October 3, 2008

CRASH TALK OCTOBER 3

Reuters - California Gov. Arnold Schwarzenegger has informed Treasury Secretary Henry Paulson that the most populous U.S. state may need to turn to the federal government for short-term financing because of a lack of liquidity in credit markets. California needs $7 billion to cover short-term expenses and has planned to issue revenue anticipation notes for it. "Absent a clear resolution to this financial crisis that restores confidence and liquidity to the credit markets, California and other states may be unable to obtain the necessary level of financing to maintain government operations and may be forced to turn to the Federal Treasury for short-term financing,"

Michel Chossudovsky, Global Research - There is something disturbing about the Black Monday collapse of Wall Street, following the rejection of the proposed bailout by the US Congress, and which has not been addressed by the media. There was prior information on how the Congressional vote would proceed. There was also an expectation that the market would crumble if the proposed 700 billion dollar bailout were to be rejected by the US Congress.

Speculators including major financial institutions had already positioned themselves.

On Black Monday September 29, markets around the world collapsed on news that the US Congress had voted against the bailout. The Dow Jones industrial average fell by 778 points, a decline of almost 7 percent, the largest one day decline since Sept. 17, 2001, when the market opened after September 11, 2001.

In percentage terms, it was the 17th largest one day decline of the DJIA. Those who were involved in speculative trade prior to Congress' rejection of the legislative process, made billions on Black Monday. And then on Tuesday, they made billions, when the market rebounded, with the Dow jumping up by 485 points, a 4.68% increase, largely compensating for Monday's decline.

Those financial actors who had advance inside information regarding the Congressional decision or had the ability to influence the vote of members of Congress made billions of dollars when the market crumbled. . .

The banks are "double dippers"; they are the recipients of the bailout. And at the same time they make money speculating on the adoption of the bailout legislation.

What has characterized the stock market in recent years is a seesaw up and down movement, where a temporary meltdown on one day is compensated by an upward rebound on the following business day. Analysts invariably dispel the speculative mechanisms. The rebound is attributable to "regained investor confidence".

Richard C Cook, Global Research - We know that the debacle started with homeowner defaults on subprime mortgages and that it has now spread to other types of mortgages. We know that the unhealthy use of subprime mortgages started during the Clinton administration, as did the bundling and sale of these mortgages into mortgage-backed securities sold in the financial markets.

What has not been reported is that the Bush administration turned these acts of reckless lending into a national program of mortgage fraud. Soon after George W. Bush became president in 2001, meetings at the White House between Federal Reserve Chairman Alan Greenspan and administration officials became more frequent. According to mortgage industry insiders I have interviewed, direction soon began to come down from the banks to mortgage brokers to falsify borrower income information to allow them to qualify for loans that were otherwise out of reach.

The FBI has investigations underway to prosecute some of these cases of mortgage fraud. But they are not reaching above the brokers’ level. The FBI is not gaining access-or at least they have not reported it publicly-to information about collusion at the political level or at the level of the banks which provided the leveraged funding for mortgage money.

When Secretary of the Treasury Henry Paulson testified before the Senate Banking Committee last week, he said he was shocked to learn when assuming office in June 2006 that no federal agency regulated mortgage lending. Rather this was an area left to the states.

What Paulson did not say was that when the states attempted to intervene, they were blocked by the Treasury Department’s Office of the Comptroller of the Currency. In a February 14 article in the Washington Post written before he resigned, New York governor Eliot Spitzer wrote:

"In 2003, during the height of the predatory lending crisis, the OCC invoked a clause from the 1863 National Bank Act to issue formal opinions preempting all state predatory lending laws, thereby rendering them inoperative. The OCC also promulgated new rules that prevented states from enforcing any of their own consumer protection laws against national banks. The federal government's actions were so egregious and so unprecedented that all 50 state attorneys general, and all 50 state banking superintendents, actively fought the new rules. But the unanimous opposition of the 50 states did not deter, or even slow, the Bush administration in its goal of protecting the banks. In fact, when my office opened an investigation of possible discrimination in mortgage lending by a number of banks, the OCC filed a federal lawsuit to stop the investigation."

Why did the Bush administration do this? The only possible answer is that it had every intention of producing the housing bubble, one that had the effect of not only inflating the cost of homes and real estate but also pumping billions of dollars of borrowed cash into the economy through mortgage and home equity loans.

The bubble enriched huge numbers of executives, managers, and shareholders throughout the financial and real estate industries, and provided jobs to millions of people. The bubble also brought back foreign capital to U.S. markets that had been scared away by the dot.com bust of 2000-2001.

Everyone seemed to benefit, but it was those at the top who skimmed the greatest profits. And for an economy that had already given away millions of its best manufacturing jobs through NAFTA, Most-Favored-Nation trading policies with China, World Trade Organization agreements, etc., the bubble acted as a kind of substitute economic engine.

