BSC Says CEO James Cayne Sold ALL His Shares at $10.84

BSC SEC Filing Says James Cayne Sold All His Remaining Shares in His Company

NEW YORK, Mar 28, 2008 NEW YORK (CNNMoney.com) -- Just a day after JPMorgan Chase quintupled its bid for Bear Stearns, James Cayne, the chairman of the troubled investment bank, dumped his entire stake in the firm, selling more than $60 million worth of company stock he owned.

Cayne, who also served as Bear Stearns' chief executive before stepping down in January of this year, sold over 5.6 million shares of company stock Tuesday at $10.82 a share, according to a company filing with the Securities and Exchange Commission on Thursday.

Bear Stearns (BSC, Fortune 500) shares closed at $11.23 apiece in Thursday trading on the New York Stock Exchange.

The deal, which was first announced by JPMorgan (JPM, Fortune 500) on the evening of March 16, initially valued the troubled investment bank at $2 a share, a 93% discount from its closing price on March 14.

The Dame of Doom Says UBS and MER to Take Another Big Hit

Ben's 'too big to fail' list is going to get busy.

Hey what about these non-US "banks" that are holding heavy like Bear Stearns? Will the Fed save them too? Or is this going to be a global central bank group effort?

Capability Tim at the NYFed can mail a 'how-to' document to Buba in care of Threadneedle Street. Obvious nationalisation is so déclassé.

Whitney: Merrill, UBS Face New Writedowns
03/27/08 -
09:16 AM EDT
Marketwatch

Oppenheimer analyst Meredith Whitney on Thursday forecast new writedowns and losses at Merrill Lynch and UBS two more investment banks hit hard amid the deep-rooted credit crunch.

Whitney, who last fall issued an early and accurate call that Citigroup would have to cut its dividend, predicted writedowns of $6 billion and $11.1 billion at the two firms, respectively. She issued the note late Wednesday, after shares of the two firms stumbled in the wake of a bearish note on Citi that predicted $13 billion in writedowns.

Shares of Merrill were falling 2% and UBS shares were up 3.6% in premarket trading. Merrill had fallen 7.2% and UBS sank 3.1% Wednesday. Citi fell 5.8% Wednesday.

Whitney expects Merrill to lose $3 a share in the first quarter, down from her earlier prediction of a profit of 45 cents a share. For the full year, she sees a profit per share of 20 cents, down from her earlier forecast of $4 a share.

UBS could lose $2.72 a share in the first quarter, she said, lowering her earlier outlook of a profit of 72 cents a share. For the full year, she sees a profit of 45 cents a share, vs. an earlier view of a $3.72-a-share profit. The two firms have been among the hardest hit in the credit crunch. Merrill wrote down $14.6 billion in soured mortgage-related investments in the fourth quarter, while UBS wrote down $18 billion.

Whitney's note on Citi Wednesday predicted as much as $50 billion in writedowns for the financial sector. The note also cut forecasts for Bank of America, JPMorgan Chase and Wachovia Bank.

...I saw pale kings and princes too,
Pale warriors, death-pale were they all;
They cried—“La Belle Dame sans Merci
Hath thee in thrall!”

I saw their starved lips in the gloam,
With horrid warning gaped wide,
And I awoke and found me here,
On the cold hill’s side.

And this is why I sojourn here,
Alone and palely loitering,
Though the sedge is wither’d from the lake,
And no birds sing. John Keats

Report Finds KPMG Culpable in Subprime Bankruptcy

What is there about the danger of 'moral hazard' that people don't understand?

Do highly profitable abuses usually stop by themselves, especially when the punishments assessed are a small cost of the price of doing business? When only a few 'outsider' scapegoats get punished while the enablers and insiders move on to corrupt new and larger circles of society?

Is there any decency and honor left in the media and our government and our businesses and our universities? Most everyone has their price, but we are dismayed to find out how relatively little it can be. How easily the rest go along with a few vocal thought leaders and lose their personal and professional souls.

What will it finally take to bring us to our senses?

March 27, 2008
Inquiry Assails Accounting Firm in Lender’s Fall
By VIKAS BAJAJ
NY Times

A sweeping five-month investigation into the collapse of one of the nation’s largest subprime lenders points a finger at a possible new culprit in the mortgage mess: the accountants.

