herring; it is used by the media to minimize what is really going
on. The meltdown in financing extends across the entire range of mortgage-security
products. No loan-type has been spared. The wholesale market for anything connected
to mortgages is frozen and the details are being intentionally withheld
from the public. Two years ago, more than 65 percent of all mortgages were
converted into securities and sold off to Wall Street. No more. That scam
unraveled in July when two Bear Stearns hedge funds blew up and their were
no takers for billions of dollars of mortgage-backed junk. Since then,
bankers and hedge fund managers have been scrambling to conceal the facts
about what mortgage-backed securities (MBS) are really worth; nothing.
The fear is that when the public finds out what is really going on, they'll
draw the logical conclusion that the banking system is bankrupt, which
it probably is. Just look at these eye-popping losses which <http://www.bloomberg.com/apps/news?pid=20601208&sid=an2o_RDeA.9A&refer=finance>appeared
in Bloomberg News on April 1 The financial ship is listing, and the
mainstream media is doing its best to keep the public in
the dark.
-
- So for the last eight months, a simple matter of "price
discovery" on publicly traded securities has been a nonstop game of
hide-n-seek. That's no way to run a free market. The recent collapses of
Bear Stearns and Carlye Capital are just the latest additions to this ongoing
farce. Carlyle was a $22 billion hedge fund that couldn't scrape together
a measly $400 billion to meet a margin call. Why? Every analyst who wrote
on the topic noted that the fund was loaded up with high-quality Triple-A
and GSE (Fannie Mae) bonds. So what were they offered for their MBS? That
question was never answered because Fed chief Ben Bernanke rode to the
rescue and created a new $200 billion auction facility and Whoosh---Carlyle's
mortgage-backed junk disappeared down a black hole. How convenient; another
Fed bailout to hide the damning evidence that trillions of dollars of MBSs
are utterly worthless and devouring the financial system from the inside.
-
- Bernanke's myriad auction facilities (four, so far) are
ostensibly designed to remove these mortgage-backed stinkers from the banks'
balance sheets so they can start lending again. But there's another reason,
too. The Fed thinks they can simply put these MBSs in cold-storage for
a while and then re-thaw them when the market bounces back. But the market
for MBSs won't bounce back. This is biggest housing bust in US history
and prices have a long way to go. Who is going to invest in mortgage-backed
bonds when the underlying asset is losing value every day? Besides,
as Paul O' Neill points out; one of the bottles contains poison and investors
don't like poison. So, Bernanke is stuck trying to treat with the symptoms
rather than the disease. As a scholar of the Great Depression, he's been
rifling through his bag o' tricks to mitigate the damage, but without success.
-
- The rate-cuts and auction facilities have been a complete
flop. The situation is worse now than it was in July; much worse. In fact,
the develeraging of financial institutions is accelerating at a pace that
no one expected threatening some of Wall Streets' biggest players and putting
$500 trillion in counterparty agreements at risk. And it all began with
eliminating the basic standards for issuing loans to credit-worthy
applicants; the straw that broke the camel's back. Now the whole system
is crumbling and an ominous sense of doom pervades trading floors across
the planet. Everyone is just waiting for the next shoe drop.
-
- Pimco's Bill Gross said, "What we are seeing
is the collapse of the modern day banking system". American-style
capitalism is in crisis-mode and the outcome is far from certain. The Fed's
interventions show that the long held belief that markets are self-correcting
has vanished. Laissez-faire is out; regulation is in.
-
- Bloomberg News summed it up like this:"It is no
coincidence that the crisis of 2007 and 2008 had its origin in unregulated
financial products traded in unregulated markets. Ever since the Great
Depression, the government has tried to limit the leverage available to
the public in the American stock market. But regulators, led by Alan Greenspan,
the former chairman of the Federal Reserve, thought it would hamper innovation,
and drive financial activity overseas, if there were any attempts to impose
limits on leverage in the unregulated markets.
