- While the financial rescue package was sold to Congress
and the public as a temporary measure it now appears that Treasury chief
Timothy Geithner has no intention of ending the bailout program even as
he gets ready to accept the return of TARP funds from 10 of the largest
banks who want out from under the restrictions of that program. Apparently
the money is never coming back to the taxpayer. I'll also cover many other
short topics this week as the world moves ever more quickly toward the
consequences of profligate spending and a reckless foreign policy with
a world seething with resentment and distrust for our government.
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- There was an interesting exchange in the latter part
of May between Senator Demint of the Senate Banking Committee and Treasury
Secretary Geithner that indicates the federal government has no intention
of ending the TARP program.
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- SEN. DEMINT: "If over the next six months $50 billion
comes back, will $50 billion go into the general fund of the United States?
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- SEC. GEITHNER: "The way the TARP is designed --
and I didn't design this (but his collaborators in Congress did) -- but
the way it's designed is every dollar that comes back goes into the general
fund but that does still create additional head room under the $700 billion
authority for us to make capital investments [meaning: we still get to
keep using $700B on a permanent basis, in any way we see fit]. So we have
the ability to still use the $700 billion if we think there's a strong
case for doing that, but the way the program works is a dollar comes in
and goes to the general fund but still creates additional room for us to
make a new [investment in banks]
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- SEN. DEMINT: "So your understanding of what we did
is that the Treasury now has $700 billion that it can use permanently,
rotating in and out of the capital markets as you see fit?
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- SEC. GEITHNER: "Well, I'm not quite sure permanent,
but you're right."
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- The problem with TARP is that it gave such general powers
to the government that there is no way to rein it in without additional
legislation. The reason Sen. Demint had to ask is there is nothing in the
bill that covers this issue, so Geithner took advantage of the loophole
to claim what he did.
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- Let's go back to the original issue that provoked this
exchange. Why are some of the 10 largest banks so anxious to pay off their
TARP bailout funds? It's not simply a matter of allowing them to go back
to the old days of compensating executives with millions of dollars. That
can't be done unless they generate huge income streams from derivatives
as before. Thus, the big banks are anxious to get back into the derivatives
and securitization game that provided all those excess profits--and they
still want to do it in the shadows, which they can't do under TARP.
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- In reality, it is not a fear of the Treasury, which the
big banks control, nor the Fed, which they own, but Congress which is under
a lot of pressure from the public to audit the Fed and bring monetary control
back under the authority of Congress. Bob Unruh of Worldnetdaily.com reports
that "there now are 193 (actually 222 and rising) co-sponsors signed
onto H.R. 1207, the Federal Reserve Transparency Act of 2009 that demands
an audit of the organization. [Congressman Ron] Paul long has opposed the
power held by the Federal Reserve and its ability to manipulate the nation's
economy and over the years has launched multiple proposals to get rid of
the quasi-governmental agency, without significant support [until now.
As the bailouts are becoming more unpopular the public is realizing the
money is only benefiting insider banks]. The bill calls for the comptroller
general of the United States to audit the private Federal Reserve and report
to Congress before the end of 2010 [This is a major flaw in Paul's proposal.
The audit will surely be controlled and politicized like all federal investigations--but
Paul really had no choice if he wanted to gain majority support. His next
step will be to challenge the results if fraudulent. He will certain get
traction against the Fed either way].
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- "When the bill has garnered the support of 218 members
of the 435-member U.S. House, it technically has the support of the majority,
even though the process of holding hearings and having committee review
still provides for open doors for failure [if co-sponsors defect under
pressure from the PTB].
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- "Paul's ultimate goals have not changed over the
years he's been concerned by the impacts on the nation's economy. 'To understand
how unwise it is to have the Federal Reserve, one must first understand
the magnitude of the privileges they have,' he wrote in a recent Straight
Talk commentary. 'They have been given the power to create money, by the
trillions, and to give it to their friends, under any terms they wish,
with little or no meaningful oversight or accountability.'
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- "Besides the support in the U.S. House, a companion
bill [to audit the Fed], S. 604, also now has been introduced in the U.S.
Senate by Sen. Bernard Sanders of Vermont [Ironically, a socialist]. It
has been referred to the Senate Committee on Banking, Housing and Urban
Affairs." What is the Fed's response to this growing backlash? --hire
a lobbyist to set up a counter campaign!
-
- Returning to the banker's motives, by getting out from
under TARP, they effectively can go back to their ponzi schemes of old
and run up new profits during the coming recovery--and do so in relative
secrecy, as before. The speculative world has been watching as the US Treasury
diverted billions into the hands of AIG and other insider investment banks
like Citi, JP Morgan and Goldman Sachs, who were guaranteeing Credit Default
Swap derivatives (insurance policies against default of everything from
GM to securitized packages of subprime loans). There is still a huge market
in this area as hundreds of outsider hedge funds and other financial institutions
are still looking to switch their unsecured and at risk CDS derivatives
to these favored 10 banks who still claim the clout to save them from default.
That's what I believe is driving this move.