New Century Financial, whose failure just a year ago came at the start of the credit crisis, engaged in “significant improper and imprudent practices” that were condoned and enabled by auditors at the accounting firm KPMG, according to an independent report commissioned by the Justice Department.

In its scope and detail, the 580-page report is the most comprehensive document yet made public about the failings of a mortgage business. Some of its accusations echo charges that surfaced about the accounting firm Arthur Andersen after the collapse of Enron in 2001.

E-mail messages uncovered in the investigation showed that some KPMG auditors raised red flags about the accounting practices at New Century, but that the KPMG partners overseeing the audits rejected those concerns because they feared losing a client.

From its headquarters in Irvine, Calif., New Century ruled as one of the nation’s leading subprime lenders. But its dominance ended when it was forced into bankruptcy last April because of a surge in defaults and a loss of confidence among its lenders.

The report lays bare the aggressive business practices at the heart of the mortgage crisis.

“I would call it incredibly thorough analysis,” said Zach Gast, an analyst at RiskMetrics who raised concerns about accounting practices at New Century and other lenders in December 2006. “This is certainly the most in-depth review we have seen of one of the mortgage lenders that we have seen go bust.”

A spokeswoman for KPMG, Kathleen Fitzgerald, took strong exception to the report’s allegations. “We strongly disagree with the report’s conclusions concerning KPMG,” she said. “We believe an objective review of the facts and circumstances will affirm our position.”

The report zeros in on how New Century accounted for losses on troubled loans that it was forced to buy back from investors like Wall Street banks and hedge funds. Had it not changed its accounting, the company would have reported a loss rather than a profit in the second half of 2006.

The report said that investigators “did not find sufficient evidence to conclude that New Century engaged in earnings management or manipulation, although its accounting irregularities almost always resulted in increased earnings.”

Even so, the profits were the basis for significant executive bonuses and helped persuade Wall Street that the company was in fine health when in fact its business was coming apart, the report contends.

In bankruptcy court, creditors of New Century say they are owed $35 billion. The company’s stock peaked at nearly $65.95 in late 2004; it was trading at a penny on Wednesday.

A spokesman for New Century, which is being managed by a restructuring firm under the supervision of the bankruptcy court, said the company was pleased that the report had been published.

The investigation was led by Michael J. Missal, a lawyer and former investigator in the enforcement division of the Securities and Exchange Commission who was hired by the United States trustee overseeing the case in United States Bankruptcy Court in Delaware.

Mr. Missal, who also worked on an investigation of WorldCom’s accounting misstatements, concluded that KPMG and some former New Century executives could be legally liable for millions of dollars in damages because of their conduct.

In the aftermath of the collapse of Enron, Arthur Andersen was indicted and convicted on obstruction of justices charges. The conviction was overturned by the Supreme Court in 2005, long after the company had ceased doing business.

Mr. Missal drew an analogy to Enron and said there was evidence that KPMG auditors had deferred excessively to New Century.

“I saw e-mails from the engaged partner saying we are at the risk of being replaced,” Mr. Missal said in a telephone interview about a KPMG partner working on the audit of New Century. “They acquiesced overly to the client, which in the post-Enron era seems mind-boggling.”

Ms. Fitzgerald of KPMG countered, “There is absolutely no evidence to support that contention.”

In one exchange in the report, a KPMG partner who was leading the New Century audit responded testily to John Klinge, a specialist at the accounting firm who was pressing him on a contentious accounting practice used by the company.

“I am very disappointed we are still discussing this,” the partner, John Donovan, wrote in the spring of 2006. “And as far as I am concerned we are done. The client thinks we are done.”

KPMG said Wednesday that a national standards committee had approved the practice in question.

The accounting irregularities became apparent when a new chief financial officer, Taj S. Bindra, started asking New Century’s accounting department and KPMG to justify their approach, beginning in November 2006.

