- All the hype from Congress and the White House about
bailing out establishment financial institutions only to "save America
from the ravages of a depression" is merely a cover for a systematic
protection racket aimed at saving those who brought this debacle upon us--and
profited during the run-up. Now they want to profit on the way down too.
As Darryl Schoon put it (bluntly), "Once the most powerful and productive
economy in the world, the US, indebted by bankers and government spending
beyond its ability to repay, is headed towards sovereign bankruptcy. The
recent request by US Treasury Secretary--and more importantly former Chairman
and CEO of investment bank Goldman Sachs-- Henry Paulson to bail out Fannie
Mae and Freddy Mac with US taxpayer dollars is but another indication of
this destructive and parasitic relationship between bankers, government
and the economy. That a private banker from a large Wall Street investment
bank is also Secretary of the US Treasury is no coincidence. It is also
no coincidence that once again, public monies from the US Treasury are
being used to rescue private bankers and to indemnify their losses."
This week I will attempt to illuminate the incestuous relationship between
these financial Powers That Be (PTB) and how they intend to sap America's
individual wealth in order to salvage their crumbling speculative empire.
- Schoon goes on to describe how government has "the
fox guarding the henhouse" by selecting major players in Wall Street
brokerage houses and investment banks to serve as Sec. of the Treasury.
Most bailouts have been engineered by these Treasury chiefs--directly benefitting
there former employers.
- "Receiving taxpayer dollars from the US Treasury
for their private benefit is not new to Goldman Sachs. In the 1990s, when
the Mexican government defaulted on its bonds, investors at Goldman Sachs
stood to lose billions of dollars. They didn't. Buried deep in the subsequent
$40 billion US bailout of Mexico was a $4 billion payment to Goldman Sachs,
gratis of the US Treasury indemnifying Goldman Sachs against any losses
on their investment in Mexican bonds. The fact that current US Treasury
Secretary and former Goldman Sachs CEO Henry Paulson also recently used
US funds to underwrite JP Morgan Chase's private buyout of investment bank
Bear Stearns and is now proposing to do the same with Fannie Mae and Freddie
Mac is to be expected. For investment bankers, using public money to privately
profit is business as usual."
- Jim Rogers, Chairman of Rogers Holdings summarized saying,
"They're ruining what has been one of the greatest economies in the
world, [Bernanke and Paulson] are bailing out their friends on Wall Street
but there are 300 million Americans that are going to have to pay for this."
--and pay we will, through rampant inflation.
- Nothing is more symptomatic of this "protecting
our own" philosophy than Paulson's latest move to shut down, temporarily,
market short sales--but only those aimed at undercutting insider institutions.
Reuters revealed this week that "US securities regulators issued an
emergency rule on Tuesday to limit certain types of short selling in major
financial firms, including Fannie Mae and Freddie Mac. The rule is the
latest effort by the U.S. Securities and Exchange Commission to clamp down
on market manipulation that some blame for the sharp declines in financial
stocks and the demise of investment bank Bear Stearns in March. The rule
will go into effect on Monday, July 21, and last through July 29, although
it could be extended to last up to 30 days."
- In fact the ruling is not aimed at stopping market manipulation.
Neither the Congress nor the White House were serious about stopping the
obvious manipulation of oil prices--which all the big New York financial
firms are involved in. But they certainly are interested in stopping others
from short selling the stocks of the big brokerage firms. "The emergency
rule applies [only] to 19 financial firms including Lehman Brothers, Goldman
Sachs, Merrill Lynch, Morgan Stanley, JPMorgan Chase & Co and Citigroup
Inc. The SEC said that a loss of confidence in markets can lead to panic
selling, which may be further exacerbated by certain types of short selling."
Yes, but the move only protects the big boys--no one else. This is clearly
meant to ensure that outside investors cannot precipitate a selling streak
to profit from the coming downturn in values at these banks and brokerage
- Jon Nadler explains the process of short selling and
why this temporary restriction won't last: "Short selling, the WSJ
explains, is a legitimate trading strategy in which traders aim to profit
from falling stock prices. In a short sale, a trader borrows stock and
then sells it, in hopes it will later fall in price. If it does, the short
seller then buys the stock in the open market at the lower price, returns
what was borrowed, and pockets the difference....Indications are that stock
short-sellers enjoyed their best month in over seven years during June,
as the stock market swooned on a raft of bad news.
