30 September 2008

Did Campaign Contributions Influence the House Vote on the Bailout?

Interesting correlation between the receipt of campaign contributions from the financial sector and the level of support for the bailout bill in the House.

We have not looked at this study closely yet, and probably won't bother to be truthful, because the level of campaign cronyism in Washington is so pervasive that we feel the point is almost moot. Campaign and lobbying reform is a must have. And we don't.

If we did we'd carefully sort out congressmen who are from states in which the insurance industry is a heavy constituenncy. We also question the inclusion of the entire FIRE segment and would look at the breakdowns of the Financial, Insurance and Real Estate components, since this bill was so heavily targeted to the financial industry.

And as always the campaign contributions are a nice data source, but unless you are looking at the registered lobbyist activity one really has no clue. Soft money is everything these days in the Beltway.

Capital Eye
Finance Sector Gave 51 Percent More to House Bailout Backers
September 29, 2008

WASHINGTON -- Members of the House of Representatives who supported bailing out the financial sector with $700 billion in taxpayer money have received 51 percent more in campaign contributions from the finance, insurance and real estate sector in their congressional careers than those who opposed the emergency legislation, the nonpartisan Center for Responsive Politics calculated following the 228-205 vote on Monday that defeated the House bill.

Examining campaign contributions from the industries that were most eager to see the Emergency Economic Stabilization Act of 2008 passed, the Center found that the gap between lawmakers who supported the bailout and those who successfully opposed it was especially wide among House Democrats. ...

The Coming Collapse of US Treasuries and the Dollar and the Role of the G7

Brad Setser nicely illustrates the increasingly artificial foundation of the US dollar. We read his site every day and find his analysis to be original and well founded, even if we do not always agree with his conclusions.

The parallels of our current situation to 1929-33 seem valid and disconcerting, although this is our view and not Brad's, which is more finely focused for now.

At some point the contrived demand for Treasuries will subside, and the bubble in US debt and the dollar will deflate, not in a monetary deflation which is the fantasy of so many, but in a shocking devaluation of the dollar and a collapse in Treasuries.

The clock is ticking.

Do not doubt that this is a real crisis: more on Fed’s balance sheet
Brad Setser
Tuesday, September 30th, 2008

My colleague at the Council on Foreign Relations, Paul Swartz, has graphed the shift in the composition of the Fed’s balance sheet. The Fed has extended a lot of credit to the financial system — and supplied even more liquidity by letting the investment banks borrow some of its Treasuries.

The amazing thing about this graph is that it doesn’t capture all the credit central banks extended to the financial system last week (Paul used the weekly average numbers, not the data for the end of the week) or the new credit that will be provided by the programs that were expanded today. Those programs should allow the Fed to increase its lending even further.

This graph also does not capture the $500 billion the Fed has lent to other central banks through various swap lines — dollars that other central banks have lent to their own troubled institutions.

Right now, the world’s central banks are truly providing the short-term financing to host of troubled banks that are having trouble raising funds in the market. Laurence H Meyers of Macroeconomic Advisers notes:

“The liquidity measures are a stopgap … You’re funding the banks’ balance sheets, but nobody wants to lend money to them because they’re all afraid of insolvency.”

That sounds right to me. Right now, the US is relying a bit too heavily on the Fed to keep this crisis from spiraling truly out of control. That avoids hard political choices –notably hard choices about how best to recapitalize the financial system — but it also creates some long-term risks for the Fed. (What we are avoiding is the downsizing of a financial sector that is still remarkably oversized, and a capital allocation system that is an unsustainable mutation of a free market. We can waste resources recapitalizing banks but without systemic reform we have accomplished nothing except to feed the instrument of our duress. - Jesse)

I fully recognize the risk that the US government eventually could flood the market with unwanted Treasuries, driving interest rates up — and thus there are limits on how much support the US government can supply the financial system. But as of now, there isn’t much evidence that there is a shortage of demand for Treasuries — indeed, recent market moves suggests a shortage of Treasury bills in the market rather than a surplus. And that certainly is not because the US government has been scaling back its bill issuance. (Demand for Treasuries is strong but not for the 'right reasons.' This is the same phenomena we saw in 1929 when excess liquidity fled the equity markets and corporate debt for Treasuries, and then the weakened dollar collapsed taking Treasuries with it. - Jesse)

By my calculations, the supply of marketable Treasury bills not held by the Fed –i.e. the bills actually in the market — increased from $738.4 to $1200.2b between August 2007 and August 2008. That is a net increase in supply of around $462b. The Treasury was issuing more bills, and the Fed was reducing its holdings to “sterilize” or offset the credit it extended to private financial institutions. The US data on foreign holdings only runs through July, but it suggests that foreign central banks only snapped up $50b or so of this increase: central bank holdings of bills rose from around $180b to $232b. There was a huge surge in private holdings of Treasury bills, with the stock in private hands nearly doubling in 12 months.

And that was before the big surge in bill issuance in September.

Yet judging from market yields, there is no shortage of demand for T-bills despite the huge increase in supply — an increase in supply that is primarily in private not central bank hands. The New York Times reports:

Yields on three-month Treasury bills shrank to just 0.29 percent on Monday, a sign that investors were fleeing from any kind of risk, even if it meant earning a return far lower than the inflation rate.

The outstanding stock of notes (coupon paying bonds with a maturity of between one and ten years) not held by the Fed rose by $280b from August 2007 to August 2008, so there wasn’t just an increase in bill supply. And again, there doesn’t seem to be a shortage of demand. Here though central banks have been big buyers.

One other interesting side note: I would estimate that foreign central banks now hold well around 70% of the outstanding $2265b stock of marketable Treasury notes not held by the Fed. To get that estimate I have to assume that central banks account for most of the $260b or so of private purchases of Treasury bonds over the past year bringing their , and that central banks hold few bonds over ten years and few TIPs — so total central bank holdings of notes are in $1650-$1700b range. Central bank holdings are actually fairly concentrated in certain market segments.

When this artificial demand from the Central Banks subsides the dollar and the US sovereign debt will utterly collapse unless the world is ready to accept the dollar as the fiat currency above all others. And do not think for one minute that the US does not see this outcome. One ring to rule them all...

This is what our bankers do; keep borrowing until you become their problem, and they finally own you by 'default.' This is the blackmail under which the US public is being held today. - Jesse

G7 was 'Staring Into the Abyss'

Interesting interview, and a peek into the bureaucratic mind.

Denial runs deep, although it should be noted this is a career politician speaking, and compared to many of our politicians he is a savant. Unfortunately he is no match for the current schemes emanating from the world's banks.

The German government seems to be in a state of self-delusion, if one can judge from this interview.

To friends and colleagues in Europe: protect yourselves, otherwise your fate will be solely in the hands of well-intentioned but misguided, old-fashioned officials who are operating well behind the financial learning curve.

Der Spiegel
'We Were All Staring into the Abyss'

SPIEGEL spoke with German Finance Minister Peer Steinbrück about the roots of the US credit disaster, whether Germany is in grave danger and what the future has in store for world banking.

SPIEGEL: Mr. Steinbrück, Wall Street is imploding. The government of the United States wants to establish a $700 billion (€480 billion) bailout program for its banks and their bad loans. How serious is the situation for the rest of the world?

Steinbrück: We are experiencing the most severe financial crisis in decades, although one should be careful about historic comparisons with 1929. One thing is clear: After this crisis, the world will no longer be the same. The financial architecture will change globally.

SPIEGEL: Could you be more specific, please.

Steinbrück: There will be shifts in terms of the importance and status of New York and London as the two main financial centers. State-owned banks and funds, as well as commercial banks from Europe, China, Russia and the Arab world will close the gaps, creating new centers of power in the financial world.

SPIEGEL: In other words, we are experiencing the beginning of a tectonic shift…

Steinbrück:... but not one that is abrupt and jarring. It will be an evolutionary process that will take several years.

SPIEGEL: The current thunder is certainly deafening. We have just seen all US investment banks disappear in one fell swoop.