Most of the mortgage company’s executives from that period have resigned or been laid off. A spokesman for two of the company’s three founders, Edward F. Gotschall and Robert K. Cole, said both had cooperated with the investigation but had not yet reviewed the report. A lawyer for Bradley A. Morrice, the third founder who was president and chief executive in 2006 and part of 2007, did not return a call.

The three founders together made more than $40.5 million in profits from selling shares in the company from 2004 to 2006, according to an analysis by Thomson Financial.

The company and its executives are the subjects of a federal investigation by the Justice Department. Investors have filed numerous civil lawsuits against the company

Is the Federal Reserve Accountable? Quis Custodiet Ipsos Custodes?

Is it a moral hazard to prop up financial institutions made insolvent through reckless speculation and probable fraud without required reforms or remedial actions? Is it appropriate to fail to take the necessary steps towards writing down assets and allowing the final cure of price discovery to occur? Are the banks using their respite to further spread the risk of their misadventures to the naive public?

Is the Fed a willing party to the continuation of one of the greatest financial frauds since The South Sea Bubble and the Mississippi Company?

Perhaps the truth will come out when Senator Chris Dodd convenes his hearings into the Bear Stearns bailout. Perhaps we will not. But we can look to the precedents.

In 1836, Jackson forced the closing of the Second Bank of the U.S. by revoking its charter for their abuses in the issuance of the nation's currency.

"Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the [public] bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves."

The Debt Shuffle
by Jesse Eisinger Mar 20 2008
Conde Nast Portfolio

Wall Street cheered Lehman's earnings, but there are questions about its balance sheet.

Bear Stearns collapsed for two reasons. It had a short-term funding crisis where lenders pulled their loans and customers pulled their cash. But it also had a longer-term leverage problem. Last week’s crisis didn’t happen in a vacuum; that leverage eventually led to the collapse in confidence.

After the collapse, Wall Street’s attention naturally turned to the other investment banks, especially Lehman Brothers, perceived as the most vulnerable. So, investors were thrilled when Lehman topped earnings expectations on Tuesday — as the firm took pains to reassure the markets that it has plenty of cash to ride out the turbulence.

Yet aside from a smattering of attention here and there, investors and the media mostly overlooked the balance sheet. In other words, they forgot what happened mere hours earlier with Bear Stearns. Wall Street’s short-term memory is notoriously lousy, but this must set a record. (Could Jimmy Cayne be sharing his stash with his hedge fund buddies?)

What actually happened to Lehman’s balance sheet in the first quarter? Assets rose. Leverage rose. Write-downs were suspiciously minuscule. And the company fiddled with the way it defines a key measure of the firm’s net worth. Let’s look at the cautionary flags:

Lehman’s balance sheet isn’t shrinking, as we’d expect.

Lehman finished the first quarter was total assets of $786 billion, up almost 14 percent from the previous quarter and 40 percent from a year earlier. Other financial institutions are taking down their exposure right now amid the market turmoil to be prudent. Lehman says it wants to. It is not.

Lehman got more leveraged, not less.

The investment banks “gross” leverage hit 31.7 times equity, up from the fourth quarter and way up from last year’s 28.1. According to Brad Hintz, an analyst with Bernstein Research, Lehman’s leverage reached its highest point since 2000. Lehman, like all the investment banks, prefers to look at net leverage, excluding hedges, and that went down. And the firm says that the asset rise was mainly a result of increases in short-term items that have low risk. But we’ve heard a lot of that lately across the financial world. It’s quite simple: The more leverage Lehman has, the less room assets have to fall to wipe out its equity.

Lehman includes debt in its calculation of equity. Say what?

It’s always worrisome when a company changes a key definition of a closely watched measure of financial performance. In a note in its earnings release, Lehman said it has a new definition of “tangible equity,” or the hard assets that it has left over after subtracting its liabilities. This is a measure of net worth, the yardstick by which investment banks are valued. Lehman’s new definition allows for a higher portion of long-term subordinated borrowings (which it calls “equity-like”) in tangible equity. Previously, it had a cap on the percentage of “perpetual preferred stock,” a form of equity-like debt that doesn’t have a maturity date, in its equity. Now, it doesn’t have a cap. Think of it this way: If you borrow money from your parents to make your down payment on your house and they don’t expect to get paid back right away (at least not before you pay your mortgage off) is it equity in your house? No, it’s a loan. And Lehman hasn’t borrowed from mommy and daddy.

