October 18, 2008


Joshua Holland, Alternet - According to the Financial Times, Robert Reoch, the London banker who may be responsible for creating the first of the now-infamous debt-based securities, is now "swamped by investors who want to extricate themselves from derivatives-linked messes, or simply to understand the products that came out of the past few years of intense financial innovation." The Washington Post reported that Joe Cassano, the financial products manager "whose complex investments led to (AIG's) near collapse," is raking in $1 million per month in consulting fees from the ailing financial giant to help sort out the toxic sludge on (and off) the bank's books. . .

The focus on home mortgages misses a crucial point: Through mid-July, banks had written off about $435 billion in bad American mortgages, a drop in the bucket relative to the size of the global economy. There's simply no way that even a major drop in the value of the U.S. housing market could possibly threaten the economic health of most of the planet.

That's where "derivatives" come in. These instruments, which Warren Buffet called "the real Weapons of Mass Destruction," are "worth" about $500 trillion, or roughly 10 times the output of the global economy.

So just what is a derivative? A derivative is a piece of paper that can be bought and sold for real money but isn't attached to a real asset. Its value is simply derived from something tangible -- hence the name. . .

There are all sorts of derivatives. They are essentially bets -- you can bet that a market will go up, or down, or that a particular company will do well or poorly. You can bet on interest rates going up or down, or the value of a country's currency, or you can make more exotic bets about just about anything in the world -- even what the weather will be like at some point in the future.

But the current meltdown was caused by debt-backed securities tied, at some point, to the U.S. housing market. When you buy a home, that's an asset. Presuming you make your monthly payments, the mortgage held by the bank is an asset as well. When a number of mortgages are cut up and bundled together and then sold off as a security, that's a derivative.

Writing in Salon, Andrew Leonard offered a useful metaphor. He suggested that we think of the real economy like a football game, with real flesh-and-blood players running around on a real field, hitting each other and moving a real ball toward a real goal post. All those guys, the field, the equipment -- they're tangible, the same way that an asset like your house is tangible.

There are some people who have a direct stake in the game -- like the teams' owners and the players' families, agents, etc. But there are also millions of people who might bet on the outcome of the game but are in no way directly involved in the play. It's these bets that parallel the trillions of dollars in debt-based derivatives that have become so "toxic" -- they were making some people rich when the housing market was flying, but now that it's tanked, they've turned out to be bad bets, and the amount of money at stake is enormous -- far, far larger than the entire value of the U.S. housing market.

Juan Cole, History News Network - The Republican Party that Nixon invented melded the moneyed classes of the Northeast with the white evangelicals of the South. This odd couple went on to simultaneously steal from and oppress the rest of us. The moneyed classes were happy to let the New Puritans impose their stringent morality, since they could always just buy any licentiousness they wanted, regardless of the law. And the New Puritans were so consumed with cultural issues such as homosexuality, abortion, school prayer and (yes) fighting school desegregation that they were happy to let the northeastern Money Men waltz off with a lion's share of the country's resources, consigning most Americans to stagnant wages and increasing debt. The Reagan revolution consolidated this alliance and brought some conservative Catholic workers into it.

These domestic policies at home were complemented by wars and belligerence abroad, which further took the eye of the public off the epochal bank robbery being conducted by the American neo-Medicis, and which were a useful way of throwing billions in government tax revenue to the military-industrial complex, which in turn funded the think tanks and reelection campaigns of the right wing politicians. . .

As a result of the Second Gilded Age and its serf-like subservience to big capital, most corporations in the US don't pay any income taxes, despite doing $2.5 trillion annually in business.

The Reagan Revolution included the stupid idea that you can cut taxes, starve government, abolish regulation of securities, banks etc. and still grow the economy. The irony is that capitalist markets need to be regulated to avoid periodically becoming chaotic (as in 'chaos theory,') but the people who most benefit from regulation are most zealous in attempting to abolish or blunt it.

What those policies did was create the preconditions for a long-term bubble or set of bubbles that benefited (for a while) the wealthiest 3 million Americans and harmed everyone else.

The average wage of the average worker is lower now than in 1973 and has been lower or flat for the past 35 years. That's the condition of the 300 million or so Americans.

In the meantime, the top 1 percent has multiplied its wealth many times over and now takes home 20% of the national income, owning some 45 percent of the privately held wealth in the US. . .

The enormous wealth of a thin sliver or people at the top of US society allows them to buy members of congress and to write the legislation that regulates their industries.

William Greider, Nation -
The government's new outline is deliberately vague about how exactly the Treasury and Federal Reserve intend to execute the details. The proposal implies but does not say that the government is taking charge of the banking system and will use its emergency powers to compel bankers to restart lending to restore the real economy of producers and consumers. Maybe that's what Paulson has in mind, but he made no promises. The public money gives a comforting tonic to the bad boys of Wall Street, but it's still packaged as a voluntary approach -- not to be confused with the genuine nationalization that Britain and other governments have undertaken. . .

Without taking explicit control, the government is simply betting the bankers will cooperate in exchange for rescue. Maybe they will start lending again, but maybe not: banks are in a deep hole of their own making, having lost more than a trillion. Typically, they apply tightfisted lending tactics to heal balance sheets -- the opposite of what the country needs from them now. The $125 billion or so targeted for the nine biggest banks will not be enough to heal them all. Institutional Risk Analytics, a bank monitoring firm, says $250 billion in capital injections "will be just the down payment to get through the wave of loan losses headed for some of the larger players in the US banking sector."