Steinbrück: Three of them were either taken over or went bankrupt. The two others, because they abandoned their business model to save themselves. No one would have thought this possible until recently. Meanwhile, 25 financial service providers have disappeared from the market in the United States. All of this is illustrative of an earthquake. In addition, many institutions are still fundamentally lacking liquidity.

SPIEGEL: And is the United States completely to blame?

Steinbrück: The source and focus of the problems are clearly in the United States. There are many causes. After 9/11, a great deal of cheap money was tossed into the market. Apparently some of that money went to people with poor creditworthiness. This led to the growth of the real estate bubble. The banks embarked on a race over profit margins. Then speculation spun completely out of control.

SPIEGEL: …which also benefited German banks for a while.

Steinbrück: But they didn't invent these transactions. The stokers on the financial markets were responsible for that. (There are benefits to being well behind the innovation curve apparently - Jesse)

SPIEGEL: And how is the US patient doing now?

Steinbrück: It's in the ICU with pneumonia. This means that here in Europe, we can at least expect to get a bad cold. The US patient lacked legislation, a regulatory framework that could have helped avoid this development. That's the key issue for me. The financial products became more and more complex, but the rules and safeguards didn't change. I don't know anyone in New York or London who would have asked for a stronger regulatory framework 18 months ago. They were always saying: The market regulates everything. What a historic mistake!

SPIEGEL: Your US counterpart, Treasury Secretary Henry Paulson, began by essentially nationalizing the two US mortgage giants, Fannie Mae and Freddie Mac. But then he allowed investment bank Lehman Brothers to plunge in bankruptcy before saving the insurance giant AIG with an $85 billion (€58 billion) bailout. This doesn't exactly look like a clear course of action.

Steinbrück: In the case of Lehman, the US government wanted to send a signal to the market that they are not prepared to offer a bailout under any circumstances. In the case of AIG, we had direct talks at the G7 level and implored them to stabilize the situation. An AIG bankruptcy would have triggered shock waves around the world. We were all staring into the abyss at that point.

SPIEGEL: What role does the US election campaign play in resolving the crisis?

Steinbrück: I hope that my US counterpart will be capable of taking action for as long as possible. We cannot have a six-month vacuum until the next president takes office and his administration is ready to get to work.

SPIEGEL: Paulson headed the investment bank Goldman Sachs for a long time. Does this make him part of the problem?

Steinbrück: He is undoubtedly doing a good job. And at least Goldman Sachs still had the option of making its own decision to transform itself into a bank holding company.

SPIEGEL: That same Paulson snubbed you a year and a half ago. You arrived late for a meeting with him in Washington and he gave you all of 11 minutes of his time -- standing up.

Steinbrück: You don't seriously believe that such trivia plays any role whatsoever in my assessment of a counterpart and of the situation!

SPIEGEL: We are alluding to arrogance and a way of thinking that Paulson may have shared with many major players on Wall Street.

Steinbrück: The way of thinking on Wall Street was quite clear: "Money makes the world go round!" The logic went like this: The government should stay out of our business! And when we Germans began -- and perhaps it was even too late by then -- to ask for controls, for more transparency and equity guidelines, they laughed at us at first.

SPIEGEL: When did those initiatives begin?

Steinbrück: Back in the days of Gerhard Schröder's chancellorship. It was reinforced when Germany assumed the G-7 presidency in early 2007. The first real debate on the subject happened in February 2007, during a meeting of the G-7 finance ministers at Villa Hügel in Essen. Then British Chancellor of the Exchequer Gordon Brown was not very amused by our call for more transparency for hedge funds. The talks have been significantly more constructive since last fall.

SPIEGEL: What, specifically, will you call for?

Steinbrück: A few agreements were already reached with the British and Americans within the G-7 in April. They include imposing new rules on the conduct of the rating agencies, tightening equity regulations and gaining a better handle on cross-border bank supervision. But as far I am concerned, it isn't enough for the industry to develop its own code of conduct. I also want to see the banks no longer allowed to sell all of their risks as they see fit. I think it as a dangerous systemic design flaw that not only loans, but also credit risk is 100-percent marketable. This can lead to uncontrollable wildfires, as we are now seeing.

SPIEGEL: How much government does capitalism need? How much can it tolerate?

Steinbrück: Overall, we have to conclude that certain elements of Marxist theory are not all that incorrect.

SPIEGEL: And you, of all people, are saying this?

Steinbrück: Every exaggeration creates, in a dialectic sense, its counterpart -- an antithesis. In the end, unbridled capitalism with all of its greed, as we have seen happening here, consumes itself

SPIEGEL: …because it creates an unbridled state?

Steinbrück: That would the wrong development. And I don't believe in it, either. Fortunately, we in Germany have done quite well for ourselves with a happy medium, the social market economy.

SPIEGEL: The German government is unwilling to participate in America's $700 billion bailout package. Is this your final word?

Steinbrück: I see neither the need for nor the possibility of taking on the responsibility for American banks. Besides, our situation is more robust.

SPIEGEL: But the United States will certainly bail out US banks first -- a distortion of competition that could put European institutions under more pressure than ever.

Steinbrück: That's an issue, of course. But I can't give you a shoot-from-the-hip solution. First we have to see what exactly the Americans intend to do.

SPIEGEL: And if things became serious in Europe, you would also have to butt heads with Brussels over intervention options.

Steinbrück: You couldn't be more right! And I have already pointed this out. The Americans are clearly faster when it comes to crisis management, because they aren't hampered by these aid procedures.

SPIEGEL: Nevertheless, you do have worst-case scenarios on the back burner.

Steinbrück: It doesn't make any sense to speculate publicly over something like this. A crisis can easily become a self-fulfilling prophecy that way.

SPIEGEL: You recently met with the top executives from the German banking and insurance industries. What was the mood like?

Steinbrück: Very serious and open. But discretion is needed to achieve any progress on this front.

SPIEGEL: The German state-owned banks, at any rate, are a prime example of a case in which government influence does not automatically guarantee more security. On the contrary. The amount of gambling that took place at institutions like SachsenLB was unbelievable. And taxpayers are the ones who end up footing the bill.

Steinbrück: The responsibility lies with the respective shareholders. Some of them, however, are showing signs of wanting to pass this responsibility on to the government. That's when I stop playing Mr. Nice Guy. They should kindly solve their own problems.

SPIEGEL: Some, it would seem, have failed to apply the rules that already exist in the German system.

Steinbrück: I cannot confirm that. The auditors can only examine what is in the financial statements and what is presented to them. IKB and SachsenLB simply outsourced tremendous risks. I also caution against taking a stop-the-thief approach. In one case, for example, a former department head from the finance ministry who was on the supervisory board of one of these banks has been severely criticized. In an effort to pass some blame on to me, it has been conveniently forgotten that half of the who's who in the German economy was on this same board.

SPIEGEL: Perhaps you should have simply allowed something like IKB to go bankrupt, instead of bailing it out with billions from the state-owned bank KfW and then essentially giving it away to an American financial investor.

Steinbrück: And what would have happened then? We had less then five weeks to conduct a thorough audit. We had 36 hours to decide what would be more costly -- stabilization or insolvency. That was the situation on July 28 and 29 of last year. What happens to the €25 billion ($36 billion) worth of deposits at the IKB? Are they supposed to vanish into thin air? What would have been the consequences for the overall German financial economy? The damage would have disproportionately higher. It's easy to be critical now.

SPIEGEL: And what about the fact that KfW just happened to transfer €319 million ($463 million) to Lehman Brothers, the US investment bank that declared bankruptcy that very same day? This sort of thing doesn't exactly create confidence in state-owned banks.

Steinbrück: That was an awful mistake, of course. A grotesque error. But it was a mistake made by bank executives, not the administrative board, which includes politicians among its members.
SPIEGEL: It proves that normal risk management procedures failed completely -- directly under the nose of the finance minister.

Steinbrück: No, it proves that an inexcusably wrong decision was made. Do you think I wasn't livid about this? The entire crisis we are talking about here is incomprehensible for the normal citizen. But such an idiotic transfer -- even my 89-year-old mother is outraged about it. All 80 million German citizens understand this…

SPIEGEL: …and suddenly you had the tabloid Bild calling the KfW "Germany's stupidest bank."