-
- To avoid a super-bubble in the future, (the) banks must
control their own borrowing. They must also curtail lending to clients
such as hedge funds by demanding greater collateral and margin requirements
on loans." (Bloomberg News)
-
- In Henry Liu's latest article in Asia Times, "A
Panic-stricken Federal Reserve", Liu makes this observation on the
Fed's auction facilities which provide hundreds of billions of dollars
in 28 day loans in exchange for dubious mortgage-backed collateral:
-
- "Since the Fed cannot retire loans made via TAF
and its repo program without adding to those 'elevated pressures', the
loans should be considered an equity infusion, because they'll be repaid
at the convenience of the borrower rather than on a schedule agreed with
the lender." What Waldman did not say was that the Fed had ventured
into a broad nationalization of the prime dealers on Wall Street by being
an equity investor. (Quote,Steve Randy Waldman of Interfluidity; Henry
Liu, "A Panic-stricken Federal Reserve")
-
- Does the Fed realize that it is effectively monetizing
the debt by issuing loans that may not be repaid or is this just a clever
way to trick foreign investors into believing that the Fed won't print
its way out of a crisis? The bottom line is, whether the nation is headed
into a deflationary spiral or not; all of the Fed's tools are inflationary.
Rate cuts, auction facilities or covert monetization all weaken the currency
and levee an unfair tax on savers and people on fixed incomes. Unfortunately,
these people have no voice in government, so we can't expect their interests
to be fairly represented.
-
- Since housing peaked in 2005, 240 independently-owned
mortgage lenders have filed for bankruptcy. Wholesale funding sources have
dried up and foreclosures are on the rise. Now, more than 75 percent of
mortgages are funded by Fannie Mae or Freddie Mac while another 10 percent
are underwritten by FHA. The real estate industry has been nationalized;
another knock-on effect of Greenspan's low interest monetary policy. Presently,
the Fed and the Secretary of the Treasury, Henry Paulson, are pushing to
expand Fannie's and Freddie's balance sheets so they can absorb
bigger and riskier mortgages. This is lunacy. Fannie Mae is already perilously
under-capitalized and, if it defaults, taxpayers will be on the hook for
$2.2 trillion.
-
- That doesn't seem to bother Paulson who is determined
to reflate the equity bubble so the profits keep rolling in to Wall
Street's coffers. Still, even if the plan goes forward, it's unlikely
that Paulson and Bernanke will be able to re-energize the real estate
market or ignite another housing boom. Public attitudes have changed dramatically
in the last few months. The myth that "housing prices never going
down" has been dispelled and high levels of personal debt have forced many
to reassess their spending priorities. The American consumer has never
been so over-extended.
-
- According to Bloomberg: Consumers fell behind on
car, credit-card and home-equity loans at the highest level in 15 years,
another sign the U.S. economy is slowing, according to the American Bankers
Association's quarterly survey. Payments at least 30 days past due increased
across all eight categories of loans tracked during the fourth quarter,
the Washington-based group said today in a statement. Late loans in the
quarter climbed 21 basis points to 2.65 percent of all accounts in a consumer-loan
index created by the group.
-
- The American consumer is tapped-out. What he needs is
a raise, not another loan. Bush's $500 per person Stimulus Package will
do nothing to reverse the effects of 30 years of anti-labor legislation
and class-oriented monetary policy.
-
- Another indication that attitudes towards spending have
changed, showed up in a survey conducted two weeks ago by USA Today/Gallup.
The poll released showed that 76 percent of Americans believe that the
country is now in recession and 59 percent think the US will
slide into a depression that will last for several years. Despite the media's
attempts to convince us that these are "the best of times"; the
public knows otherwise. Their pessimism is expressing itself through curtailed
spending. There's nothing the Fed can do to change the prevailing mood
of the country. Working people are hurting. The spending spree is over.
-
- The housing market will be dead for a generation. That
means the MBS market will falter and the multi-trillion dollar derivatives
monolith will continue to unwind. It will take emergency measures to address
the credit avalanche which is just now hitting the broader economy.
