Saturday, October 11, 2008


A reminder: No one has yet told us how much of the fiscal crisis is due to subprime loans and how much to various forms of casino capitalism such as investing with non existent money and how much to the collapse of laundered money for the drug trade and other illegal operations. It would be nice to know.

Michael Hudson, Democracy Now -
Well, what upsets the Europeans and the foreigners is that the US plan has done nothing at all about the debt crisis itself. It's bailed out the creditors, but not a penny of the actual debts, the subprime mortgage debts, are addressed. Without any of the media knowing, the Federal Reserve over the last few months has given $850 billion of cash for trash already. This is what the $700 billion discussion in Congress was supposed to be about, but the Fed, without anyone knowing, has already been exchanging these securities. And the securities essentially have been swapped by the US bankers to their pals and not done anything at all to write down the actual subprime debts. . . And if you add up all of the subprime bad loans and defaults, that's altogether $1 trillion. So far, the government has given away $6 trillion already to Wall Street. That's much more than any of the subprime debt. And the volume of derivative trade has been estimated at $450 trillion, an unbelievable amount. So nobody has any idea about how much money is at stake.

And what really triggered a lot of this was the way in which Lehman went bankrupt. The day - and this has not been discussed either in America, but it's all over the European press. The day before Lehman went bankrupt, it basically looted all of its foreign offices. For instance, in England, it emptied out the English account of a few billion dollars, leaving the English employees only with the . . . the little cards they had to use in the vending machines. No salaries were paid. The London office was closed down immediately. And the next day, Lehman used the money that it took from London to pay its closest associates to redeem the derivative trades that it had done. So the English bankers [have] come to the conclusion that the American bankers - well, we won't say "crooks," but let's say they're cronies who deal among themselves and are willing to screw the foreigner.

And this has created such a mistrust abroad that Europeans and Asians and OPEC country investors are simply pulling their money out of the US, because they don't have a clue as to the solvency of the banks. We're seeing the end result of the Alan Greenspan deregulatory revolution, where he said markets are all self-regulating. Right now, you're seeing the markets self-regulate themselves. And the result is a wipeout of the American pyramiding. . .

Forty percent of American income is spent now on rent, and about 15 to 20 percent on interest payments. And without addressing the debt problem, no matter how much money the banks have, they are not going to lend money to somebody who can't afford to take on any more debt. And most people in America right now cannot afford to meet the bank's standards for taking on any more debt. So none of this money that's being given away has any effect at all on real people and purchasing power and cars and goods and services. It's all to settle debt pyramiding among the banks and Wall Street institutions themselves. . .

William Engdahl, Global Research - What's clear from the behavior of European financial markets over the past two weeks is that the dramatic stories of financial meltdown and panic are deliberately being used by certain influential factions in and outside the EU to shape the future face of global banking in the wake of the US sub-prime and asset-backed security debacle. The most interesting development in recent days has been the unified and strong position of the German Chancellor, Finance Minister, Bundesbank and coalition government, all opposing an American-style EU superfund bank bailout. Meanwhile Treasury Secretary Henry Paulson pursues his crony capitalism to the detriment of the nation and benefit of his cronies in the financial world. It's an explosive cocktail that need not have been. . .

There is serious ground to believe that US Goldman Sachs ex CEO Henry Paulson, as Treasury Secretary, is not stupid. There is also serious ground to believe that he is actually moving according to a well-thought-out long-term strategy. Events as they are now unfolding in the EU tend to confirm that. As one senior European banker put it to me in private discussion, 'There is an all-out war going on between the United States and the EU to define the future face of European banking.'

In this banker's view, the attempt of Italian Prime Minister Silvio Berlusconi and France's Nicholas Sarkozy to get an EU common 'fund', with perhaps upwards of $300 billion to rescue troubled banks, would de facto play directly into Paulson and the US establishment's long-term strategy, by in effect weakening the banks and repaying US-originated asset backed securities held by EU banks. . .

It's becoming increasingly obvious that people like Henry Paulson, who by the way was one of the most aggressive practitioners of the ABS revolution on Wall Street before becoming Treasury Secretary, are operating on motives beyond their over-proportional sense of greed. Paulson's own background is interesting in that context. Back in the early 1970's Paulson started his career working for a rather notorious man named John Erlichman, Nixon's ruthless adviser who created the Plumbers' Unit during the Watergate era to silence opponents of the President, and was left by Nixon to 'twist in the wind' for it in prison.

Paulson seems to have learned from his White House mentor. As co-chairman of Goldman Sachs according to a New York Times account, in 1998 he forced out his co-chairman, Jon Corzine 'in what amounted to a coup' according to the Times. . .

Knowing that at a certain juncture the pyramid of trillions of dollars of dubious sub-prime and other high risk home mortgage-based securities would come falling down, they apparently determined to spread the so-called 'toxic waste' ABS securities as globally as possible, in order to seduce the big global banks of the world, most especially of the EU, into their honey trap. . .