Steinbrück: Okay, okay. But it's also worth noting that KfW passed all tests and checks regarding its risk management procedures that were performed by the federal audit court and auditors last year. (LOL - Jesse) Of course, I know that the bottom line is that what happened was completely ridiculous. But even that has to be carefully examined. We cannot simply start shooting at random, just to flush out a few executives and keep the public happy.

SPIEGEL: At any rate, the failures and breakdowns among many state-owned German banks show that the government isn't exactly an effective banker.

Steinbrück: I never claimed that it was. The government is neither better nor worse as a banker. Financial transactions are not its core field of operations. The fact that many bankers working for state-owned banks clearly miscalculated is partly the result of their having lost sight of the relationships between risks and profitability. But let me say this once again: Lehman was no state-owned bank, nor was Bear Stearns, Northern Rock or IKB.

SPIEGEL: How dramatic will the effects of the financial crisis be on the German economy?

Steinbrück: So far, the only obvious outcome is that numbers are getting worse. At this point, no one can provide a credible estimate of how bad they will become. Of course, this crisis will also affect growth. However, some developments are currently moving in the opposite direction. The employment market is still strong. And we are still pleased with our tax revenues.

SPIEGEL: You were optimistic only two weeks ago. You said that there was no reason to expect cataclysmic scenarios, and that growth for the year would remain at 1.7 percent.

Steinbrück: I object to your criticism. I have always been on the cautious side, and at the beginning of the year I stated that 2009 will be worse than 2008. I have no reason to revise my predictions for 2008. But 2009 will be significantly worse than the previous estimate of 1.2 percent growth.

SPIEGEL: Should German depositors be concerned about their savings?

Steinbrück: No. No one should be worried about savings accounts. We will see a tectonic shift in the global financial system. Entire types of banks and their business models will disappear, but that doesn't mean that anyone in Germany should be worried about their savings.

SPIEGEL: Is capitalism currently undergoing a general crisis?

Steinbrück: I don't think so. But the behavior of some elites is worth criticizing. We have to be careful not to allow enlightened capitalism to become tainted with questions of legitimacy, acceptance or credibility. This isn't merely an issue of excessive salary developments in some areas. I'm talking about tax evasion and corruption. I'm talking about scandals and affairs of the sort we have recently experienced, although one shouldn't generalize these occurrences. But they are the sort of thing the general public understands all too well. And when they are allowed to continue for too long, the public gets the impression that "those people at the top" no longer have to play by the rules. There have been times in Germany when these elites were closer to the general population. Some things have gotten out of control in this respect.

SPIEGEL: One cannot regulate morality. (The point is not to regulate morality, the point is to circumscribe the effects of those who make free choices, and in some cases to limit those choices. - Jesse)

Steinbrück: No, but that too is dialectics. The elites must understand that it is a matter of self-protection, of developing a sense of the right balance or allowing judgment to prevail.

SPIEGEL: Mr. Steinbrück, thank you very much for taking the time to speak with us.

Interview conducted by Wolfgang Reuter and Thomas Tuma

Translated from the German by Christopher Sultan

Peer Steinbrück, born January 10, 1947, has dedicated his entire professional life to politics.

Steinbrück studied macroeconomics and social sciences in Kiel. Beginning in 1974, he works in various functions for the federal government, among others as a consultant within the Federal Ministry of Research and in the Office of the Chancellor.

In 1985, he switches to the Düsseldorf State Government, where he is, among other things, Chief of Staff for then-Prime Minister Johannes Rau.

Steinbrück went to Schleswig-Holstein in 1990, where he first served as Secretary of State, later as Minister for Economics and Transportation.

In 1998, he returns to North Rhine-Westphalia, becomes Economics Minister, then in early 2000 Finance Minister.

At the end of 2002, the sitting Prime Minister Clement left for Berlin to serve as the Economics and Labor Minister in the federal government. On November 6, 2002, Steinbrück is elected Prime Minister of North Rhine-Westphalia.

Ireland Guarantees Banks for More than Twice GDP

Hard to believe, but the US is still looking like the bastion of capitalism and free markets. We suppose everything is relative.

WSJ Europe
Irish Government Moves to Safeguard Banking System
SEPTEMBER 30, 2008, 6:04 A.M. ET

DUBLIN -- The Irish government Tuesday announced a surprise decision to safeguard the Irish banking system for two years, guaranteeing all deposits, covered bonds, senior debt and dated subordinated debt of the four main banks.

The government said it aims "to safeguard the Irish financial system and to remedy a serious disturbance in the economy caused by the recent turmoil in the international financial markets."
Finance Minister Brian Lenihan said the guarantee will cover €400 billion ($577.64 billion) of the €500 billion of bank assets involved. That is more than Ireland's gross domestic product of €190 billion and national ...

29 September 2008

Raymond James Applies to Become a Bank Holding Company

This has the look of a trend. First Goldman and Morgan Stanley and Now RJ. When the going gets tough, the Masters of the Universe slither over to their safe haven at the Fed.

Bring back Glass-Steagall.

The Bond Buyer
Raymond James Financial Will Apply for Bank Holding Company Status
By Patrick Temple-West
September 29, 2008

Raymond James Financial Inc. confirmed Thursday that it will apply for bank holding company status, following the course taken last week by the larger investment banks, Goldman Sachs Group Inc. and Morgan Stanley.

The firm's management stressed that the move comes as part of a long-term strategy and does not indicate any immediate capital needs. The conversion "will have little impact" on the firm's operations and management structure, officials said in a financial statement filed with the Securities and Exchange Commission.

"It's an unfortunate misperception that Goldman Sachs, Morgan Stanley, and now Raymond James are fundamentally changing their business models," Thomas A. James, the firm's CEO and chairman, said in the filing. "In fact, these changes are more form than substance in that regard."

Raymond James ranked 24th among municipal underwriters and was senior manager on 54 issues this year through Sept. 25, according to Thomson Reuters. The firm ranked 34th among financial advisors, serving as FA on 12 issues for the same period. With $40.8 billion in assets under management as of June 30, Raymond James would rank 32nd among bank holding companies, according to the Federal Reserve.

The conversion to a bank holding company is the first step toward eventually becoming a financial holding company, the firm said. If approved by the Fed, the St. Petersburg, Fla.-based Raymond James will convert its thrift, Raymond James Bank, into a state-chartered commercial bank.

The conversion of the bank, which had $7.7 billion in deposits as of June 30, would allow it to engage in more corporate lending, which historically has been more profitable and bears less interest rate risk, the firm said. A financial holding company is a subset of a bank holding company that allows a firm to engage in investing, insurance, and other activities when its commercial bank meets the regulatory standards set by the Fed.

The conversion would lead to greater regulation by the Federal Reserve. Under Regulation Y, the Fed may regulate non-banking activities of the parent company, including mergers and acquisitions. The parent is also expected to maintain the capital and leverage requirements the Fed places on the commercial banks. Subsidiary commercial banks are limited by how much they can lend to the parent company.

Once the conversion for Raymond James takes place, oversight of the Raymond James Bank will be transferred from the Office of Thrift Supervision to the Office of the Comptroller of the Currency.

Goldman Sachs and Morgan Stanley received Fed approval on Sept. 22 to convert to bank holding companies on an expedited basis. The five-day waiting period the Fed requires to examine antitrust concerns before beginning the conversion status was waived for both firms because "emergency conditions exist that justify expeditious action," the Fed said.

Raymond James said it is not looking for emergency funding and that it expects the conversion to a banking holding company to be completed by summer 2009.

The shift to bank holding companies signifies a change in the financial sector. Investment banks like Raymond James rely on short-term borrowing to fund its businesses. Large bank holding companies like Citigroup Global Markets Inc. and JPMorgan Chase & Co. have weathered the liquidity crisis better than the investment banks because they are perceived as being safer under Fed regulations.

