September 24, 2008

CRASH TALK SEPTEMBER 24

Crooks & Liars - Ulrich Wilhelm, spokesman for Angela Merkel, the German chancellor, said there was no need for "a measure along the lines of what has been decided in the US". Peer Steinbruck, the German finance minister, also made clear after a telephone conference with his contemporaries in the G7 group of leading nations that Berlin did not need to set up a rescue package. . . The French government also said it did not plan to set up a toxic asset fund or contribute to the US scheme. British officials said they had already instigated a special liquidity scheme, but like France and Germany they did not intend to pursue a toxic asset fund. The European Commission made clear it was not planning any emergency measures.

That's a wee bit of a problem for Paulson's plan, and signals exactly how much confidence European governments have in it. And the reason they have so little confidence in Hanks plan is simple - it won't solve the underlying problem which is that too many banks have sailed too close to the wind and are now insolvent. Solving that problem would require recapitalizing those banks and getting credit flows unfrozen again - which would cost yet more untold hundreds of billions and would again reward bad actors for their sins but at least would help people other than the fat-cats at those major banks.

Without such a recapitalization, though, the light at the end of the tunnel is still the oncoming train of recession.

Speaking at the Reuters 2008 Restructuring Summit, Andrew Feltus, senior portfolio manager of an $8 billion high-yield fund at Pioneer Investments in Boston, said the remaining banks will dominate the market, which is "good for them, not good for the borrowers and not good for the overall economy."


Active Rain
- Much of the blame for the current financial crisis our country is suffering through can be traced back to de-regulation that occurred in the banking and finance industry over the last 20 years. The majority of this regulation was put in place in the 1930's to prevent a recurrence of the events that lead up to The Great Depression. The single biggest piece of deregulation that took place in 1999 was the repeal of the Glass-Steagall Act. The Glass-Steagall Act created many banking reforms designed to control speculation and against a systematic event in the banking system, basically what we are facing now. Specifically it required for the separation of many financial activities such as investment banking operations, deposit activities, insurance, etc to reduce the potential for this domino effect that could ripple through the financial systems. This is exactly what we are being warned may occurr now.

In a very prophetic speech made in 1999, representative John Dingell delivered the following remarks opposing the repeal of Glass-Steagall:

|||| I just want to remind my colleagues about what happened the last time the Committee on Banking brought a bill on the floor which deregulated the savings and loans. It wound up imposing upon the taxpayers of this nation about a $500 billion liability. that is what it cost to clean up that mess. . .

What we are creating now is a group of institutions which are too big to fail. Not only are they going to be big banks, but they are going to be big everything, because they are going to be in securities and insurance, in issuance of stocks and bonds and underwriting, and they are also going to be in banks. And under this legislation, the whole of the regulatory structure is so obfuscated and so confused that liability in one area is going to fall over into liability in the next. Taxpayers are going to be called upon to cure the failures we are creating tonight, and it is going to cost a lot of money, and it is coming. Just be prepared for those events.

You are going to find that they are too big to fail, so the Fed is going to be in and other Federal agencies are going to be in to bail them out. Just expect that. ||||

Richard Cook, Global Research - The credit system has started to shut down in the largest financial crisis since the Great Depression. Committee chairman Chris Dodd (D-CT) and Democratic member Chuck Schumer (D-NY) made reference to the private briefing of congressional leaders last Thursday night by Paulson and Federal Reserve Chairman Ben Bernanke, when they told lawmakers the "arteries of the financial system were clogged and that a heart attack was imminent.". . .

Not too long ago, officials of the Bush administration, along with Republican presidential candidate John McCain, were telling everyone that economic fundamentals are sound, and that while there has been a downturn, there is not even a recession. One of the architects of financial deregulation, former Senator Phil Gramm, a sometime McCain advisor, chastised the public for being a "nation of whiners."

Now, suddenly we are facing a catastrophe. As Senator Jon Tester (D-MT) asked Paulson, "Why do we have only one week to allocate $750 billion?" There was no answer. . .

Senator Dodd said that to issue Paulson a blank check "would put the Constitution at risk." . . . But would the bailout really fix the system? Obviously, for it to do so, it would have to address and correct the cause.

So what is the cause? According to Paulson, the cause is "defaults on mortgages." Senator Schumer agreed that ,"It's been mortgages that have brought the financial system to its knees."

Senator Bennett said, "the housing bubble has burst," with others pointing out that for many homeowners the value of their homes now was much less than when they bought them.

Paulson agreed that "housing values have been falling," but he did not elaborate on why millions of Americans could no longer pay their mortgages. Cox blamed it on a "failure of lending standards" and said that the SEC had a number of ongoing investigations of fraud in the mortgage application process. Nevertheless, Paulson made it clear that his proposal was not to help distressed homeowners, saying "every homeowner won't save their home."