What has emerged are the outlines of two opposite approaches to the unfolding crisis. The Paulson plan is now clearly part of a project to create three colossal global financial giants - Citigroup, JP Morgan Chase and, of course, Paulson's own Goldman Sachs, now conveniently enough a bank. Having successfully used fear and panic to wrestle a $700 billion bailout from the US taxpayers, now the big three will try to use their unprecedented muscle to ravage European banks in the years ahead. So long as the world's largest financial credit rating agencies - Moody's and Standard & Poors - are untouched by the scandals and Congressional hearings, the reorganized US financial power of Goldman Sachs, Citigroup and JP Morgan Chase could potentially regroup and advance their global agenda over the coming several years, walking over the ashes of a bankrupt American economy made bankrupt by their follies.

By agreeing on a strategy of nationalizing what EU finance ministers deem are 'EU banks too systemically strategic to fail,' while guaranteeing bank deposits, the largest EU governments, Germany and the UK, in contrast to the US, have opted for what will in the longer run allow European banking giants to withstand the anticipated financial attacks from the likes of Goldman or Citigroup. . .

Dean Baker, Prospect -
The WSJ reports that Neel Kashkari, the bailout czar, told a group of Wall Street executives that the restrictions on executive compensation in the bailout bill really don't mean anything. Of course anyone who bothered to look at the bill already knew that the compensation restrictions were meaningless before the bill passed. So why do we only see this reported in the media after the fact? . . . It looks to me like the media went into full sales promotion mode on this bailout bill, but I'm open to other explanations.

Hartford Courant -
Police are investigating the apparent poisoning of a real estate agent who investigators say was fed a piece of tainted ginger cake by a woman whose house he was trying to sell. . . Police said they were called to the ERA Broder Group real estate office at 43 North Main St. at 11:34 a.m. Thursday on a medical call. A 28-year-old man was ill and ended up requiring treatment at St. Francis Hospital and Medical Center in Hartford, police Capt. Paul Melanson said.
"The guy who is the victim is selling a house for Nancy Glass," Melanson said. "He met with her [Thursday] morning to talk about the sale of the house. She offered him a piece of cake. He ate it." When he returned to his firm's office, he began to feel ill and ultimately called 911.

Jason Zweig, Wall Street Journal
- Robert Shiller, professor of finance at Yale University and chief economist for MacroMarkets LLC, tracks what he calls the "Graham P/E," a measure of market valuation he adapted from an observation [Benjamin] Graham made many years ago. The Graham P/E divides the price of major U.S. stocks by their net earnings averaged over the past 10 years, adjusted for inflation. After this week's bloodbath, the Standard & Poor's 500-stock index is priced at 15 times earnings by the Graham-Shiller measure. That is a 25% decline since Sept. 30 alone. The Graham P/E has not been this low since January 1989; the long-term average in Prof. Shiller's database, which goes back to 1881, is 16.3 times earnings.

But when the stock market moves away from historical norms, it tends to overshoot. The modern low on the Graham P/E was 6.6 in July and August of 1982, and it has sunk below 10 for several long stretches since World War II -- most recently, from 1977 through 1984. It would take a bottom of about 600 on the S&P 500 to take the current Graham P/E down to 10. That's roughly a 30% drop from last week's levels; an equivalent drop would take the Dow below 6000.

Could the market really overshoot that far on the downside? "That's a serious possibility, because it's done it before," says Prof. Shiller. "It strikes me that it might go down a lot more" from current levels.

In order to trade at a Graham P/E as bad as the 1982 low, the S&P 500 would have to fall to roughly 400, more than a 50% slide from where it is today. A similar drop in the Dow would hit bottom somewhere around 4000. . .

Strikingly, today's conditions bear quite a close resemblance to what Graham described in the abyss of the Great Depression. Regardless of how much further it might (or might not) drop, the stock market now abounds with so many bargains it's hard to avoid stepping on them. Out of 9,194 stocks tracked by Standard & Poor's Compustat research service, 3,518 are now trading at less than eight times their earnings over the past year -- or at levels less than half the long-term average valuation of the stock market as a whole. Nearly one in 10, or 876 stocks, trade below the value of their per-share holdings of cash -- an even greater proportion than Graham found in 1932. Charles Schwab Corp., to name one example, holds $27.8 billion in cash and has a total stock-market value of $21 billion.

Those numbers testify to the wholesale destruction of the stock market's faith in the future. And, as Graham wrote in 1932, "In all probability [the stock market] is wrong, as it always has been wrong in its major judgments of the future."

In fact, the market is probably wrong again in its obsession over whether this decline will turn into a cataclysmic collapse. Eugene White, an economics professor at Rutgers University who is an expert on the crash of 1929 and its aftermath, thinks that the only real similarity between today's climate and the Great Depression is that, once again, "the market is moving on fear, not facts." As bumbling as its response so far may seem, the government's actions in 2008 are "way different" from the hands-off mentality of the Hoover administration and the rigid detachment of the Federal Reserve in 1929 through 1932. "Policymakers are making much wiser decisions," says Prof. White, "and we are moving in the right direction.