- "Apparently, not every such trade may have been
conducted with borrowed stocks in someone's pocket. Some traders, in fact,
may not have had any pockets to speak of, as they were...buck naked. This
has caught the attention of regulators [Actually, it is a well known phenomenon
that is permitted only for insiders] who were at first just focusing on
Bear and Lehman trades and possible rumors."
- Quoting the Wall Street Journal, Nadler continues: "The
SEC said Tuesday's move aims to stop 'unlawful manipulation through naked
short selling'-- the practice of selling stock short without taking steps
to borrow it... So far, there's much chatter, apparently, over whether
the SEC's plan, which is expected to go into effect on Monday and will
expire in 30 days, will actually work. But based on the history of efforts
to curb short selling, prospects don't look good... In the 1990s, Hong
Kong temporarily banned short sales, and the Malaysian finance ministry
proposed that anyone caught short selling should be punished by caning.
Neither measure prevented those markets from falling during or after the
1998 Asian crisis.
- "'In the near term, short sellers may see some marginal
increase in their cost of borrowing, as brokers adjust their operations,'
said Laurel Fitz Patrick, a partner at Ropes & Gray who advises hedge
funds. 'Ultimately, neither this rule, nor the SEC's indications that they
are looking to bring enforcement cases against sellers spreading rumors,
will reduce short selling if sellers believe a stock is overvalued.'"
Only the insiders are told directly that they need have no fear of enforcement.
These rules are meant to scare away the short selling competition, or from
encouraging the general public from cashing in on this pre-depression windfall.
- INSIDER EXEMPTIONS FROM REGULATION
- Often the only visible sign of who is deep inside the
protected establishment is by some obvious exception to the laws and regulations
the rest of us have to abide by. Enron, for example, had over 600 offshore
tax shelters and none were ever audited. Try that as a common taxpayer.
Sen. Chris Dodd got a special VIP loan from Countrywide and never had to
declare it as a perk to the Senate ethics committee. Here's another related
to federal disclosure laws for lobbying:
- The Department of Justice is mandated by law to keep
a registry of all political operatives that formally or informally represent
foreign governments in their dealings with the US. Andrew Tilghman reports
that "Stephen Payne, the Bush supporter caught on tape offering access
for cash, claims his firm has done a lot of work for foreign governments
and politicians, but neither he nor his firm show up much in the DOJ database
that tracks registered foreign agents.
- "For example, one of the firm's brochures claims
they did extensive work for Azerbaijan, including: Arranged for the President
of Azerbaijan to visit the U.S. and meet with President Bush -- a task
the Azeri Government had been trying to do over the past three years. He
has arranged a private phone call between the Vice President of the United
States and the President of Azerbaijan, prior to the Azeri Elections in
November 2005. That sounds a lot like working for a foreign agent. The
brochure also maintains that the firm did work for Afghanistan, Turkmenistan
and an Uzbek opposition leader -- and alleged terrorist -- called Muhammad
Salih. Yet the only place Payne or Worldwide Strategies shows up in the
DOJ database is for some work that Payne did for Pakistan a few years ago
under the name of a firm called Team Eagle, also known as Team Barakat.
- "Payne told UPI that he spoke with the Department
of Justice about this work and a DOJ official assured him that he did not
have to register, in part because they were 'commercial' contracts."
This is incorrect. Anytime a lobbyist, commercial or otherwise, begins
to having dealings with any branch of government, he must register. Obviously
both Payne and government insiders have coordinated their excuses so the
back one another up.
- BAILING OUT FANNIE AND FREDDIE
- Robert Borosage writing for the Huffington Post describes
this bailout in starkly real terms: "Treasury Secretary Henry Paulson,
former head of the Goldman Sachs investment house, provided us with a perfect
demonstration of Wall Street socialism. He announced that the Bush administration
would seek congressional approval to bail out Fanny Mae and Freddy Mac,
the government created, but privately owned, profit-making housing finance
companies that hold or guarantee nearly half of the US mortgage market
---- some $5 trillion in debt. Paulson seeks and will get an unlimited
line of credit to guarantee their debt, as well as authority to purchase
their shares to supplement their capital base. The Federal Reserve announced
it was ready to provide lending while waiting for Congress to act."
The Fed, being a private entity doesn't need authority from Congress to
start the bailout rolling--even though the subsequent price inflation (or
devaluation of the value of money) affects us all.According to Bloomberg
News, "Rep. Barney Frank, the Democrat who chairs the House panel
overseeing housing, aims to include penalties for Fannie Mae and Freddie
Mac in legislation authorizing a rescue of the beleaguered mortgage firms."