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- However, there are still two of the largest insider banks
that can't get out from the TARP net of control. Bank of America and Citigroup
have received some $90 billion in bailout funds from the US Treasury. In
their weakened financial condition, they cannot repay. Citibank, previously
the world's largest bank, was so deep into the derivatives meltdown that
it is still technically insolvent despite the bailout. Bank of America
is still under water after absorbing the bankrupt Countrywide Financial
mortgage unit--repudiating much of its debt in the process (stiffing the
creditors and turning a potential pig of a deal into something sweet).
But then on the heels of that deal, the PTB decided that BOA should buy
the now defunct insider stock brokerage of Merrill Lynch. The latest revelations
this week indicate that BOA executives refused knowing that the company
was worthless and the price too high. Leaks from BOA claim the government
forced it upon them.
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- The Washington Post revealed some of the pressure applied
by the Fed. "Bank of America had agreed to the deal in September,
then tried to back out in December when he found out that Sec. of Treasury
Paulson and Fed Chairman Bernanke had grossly misrepresented Merrill's
financial status to the bank when they requested BOA take over Merrill
Lynch. Bank of America CEO Ken Lewis said that "Over a six-day period
in late 2008, Merrill's expected losses jumped from $9 billion to $12 billion,
with the possibility that they would reach as high as $15 billion."
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- "Fed Chairman Ben S. Bernanke wrote at the time
that the company's reversal was 'a foolish move' and said 'regulators will
not condone it [backing out].' [This was not true. Since the losses at
Merrill were grossly understated to BOA, it constituted a "material
and adverse change" in a deal that would certainly justify BOA backing
out]. The e-mail [of Bernanke] was provided by the Fed in response to a
subpoena from the House Committee on Oversight and Government Reform, and
quoted in a memo circulated by the panel's Republican staff. Bernanke also
told other Fed officials that he would warn Bank of America that senior
management would be removed if the bank abandoned the deal and then needed
more federal aid. Bank of America's Lewis said in a deposition that he
yielded to the pressure." Then, under testimony to Congress the next
day, Lewis reversed himself and claimed the threats of the government did
NOT influence his decision. Somebody obviously got to Lewis, and at least
two of his Congressional inquisitors expressed openly that they weren't
buying his denials.
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- The larger questions that remain are: What kind of leverage
did the government have on BOA that allowed them to twist its arm on the
Merrill Lynch deal beyond threatening Lewis' job? And, what kind of special
relationship did Bernanke and Paulson have with Merrill Lynch principals
that made it so important to illegally pressure BOA to purchase them at
a loss? These kinds of high level management types are people who have
long played along with the PTB in order to rise to the top of financial
institutions that are given special advantages in the markets.
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- Every insider bank that has these kinds of special relationship
with government had been the beneficiary of special treatment, insider
deals and/or other efforts to get regulators to look the other way on accounting
issues that makes them vulnerable to this kind of blackmail. Large brokerage
houses like Goldman Sachs, and Merrill Lynch are allowed to participate
in government sponsored option movements as part of the Plunge Protection
Team efforts to manipulate markets. Above all, the largest insider banks
and brokerage houses were the ones allowed to develop, sell and profit
from the huge markets created by the securitization of subprime mortgages
and derivatives.
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- Mike Whitney of Global Research explains just how these
securitization and derivatives ponzi schemes work. "Is it possible
to make hundreds of billions of dollars in profits on securities that are
backed by nothing more than cyber-entries into a loan book? It's not only
possible; it's been done. And now the scoundrels who cashed in on the swindle
have lined up outside the Federal Reserve building to trade their garbage
paper for billions of dollars of taxpayer-funded loans. Where's the justice?
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- "Meanwhile, the credit bust has left the financial
system in a shambles and driven the economy into the ground like a tent
stake. The unemployment lines are growing longer and consumers are cutting
back on everything from nights-on-the-town to trips to the grocery store.
And it's all due to a Ponzi-finance scam that was concocted on Wall Street
and spread through the global system like an aggressive strain of Bird
Flu. This isn't a normal recession; the financial system was blown up by
greedy bankers who used 'financial innovation' to game the system and inflate
the biggest speculative bubble of all time. And they did it all legally,
using a little-known process called securitization.
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- "Securitization--which is the conversion of pools
of loans into securities that are sold in the secondary market--provides
a means for massive debt-leveraging. The banks use off-balance sheet operations
to create securities so they can avoid normal reserve requirements and
bothersome regulatory oversight. Oddly enough, the quality of the loan
makes no difference at all, since the banks make their money on loan originations
and other related fees [But their ability to sell these packages depends
upon the existence of derivatives which supposedly guaranteed them against
loss. There was, however, absolutely no financial backing behind these
CDS insurance guarantees].
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- "What matters is quantity, quantity, quantity; an
industrial-scale assembly line of fetid loans dumped on unsuspecting investors
to fatten the bottom line. And, boy, can Wall Street grind out the rotten
paper when there's no cop on the beat and the Fed is cheering from the
bleachers. In an analysis written by economist Gary Gorton for the Federal
Reserve Bank of Atlanta's 2009 Financial Markets Conference, the author
shows that mortgage-related securities ballooned from $492.6 billion in
1996 to $3,071.1 in 2003, while asset backed securities (ABS) jumped from
$168.4 billion in 1996 to $1,253.1 in 2006. All told, more than $20 trillion
in securitized debt was sold between 1997 and 2007 [and guaranteed by appropriate
volumes of derivatives].
