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Monday, March 17, 2008

Economy: Find The Truth

Looks like the fit has hit the shan. Georgie's puppetmasters are doing a desperate soft-shoe shuffle to get around the implications of the financial events of this week. Will they succeed? Only if you're willing to believe the lies they tell. Raw Story tells us that Treasury Secretary Henry Paulson went to Fox News Sunday to give Chris Wallace his song and dance about the Feds bailing out Bear Stearns.

For those who don't know, Bear Stearns is one of the largest financial institutions in the world. It is not a bank, as such. That is to say, it does not do business with the average small individual investor. Rather it is an investment and securities trading organisation, working with large corporations to buy and sell stocks, bonds, and other financial instruments. And, as we mentioned, it is one of the largest in the world.

The company is about 85 years old. Approximately 30 per cent of its stock is owned by its employees, according to Reuters. However, not all employees are equal, in terms of stock, as this story at TheStreet shows. Needless to say, those employees who didn't walk off with tens of millions of dollars are now worrying about their jobs. Bear Stearns employees number approximately 14,000. Doesn't look like there'll be too many job openings on Wall Street soon.

A year ago, Bear Stearns stock was valued at $150 per share. On the last day of last year, Bear Stearns closed at $88.25 per share. A week ago, that had dropped to $60 per share. Just before the weekend, on Friday, March 14th, value had halved &mdash $30 per share. Yesterday &mdash less than two days later &mdash J.P. Morgan announced that it was buying Bear Stearns for $2 a share. How art thou fallen, O Lucifer, son of the morning! This is a company that successfully survived The Great Depression. And now the man with the Reverse Midas Touch has managed to lay even this low?

Here's what his chief shill, Treasury Secretary Paulson, has to say about the hoo-ha:
"We've got strong financial institutions," insists Paulson. "Our markets are the envy of the world. They're resilient, they're...innovative, they're flexible. I think we move very quickly to address situations in this country, and, as I said, our financial institutions are strong."
Not quickly enough, Mr. Paulson. As we documented earlier, the captain of the Failboat should have seen the warning signs popping up three years ago. The NYT certainly did.

Chris Wallace, who appears to moving back in the direction of humanity lately, pushed Paulson on the issue:
"[...] isn't the result of this that U.S. taxpayers might end up holding billions of dollars in bad mortgage securities?"


"Why should the government, and thereby, U.S. taxpayers, bail out lenders and borrowers who made bad decisions; and, if they know they're going to be bailed out, what does that do to the 'moral hazard' argument that they don't end up paying a price?"


"Why not take a more aggressive stance and support a stronger and stable dollar, and even implement policies to--prop up the dollar?"

"A strong dollar is in our nation's interest," responds Paulson. "Our long-term fundamentals in this country--economic fundamentals--are strong. Our economy has its ups and downs like any other economy, but I believe that that long-term strength is going to be in the dollar."

Paulson touts "pro-growth tax" and openness to free trade (including a pending free trade agreement with Colombia).

He concludes: "Anything we can do to enhance confidence in our marketplace; in our capital markets; in our economy; are--the policies that increase confidence in our economy over time."
Have you ever heard such unmitigated bullshit in your life? We haven't. Here's a direct rebuttal of Paulson's argument that the economy is strong, from The Telegraph.
As feared, foreign bond holders have begun to exercise a collective vote of no confidence in the devaluation policies of the US government. The Federal Reserve faces a potential veto of its rescue measures.

Asian, Mid East and European investors stood aside at last week's auction of 10-year US Treasury notes. "It was a disaster," said Ray Attrill from 4castweb. "We may be close to the point where the uglier consequences of benign neglect towards the currency are revealed."

The share of foreign buyers ("indirect bidders") plummeted to 5.8pc, from an average 25pc over the last eight weeks. On the Richter Scale of unfolding dramas, this matches the death of Bear Stearns.
And why the hell should people outside the U.S. keep financing this consumerist lifestyle? So we can buy their products? Economists, political junkies and newspapers have been warning for over six years that the nation was running up too much foreign debt, that America had no savings, that subprime mortgages were worthless paper, that ninja (no income, no job or assets) loans were downright crazy, and had the potential to topple the entire mortgage/banking/financial industry.

Now, four-fifths of the people who used to finance our ridiculous lifestyle of McMansions, Hummers, and cheap foreign oil, have backed away from the oncoming crisis. Suddenly, the same people (Bushies, stockbrokers, Fed) who screamed the loudest for deregulation are allowing as how a little regulation might be a good thing.

People: these measures should have been taken six or seven years ago. We should have regulated the mortgage industry and lending industry. We should not have committed to a foreign war based on inadequate blather about how to finance it.

Come on, get real. If a family member came to you and said, hey, lend me ten thousand, man, before you gave them a red cent, you'd want to know: Do they have a job? Do they have a plan for repaying the money? What do they need the money for? If they said, a new Hummer, you'd probably send them on their way tout-suite, n'est-ce pas?