Lehman says it is merely conforming to the Securities and Exchange Commission’s definition of tangible equity and had contemplated making the change for a while. And the firm says the change didn’t result in any difference to its net leverage ratio.

Lehman reaped substantial earnings gains because investors thought it is more likely to go bankrupt.

For several quarters, all the investment banks have been taking gains on their liabilities. Say you owe $100 to your friend. But you run into severe problems and your friend starts to figure you can only afford to pay back $95. If you were an investment bank, the magic of fair value accounting dictates that you could get to reduce your liability. What’s more, that $5 gain gets added to earnings. Because investors thought Lehman was more likely to default, its liabilties fell in value and Lehman garnered earnings from this. How much did Lehman win through losing? $600 million in the quarter. How much was its net income? $489 million.

Lehman and all the other investment banks are following the accounting rules on this, but that $600 million is hardly the stuff of quality earnings. Indeed, Bernstein’s Hintz called the bank’s earnings quality “weak.”

Lehman’s write-downs seem tiny.

Lehman finished the quarter with $87.3 billion of real estate assets. These include residential mortgages and commercial real estate paper. The bank only wrote these assets down by 3 percent. And its Level III assets —the hardest to value portion of these instruments—were written down by only the same percentage. The indexes and publicly traded instruments and companies that serve as proxies for these securities generally fell more than that in the quarter. Lehman points out that took larger gross write-downs and then made money through hedges, for a smaller net number.

Lehman remains exposed to lots of dodgy mortgages, including a group labeled: “Prime and Alt-A.” Prime mortgages represent loans to good quality borrowers; Alt-A loans go to borrowers a mere step up from subprime, and represent an area with almost as many problem loans as subprime. The total amount of such mortgages on Lehman’s balance sheet was $14.6 billion in the first quarter and it actually rose from $12.7 billion in the previous quarter. Is this the time to be increasing exposure to questionable mortgages? More ominously, only $1 billion of that figure is prime and the rest is Alt-A, according to Hintz’s estimate.

The picture emerging is that of an investment bank that is dancing as fast as it can. If Lehman can keep piling up more assets, and if these assets come back, Lehman comes out a big winner. But if it didn’t properly mark down those assets during these bad times, the investment bank’s returns —and therefore its profitability—will be much lower in the future.

And that’s the good case. If the assets do not recover, then time is against the firm.

There is a larger, monetary policy issue here. The Federal Reserve has announced that it will lend to investment banks for the first time since the Depression, acting as a lender of last resort. At the very least, regulators should be demanding that the investment banks bring down their leverage and reduce their risk. Are the regulators sending a stern-enough message to Lehman? If so, it’s not getting through.

The implications of the Fed's actions in the case of Bear Stearns are enormous. It has radically extended its scope of regulation and activity beyond traditional banking to investment banks, non-members of the Federal Reserve System, and set itself up as the lender-of-last-resort to the entire financial community. This needs to be examined closely by the Congress, in addition to the specific actions with regard to Bear Stearns.

Four Largest US Banks Earnings Outlooks Slashed

Four largest U.S. banks' outlooks slashed: Oppenheimer
Wed Mar 26, 2008 1:22am EDT
By Jonathan Stempel

NEW YORK (Reuters) - The earnings outlooks for the four largest U.S. banks have been slashed by Oppenheimer & Co analyst Meredith Whitney, who said there is "no clear end in sight" to downward pressure on the sector's profits.

In a report late Tuesday, Whitney said Citigroup Inc the largest U.S. bank by assets, might lose $1.15 per share in the first quarter, four times her prior forecast for a 28 cents per share loss. She expects the bank to lose 15 cents per share in 2008, after earlier seeing profit of 75 cents per share.

Whitney in October correctly predicted that Citigroup would cut its dividend and raise $30 billion of capital.

The analyst on Tuesday also lowered her first-quarter profit per share forecasts for Bank of America Corp to 35 cents from 92 cents, for J.P.Morgan Chase & Co to 70 cents from 86 cents, and for Wachovia Corp (WB) to 55 cents from 78 cents.