-
- The Bear Stearns bailout is a prime example of the
extent to which the Fed is willing to go to stop a meltdown. By approving
the $30 billion dollar deal with JP Morgan, the Fed arbitrarily went beyond
its mandate of providing liquidity to the markets and usurped Congress'
authority to appropriate funds. It was a power-grab engineered under shaky
pretenses. The Fed isn't authorized to prevent privately-owned businesses
that are recklessly leveraged at 30 to 1 from defaulting. More importantly,
the Federal Reserve is not Congress, although they have now assumed those
constitutional duties. Speaker of the House Pelosi has said nothing
so far.
-
- Paulson has used the Bear fiasco as a platform for
his blueprint for "broad market reforms"; a 200-plus page document
that removes Congress from its role of overseeing the financial markets.
According to the New York Times:
-
- "President Bush was preparing to issue an executive
order soon to expand the membership and reach of an interagency committee
called the President's Working Group on Financial Markets. (aka; The Plunge
Protection Team) The group was created after the stock market plummeted
in 1987. The group is also expected to consider ways to broaden the authority
of the Federal Reserve to lend money to nonbanks as needs arise. (Ed. note:
To authorize more Bear Stearns type bailouts with consulting Congress).....Elements
of the plan are clearly deregulatory. The plan proposes, for instance,
to reduce the enforcement authority of the S.E.C. in a variety of ways
and hand that authority instead to industry groups. The plan recommends
that investment advisers no longer be directly regulated by the commission,
but instead be supervised by an industry regulatory organization.
-
- The Treasury Department's blueprint is designed to boost
Wall Street's competitiveness, not Main Street investor protection,"
said Karen Tyler, president of the North American Securities Administrators
Association and the securities commissioner of North Dakota." (New
York Times)
-
- Congress is being muscled out of financial market supervision
by a troop of venal banksters and corporate picaroons who are threatening
to finish-off the already-defanged SEC. That will put the Fed in the driver's
seat for good. Paulson wants to police the world's most complex markets
on the "honor system". It's crazy. His blueprint is an obvious attempt
to consolidate market-related functions under a central authority that
is accountable to private industry alone. That way, the Fed can bailout
whomever it chooses without congressional approval. Paulson's press conference
was just a polite way of informing the American people that the seat of
power has shifted from Washington to Wall Street. It's a banker's
coup.
-
- So, where do we go from here? Pimco's Bill Gross gives
us some indication in this recent quote: "In my opinion, the
private credit markets have forfeited their privileged right to operate
relatively autonomously because of incompetence, excessive greed, and in
minor instances, fraudulent activities. As a result, the deflating private
market's balance sheet is being re-nationalized in some cases with increased
regulation, in others with outright guarantees and agency lending. Ultimately
government programs which support private credit market assets may be required
in order to prevent an asset deflation of significant proportions. Authorities
must act quickly, with a shot of adrenalin straight to the heart of the
problem: home prices. Since homes are the most highly levered and monetarily
significant asset that American consumers own, if they decline much further
they will drag the rest of the economy with them ."
-
- "Re-nationalized"; is that what it is? No one
authorized the Fed or Paulson to re-nationalize anything. These over-leveraged
banking behemoths need to fail. Let the market work. 28 million Americans
are on food stamps, tent cities are sprouting up across the country, discretionary
spending is down, food and energy prices are skyrocketing, and wages have
been frozen for a generation. Where's the bailout for the working
man? Instead, the government's largess is showered on a
throng of unctuous fat-cat banksters so they can keep the larder on Martha's
Vineyard topped off with Godiva truffles and Cuban cigars. Paulson
has to go. Bernanke too.
-
- An article in last week's New York Times, "Leveraged
Planet", provides a great description of the Fed's activities
during the weekend of the Bear Stearns fiasco. Journalist Andrew Sorkin
recreates the frantic phone calls and panicky deal-making that went on
behind the scenes while the stock market was preparing for a Monday morning
blow-out:
-
- " JUST before JP Morgan-Chase announced its
initial $2-a-share deal to buy Bear Stearns, Ben Bernanke, the chairman
of the Federal Reserve, held an extraordinary impromptu conference call.