Frank wants to prohibit the two companies from paying stock dividends and
bonuses to company owners out of the bailout money they receive. The legislation,
"still being formed, will require regulators to approve the compensation
for Fannie Mae and Freddie Mac's top executives to ensure it's 'reasonable.'"
This is more opposition window dressing. There is no way these restrictions
will amount to anything substantive--especially the determination of "reasonable"
executive bonus compensation.
- Fannie, Freddie have a long history of lavishing spending
on highly placed government operatives in order to grease their road to
the top. As Lisa Lerer writes, "If you want to know how Fannie Mae
and Freddie Mac have survived scandal and crisis, consider this: Over the
past decade, they have spent nearly $200 million on lobbying and campaign
contributions. But the political tentacles of the mortgage giants extend
far beyond their checkbooks. The two government-chartered companies run
a highly sophisticated lobbying operation, with deep-pocketed lobbyists
in Washington and scores of local Fannie- and Freddie-sponsored homeowner
groups ready to pressure lawmakers back home."They've stacked their
payrolls with top Washington power brokers of all political stripes, including
Republican John McCain's presidential campaign manager, Rick Davis; Democrat
Barack Obama's original vice presidential vetter, Jim Johnson; and scores
of others now working for the two rivals for the White House. Fannie and
Freddie's aggressive political maneuvering has helped stave off increased
regulation and preserve special benefits such as exemption from state and
local income taxes and the ability to borrow at low rates. When their stock
prices took a dive last week, their government allies extended another
helping hand with a plan for the Treasury Department, the Federal Reserve
and, possibly, Congress to shore up the companies."
- Robert Higgs had some of the best commentary on the long
term repercussions we will face due to these continuing bailouts: "The
plan, unveiled Sunday, is intended to signal the government is prepared
to take all necessary steps to prevent the credit market troubles that
erupted last year with losses from subprime mortgages from engulfing financial
markets. Yes, what is a government for, if not to save us from the impending
disaster that its own policies have produced?
- "The Fed said it granted the Federal Reserve Bank
of New York authority to lend to the two companies 'should such lending
prove necessary.' They would pay 2.25 percent for any borrowed funds --
the same rate given to commercial banks and big Wall Street firms... Note,
however, that lending at 2.25 percent when the rate of inflation is at
least twice that great means that the lender is giving away money. The
real interest rate on such a loan is negative. Worse, because the Fed itself
is the lender, the loan will take the form of newly created money -- that
is, the loan will be pure inflation, a hidden tax on all assets denominated
in dollar units, including dollar balances themselves.
- "The Fed said this should help the companies' ability
to 'promote the availability of home mortgage credit during a period of
stress in financial markets'... And what could be more noble than pulling
some leading crony capitalists away from the brink over which their own
actions amply warrant their plunging? Our saviors protest, however, that
the government's every action aims only at helping the little guy. It's
music to the ears of the booboisie.
- "Secretary Henry Paulson said the Treasury is seeking
expedited authority from Congress to expand its current line of credit
to the two companies and make an equity investment in the companies --
if needed. Ah, equity investment! Now we're looking at overt government
takeover. For laggard students, let us define socialism: government ownership
and control of the major means of production (including production of financial
services). In a pinch, we can always resort to socialism -- after all,
we are doing so only in order to save capitalism!
- "'Fannie Mae and Freddie Mac play a central role
in our housing finance system and must continue to do so in their current
form as shareholder-owned companies,' Paulson said Sunday. But Freddie
and Fannie are publicly owned corporations; they are listed on the New
York Stock Exchange and regulated by the Office of Federal Housing and
Enterprise Oversight. Hence, they must meet capital requirements determined
by recognized accounting standards." This bailout puts them in the
position of being able to defy the accounting standards that other public
stock companies have to meet.
- "Sen. Christopher Dodd, chairman of the Senate Banking
Committee [and recipient of an insider mortgage at terms not available
to the public], on Monday called the Bush administration's actions Sunday
'probably the right steps' ... He also drew a distinction between last
week's failure of IndyMac -- which engaged in originating riskier mortgages
than traditional community and regional banks -- and the two mortgage giants.
'IndyMac engaged in very bad mortgages, luring people into deals they could
never afford [They also lured thousands of depositors with higher than
market rates they knew they could not sustain]. That's not the case with
Fannie and Freddie.'" Oh no? But Fannie and Freddie did agree to buy
up all the bad mortgages written by others and market them to investors--making
them accessories to the crime."