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- "Deregulation [especially the lack of reserve requirements
for derivatives] opened Pandora's box, unleashing a weird mix of shady
off-book operations (SPVs, SIVs) and dodgy, odd-sounding derivatives that
were used to amplify leverage and stack debt on tinier and tinier scraps
of capital. It's easy to make money, when one has no skin in the game.
That's how hedge fund managers and private equity sharpies get rich. Securitization
gave the banks the opportunity to take substandard loans from applicants
who had no way of paying them back, and magically transform them into Triple
A securities [in collusion with the 3 major debt ratings agencies].
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- The bottom line is that the economy is still on the brink.
In an op-ed piece in the NY Times, Sandy Lewis and William Cohan, both
former Wall Street insiders (Lewis was convicted of stock manipulation),
tell why they still think things are rotten on Wall Street. "Mr. Obama
thinks that the way to revive the economy is to restore confidence in it.
If the mood is right, the capital will flow. But this belief is dangerously
misguided. We are sympathetic to the extraordinary challenge the president
faces, but if we've learned anything at all two years into the worst financial
crisis of our lifetimes, it is that a capital-markets system this dependent
on public confidence is a shockingly inadequate foundation upon which to
rest our economy.
-
- "We have both spent large chunks of our lives working
on Wall Street, absorbing its [lack of] ethic and mores. We're concerned
that nothing has really been fixed. We're doubly concerned that people
appear to feel the worst of the storm is over -- and in this, they are
aided and abetted by a hugely popular and charismatic president and by
the fact that the Dow has increased by 35 percent or so since Mr. Obama
started to lay out his economic plans in March. But wishing for improvement
and managing by the Dow's swings are a fool's game.
-
- The storm is not over, not by a long shot. Huge structural
flaws remain in the architecture of our financial system, and many of the
fixes that the Obama administration has proposed will do little to address
them and may make them worse."
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- Michael Pento of Delta Global Advisors says the consequences
of dollar debasement are already starting to show. "The consequences
of adopting a weak dollar and inflationary monetary policy to bail out
the economy have begun to manifest themselves, although the real effects
of the government's $12.8 trillion dollar recovery plan have only just
started to show up... To illustrate the point, the price of oil has increased
53% this year while gasoline has increased 26% in price since May 1st.
That move alone should start to ring the alarm bells for everyone. But
commodity prices have risen across the board sending the CRB Index up 14%
in May alone. In addition, copper is up over 60% this year while cotton
is up 18% in 2009 and the US dollar has also lost about 10% of its value
since early March.
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- "The cause of steep rises in basic materials and
energy is not so much a U.S. demand story. Asia seems to be faring better;
(their economy expanded at a 6.1% annual rate in Q1, the slowest rate in
10 years) while our economy has shed over 6 million jobs since the recession
began and GDP contracted at a 5.7% annual rate in the first quarter. But
the real cause in the rise of commodities can be found in the weakness
of the US dollar... The progenitor of this crisis was a collapse in real
estate prices and it has shown only a few signs of stabilization in sales,
but is still far from a marked recovery in prices. In fact, last month's
report on existing home sales showed a drop of 15.4%. Both mortgage delinquencies
and foreclosures reached record levels in Q1 2009 while the months' supply
of existing homes actually climbed to 10.2 from 9.6. So while mortgage
rates are on the rise, housing fundamentals continue to exhibit weakness.
Those soaring bond yields and mortgage rates will wreak havoc on our debt-imbued
economy. Already we saw a report by the Mortgage Bankers Association showing
a drop of 16% in the Refinance and Purchase Index for the week ending May
29th. For an economy that has a total debt to GDP ratio of 370%, we can
also expect dire repercussions in everything from credit card loans to
municipal bonds.
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- "If Banana Ben steps up his manipulation of bond
prices, the current fall in the dollar along with the rise in commodity
prices and interest rates will seem inconsequential by comparison in the
not too distant future. Our government risks morphing what would have been
a severe deflationary recession into an inflationary recession/depression
in the longer term. Their decision to choose the inflationary route is
based on the fact that inflation bails out those in debt. Make no mistake,
for a country with $11.4 trillion in debt [actually more like $50T counting
all obligations and off-the books accounting] and a 2009 deficit equal
to 13% of GDP, inflation is perceived as the only way out. However, inflation
can never bail out anything or anyone, it only helps the very rich maintain
their purchasing power while robbing it from the rest of the country."
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- World Affairs Brief, June 12, 2009 Commentary
and Insights on a Troubled World.
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- Copyright Joel Skousen. Partial quotations with attribution
permitted.
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- Cite source as Joel Skousen's World Affairs Brief
- http://www.worldaffairsbrief.com
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- World Affairs Brief, 290 West 580 South, Orem, Ut 84058,
USA
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