The participants on the Sunday night call, who got a preview of the deal,
were Wall Street's biggest power brokers: Lloyd Blankfein of Goldman Sachs
dialed in from home. John Mack of Morgan Stanley rushed to the office
to listen on speakerphone. Richard Fuld of Lehmann Brothers, who had been
directed to return home from a business trip in New Delhi by
none other than Henry Paulson, the Treasury secretary, was patched in,
too, among others.
-
- The half-hour call was a rallying cry for support of
Bear Stearns - and more broadly, the financial markets, which, as it was
described on the call, were on the verge of a major meltdown if not for
the pre-emptive steps that the Fed and JPMorgan took. "It was much
worse than anyone realized; the markets were on the precipice of a real
crisis," said one participant. Given that Bear held trading contracts
with an outstanding value of $2.5 trillion with firms around the world,
"we were talking about the possibility of a global run on the bank."
( Andrew Sorkin, "Leveraged Planet" New York Times)
-
- Typical of the Times, the reader is left feeling that
the wild and destabilizing activities of one unregulated market participant,
like Bear, is as natural as a spring rain. There's not the slightest hint
that Bears' transgressions may have emerged from years of kicking down
regulatory doors and feeding campaign contributions into a corrupt political
system. That's way beyond the Times' range of analysis. Instead, the heroes
of this financial kabuki are none other than the ashen-faced palatines
at Fed and the Treasury who deftly donned their Haz-mat suits long enough
to battle the flames of the banking inferno with a stream of taxpayer money.
So much for moral hazard.
-
- If Bear had been properly policed; it would have been
better capitalized with considerably less leverage. Its $2.5 trillion of
derivatives contracts would have been regulated by government officials
to make sure that they posed no threat to the broader system. Sorkin's
recap just proves that the present stewards of the system are bunglers
who are out of their depth. After years of serial bubble-making, they are
finally begin to realize that their neoliberal Golden Calf was built on
a foundation of pure quicksand. In fact, the sirens are already wailing
as the yields on 3 month Treasuries continue to plummet, which is the bond
market's way of perching itself atop the highest building in downtown Manhattan and
screaming, "FIRE!" There's no telling when the stock
market will get the message, but it shouldn't be too long.
-
- CODE RED; Emergency planning now underway
-
- So, what is to be done? New York Fed chief Timothy Geithner
says that capital markets are still "substantially impaired"
and policy makers and financial industry leaders must "act forcefully"
to stem the crisis.
-
- "What we were observing in U.S. and global
financial markets was similar to the classic pattern in financial crises,''
Geithner said in his prepared testimony to the Senate Banking Committee.
He cited ``a self-reinforcing downward spiral'' of asset sales, ``higher
volatility, and still lower prices." (Bloomberg News)
-
- If Geithner's predictions of "a self-reinforcing
downward spiral'' sound scary; so do the remedies. The Financial Times
outlined the radical strategies that are now under consideration by the
G-7 powers for dealing with challenges of the rapidly-expanding credit
crisis. These include "the temporary suspension of capital requirements,
taxpayer-funded recapitalisation of banks and outright public purchase
of mortgage-backed securities." Everything is on the table.
-
- Representatives from the main western central banks are
also discussing whether to force a number of the larger banks to disclose
their financial positions so they can objectively determine the weaknesses
on their balance sheets.
-
- Other recommendations include boosting capital requirements,
"conserving financial resources", and utilizing public funds.
The group is also deciding whether to "suspend capital and reporting
rules that tie prudential requirements to market values of securities."
That way the banks can avoid letting shareholders know the true downgraded
value of their assets. This is clearly an attempt to deceive the public
about the real financial condition of the banks.
-
- "Emergency liquidity support", reductions in
capital requirements, concealing the true value of collateral, relaxing
regulations, suspending accounting rules for assets; it sounds a lot like
panic. These are the signs of a system so dilapidated that the pilings
shake and the scaffolding wobbles with the slightest breeze. A system that's
held together with the frayed strands of collective fear; bankers angst.
Strike a match and the whole thing will go up like a Roman candle.
-
- By Mike Whitney
-
- fergiewhitney@msn.com
-
- Mike is a well respected freelance writer living in Washington state,
interested in politics and economics from a libertarian perspective.
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