Largest One Day Declines in the DJIA by Percentage

Charts in the Babson Style for Blue Monday 29 September 2008

$630 Billion Helicopter Drop from the Fed

"These capitalists generally act harmoniously and in concert to fleece the people, and now that they have got into a quarrel with themselves, we are called upon to appropriate the people’s money to settle the quarrel."

Abraham Lincoln, speech to Illinois legislature, January 1837

Fed Pumps Further $630 Billion Into Financial System
By Scott Lanman and Craig Torres

Sept. 29 (Bloomberg) -- The Federal Reserve will pump an additional $630 billion into the global financial system, flooding banks with cash to alleviate the worst banking crisis since the Great Depression.

The Fed increased its existing currency swaps with foreign central banks by $330 billion to $620 billion to make more dollars available worldwide. The Term Auction Facility, the Fed's emergency loan program, will expand by $300 billion to $450 billion. The European Central Bank, the Bank of England and the Bank of Japan are among the participating authorities.

The Fed's expansion of liquidity, the biggest since credit markets seized up last year, came hours before the U.S. House of Representatives rejected a $700 billion bailout for the financial industry. The crisis is reverberating through the global economy, causing stocks to plunge and forcing European governments to rescue four banks over the past two days alone.

``Today's blast of term liquidity will settle the funding markets down, and allow trust to slowly be restored between borrowers and lenders,'' said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. On the other hand, ``the Fed's balance sheet is about to explode.'' (As Dr. Greg House might say, "Cooool.." - Jesse)

The MSCI World Index of stocks in 23 developed markets sank 6 percent, the most since its creation in 1970. Credit markets deteriorated further as authorities tried to save more financial institutions from collapse.

European Rescue

European governments have rescued four banks in two days and the Federal Deposit Insurance Corp. said today it helped Citigroup Inc. buy the banking operations of Wachovia Corp. after its shares collapsed. The Standard & Poor's 500 Index fell 3.8 percent and the cost of borrowing dollars for three months rose to the highest since January. The rate for euros hit a record.

``If people think the authorities may give in to fears, they are wrong,'' Financial Stability Forum Chairman Mario Draghi said today in Amsterdam, where the international group of regulators and finance officials is meeting. ``There is willingness and determination on winning the battle to restore confidence and stability.'' (Yes, manipulate the markets until confidence is restored - Jesse)

Banks and brokers have slowed lending as they struggle to restore their capital after $586 billion in credit losses and writedowns since the mortgage crisis began a year ago. The bankruptcy of Lehman Brothers Holdings Inc. also sparked fears among banks they wouldn't be repaid by counterparties, driving up the cost of short-term loans between banks.

Bailout Bill Fails in the House

The Bailout Bill has failed in the house.

The popular voice has been heard as sentiment was running 99 to 1 against.

There was a motion to reconsider, but the vote has failed 205 to 228.

They cannot bring back the exact bill as it has been defeated, but they can reintroduce the bill with changes if they believe they can obtain the votes.

Now we'll take this to the next level, and most likely a Plan B. We would like to see an approach that better targets aid and does not give Wall Street a blank check. For once we would like to see a government plan that provides for more of a 'trickle up' approach that takes care of the people and allows the corporations to profit by adding legitmate value, not obtaining sincecures through devious maneuvers.

Keep providing your opinions and wishes to your elected representatives, because now the pressure from inside the Beltway will be more intense than ever. Whatever you wish, whatever your opinion, make yourself heard.

And be sure to vote in November.

SP Weekly Chart Updates - At the Brink

So far this looks like simple blackmail in a controlled descent.

We think there will be a snapback rally if the House votes for the bailout.

The pressure will remain on until the Senate votes on Wednesday.

Expect anything.

Global Central Banks Attempt to Provide LIquidity and Rescue the Dollar

Federal Reserve Bank
Release Date: September 26, 2008

Central banks have been employing coordinated measures designed to address the pressures in global money markets. Most recently, central banks have acted together to inject dollars into the overnight markets. Using their reciprocal currency arrangements (swap lines) with the Federal Reserve, the Bank of England, the European Central Bank (ECB), and the Swiss National Bank today are announcing the introduction of operations to provide U.S. dollar liquidity with a one-week maturity. These operations are designed to address funding pressures over quarter end. Central banks continue to work together closely and are prepared to take further steps as needed to address the ongoing pressures in funding markets.

Federal Reserve Actions

To assist in the expansion of these operations, the Federal Open Market Committee has authorized a $10 billion increase in its temporary swap facility with the ECB and a $3 billion increase in its facility with the Swiss National Bank. These expanded facilities will now support the provision of U.S. dollar liquidity in amounts of up to $120 billion by the ECB and up to $30 billion by the Swiss National Bank.

In sum, these changes represent a $13 billion addition to the $277 billion previously authorized temporary reciprocal currency arrangements with other central banks. In addition to the swap lines with ECB and the Swiss National Bank, temporary swap lines previously have been authorized with: the Bank of Japan ($60 billion), the Bank of England ($40 billion), the Reserve Bank of Australia ($10 billion), the Bank of Canada ($10 billion), the Bank of Sweden ($10 billion), the National Bank of Denmark ($5 billion), and the Bank of Norway ($5 billion).

These arrangements have been authorized through January 30, 2009.

28 September 2008

Roubini Pans the Bailout as a "Disgrace and Ripoff" and Most People Agree

Something needs to be done because of the errors, deceptions, regulatory lapses, and mismanagement of the Bush and Clinton administrations which allowed the unbridled greed of Wall Street to bring the global economy to the brink of ruin.

The priority of this plan is to preserve the status quo. This will not work. This plan will fail and more money will be urged.

Building from the bottom up, protecting the savings of depositors is paramount while liquidating the prime actors in this colossal financial fraud. Balance must be returned to the economy. A simple bailout will not accomplish this.

Restoring the confidence of the public after 16 years of pathological deceit will not be easy.

The Democratic leadership has shown itself to be vacuous, unimaginative and mechanical; the Republicans are pigmen through and through.

Any approach that maintains Morgan Stanley and Goldman Sachs as major players in the banking industry is a disgrace.

RGE Monitor
Is Purchasing $700 billion of Toxic Assets the Best Way to Recapitalize the Financial System?
No! It is Rather a Disgrace and Rip-Off Benefitting only the Shareholders and Unsecured Creditors of Banks
Nouriel Roubini
September 28, 2008

Whenever there is a systemic banking crisis there is a need to recapitalize the banking/financial system to avoid an excessive and destructive credit contraction. But purchasing toxic/illiquid assets of the financial system is not the most effective and efficient way to recapitalize the banking system. Such recapitalization – via the use of public resources – can occur in a number of alternative ways: purchase of bad assets/loans; government injection of preferred shares; government injection of common shares; government purchase of subordinated debt; government issuance of government bonds to be placed on the banks’ balance sheet; government injection of cash; government credit lines extended to the banks; government assumption of government liabilities.

A recent IMF study of 42 systemic banking crises across the world provides evidence on how different crises were resolved. First of all only in 32 of the 42 cases there was government financial intervention of any sort; in 10 cases systemic banking crises were resolved without any government financial intervention. Of the 32 cases where the government recapitalized the banking system only seven included a program of purchase of bad assets/loans (like the one proposed by the US Treasury). In 25 other cases there was no government purchase of such toxic assets. In 6 cases the government purchased preferred shares; in 4 cases the government purchased common shares; in 11 cases the government purchased subordinated debt; in 12 cases the government injected cash in the banks; in 2 cases credit was extended to the banks; and in 3 cases the government assumed bank liabilities. Even in cases where bad assets were purchased – as in Chile – dividends were suspended and all profits and recoveries had to be used to repurchase the bad assets. Of course in most cases multiple forms of government recapitalization of banks were used.

But government purchase of bad assets was the exception rather than the rule. It was used only in Mexico, Japan, Bolivia, Czech Republic, Jamaica, Malaysia, and Paraguay. Even in six of these seven cases where the recapitalization of banks occurred via the government purchase of bad assets such recapitalization was a combination of purchase of bad assets together with other forms of recapitalization (such as government purchase of preferred shares or subordinated debt).

