- Begin Excerpt
- While this isn't news to readers of the WAB, it is confirmation
of my extensive analysis throughout the crisis last fall. Henry Blodget
and Bloomberg News get it mostly right, but they still shy away from exposing
the wider outright conspiracy that exists between the US Treasury and the
- "When the historians finally finish sorting through
the appalling decisions that have been made in the past two years, this
one will probably be at the top of the heap. Last fall, as AIG began to
realize how screwed it was, it started negotiating with the counterparties
to all the credit default swaps it had written. One of the AIG's goals
was to persuade these counterparties--including Goldman Sachs--to accept
buyout discounts of as much as $0.40 cents on the dollar.
- "But then Tim Geithner, head of the New York Fed,
stepped in. A few weeks later, the counterparties--all of whom voluntarily
did business with AIG and understood the risks [no, they were deceived
about the risks]--were bailed out at par: 100 cents on the dollar [In fact,
it was not ALL the creditors--but only the larger insider banks and institutions
both here and abroad].
- "Thus began the most nauseating giveaway in the
history of the country. Bloomberg has the whole sickening story: 'The Federal
Reserve Bank of New York, the regional NY Fed office with special responsibility
for Wall Street [run by Tim Geithner], opened an $85 billion credit line
for New York-based AIG. That bought it 77.9 percent of AIG and effective
control of the insurer [a willing partnership between thieves]. The government's
commitment to AIG through credit facilities and investments would eventually
add up to $182.3 billion.'
- "'Geithner's team circulated a draft term sheet
outlining how the New York Fed wanted to deal with the swaps --insurance-like
contracts that backed soured collateralized-debt obligations... Part of
a sentence in the document was crossed out. It contained a blank space
that was intended to show the amount of the 'haircut' the banks would take,
according to people who saw the term sheet. After less than a week of private
negotiations with the banks, the New York Fed instructed AIG to pay them
par, or 100 cents on the dollar. The content of its deliberations has never
been made public...The New York Fed's decision to pay the banks in full
cost AIG -- and thus American taxpayers -- at least $13 billion. That's
40 percent of the $32.5 billion AIG paid to retire the swaps. Under the
agreement, the government and its taxpayers became owners of the dubious
CDOs, whose face value was $62 billion and for which AIG paid the market
price of $29.6 billion. The CDOs were shunted into a Fed-run entity called
Maiden Lane III.'"
- Now that this accusation is hitting the streets, the
Washington Post, comes to the rescue to give the Federal Reserve's reason
for giving favored banks 100 cents on the dollar. "The Federal Reserve
Bank of New York said Tuesday that it had no choice but to instruct American
International Group last November to reimburse the full amount of what
it owed to big banks on derivatives contracts... The officials said AIG
lost its leverage in demanding a better deal once the company had been
saved from bankruptcy"
- That's circular reasoning, and quite untrue. They only
lost their leverage because of federal intervention which stopped their
negotiations. The reason the Fed stepped in precipitously was to specifically
save their banking buddies from having to accept 40 cents on the dollar.
AIG did default on some obligations to non-insider institutions and pension
funds. That's the untold story.
- It's no wonder that a backlash is building in Congress
against the Obama administration's new regulatory plan--which is more of
a cover for making future bailouts permanent. Reuters reports that "Both
Democrats and Republicans broadly criticized the strategy at a public hearing
convened by the U.S. House of Representatives Financial Services Committee
chaired by Barney Frank [who is in bed with the Fed on this]. 'The bill
we're considering today would merely institutionalize 'too big to fail','
said Republican Representative Jeb Hensarling, referring to a perception
that financial giants could count on government [future] bailouts.
- "Democratic Representative Brad Sherman said the
Obama plan would provide 'permanent, unlimited bailout authority.' He said
it would give 'unprecedented powers for the executive to decide spending
and taxes, without congressional approval; and, depending on the desires
of the executive branch from time to time, the greatest transfer of money
from the Treasury to Wall Street in U.S. history.'" Indeed.
- IS THE STIMULUS WORKING?
- Yes and No. Yes, in a temporary artificial way; but not
in the long run. Direct injections of cash to buyers as in the Cash for
Clunkers program worked, but only until the money ran out. Total cost of
the program to taxpayers was $24,000 per car! The $180B tax rebates "worked"
(in an inflationary way) last year, but can't be sustained. House price
declines leveled off in tandem with the government's $8000 incentive program,
but new home sales have dropped again, proving that temporary stimulus
only works as long as there exists potential first-time buyers who can
afford a loan. Once that group was exhausted, housing prices started down
again. Congress is now looking to broadening the program for everyone to
keep the stimulus going. It would be a greater boon to the economy to simply
let house prices fall further, making them more affordable in the long
term for everyone.
- One of the problems created by past incentives is that
there were plenty of ineligible applications for rebates, so now the IRS
is being forced to audit manually all tax returns claiming the $8,000 federal
housing new home credit--causing long delays.
- The stimulus money is actually concentrating its effect
on the speculative markets, fired up by the "carry trade" in
dollars. A carry trade is created when one government offers below market
interest rates for borrowing currency, just as Japan did during their decades-long
recession. The money is borrowed and invested elsewhere (carried) and the
investor pockets the interest rate difference. Now it's the dollar dominating
the carry trade instead of the Yen. Insiders can borrow at the Fed for
almost zero interest and invest those dollars in other nations and in any
number of hedges with a profit potential. That's how the biggest US banks,
in a declining economy, showed such massive profits less than a year after
- Countries like Brazil are trying to take advantage of
this new speculative influx of dollars in the carry trade. The government
just slapped a tax on foreign investors of 2% on all foreign purchases
of Brazilian fixed-income securities and stocks, effective immediately.
- End Excerpt
- Copyright Joel Skousen. Partial quotations with attribution
- Cite source as Joel Skousen's World Affairs Brief http://www.worldaffairsbrief.com
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