She cut her 2008 profit per share forecasts to $3.25 from $3.65 for Bank of America, to $2.90 from $3.20 for JPMorgan, and to $2.70 from $3.05 for Wachovia. The new forecasts are below analysts' average forecasts compiled by Reuters Estimates.

"Despite cutting estimates for financials by over 30 times since November, we are confident this will not be our last reduction in 2008," Whitney wrote. "As key mark-to-market indices trend lower, the housing market worsens, and the U.S. consumer comes under increasing pressure, we anticipate further downside to both estimates and stock prices."

She added: "We anticipate the current credit cycle to be the worst in generations."

The analyst left her profit per share forecast for Wells Fargo & Co (WFC.N: Quote, Profile, Research), the fifth-largest U.S. bank, unchanged at 55 cents for the first quarter and $2.15 for the year.

Whitney expects Citigroup to suffer $13.12 billion of write-downs in the first quarter, on top of $18.1 billion of write-downs and costs tied to subprime mortgages in the fourth quarter.

The analyst said the bank's first-quarter write-downs might include $9 billion for collateralized debt obligations, $1.97 billion for commercial mortgage securities, and $2.15 billion for "leveraged" loans used to fund corporate buyouts.

She said Bank of America might suffer $4.29 billion of write-downs, including about two-thirds from CDOs.

JPMorgan might suffer $2.83 billion of write-downs, with nearly half from leveraged loans, while Wachovia faces a possible $1.53 billion of write-downs, with about half tied to commercial mortgages, she said.

Whitney rates Citigroup "underperform," and the other three banks "perform." These reflect how shares may perform relative to the Standard & Poor's 500 .SPX over 12 to 18 months.

In Tuesday trading, shares of Citigroup closed at $23.42, Bank of America at $40.97, JPMorgan at $46.06 and Wachovia at $30.04. The shares are down a respective 55 percent, 21 percent, 5 percent and 47 percent since last March 26. The S&P 500 is down 6 percent over that time.

(Editing by Tomasz Janowski)

Consumer Expectations Decline to the Lowest Level Since the Beginning of the 1973-4 Bear Market

US consumer confidence stumbles to 5-year low

WASHINGTON (AFP) — US consumer confidence slid to a five-year low in March while a measure of expectations for the future hit the weakest level in 35 years, a closely watched survey showed Tuesday.

The Conference Board said its index of consumer confidence declined to 64.5 points from 76.4 a month earlier. That was sharply below the level of 73.4 points expected by economists.

The survey -- often is seen as a gauge of consumer spending, which represents the bulk of US economic activity -- showed the weakest confidence since the start of the US invasion in Iraq.

Lynn Franco, director of the Conference Board consumer research center, said: "Consumers' confidence in the state of the economy continues to fade and the index remains at a five-year low."

In an even more ominous sign, the survey's expectations index declined to 47.9 from 58.0.

Franco said: "Looking ahead, consumers' outlook for business conditions, the job market and their income prospects is quite pessimistic and suggests further weakening may be on the horizon. The expectations index, in fact, is now at a 35-year low, levels not seen since the (1973) oil embargo and Watergate." (as you may recall, 1973 was the beginning of a major two year bear market - Jesse)

The present situation index decreased to 89.2 from 104.0 in February, suggesting activity has weakened in recent months, according to Franco. Consumers claiming business conditions are "bad" increased to 25.4 percent from 21.3 percent, while those claiming conditions were "good" declined to 15.4 percent from 19.1 percent.

Those saying jobs are "hard to get" rose to 25.1 percent from 23.4 percent, while those indicating jobs are "plentiful" decreased to 18.8 percent from 21.5 percent."The labor market situation is at the center stage of the fall," said economist Marie-Pierre Ripert at Ixis Corporate and Investment Bank, who adds that the report is more evidence a recession has arrived.

"Even if the correlation in monthly changes in consumer confidence and private consumption is quite loose, the recent development in consumer confidence suggests a decline in consumer spending in the first and second quarters ... As a result, we don't rule out two declines in a row in GDP (gross domestic product)."

The report is based on a survey of 5,000 US households through March 18.