In the Scandinavian banking crises (Sweden, Norway, Finland) that are a model of how a banking crisis should be resolved there was not government purchase of bad assets; most of the recapitalization occurred through various injections of public capital in the banking system. Purchase of toxic assets instead – in most cases in which it was used – made the fiscal cost of the crisis much higher and expensive (as in Japan and Mexico).

Thus the claim by the Fed and Treasury that spending $700 billion of public money is the best way to recapitalize banks has absolutely no factual basis or justification. This way of recapitalizing financial institutions is a total rip-off that will mostly benefit – at a huge expense for the US taxpayer - the common and preferred shareholders and even unsecured creditors of the banks. Even the late addition of some warrants that the government will get in exchange of this massive injection of public money is only a cosmetic fig leaf of dubious value as the form and size of such warrants is totally vague and fuzzy.

So this rescue plan is a huge and massive bailout of the shareholders and the unsecured creditors of the financial firms (not just banks but also other non bank financial institutions); with $700 billion of taxpayer money the pockets of reckless bankers and investors have been made fatter under the fake argument that bailing out Wall Street was necessary to rescue Main Street from a severe recession. Instead, the restoration of the financial health of distressed financial firms could have been achieved with a cheaper and better use of public money.

Indeed, the plan also does not address the need to recapitalize those financial institutions that are badly undercapitalized: this could have been achieved by using some of the $700 billion to inject public funds in ways other and more effective than a purchase of toxic assets: via public injections of preferred shares into these firms; via required matching injections of Tier 1 capital by current shareholders to make sure that such shareholders take first tier loss in the presence of public recapitalization; via suspension of dividends payments; via a conversion of some of the unsecured debt into equity (a debt for equity swap). All these actions would have implied a much lower fiscal costs for the government as they would have forced the shareholders and creditors of the banks to contribute to the recapitalization of the banks. So less than $700 billion of public money could have been spent if the private shareholders and creditors had been forced to contribute to the recapitalization; and whatever the size of the public contribution were to be its distribution between purchases of bad assets and more efficient and fair forms of recapitalization (preferred shares, common shares, sub debt) should have been different. For example if the private sector had done its fair matching share only $350 billion of public money could have been used; and of this $350 billion half could have taken the form of purchase of bad assets and the other half should have taken the form of injection of public capital in these financial institutions. So instead of purchasing – most likely at an excessive price - $700 billion of toxic assets the government could have achieved the same result – or a better result of recapitalizing the banks – by spending only $175 billion in the direct purchase of toxic assets. And even after the government will waste $700 billion buying toxic assets many banks that have not yet provisioned for such losses/writedowns will be even more undercapitalized than before. So this plan does not even achieve the basic objective of recapitalizing undercapitalized banks.

The Treasury plan also does not explicitly include an HOLC-style program to reduce across the board the debt burden of the distressed household sector; without such a component the debt overhang of the household sector will continue to depress consumption spending and will exacerbate the current economic recession.

Thus, the Treasury plan is a disgrace: a bailout of reckless bankers, lenders and investors that provides little direct debt relief to borrowers and financially stressed households and that will come at a very high cost to the US taxpayer. And the plan does nothing to resolve the severe stress in money markets and interbank markets that are now close to a systemic meltdown. It is pathetic that Congress did not consult any of the many professional economists that have presented - many on the RGE Monitor Finance blog forum - alternative plans that were more fair and efficient and less costly ways to resolve this crisis. This is again a case of privatizing the gains and socializing the losses; a bailout and socialism for the rich, the well-connected and Wall Street. And it is a scandal that even Congressional Democrats have fallen for this Treasury scam that does little to resolve the debt burden of millions of distressed home owners.

27 September 2008

Charts in the Babson Style for the Week Ending 26 September 2008

These charts are incredibly bearish, and were it not for the bailout being cooked up by the Federals we would be looking to get short and stay short until we burn a thousand points to the downside at least.

However, that is not the case. It does look like the government 'will do something' and this may have a powerful short term impact on the markets.

We want to be ready and capable of taking advantage of a volatile situation.

26 September 2008

Fed Puts Pedal to the Metal - Adjusted Monetary Base Rises at Record Levels

It will be interesting to see how the lagged effects of this begin to exhibit in the broader monetary supply measures over time.

Recall that after each of these spikes in the adjusted monetary base there was a resultant bubble in techs and then in housing. Will there be another bubble? Where will it be?

And the presses go rolling along....

25 September 2008

Investment Banks Help Drive Discount Window Lending to a Record $262 Billion This Week

Tell us again why we need to give $700 Billion of taxpayer money to Wall Street?

The report attached references the 'investment banks.' We hear that Goldman and Morgan are the only remaining investment banks while they are in the five day 'waiting period' to be bank holding companies.

While we obviously cannot be sure the implication is that they are both insolvent in the hundreds of billions of dollars, and without support would be bankrupt.

Goldman Sachs and Morgan Stanley and the other investment banks are among the prime actors that caused the problems that have been plaguing us since the 1990's.

They devastated multiple industrial sectors in the US through the distortions of asset bubbles while stuffing hundreds of millions of dollars into their pockets.

They corrupted the financial and political systems with their unbridled greed and shameless pursuit of excess and ego.

And now they need three quarters of a trillion dollars to maintain the lifestyle to which they have become accustomed.

Their spokespuppets tell us if we don't give it to them, they will crash the global economy.

The deal on the table is that they sell us nearly worthless assets and derivatives for $700 Billion dollars, and then they loan that money back to us at interest.

Would you like to buy a vowel?

We'd rather give the money to every family that made less than five million dollars on a sliding scale last year. what would that be, about $36,000? And let you wait for it to trickle up.

Oh no, we couldn't do that, it would be inflationary. It would be socialism. But if we give it to the Bush crony capitalists that is good business.

The best Wall Street should hope for is a head start, if there is any justice left in this land.

American Banker
Discount Window Borrowing Jumps to $262 Billion
By Steven Sloan
September 26, 2008

WASHINGTON — During another turbulent week on Wall Street, lending through the Federal Reserve Board's discount window skyrocketed to $262.3 billion on Wednesday, thanks to new lending programs unveiled during the week.

It was the second record in as many weeks and more than double from the previous high water mark.

The heaviest lending was centered on the primary dealer credit facility, which was established in March to give investment banks access to the discount window. The Fed eased terms on the facility on Sunday when it approved requests from Goldman Sachs and Morgan Stanley to convert to bank holding companies.

The Fed said Goldman and Morgan, the last of the major investment banks, could borrow on the same terms as commercial banks and with the same collateral. In response, lending through the PDCF totalled $105.662 billion on Wednesday, from $59.8 billion a week earlier.

Commercial banks were also very active at the discount window. Loans to banks increased 17.7%, to $39.9 billion, a new record.

Meanwhile, the Fed issued loans to weak banks for the second week in a row. These loans increased 5.6%, to $19 million on Wednesday.

The Fed's efforts to backstop the market for money market mutual funds appears to have been met with initial success. The Fed said Friday it would lend against asset backed commercial paper held by the funds. It distributed $72.7 billion by Wednesday.

The central bank also said American International Group Inc., the insurance giant the Fed bailed out on Sept. 16, drew $44.6 billion of its $85 billion government loan by Wednesday. A week earlier, the company had tapped $28 billion of the loan.

As the Fed continues to boost and widen its lending programs, concern has grown that too much of its balance sheet is being dedicated to helping banks survive the credit crunch. With these concerns in mind, the Fed grew its balance sheet by 22%, to $1.2 trillion.

The Fed was helped in these efforts by the Treasury Department, which began a program earlier this month to sell Treasury bills and send the cash generated to the Federal Reserve Bank of New York. The central bank said it received $159.8 billion from the Treasury through this program.

Bipartisan Senator Group Calls for Special Investigator to Oversee Bailout Operations

This could be useless smoke, or it could have some teeth and be useful.

If this position was filled by Eliot Spitzer it might be interesting, maybe for no pay as a community service deal. He would surely be up for that. Payback is a bitch after all. Probably a little outré for Washington.