Investors seem, above all, to be in a state of shock, bludgeoned into paralysis by the market's astonishing volatility. How is Theodore Aronson, partner at Aronson + Johnson + Ortiz LP, a Philadelphia money manager overseeing some $15 billion, holding up in the bear market? "We have 101 clients and almost as many consultants representing them," he says, "and we've had virtually no calls, only a handful." Most of the financial planners I have spoken with around the country have told me much the same thing: Their phones are not ringing, and very few of their clients have even asked for reassurance. The entire nation, it seems, is in the grip of what psychologists call "the disposition effect," or an inability to confront financial losses. The natural way to palliate the pain of losing money is by refusing to recognize exactly how badly your portfolio has been damaged. A few weeks ago, investors were gasping; now, en masse, they seem to have gone numb. . .

This collective stupor may very likely be the last stage before many investors finally let go -- the phase of market psychology that veteran traders call "capitulation."


At October 11, 2008 2:56 PM, Anonymous Anonymous said...

Re Michael Hudson,

First Hudson speaks of the 700 Billion in the bailout, then he adds in the other aid to AIG, et al, and that comes to 1 Trillion. Next he talks about having already given Wall St 6 Trillion dollars. OK, where did the other 5 Trillion go (come from)?

Then Hudson says that GMs problem is not that it isn't selling cars, but that GM is going down because of its pension system. That's it -- blame it on those corporate decision makers, the assembly line workers.

Its a load of nonsense. GM is going down because for 40+ years GM management refused to compete with foreign cars makers in terms of reliability, cost and comfort. The big three domestic car makers couldn't compete with those foreign car makers who make their cars in the US.

The big three domestic car makers also had cars built in other countries and sold under domestic names. But, the cars were designed under the management policies of the big three and as a result those cars weren't competitive here either.

The common factor in the failures is the management of the big three. They are the failure, they are the reason the car companies are failing.

At October 11, 2008 6:32 PM, Blogger reunionpi said...

Henry Paulson and Goldman Sachs:

Scattered from California to New York: The judgments from the Department of Labor, tax liens against 401-K plans, state tax liens, mechanics lien, judgments from other companies,

At October 12, 2008 8:26 AM, Anonymous Anonymous said...

The housing sector had been coming off for about two years prior to the latest round of collapses, so I have my doubts as to whether mortgages are at the heart of the problem here. Mortgages haven't helped, but they're not the cause. The real cause is widening credit spreads, which is a result of excess credit. Simple enough. But how much credit?

To give you an idea:

After the immense tar baby of the oil price run up fell off the planet pluto and finally crashed into the protected atrium of credit derivative obligations, are we beginning to see the dimensions of the problem. Its like a market corner of the immense oil markets.

Nobody forsaw the effect of an oil price crash, and the problem still goes unrecognized in the press. And yet mortgages are to blame for Wall St. fabled commercial banks going bust.

With the use of credit derivative obligations and swaps, these secondary lien type financings have no hope of ever being settled, let alone bailed out. This is because the entire banking sector has been conscripted into an Enron like trading scheme, applied to just about anything that moves. The credit for these schemes has to come from somewhere, and if there isn't enough capital in reserves on the banking ledger, then borrowings become assets to borrow against. The sum total of notional value of these assets runs into the hundreds of trillions of dollars, far exceeding world GDP.

The whole effort of bailing out the banks and propping up the financial system is so that none of these derivative contracts come to light. In effect, its a little like ghost busters trying to effectively use whatever comes to hand in an effort to stem the tide of notional obligations bearing down on the financial system.

At October 12, 2008 8:53 AM, Anonymous Anonymous said...

With the collapse of Lehman bros., you have an idea of the extent of the problem. All Wall St. banks are thus exposed, heaven help us if the U.S. treasury market suddenly collapses, as government issued bonds are also subjected to secondary lien type financings:

Independant UK

At October 12, 2008 9:36 PM, Anonymous Anonymous said...

Hi, me again. I just thought I would direct your attention to the following blog posts over the role of long term U.S. bonds internationally and domestically:

A collapse in the long term bond market would cause a rise in interest rates and the dollar to finally capitulate into unheard of lows.

At October 12, 2008 9:44 PM, Anonymous Anonymous said...

Ok. Last one. The banking cartel that was formed over the demise of Bear Stearns and the collapse of Lehman, along with moves in Washington points to commercial banks presiding over exclusive patronge of government-issued bonds, with the taxpayer serving as unwitting counterparty as they attempt to bolster the Credit Derivative Swaps held against the short end of the treasury curve.

700 billion is merely the amount estimated when the payoff inevitably occurs as a result of untold notional amounts in these swaps. I'm having a difficult time writing this as I am way out of my depth, but this is my guess as to what the purpose of all this is.

Take Care, Sam


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