Get Ready for the Second Wave of Writedowns, Defaults, and Invsolvencies

This week is the end of the first quarter, and so the Wall Street carneys are taking Uncle Sam's easy money and are whitewashing the fences, putting lipstick on the pigs, dressing the windows, and painting the tape.

But make no mistake, this is far from over and Bear Stearns was just the first shoe to drop.

Wall Street May Face $460 Billion Credit Losses, Goldman Says
By Zhao Yidi

March 25 (Bloomberg) -- Wall Street banks, brokerages and hedge funds may report $460 billion in credit losses from the collapse of the subprime mortgage market, or almost four times the amount already disclosed, according to Goldman Sachs Group Inc. Profits will continue to wane, other analysts said. (Note: this is for the subprime piece - Jesse)

``There is light at the end of the tunnel, but it is still rather dim,'' Goldman analysts including New York-based Andrew Tilton said in a note to investors today. They estimated that residential mortgage losses will account for half the total, and commercial mortgages as much as 20 percent.

Earnings and share prices at U.S. financial institutions tumbled in the past year as fallout from the mortgage crisis spread to other markets. Demand for mortgage-backed securities evaporated, leading to the collapse of Bear Stearns Cos., once that market's largest underwriter, and a Federal Reserve-led bailout by JPMorgan Chase & Co. earlier this month.

Goldman's own share-price estimate was cut 3.7 percent to $210 at Fox-Pitt Kelton Cochran Caronia Waller. The research firm also reduced its profit estimates for the world's biggest securities firm for the rest of this year and all of 2009.

Merrill Lynch & Co. had its 2008 profit estimates cut by 45 percent at JPMorgan on concern the third-largest U.S. securities firm by market value may disclose further writedowns on subprime mortgages. Merrill may report a total of $5 billion in additional losses on collateralized debt obligations, so-called Alt-A mortgages and commercial mortgages, New York-based analyst Kenneth Worthington said.

Bank of America Corp., the second-biggest U.S. bank by assets, was downgraded to ``sell'' from ``neutral'' at Merrill Lynch. The company, based in Charlotte, North Carolina, also had its earnings-per-share estimate lowered to $3.30 from $3.50 in 2008 and to $4.00 from $4.40 in 2009, analysts including New York-based Edward Najarian wrote in a note to clients today.

Lehman Brothers Holdings Inc., the fourth-largest U.S. securities firm, had its share-price forecast cut 16 percent to $70 at Fox-Pitt. The brokerage's 2008 and 2009 profit estimates were also reduced.

Goldman said the $460 billion in credit losses it foresees may ``result in a substantial tightening in credit conditions as these institutions pull back on lending to preserve their reduced capital and to maintain statutory capital adequacy ratios.''

Credit-card loans, auto loans, commercial and industrial lending and non-financial corporate bonds make up the rest of the $460 billion in credit losses.

Goldman, which has lost 17 percent this year on the New York Stock Exchange, rose 36 cents to $179.24 in composite trading at 11:50 a.m. Merrill fell $1.13 to $47.25, Lehman declined $2.16 to $44.48 and Bank of America dropped $1.47 to $40.98.

To contact the reporter on this story: Zhao Yidi in New York at at yzhao7@bloomberg.net.
Last Updated: March 25, 2008 12:02 EDT

The Failure of Croney Capitalism

Count on the British press to provide a realistic alternative analysis, as compared to the sychophants in the mainstream corporate media and academia in the States.

We differ a bit in prescription for a cure, but the diagnosis could not be more clear or more correct.

THE RED MENACE
The world's markets gambled on financial alchemy. They lost.
By Iain MacWhirter

COME BACK Karl Marx, all is forgiven. Just when everyone thought that the German philosopher's critique of capitalism had been buried with the Soviet Union, suddenly capitalism reverts to type. It has laid a colossal, global egg and plunged the world economy into precisely the kind of crisis he forecast.

The irony, though, is that this time it isn't the working classes who are demanding that the state should take over, but the banks. The capitalists are throwing themselves on the mercy of government, demanding subsidies and protection from the capitalist market - it's socialism for the banks. Hedge fund managers of the world unite, you have nothing to lose but your bonuses.