- "The White House, in a statement, said President
Bush directed Paulson to 'immediately work with Congress' to get the plan
enacted. It also said it believed the steps outlined by Paulson 'will help
add stability during this period.' Here's a general rule for you amateur
political economists: whenever the government justifies a policy on the
grounds that it must 'stabilize' something (e.g., stabilize the Middle
East, stabilize Iraq, stabilize Afghanistan, stabilize the commodity markets,
stabilize the financial markets, stabilize the macro economy, etc.), immediately
conclude that it is up to no good and hold on to your wallet.
- "Of course. Democrats and Republicans in the government
belong to the same thieving gang. Democratic presidential contender Barack
Obama said the government's main concern should be 'to make sure that home
ownership remains attainable and affordable for American families. Second,
any measures should protect taxpayers and not bailout the shareholders
and management of Fannie Mae and Freddie Mac.' Evidently, Obama was absent
the day the logic class took up the subject of internal consistency. Republican
rival John McCain believes the measures announced Sunday 'are consistent
with the goal of providing support for a path through the current duress
toward steps that include regulatory reform, market discipline and mission
focus,' To which the only intelligent reply is, 'say what'?"
- Financial guru Porter Stansfield was outraged by the
bailouts. "Whether we like to admit it or not, the entire market for
housing in the United States has been corrupted by government involvement.
By subsidizing the availability of credit and by granting huge tax incentives
to home speculators, the government helped finance the biggest bubble of
all -- the biggest bubble in history. It won't be unwound without serious
disruptions to our economy and, unfortunately, a tremendous amount of pain.
- "I was listening carefully yesterday to the congressional
testimony of Federal Reserve Chairman Ben Bernanke and Treasury Secretary
Henry Paulson. Both insisted Fannie and Freddie have enough capital to
continue their operations. Paulson sounded just like a Latin American finance
minister on the eve of devaluation.
- "Incredibly, they both insisted all that was needed
was more regulation! I felt like I was watching a kind of financial Nuremberg
trial, where the main perpetrators of the crime were utterly oblivious
to the evil they'd created. I was aghast. Consider: Only 20 years ago,
the U.S.'s total outstanding mortgage debt made up roughly 30% of our GDP.
Homeowners held large stakes in their houses -- close to 70% of the equity
on average. Today, mortgage debt equals nearly 80% of GDP. The average
homeowner owns less than half the equity in his home. This seismic change
in the nature of home ownership and debt financing occurred nearly overnight
-- in less than one generation.
- "Fannie Mae and Freddie Mac made it all possible.
Released from capital-ratio requirements and backed with a line of credit
at the Treasury, they were able to buy a nearly unlimited amount of mortgages.
Today, Freddie or Fannie finance more than 80% of all new mortgages in
the United States. Over the last several decades, their presence in the
market greatly lowered interest rates, created an endless supply of credit,
and pushed housing prices higher. Meanwhile, the cost of the government
guarantee, which lay behind Fannie and Freddie's power, was invisible.
- "Now what? The size of the bailout of Fannie Mae
and Freddie Mac could easily surpass $1 trillion. But Congress has no understanding,
at all, of what's about to happen. Take the "mortgage bailout"
Congress has been working on. The chairman of the Senate Banking Committee,
Chris Dodd, is truly one of the stupidest people in all of public life....
- "In 2003, he refinanced his home mortgages with
Countrywide Financial, receiving a below-market interest rate that allegedly
saved him $75,000 a year. He never disclosed the benefit to the Senate
and claimed he was in Countrywide's VIP program because he was 'a good
customer of Countrywide's' -- which is as bald-faced a lie as has ever
been told in Washington, D.C.
- "In any case, the bill Dodd is getting through Congress
(which was written by Bank of America, by the way) will create a new tax
on Freddie and Fannie -- 4.2 basis points on all mortgages they buy. That
would generate about $600 million annually. And, the money won't go into
the general fund. Most of the money (65%) will go directly to the secretary
of Housing and Urban Development, who will pass out the loot in the form
of block grants to states. The Treasury secretary will get the rest of
the money...If Congress had any idea how serious the problems with Freddie
and Fannie were going to become, they wouldn't mess around with a new tax
or allowing a rival to Fannie and Freddie (Bank of America) to draft the
- World Affairs Brief - Commentary and Insights on
a Troubled World
- Copyright Joel Skousen. Partial quotations with attribution
- Cite source as Joel Skousen's World Affairs Brief http://www.worldaffairsbrief.com