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The Big Financial Bailouts -
Protecting Their Own

By Joel Skousen
World Affairs Brief
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 houses.
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.
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.
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 bailout."
World Affairs Brief - Commentary and Insights on a Troubled World
Copyright Joel Skousen. Partial quotations with attribution permitted.
Cite source as Joel Skousen's World Affairs Brief  http://www.worldaffairsbrief.com
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