And that is the crux of the problem, which explains why Paulson's proposal may keep the financial system alive but won't help anyone who was hurt by the housing bubble in the first place. Senator Dodd agreed with Paulson that, "the proposal will not help a single family save their home." And even though he said the plan should "put an end to foreclosures and defaults," it won't. . .

The committee never addressed the issue of why the bankers would oppose homeowner relief. Could it be that they actually favor foreclosures? Could it be that a situation where millions of foreclosed homes across America can be bought today for dimes on the dollar is somehow to their advantage? Or to the advantage of other investors who are now working the U.S. foreclosure markets, such as foreign sovereign equity funds? These questions did not come up at the Banking Committee's hearing, though they should have. . .

Obviously a real solution would involve not only homeowner relief and taxpayer guarantees for a controlled bailout, but also rebuilding the U.S. economy. But no one wanted to talk about that today. Maybe it's because this latest piece of "mortgage fraud" is designed mainly to keep the economy afloat until the presidential election, because a collapse would drag down John McCain and the Republicans with it. And heaven forbid that anything should ever be proposed that would threaten the stranglehold the banking industry has over every man, woman, and child in America .

Carolyn Betts - I agree with every point in Bernie Sanders' proposal but have a suggestion. I worked with lead counsel to the RTC (the government entity that served as receiver for defunct savings & loans) in designing and implementing the sealed bid auction program for non-performing commercial mortgage loans during the S&L crisis. I also worked for FHA's lead financial advisor in carrying out the congressional mandate that HUD enter into "negotiated" sales of its nonperforming multifamily loans to state housing finance agencies. Based on what I saw in these contexts and in carrying out sales of pools of VA, Farmers Home and HUD performing and nonperforming single-family loans, both in auctions and in mortgage backed securities form, my conclusion is this: the Wall Street players made out like bandits, ultimately at taxpayer expense and borrowers were not helped.

I suggest we try another tack, in addition to what Congressman Sanders proposes: support the borrowers of the troubled loans, not the owners of the loans. I believe there is a good chance that there is collateral and other fraud in these mortgage loan portfolios. I.e., loans with no properties to support them, multiple loans secured by a single property, loans used to launder money through government guarantees. This conclusion is based in part on the numbers, which don't make sense, and upon observation of the number of HUD-insured loans that have gone into default before a single payment was received. If the lenders are just paid for these loans what is the theoretical value in a good market for these loans, assuming they are performing (i.e., above current market value), the lenders will get a windfall and be rewarded for making fraudulent and/or predatory loans. And the bailout as proposed will be a perfect way to hide the evidence of wrongdoing.

Would it cost anywhere near $700 billion to have the government stand behind the borrowers' obligations, in concert with a program to address unemployment/underemployment and health care issues that are the primary sources of financial problems that cause these loans to go into default? I think not. I would impose a condition that the existing "problem" home loans in portfolio, and maybe also related home equity loans, be marked to decent rates of interest and reamortized over 30 or 35 years, with write-off of penalty interest, late fees, etc., at lender expense. Then, to the extent the borrowers still cannot make their payments but want to stay in their homes, have the government funding program (with a local-level administrator not controlled by those who caused the current crisis) make up the difference. Perhaps the government gets a lien on the property for only the amount of the borrower's shortfall after a period of time during which the health care fix and jobs programs can take effect (say, 18 months).

I agree that the bailout bill will be a disaster, in so many ways I can't even list them all. Allowing the market to crash, with all its consequences, would be better than giving away $700 billion plus to the perps that brought us to the brink of world economic collapse. The longer we keep putting fingers in the dikes to avoid the consequences of bad decisions, money laundering and theft by the corporados, the worse the eventual flood will be.

William Greider, Nation - Both political parties may submit to this extortion because they don't have a clue what else to do and bending over for Wall Street instruction, their usual posture, seems less risky than taking responsibility. Paulson and Bernanke evoked intimidating pressure for two reasons. The previous efforts to restore investor confidence had all failed as their slapdash interventions worsened the global panic. Besides, the Federal Reserve was running out of money. Nearly three-fifths of the Fed's $800 billion portfolio is now loaded down with junk--the mortgage securities and other rotten assets it took off Wall Street balance sheets. The imperious central bank is fast approaching its own historic disgrace--potentially as discredited as it was after the 1929 crash.

Despite its size, the gargantuan bailout is still designed for the narrow purpose of relieving the major banks and investment houses of their grief, then hoping this restores regular order to economic life. . .