Maybe George Soros, Nouriel Roubini, or Paul Krugman? No their knuckles are not hairy enough for this task. Karl Denninger of Tickerforum or Gata's Bill Murphy could do it if they had strong staff support. There would not be a bank left unscathed after they hit their stride. The press briefings would be fun.

The most significant talent for a Special Inspector General in addition to being able to build and organize a large administrative problem with loads of special influence-peddling interference would be to sniff out fraud and roll the small fry over on the heavy hitters.

The Senate would probably want to consider someone NOT nominated by short-timer Bush. As they say in boxing that nominee would be a 'tomato.' Someone like Tom Kean, Rudy Giuliani or Phil Gramm. Hey, Sara Palin is a reformer and knows finance; she has a checkbook.

It would best be someone with significant experience in RICO investigations and a serious lack of sympathy for Wall Street, but with a familiarity with their methods and a spotless reputation.

Does such a person exist?

RTT Global Financial News
32 Senators Call For Creation Of Special Investigator General To Oversee Bailout

9/25/2008 3:50 PM ET

(RTTNews) - A bipartisan group of 32 senators is calling for a special auditor for any federal bailout program for financial institutions.

The group, led by Finance Committee Chairman Max Baucus, D-Mont., says a special investigator general for the program would be an important step to preventing waste, fraud and abuse.

In a letter to House and Senate leaders of both parties, the 32 senators said the program should be modeled after the Special Investigator General investigating problems in Iraqi reconstruction efforts.

"But this Special Treasury Inspector General would be on the job long before waste, fraud, and abuse has a chance to take hold in the Treasury program," they said in the letter. "Proper oversight will require not only our constant effort, but the full time attention of an office with only one task: to monitor this extremely complex effort with a team of expert personnel who will not be distracted by other duties."

The letter calls for the new IG to be nominated within 30 days of approval of a bailout plan and demands that the inspector have full power to investigate, audit and issue subpoenas.

"I don't like bailouts, and I certainly wasn't okay with the blank-check request that first came to Congress from the Treasury. If Congress does pass legislation - and I will have to look at it closely - creating a Special Inspector General will make any program more accountable to taxpayers," Baucus said in a statement.

China Admits to Currency Manipulation, Dictates Terms for Support of US Sovereign Debt

Anyone care to remember the many economists, talking heads and government hacks who provided lengthy explanations why China was not manipulating the currency markets to provide a de facto set of subsidies and tariffs in the international markets?

Now China is dictating the terms.

This started with the Clintons and was brought to full flower under Bush.

The Wall Street bailout will probably pass under duress. Why not? The Congress cannot hear their constituents, and have been increasingly ignoring them for years. We need to vote out all incumbents in November.

It is merely another step in the systematic betrayal of the markets and the public and all holders of the US dollar.

The reason why the government will give trillions to the banks and not the people is because of fear of making a mistake and campaign donations from Wall Street.

The reason that the Treasury and Fed wish to pay more than junk assets are worth and give it to the banks rather than the people is that the banks will take the money and put it in the multiplier machine x10 through fractional reserve accounting and inflate us out of our debt problems. They are counting on countries like China and Japan to help them hide it for as long as possible while they think about another plan to prevent hyperinflation.

What does not kill the dollar makes it.... stranger.

Asia Needs Deal to Prevent Panic Selling of U.S. Debt, Yu Says
By Kevin Hamlin

Sept. 25 (Bloomberg) -- Japan, China and other holders of U.S. government debt must quickly reach an agreement to prevent panic sales leading to a global financial collapse, said Yu Yongding, a former adviser to the Chinese central bank.

``We are in the same boat, we must cooperate,'' Yu said in an interview in Beijing on Sept. 23. ``If there's no selling in a panicked way, then China willingly can continue to provide our financial support by continuing to hold U.S. assets.''

An agreement is needed so that no nation rushes to sell, ``causing a collapse,'' Yu said. Japan is the biggest owner of U.S. Treasury bills, holding $593 billion, and China is second with $519 billion. Asian countries together hold half of the $2.67 trillion total held by foreign nations.

China, Japan, South Korea and others should meet soon to seal a deal, said Yu, a former academic member of the central bank's monetary policy committee. The talks should involve finance ministers, central bank governors and even national leaders, he said.

``Whether some kind of agreement between them to continue to hold Treasury bills is viable, I'm not sure,'' said James McCormack, head of sovereign ratings at Fitch Ratings Ltd in Hong Kong. ``It would be unusual. If it became apparent that sovereigns in Asia were selling Treasuries the market would take that quite badly, it's something to be avoided...''

China's huge holdings of U.S. debt means it must bear a large proportion of the ``burden of sorting things out'' in the U.S., Yu said. China is not in a hurry to dump its U.S. holdings and communication between the two nations every ``couple of days'' is keeping Chinese leaders informed and helping to avoid a potential panic, he added.

``China is very worried about the safety of its assets,'' he said. ``If you want China to keep calm, you must ensure China that its assets are safe.''

Currency Manipulator

Yu said China is helping the U.S. ``in a very big way'' and added that it should get something in return. The U.S. should avoid labeling it an unfair trader and a currency manipulator and not politicize other issues, he said.

``It is not fair that we are doing this in good faith and are prepared to bear serious consequences and you are still labeling China this and that, accusing China of this and that,'' he said. ``China knows what to do. We don't need your intervention.''

The U.S. financial crisis had taught China a lesson and that was: ``Why are we piling up these IOUs if they may default?'' China's economic expansion strategy, which emphasizes export growth that has led to trade surpluses and the accumulation of $1.81 trillion in foreign-exchange reserves, is the main problem, said Yu.

``Our export-growth strategy has run its natural course,'' he said. ``We should change course.''

China should stop intervening in the foreign currency markets and thus allow rapid appreciation of the yuan, he said. While this would cause pain for exporters, China could ease the transition by using its strong fiscal position to aid those who lose their jobs. It also should stimulate domestic demand to offset lower income from overseas sales.

Without yuan appreciation, China will continue to accumulate foreign reserves, which means further accumulating ``IOUs from the U.S.,'' said Yu. ``This is paper and it may default and it will not increase China's national welfare.''

If China doesn't allow the yuan to appreciate and continues to promote export-led growth it will lead to confrontation with the U.S. and Europe, Yu said.

China Regulator Bans Lending to US Banks Because of Default Risk

South China Morning Post
China banks told to halt lending to US banks

by Alan Wheatley and Langi Chiang
Sep 24, 2008 9:52pm EDT

BEIJING, Sept 25 (Reuters) - Chinese regulators have told domestic banks to stop interbank lending to U.S. financial institutions to prevent possible losses during the financial crisis, the South China Morning Post reported on Thursday.

The Hong Kong newspaper cited unidentified industry sources as saying the instruction from the China Banking Regulatory Commission (CBRC) applied to interbank lending of all currencies to U.S. banks but not to banks from other countries.

"The decree appears to be Beijing's first attempt to erect defences against the deepening U.S. financial meltdown after the mainland's major lenders reported billions of U.S. dollars in exposure to the credit crisis," the SCMP said.

A spokesman for the CBRC had no immediate comment.

24 September 2008

American Public to Wall Street Banks: Drop Dead

“Most illiquid bond assets are illiquid because they are not worth anything.” - Ron Paul

When this was forecast below was written a few weeks ago it was not with the idea that the 'offer' would be coming so quickly. But with McCain lagging badly in the polls, it looks like the money powers decided it was time to act just ahead of a congressional recess.
"When the banks make us an offer they think that we cannot refuse, we will be at the crossroads and will decide what we wish to be: slaves [to fear] or free men. Yes, it really is that simple."

Death of Capitalism: Financial Tsunami Incoming - 8 Sept 2008

How did we know this was coming? Because the setup really is that obvious. These guys are not clever, they are shameless.

What is most surprising has been the enormous response from the public to the Congress since Paulson's Treasury made their arrogant proposal to the country last week on behalf of Wall Street. Aides report that it is running solidly 99 to 1 against. The common sense of the people is a sleeping giant and has apparently been awakened by this outrage. Not completely, but stirring. We don't have any illusions. Its hard to stand up to the Big Lie. The Banks will get something.