On Friday, the heads of the big five British banks demanded - and got - another £5 billion in "emergency liquidity" from the Bank of England to add to the £5bn they received earlier in the week. But like militant shop stewards they complained it wasn't enough. "Look how much the banks are getting in Europe and America," they whinged. Hundreds of billions of dollars and euros are being thrown at banks in an attempt to save them from themselves.

The quaint idea that loss-making companies should fail, to ensure the health and vitality of the capitalist system, has quietly been discarded. The banks, we are told, are "too big to fail", which means that they have to be taken into public ownership - like Northern Rock - or have their debts underwritten by government, like Bear Stearns, which comes to much the same thing. The central banks are also cutting interest rates to try to boost banking profits, and this is making currencies such as the dollar increasingly unstable.

Which takes us back to Marx. The crisis that is rocking the world is a classic example of the kind of shocks and dislocations that Marx said were an essential feature of a competitive capitalist economy. The falling rate of profit that results from too much investment piling into new technologies and commodities forces capital to engage in a constant search for profit. (Personally the shocks we are seeing are not the result of functioning free markets, but the result of gross imbalances introduced by the corruption that croney capitalism through protracted malinvestment fostered by Greenspan's outrrageously obvious credit bubble and promotion of the degradation of safeguards and regulation. - Jesse)

As it becomes harder and harder to make money out of making things - just look at the collapse in prices of computers over the last decade - so exotic financial derivatives have been created to boost wealth without engaging in recognisable economic activity. Speculation takes over. British manufacturing has collapsed to a fraction of what it was 20 years ago, and a vast financial services sector has grown up in its place making money largely out of inflation in house prices, ie debt.

Moreover, with globalisation, trillions of dollars have been washing around the world markets looking for a home. This has created a monster: the market in financial derivatives; a Pandora's box of inscrutable financial instruments governed by supposedly failsafe mathematical formulae. Collateralised debt obligations - implicated in the subprime mortgage crisis - are at least rooted in nominal house prices, but they have been detached from the actual mortgages and sold as commodities in the securities market.

Credit default swaps have created a $45 trillion global industry based on nothing at all, merely speculating on the movements of currencies and commodity prices. A credit default swap is a kind of insurance contract taken out between two bankers who bet on the price of an asset. They don't need to own the asset, and there is no actual loss if the default happens. But the contracts can be traded, allowing the swappers to create value out of nothing but their own agreement.

According to the Bank for International Settlement in Basel, the global derivatives market is worth some $516 trillion - 10 times the value of all the world's stock markets put together. And much of it is based on very little but leveraged optimism; pieces of paper theoretically based on the price of an empty house in Cleveland, Ohio.

Billions have been magicked out of nothing by this financial alchemy, but in the end, there is no way of turning dross into gold, and the reckoning had to come. And someone had to pay - which is where we, the people, come in.

As happened in the 1930s, the whole system is collapsing. We are faced with the choice of colossal bank defaults or hyper inflation: saving the banks or saving our savings. The central bankers decided that they would rather save the banks. So our governments are using public money to bolster banking balance sheets and allowing inflation to rip so that the banks' losses will be devalued, along with the pound in your pocket.

So what happens now? Or as Lenin said, What Is To Be Done? Well, not Communism for a start. Central control and outright state ownership along Soviet lines is no longer a viable political option - an undemocratic public monopoly is almost as bad as a private one. The fact that the banks are currently in league with western governments to create a kind of financial communism is doubly disturbing.

Instead of just propping up bankrupt banks, the governments should be democratising them - mobilising their assets to stimulate the productive economy, repairing infrastructure, researching and developing new markets, and refitting western economies to combat climate change. It needs a kind of green New Deal - an update on Roosevelt's imaginative policies of the 1930s fought tooth and nail by the banks.

They want unlimited access to public money to save themselves from the consequences of their own actions; welfare for the wealthy. This is above all a political, not an economic problem. There needs to be a political mobilisation of public opinion to force the banks and the government to bring the people into the equation. Unfortunately, the party that used to perform this function, Labour, has largely been bought out by the banks. They have privatised the government, even as they have socialised the financial markets.