Secrecy and opacity are crucial to achieve Wall Street's purposes. It could allow Paulson to overpay his old pals for near-worthless assets and slyly recapitalize the damaged banks while telling public and politicians the money is to save the system. To achieve this, Wall Street needs to keep control of the process whoever is elected president (the Wall Street Journal recommends John Thain, ex-chief of the New York Stock Exchange to succeed Paulson). Not everyone will be saved, of course, but high on the list of endangered nameplates is Goldman Sachs, Paulson's old firm. The high-flying investment house looks doomed by these events. The Fed quickly agreed to convert Goldman and Morgan Stanley into banks. . .

If Paulson's gamble fails--just as possible--then maybe government will finally undertake forceful intervention rather than friendly solicitude for Wall Street. Washington should literally take control of the banking and finance sector and employ its emergency powers to oversee and direct these private, profit-making enterprises. If any bankers do not wish to play, cut them off from any public assistance (and wish them good luck). Then government can exercise temporary supervisory powers that force banking to cooperate with economic recovery by sustaining lending and investment to the real economy. Washington can put profit on hold.

Order full stop to the many financial gimmicks and accounting illusions that led to inflated lending and falsified asset valuations. Unwind the complicated time bombs known as credit derivatives and shut down this lucrative line of business. Meanwhile, instead of throwing millions of homeowners and debtors out of their homes and into bankruptcy, hold them harmless temporarily so people can work out reasonable terms for recovery. Finally, force-feed new life into the real economy with government spending on public projects and capital formation. How much spending? Rescuing America from irresponsible Wall Street is worth whatever it costs to save the bloodied bankers.

Dennis Kucinich's plan - Reinstatement of the provisions of Glass-Steagall, which forbade speculation

Re-regulation of the finance, insurance, and real estate industries

Accountability on the part of those who took the companies down: a) resignations of management b) givebacks of executive compensation packages c) limitations on executive compensation d) admission by CEO's of what went wrong and how, prior to any government bailout

Demands for transparency a) with respect to analyzing the transactions which took the companies down b) with respect to Treasury's dealings with the companies pre and post-bailout

An equity position for the taxpayers a) some form of ownership of assets

Some credible formula for evaluating the price of the assets that the government is buying.

A sunset clause on the legislation

Full public disclosure by members of Congress of assets held, with possible conflicts put in blind trust.

A ban on political campaign contributions from officers of corporations receiving bailouts

A requirement that 2008 cycle candidates return political contributions to officers and representatives of corporations receiving bailouts

And, most importantly, some mechanism for direct assistance to homeowners saddled with unreasonable or unmanageable mortgages, as well as protection for renters who have lived up to their obligation but fall victim to financial tragedy when the property they live in undergoes foreclosure.

Market Watch - Fairly or not, some critics say they can't help but see similarities between the Bush administration's hurried approach to the financial market crisis and its headlong plunge into the Iraq war. "You can draw some valid parallels between the prosecution of the war under the Bush regime and the way the financial sector has operated in recent years," said Tom Schlesinger, head of the nonprofit research group Financial Markets Center in Howardsville, Va. "It fails the most basic test of democratic accountability," Schlesinger said. . . . It boils down to "give me the money and trust me," Schlesinger said. James Angel, a professor of finance at Georgetown University, said the White House appears to be "flying by the seat of their pants." Sidelined Congress got little advance warning of the proposed bailout, as the Treasury Department waited until five days before lawmakers were set to leave town for the presidential and Congressional election campaigns. As a result, any discussion of alternatives has been sidelined. In the eight years of the Bush administration, investment firms have, like the security contractor Blackwater, been subjected to slim or no oversight, Schlesinger said. Now comes another big contracting job.

Stateline - Massachusetts Gov. Deval Patrick (D) said "we are beginning to see some early declines in state (tax) revenues." New York, which already projects a $22 billion budget gap over the next three years, would be hardest hit because the financial services industry is the largest in the state. According to some estimates, financial workers account for 20 percent of annual state tax revenues. Connecticut and New Jersey are also braced for a hit. . . Besides suffering the budgetary effects of a national financial crisis, states will also face a regulatory impact. They will be forced to oversee the unwinding of AIG assets as it complies with terms of the $85 billion federal takeover. The nation's largest insurer gradually will sell off its insurance units to repay Uncle Sam over the next two years. . . When Lehman Brothers filed for bankruptcy on Sept. 15, state finance officials, who had been monitoring the situation, knew very quickly the extent of their losses. The good news was that the states' investments in Lehman were a fraction of their total holdings. Lehman stocks and bonds accounted for only 2/10s of 1 percent of Connecticut's $25 billion pension fund, for example.

John McCain on CBS was asked "In 1999, you were one of the senators who helped pass deregulation of Wall Street. Do you regret that now?" His answer: "No. I think the deregulation was probably helpful to the growth of our economy."

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