The banks have mispriced assets on their books. They will never be worth what they thought they would be, where they marked them with the cooperation of the ratings agencies, if they hold them until kingdom come.

This is why they do not wish to hold them on their books. They want to sell them, but they do not wish to accept the price that an informed market will offer, now or in the near future.

Its hard to understand this unless you accept the inherently fraudulent nature of much of the paper that was packaged and put together for sale to others. This latest bubble fell apart prematurely when the market for this junk collapsed and the banks were left holding the bag.

Provide liquidity to the banks at a price. Put four hundred billion dollars into the FDIC to insure the savers' bank accounts and increase it to one million dollars per person. Put another three hundred billion in the Small Business Administration and Office of Thrift Supervision and the FHA if necessary to make loans to small businesses and consumers that cannot obtain market liquidity through the regional banks, which should be the key to the rebuilding of our financial system. Provide large amounts of liquidity to the healthy banks in the quantities required to support economic activity.

But do NOT buy this junk from the Wall Street banks, especially the investment banks. Allow the tide to continue to go out and let's see who is wearing what. If we provide a bailout to this crowd while they continue to pay out fat dividends and capital gains and outrageous salaries we deserve what we will most surely get in return.

"Last year Goldman paid its employees $20 billion, 44 percent of the firm's revenue. Chief Executive Officer Lloyd Blankfein took home $68.5 million, and many otherwise ordinary human beings took home $10 million or more.

This inspired young people everywhere, many of whom may have privately wondered whether it was still worth their time to become investment bankers. Torn between a future in, say, the law and the manufacture of mezzanine CDOs they sucked up their courage and plunged onto Wall Street. And thank God for that: we needed the best and the brightest to get us into this mess, and we'll need the best and the brightest to get us out of it."

America Must Rescue the Bonuses at Goldman Sachs - Michael Lewis

The Wall Street banks are an inefficient, manipulative, overly-expensive, oversized, and a hopelessly broken mechanism for the rational allocation of capital. A number of those banks need to be broken apart and liquidated, not replenished with increasingly scarce public capital. We need to cut out the parts that are hopelessly rotten, save what is good, and rebuild together from there.

What would we do if the oil companies said "Give us the Artic Wildlife refuge and 700 billion in public money to develop it or we won't give you any gas starting next month. We'll send it all to China and Europe."

What if the drug companies said, "Give us free malpractice insurance and accelerated drug approvals and scrap the FDA and 700 billion for research and development or you won't get any more medicine next week."

Or GM and Ford said "Give us 700 billion to retool to meet industry standards and pay off our healthcare and pensions or we stop fixing and shipping cars and crash the manufacturing industry."

Why is it when it comes to Wall street that people lose all perspective?

What would you do if your your teenager said they wanted a $7000 home entertainment system or they would throw themselves on the ground and make an embarrassing scene?

What are we going to do when the Big Banks come back in six months and say, "the 700 billion was not enough, we ran through it already. We need another 700 billion or the markets will crash and we will stop lending money."

Decisions made under the duress of dire threats and political blackmail never work out as intended, and never stop there, because appeasement does not work.

If we do not invade Iraq the first warning we will get about their WMDs will be a mushroom cloud. If you do not pass the Patriot Act immediately hidden sleeper cells will rise up and bomb the shopping malls.

We need to fix this problem, not just throw money at it and hope it goes away. Maybe there is a good case to be made for a capital infusion but we certainly have not heard it explained. So far all we have are demands and threats as this site predicted we would receive weeks ago.

ProPublica - History of US Government Bailouts

Nasdaq Composite Long Term Logarithmic Chart

This is a logarithmic long term chart of the Nasdaq Composite.

Quite a bit of these gains simply reflect the effects of dollar inflation which has a significant compounding effect over time.

But it does suggest that the potential downside is profound.

The indicators on the bottom of the chart are the volume-based money flows.

AIG Takes 85 Billion Fed Loan, Agrees to be Nationalized

AIG signs up for $85 billion Fed loan
By Alistair Barr,
1:25 p.m. EDT Sept. 24, 2008

Insurer effectively 'nationalized' after failing to raise capital in private market

SAN FRANCISCO (MarketWatch) -- American International Group shares fell more than 10%on Wednesday after the giant insurer agreed to be effectively nationalized late Tuesday.

AIG narrowly avoided bankruptcy last week after the Federal Reserve stepped in with a massive bailout.

Some big AIG shareholders have reportedly been trying to raise capital in private markets to avoid the government seizing control of the company.

But late Tuesday AIG said it signed a definitive agreement with the Federal Reserve Bank of New York for a two-year, $85 billion revolving credit facility.

As part of the deal, AIG will issue a series of Convertible Participating Serial Preferred Stock to a trust that will hold the new securities for the benefit of the Treasury. The Preferred Stock will get almost 80% of any dividends paid on AIG's common stock and will give the government almost 80% of the voting power. The securities will then be converted to common stock at a special shareholder meeting, AIG said.

The agreement leaves "AIG essentially nationalized," Bijan Moazami, an analyst at Friedman, Billings, Ramsey, wrote in a note to investors on Wednesday. "Shareholder efforts to prevent the government from taking an equity stake in AIG will prove fruitless."

Indeed, AIG's new chief executive Edward Liddy said the company made an "exhaustive effort" to borrow money in the private market, but failed.

"This facility was the company's best alternative," Liddy added in a statement late Tuesday
AIG shares dropped 13% to $4.36 during afternoon trading on Wednesday.

Asset sales, dilution

Liddy said AIG is developing a plan to sell assets and use the proceeds to repay the government loan, hopefully emerging later as a smaller but profitable company.

FBR's Moazami expects AIG to borrow all the $85 billion immediately, partly because the company will have to pay hefty fees and interest on the money it doesn't use. The agreement with the Fed requires the insurer to pay an annual interest rate of 8.5% on the money it doesn't borrow from the loan facility.

AIG has to pay back the $85 billion from the proceeds of certain asset sales and the issuances of new debt and equity, the company said.

AIG has "little to no" capacity to borrow more money in private markets, so if it has to raise capital to repay the Fed the insurer will probably have to sell more common shares, diluting current investors even more, Moazami warned

The Failed Bankers Rescue of 1929 Redux

“This is scare tactics to try to do something that’s in the private but not the public interest,” said Allan Meltzer, a former economic adviser to President Reagan, and an expert on monetary policy at the Carnegie Mellon Tepper School of Business. “It’s terrible.”
Alan Meltzer of Carnegie Mellon just finished excoriating the Bernanke-Paulson plan on Bloomberg television and he is right. We need to allow the markets to work through this longer, to use the facilities we have in place, to allow the Fed if necessary to add liquidity to the markets if they feel the need and the situation calls for it.

But purchasing specific bad debt from specific banks with no strings attached is crony capitalism, with dividends to be paid, stock gains to be taken, management compensation to remain at lofty levels. It is a repugnant to the republic and free markets.

And it is increasingly difficult to believe that this proposal is being made in good faith with the intentions and objectives as stated.

...several leading Wall Street bankers met to find a solution. The group included Thomas W. Lamont, acting head of Morgan Bank; Albert Wiggin of the Chase National Bank; and Charles E. Mitchell, of National City Bank. They chose Richard Whitney, vice president of the Exchange, to act on their behalf.

With the bankers' financial resources behind him, Whitney placed a bid to purchase a large block of shares in U.S. Steel at a price well above the current market. As amazed traders watched, Whitney then placed similar bids on other blue-chip stocks.
Although a similar such tactic had ended the Panic of 1907, this action halted the slide that day and returned stability to the market only temporarily.

We may have finally figured out Ben's game and connected some of the dots that did not seem to make any sense in isolation. It was in his explanation of why the Treasury should pay well over market prices for the toxic bank debt held by Wall Street. (We're not willing yet to speculate on Hank's game yet.)

This morning in response to a question about why the Treasury should not penalize or demand anything in return from the banks for buying distressed assets in return for the risk, and pay closer to hold to maturity prices, Ben said that this would not be fair since all the banks stand to benefit from this action.'