The Red Menace - Sunday Herald - UK

Bailing Out the Fed: Aid to Dependent Pigmen

How Can We Help to Finance the 29 Billion in Risk the Fed is Taking for Bear Stearns and JPM?

How do we insulate the Federal Reserve from absorbing any of those losses, even though they will be passed along to all holders of the US dollar?

By all means let's "Stop Those Rebate Checks."

But this time let's start by stopping the checks to the small elite of wealthiest US citizens that have been going out for the past eight years.

The depths of Wall Street venality knows no bounds. They cannot stop. These are serial Pigmen.

March 24, 2008
Op-Ed Contributor
Stop Those Checks
By BRUCE BARTLETT
Great Falls, Va.

WITH unusual speed and cooperation last month, George W. Bush and Democrats in Congress agreed to a tax rebate set to be paid out beginning in May. Families will get checks for $300 to $1200 or more, and it is assumed that they will all rush out to spend this money immediately, giving retailers a boost that will raise economic growth.

Despite the bipartisan support for the rebate, few economists have supported the idea. They note that we have tried rebates in the past — most recently in 2001 — and there is no evidence that they have meaningfully stimulated either consumption or growth. By and large, people saved the money they received or paid bills (which is the same thing); very few used their rebates to increase spending.

The true reason why the current rebate has been so popular in Washington is that giving away free money in an election year is good for politicians of both parties. Superficially, it looks as if Washington is responding to a real problem with decisive action. After all, if there is a recession the Democrats who control Congress will be held just as accountable as the Republicans who control the executive branch.

But in the almost six weeks since the rebate legislation was signed into law, the economic situation has changed. The meltdown in financial markets is much more serious than it looked in February. At its root are bad mortgages and other debts that are like toxic waste spreading throughout the financial system.

The solution, therefore, is not to drop $100 bills from helicopters — which is essentially what the rebate would do. Rather, what we need is a mortgage Superfund that can clean up the toxic waste. If we can cleanse the financial system of at least some of the bad debts, it will do far more to restore the economy to health than anything that could be accomplished by the rebate — even if the rebate were to work as it is supposed to.

We all know that the government is eventually going to get stuck with a lot of the bad debts, just as it did in the early 1990s when a previous housing bubble burst and bankrupt savings and loans had to be rescued. That bailout cost taxpayers $160 billion. The next one will probably cost more because the problem is bigger and the economy is larger.

At the same time, there are increasing demands for targeted relief for homeowners facing foreclosure. It looks to many people as if Washington cares more about fat-cat bankers than working families in hard times. At some point, Congress is going to respond with additional aid for people caught in the mortgage mess, and this relief will come on top of the $117 billion cost of the rebate.

We need to stop and ask whether we can afford to spend $117 billion that the Treasury Department does not have on a program of dubious effectiveness. It simply makes no sense to send out checks to people who have no need for it as some kind of election-year bribe to vote for incumbents of both parties. That money would go a long way toward cleaning up the mortgages that are poisoning the financial sector.

Congress should immediately repeal the rebate and redirect the money that has been budgeted into a package of measures that would help the housing sector and those people who actually need assistance. The Treasury might use some of the money, for example, to enable Fannie Mae and Freddie Mac, the government-sponsored housing agencies, to buy up some of the bad mortgages, get them off bank balance sheets and help homeowners refinance them.

My gut tells me that the vast majority of Americans would happily give up their rebate if they knew that the money would be used instead to help families in need and start the process of cleaning up the bad debts in the housing sector. Everyone knows that we will have to spend the money eventually and that the sooner the financial sector goes through detox the better it will be for everyone.

This is a proposal that both Republicans and Democrats should embrace. It involves no increase in the deficit. We would simply redirect already appropriated money into other channels that are much more likely to help the economy.

The checks haven’t gone out yet so no one has to give anything back. Congress could pass a repeal bill in a day if it wanted to. At a minimum, hearings should be held on this proposal in light of the country’s deteriorating financial situation.

Bruce Bartlett, the author of “Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy,” was an official under Presidents Ronald Reagan and George H. W. Bush.

Stop Those Checks - NY Times