It also resulted in tax revenues that allowed the Bush administration to implement its 2001 and 2003 tax cuts for the rich and provide funding for the Afghanistan and Iraq wars. Of course these tax revenues were not enough, as the national debt soared to over $9 trillion during the Bush years as well.

Economist Dean Baker of the Center for Economic and Policy Research makes the point:

"The near hysterical discussion (count the times ‘Great Depression’ appears in news stories) of the bailout still largely fails to recognize the roots of the economy's current problems in the collapse of the housing bubble. Much of the discussion assumes that the problem is just bad subprime loans and that house prices will bounce back once the credit markets are working properly.". . .

But credit is the lifeblood of the economy only because people are broke. Purchasing power in the U.S. has collapsed, and it is getting worse as the recession which has now begun worsens. . .

Richard C. Cook is a former U.S. federal government analyst, whose career included service with the U.S. Civil Service Commission, the Food and Drug Administration, the Carter White House, NASA, and the U.S. Treasury Department.

Internet Sighting - If you had purchased L1000 of Northern Rock shares one year ago they would now be worth L4.95; with HBOS, earlier this week your L1000 would have been worth L16.50; L1000 invested in XL Leisure would now be worth less than L5. . . But if you bought L1000 worth of Tennents Lager one year ago, drank it all, then took the empty cans to an aluminum re-cycling plant, you would get L214. So based on the above statistics the best current investment advice is to drink heavily and recycle.

Martin Goldberg, Financial Sense - Things You’ll Never Read. . . "Added to the house bill was a clause that amends IRS regulations to retroactively tax officers of the 700 financial companies as follows. Any income derived from salary and sale of company shares at inflated market prices that were based on falsely booked profits from dubious loan activity from 2003 onward, shall be retroactively taxed by the government at a rate of 90%. Those individuals unable to come up with the tax money due to the retroactive nature of the tax shall be given the opportunity of a government loan to cover the tax which shall be paid back at variable rates over 10 a year period."
. . . This would be just and appropriate to the community. But as I said, this is a thing you’ll never read.

Washington Post - The head of the National Urban League is calling on Treasury Secretary Henry M. Paulson Jr. to refute statements by conservative politicians and pundits that subprime mortgages provided to minorities led to the financial crisis and a $700 billion federal rescue of Wall Street. In a strongly worded letter to Paulson this week, Marc H. Morial said Paulson has "an obligation to correct the misinformation that is spread concerning the root cause of the current financial crisis."

Morial, a former mayor of New Orleans, said in an interview yesterday that the effort "to pin the subprime crisis on African Americans and Latinos" is a "big lie."

"It's an effort to shift the climate away from deregulation and the lack of oversight," he said. "The numbers are becoming clearer each day that a large number of people who ended up with a subprime loan could have qualified for a prime loan. That's the abuse that's inherent here.". . .

On the House floor, on cable network television and in Internet blogs in recent days, conservative politicians and commentators have traced the problem to the Community Reinvestment Act, or CRA, enacted in 1977 to extend loans to minorities who were historically denied homeownership. . .

Defenders of the act say claims that it encouraged risky loans and caused the foreclosure crisis do not square with the facts of subprime lending. Only a tiny fraction of subprime loans made since 2000 were ever generated to meet the goals of the act, which requires banks and savings-and-loan institutions to provide credit to their lower-income clients as well as their wealthy ones, they said.

Center on Budget Policy & Priorities - September was the ninth straight month of job declines, with employers shedding a net 760,000 jobs so far this year . The official unemployment rate was 6.1 percent in September, and other indicators show even greater labor market weakness. The percentage of the population with a job (62 percent) has not been lower since 1993.

Signs that the economy is weakening are everywhere. The effects of the first economic stimulus package appear to have run their course; consumer spending (which is over two-thirds of GDP) was anemic in August. Auto sales are plummeting, and the manufacturing index, which had been signaling only a mild contraction, suffered its largest decline since 1984 in September.

Washington Post - Mark Buse, a longtime McCain adviser who had been staff director of the Senate commerce committee, signed on as a Freddie Mac lobbyist, and his firm, ML Strategies, earned $460,000 in lobbying fees in late 2003 and 2004, according to lobbying disclosures. Buse is now chief of staff at McCain's Senate office. Buse was one of many strategic hires made by Freddie Mac in its efforts to sew up support and manage opponents on Capitol Hill, a push that peaked in 2004 with the retention of 34 outside lobbying firms. Over the past decade, Freddie spent more than $95 million on lobbying, while its sister company, Fannie Mae, spent more than $79 million. . .

McCain's own entanglements include his campaign manager, Rick Davis, who earned more than $2 million as president of an advocacy group that defended Fannie and Freddie against stricter regulation. Davis's lobbying firm, Davis Manafort, also received monthly payments of $15,000 from Freddie Mac as recently as August. . .

McCain campaign spokesman Brian Rogers said the hiring of Buse did not influence McCain. "I think the reality is that John McCain takes positions, you know, based on what he believes is in the public interest, period," Rogers said. "If these folks thought they were getting something out of John McCain . . . it's not based in fact."

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