The point of this exercise is not to help two or three banks or ten banks which are in trouble.

The point of this exercise is to try and support the debt markets by buying assets at prices well above the market, and to do it quickly and in size in the hope of forestalling a likely debt market and stock market crash. They are going to give the money to the banks for worthless assets because they want to gear up x10 using the fractional reserve money multiplier. Its a helicopter drop to the Wall Street banks. They will take a hefty cut for themselves for taking the package and doling it out like third world warlords handing out Red Cross aid.

This is eerily similar to the actions taken by the Morgan's Lamont and the NY banks in putting together a pool of money, and halting the Crash of 1929 by having Dick Whitney walk across the street, and loudly start buying stocks at above market prices to "restore confidence" in the markets. This did work, for a day.

It is also similar to a tactic Morgan himself and the bankers used in 1907 to halt the liquidity panic caused by some specific bank failures caused by overextension in bad assets.

Why are these policy failures? It presumes that the markets are wrong, and that they are pricing risk incorrectly. Further, it does nothing to change the dynamics and fundamentals underlying the markets assumptions except to hold out a federal subsidy at an above market price. The traders will come back and hit that subsidy over and over until it is exhausted, as the currency traders hit sterling when the Bank of England tried to support it above the market.

We think this will not work, is a policy error, because buying assets above market price will not stop this juggernaut of a collapsing bubble, and will merely throw 700 billion of capital we will sorely miss later down a hole, specifically benefiting a remarkably few individuals who will skim most of it before it is obliterated. It will inflate the currency and soon be exhausted. It will accomplish nothing and only make it worse for many who fail to take action to protect themselves, being deceived by this market manipulation.

In short, Bernanke's proposal fixes NOTHING. It provides some getting out of town money for some of the worst of the insiders of this financial fiasco.

That's why he needs this today or tomorrow. Because the US equity markets are in the process of crashing. And he is attempting the same type of banker's rescue that was attempted in 1929.

Sweeping actions will not work. We cannot fix this by reflating the bubble and pricing the assets back up to bubble levels. This would buy a little time at best.

We need to get in and tie off the bleeding parts, the truly insolvent banks, sort out which are good and which are foul, and cut them off in bankruptcy like Lehman. This cannot be done by banking insiders because of the obvious conflicts of interest which are profound, even in self-proclaimed purely objective Ben.

One last thing to think about. We are having these discussions about the fate of our biggest banks. Which ones to save and how? Which ones to take into conservatorship and manage their affairs as a major creditor. Which ones to fail and liquidate. How best to firewall the side effects.

What are our creditors overseas saying about us? About the US and the sovereign debt and our impending insolvency? And don't think they are not having these discussions, perhaps without our direct involvement.

There came a Wednesday, October 23rd, when the market was a little shaky, weak. And whether this caused some spread of pessimism, one doesn't know. It certainly led a lot of people to think they should get out. And so, Thursday, October the 24th -- the first Black Thursday -- the market, beginning in the morning, took a terrific tumble. The market opened in an absolutely free fall and some people couldn't even get any bids for their shares and it was wild panic. And an ugly crowd gathered outside the stock exchange and it was described as making weird and threatening noises. It was, indeed, one of the worst days that had ever been seen down there."

"There was a glimmer of hope on Black Thursday...About 12:30, there was an announcement that this group of bankers would make available a very substantial sum to ease the credit stringency and support the market. And right after that, Dick Whitney made his famous walk across the floor of the New York Stock Exchange.... At 1:30 in the afternoon, at the height of the panic, he strolled across the floor and in a loud, clear voice, ordered 10,000 shares of U.S. Steel at a price considerably higher than the last bid. He then went from post to post, shouting buy orders for key stocks."

"And sure enough, this seemed to be evidence that the bankers had moved in to end the panic. And they did end it for that day. The market then stabilized and even went up."

"But Monday was not good. Apparently, people had thought about things over the weekend, over Sunday, and decided maybe they might be safer to get out. And then came the real crash, which was on Tuesday, when the market went down and down and down, without seeming limit...Morgan's bankers could no longer stem the tide. It was like trying to stop Niagara Falls. Everyone wanted to sell."

"In brokers' offices across the country, the small investors -- the tailors, the grocers, the secretaries -- stared at the moving ticker in numb silence. Hope of an easy retirement, the new home, their children's education, everything was gone."

23 September 2008

Warren Buffet Goes Dumpster Diving and Gets the Gold, Man

Goldman is paying Warren a pretty rich return for his buy-in.

Did they give up hope on Hank and Ben for a government handout?

Or did Warren just decide to get a place at the table with the new ruling power in the US?

American Banker
Berkshire to Buy $5B of Preferred Stock from Goldman Sachs
By Jack Herman
September 23, 2008

Berkshire Hathaway Inc. will buy $5 billion worth of perpetual preferred stock from Goldman Sachs Group Inc. in a private offering, Goldman Sachs announced today.

The preferred stock will pay a 10% dividend and will be callable any time at a 10% premium. Berkshire will also receive warrants to purchase $5 billion worth of common stock within five years and a strike price of $115 per share.

Along with Morgan Stanley, Goldman Sachs announced Sunday it would convert into a bank holding company.

"We are pleased that given our longstanding relationship, Warren Buffett, arguably the world's most admired and successful investor, has decided to make such a significant investment in Goldman Sachs. We view it as a strong validation of our client franchise and future prospects," Lloyd C. Blankfein, chairman and chief executive officer of Goldman Sachs Group Inc., said in a statement. "This investment will further bolster our strong capitalization and liquidity position."

"Goldman Sachs is an exceptional institution," Warren Buffett, chairman and CEO of Berkshire Hathaway, said in a statement. "It has an unrivaled global franchise, a proven and deep management team, and the intellectual and financial capital to continue its track record of outperformance."

FBI Looking for Financial Misdeeds on Wall Street

May as well throw a cordon around Manhattan and bring in everyone wearing a power tie, suspenders, or designer shoes from Bergdorf's.

"...the FBI's hunt for culprits in the nation's subprime mortgage crisis focused on accounting fraud, insider trading, and failure to disclose the value of mortgage-related securities and other investments."

Associated Press
FBI investigating companies at heart of meltdown
09.23.08, 8:09 PM ET

WASHINGTON - The FBI is investigating four major U.S. financial institutions whose collapse helped trigger a $700 billion bailout plan by the Bush administration, The Associated Press has learned.

Two law enforcement officials said Tuesday the FBI is looking at potential fraud by mortgage finance giants Fannie Mae and Freddie Mac, and insurer American International Group Inc. Additionally, a senior law enforcement official said Lehman Brothers Holdings Inc. also is under investigation.

The inquiries will focus on the financial institutions and the individuals that ran them, the senior law enforcement official said.

The law enforcement officials spoke on condition of anonymity because the investigations are ongoing and are in the very early stages.

Officials said the new inquiries bring to 26 the number of corporate lenders under investigation over the past year.

Spokesmen for AIG, Fannie Mae and Freddie Mac did not immediately return calls for comment Tuesday evening. A Lehman spokesman did not have an immediate comment.

Just last week, FBI Director Robert Mueller put the number of large financial firms under investigation at 24. He did not name any of the companies under investigation but said the FBI also was looking at whether any of them have misrepresented their assets.

Over the past year as the housing market cratered, the FBI has opened a wide-ranging probe of companies across the financial services industry, from mortgage lenders to investment banks that bundle home loans into securities sold to investors. Mueller has previously said the FBI's hunt for culprits in the nation's subprime mortgage crisis focused on accounting fraud, insider trading, and failure to disclose the value of mortgage-related securities and other investments.

The investigations revealed Tuesday come as lawmakers began considering whether to approve emergency legislation that would give the government broad power to buy up devalued assets from troubled finance....

Additionally, the FBI is investigating failed bank IndyMac Bancorp Inc. for possible fraud. Countrywide Financial Corp., formerly the nation's largest mortgage lender and now owned by Bank of America Corp., is also under scrutiny.