Meanwhile, the money provides a feel-good tonic for the club -- the relatively small congregation of financial institutions that exert such oppressive influence over business and society, not to mention politics. Paulson is handing them cheap money (ours) that will initially earn only 5 percent, even as Warren Buffett gets 10 percent dividends on the capital he provided Goldman Sachs. Nor does the public get a controlling interest, or even seats on the board, for its generosity. The choices Paulson makes as he hands out the public money will effectively design the future -- making the big boys even bigger and more arrogant, since they know the government will not let them fail. Informed financiers already see the nine largest banks consolidating into four behemoths. The next president and treasury secretary (if they have the nerve) will have to confront this question of scale and cut the big banks down to size -- small enough to fail without damaging society.

Phil Mattera, Dirt Diggers Digest -
Twice in the past month, the Bush Administration has sounded the alarm about the economy and pushed through unprecedented measures: a $700 billion buyout of toxic assets from financial institutions and now a $250 billion plan for the federal government to take ownership interests in banks. Neither of these schemes has been fully implemented, but already there are signs that they are not having the desired effect of calming financial markets. Stocks, in particular, remain incredibly volatile, swinging wildly from day to day.

There are also voices suggesting that by focusing on bailing out the banks, Treasury Secretary Henry Paulson and his cohorts made a serious miscalculation. As the New York Times put it in its account of Wednesday's 733 point plunge in the Dow: "Investors are recognizing that the financial crisis is not the fundamental problem. It has merely amplified economic ailments that are now intensifying: vanishing paychecks, falling home prices and diminished spending. And there is no relief in sight."

A blunt attack on the Paulson Doctrine also came from the Chairman of the Federal Deposit Insurance Corporation, Sheila Bair. In an interview with the Wall Street Journal, she expressed frustration at the failure of the bailout measures to provide direct help to struggling homeowners. Mortgage defaults are "what's causing the distress at the institution level," Bair says, "so why not tackle the borrower problem?" The Journal notes that Bair has long been pushing the idea of using federal resources to restructure mortgages to avoid foreclosures, but she was apparently thwarted by Bush Administration figures such as White House Chief of Staff Joshua Bolten.

Not only is the bailout not providing aid to homeowners, it is making things worse. One of the side effects of the plan has been to push mortgage interest rates higher. Rates on 30-year fixed mortgages have jumped to 6.38 percent from 5.87 percent last week. This makes it more difficult for those with predatory mortgages to refinance, and it also drives down home values. All of this will exacerbate the foreclosure problem and make the mortgage-backed securities held by banks even more worthless.

NY Times -
The bailout seems to be having no impact at all on the presidential race. Both Senator John McCain and Senator Barack Obama voted for it, and neither man chose to mention it in this week's final presidential debate.

There is virtually no difference between Obama backers and McCain supporters in terms of supporting the bailout, as is shown in the accompanying chart based on the New York Times/CBS poll taken from Oct. 10 to 13.

Among those who thought the bailout was a good idea, the split in favor of Senator Obama was 55 percent to 37 percent. Among those who opposed the bailout, the split was 53 percent to 37 percent. . .

One question in the poll asked if the beneficiaries would be "mostly just a few big investors and people who work on Wall Street" or whether it would help "homeowners and people throughout the country as well." A large majority of those polled - 63 percent - thought the bailout would benefit only Wall Street, and those voters were overwhelmingly for Senator Obama, by a 59 percent to 31 percent margin. . .

Among the 28 percent of Americans who thought everyone would benefit, the Obama lead is a statistically insignificant one point, 44 to 43.

Portfolio -
Andrew Lahde, manager of a small California hedge fund, Lahde Capital, burst into the spotlight last year after his one-year-old fund returned 866 percent betting against the subprime collapse. Last month, he did the unthinkable -- he shut things down, claiming dealing with his bank counterparties had become too risky. Today, Lahde passed along his "goodbye" letter

Andrew Lahde - Today I write not to gloat. Given the pain that nearly everyone is experiencing, that would be entirely inappropriate. Nor am I writing to make further predictions, as most of my forecasts in previous letters have unfolded or are in the process of unfolding. Instead, I am writing to say goodbye.

Recently, on the front page of Section C of the Wall Street Journal, a hedge fund manager who was also closing up shop (a $300 million fund), was quoted as saying, "What I have learned about the hedge fund business is that I hate it." I could not agree more with that statement. I was in this game for the money. The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the aristocracy, only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America. . .

I will no longer manage money for other people or institutions. I have enough of my own wealth to manage. . . . I am content with my rewards. Moreover, I will let others try to amass nine, ten or eleven figure net worths. Meanwhile, their lives suck. Appointments back to back, booked solid for the next three months, they look forward to their two week vacation in January during which they will likely be glued to their Blackberries or other such devices. What is the point? They will all be forgotten in fifty years anyway. . . Throw the Blackberry away and enjoy life. . .

- Construction of new US homes fell more than expected last month to reach its lowest level in almost 18 years, Commerce Department figures have shown. The number of new houses and apartments being built in September declined 6.3% compared with the same month in 2007. This fall was much more severe than the 1.6% dip that analysts had expected. The report showed that 817,000 new homes were built across the country last month on a seasonally adjusted basis, the slowest pace since January, 1991.


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