So what were bankers doing lending money to people &mdash and not just a few dollars, we're talking millions, here &mdash to people with no jobs, no income, no assets? Yet they were doing just that, before our astonished eyes. And greedy people were buying more house than they could afford, just because there was so much "free money" lying around. And even greedier people were buying many more houses than they could afford or needed, in the hope that they could "flip" the properties for a profit. And stupid people were pulling money out of their homes to spend on weddings and vacations and the champagne lifestyle that they couldn't really afford but wanted anyway.

When poor people steal a Nike jacket or $200 shoes, they get their ass thrown in jail. Nobody sympathizes with them for desiring something they can't afford. But when middle-class morons want a six-bedroom McMansion, a "soccer-mommy" Suburban Assault Vehicle or two, and a lifestyle outside their economic reach, we all shed tears on their behalf and burgle the Treasury to give them "relief." And when the rich and mighty walk off with tens of millions from the companies that they broke, we reward them with multibillion dollar buyouts and fancy schemes.

Is anyone telling the CEOs and CFOs of Bear Stearns and their buddies in the banking business to hand back the moolah or face the hoosegow? Don't be ridiculous. Those guys are going to get bonuses for their performance.

But back to the killing fields, where Ambrose Evans-Pritchard, International Business Editor at the Telegraph continues the brutal beating:
I believe the forces of debt deflation now engulfing America - and soon half the world - are so powerful that nobody will be worrying about inflation a year hence.

Yes, the Fed caused this mess by setting the price of credit too low for too long, feeding the cancer of debt dependency. But we are in the eye of the storm now. This is not a time for priggery.

The Fed's emergency actions are imperative. Last week's collapse of confidence in the creditworthiness of Fannie Mae and Freddie Mac was life-threatening. These agencies underpin 60pc of the $11,000bn market for US home loans.


Former US Treasury secretary Lawrence Summers says the Fed's shower of liquidity cannot cure a bankruptcy crisis caused by a tidal wave of property defaults.


But even if you think the Fed has no choice other than to take dramatic action, the critics are also right in warning that this comes at a serious cost and it may backfire.

The imminent risk is that global flight from US Treasury and agency debt drives up long-term rates, the key funding instrument for mortgages and corporations. The effect could outweigh Fed easing.

Overall credit conditions could tighten into a slump (like 1930). It's the stuff of bad dreams.

Is this the moment when America finally discovers the meaning of the Faustian pact it signed so blithely with Asian creditors?

As the Wall Street Journal wrote this weekend, the entire country is facing a "margin call". The US has come to depend on $800bn inflows of cheap foreign capital each year to cover shopping bills. They may have to pay a much stiffer rent.

As of June 2007, foreigners owned $6,007bn of long-term US debt. (Equal to 66pc of the entire US federal debt). The biggest holdings by country are, in billions: Japan (901), China (870), UK (475), Luxembourg (424), Cayman Islands (422), Belgium (369), Ireland (176), Germany (155), Switzerland (140), Bermuda (133), Netherlands (123), Korea (118), Russia (109), Taiwan (107), Canada (106), Brazil (103). Who is jumping ship?
Good question. Go read his article for the painful details. Just one or two little things we want to point out here. Luxembourg, the Cayman Islands, and Bermuda are not rich and powerful nations with a highly developed indigenous banking system that can compete with the likes of U.S. financial institutions. Rather, these small nations have a system of laws that favour foreign investors. So the companies incorporated there are probably American corporations that are now putting the squeeze on the Motherland. Nice going, folks.

International Capitalism has no conscience, no loyalty, and no patriotism. Those are the same people who financed George Dumbya Bush's stealing of the White House, in the hope that he would let them have their tax shelters and havens and cuts. He has delivered. Now it's up to you, taxpayers, to bail their collective ass out.

However, the bailout of Bear Stearns should raise even more questions than it has. The Fed has never before taken the step of financially propping up non-banking financial institutions. Why is it doing so now? Shouldn't these titans of the "free market" be allowed to let the free market do with them as it will?

Nouriel Roubini has some troubling observations:
So the question is: if Bear Stearns screwed up big time - as it did - with huge leverage, reckless investments, lousy risk management and massive underestimation of liquidity risk why should the US taxpayer bail out this firm and its shareholders? First fully wipe out those shareholders, then fire all the senior management and have the government take over such a bankrupt institution before a penny of public money is wasted in bailing it out. Instead now the use of public money to bail out financial institutions is spreading from banking ones to non banking ones. The Fed should at least give a clear and public explanation of why such extremely exceptional - and almost never used - intervention was justified.

Unless public money is used on a very temporary basis to achieve an orderly wind-down or merger of Bear Stearns this is another case where profits are privatized and losses are socialized. By having thrown down the drain the decades old doctrine and rule that the Fed should not lend or bail out non-bank financial institutions the Fed has created an extremely dangerous precedent that seriously aggravates the moral hazard of its lender of last resort support role. If the Fed starts on the slippery slope of providing massive liquidity support to non-bank financial institutions that have recklessly managed their risks it enters into uncharted territory that radically changes its mandate and formal role. Breaking decades-old rules and practices is a radical action that seriously requires a clear public explanation and justification.
Meanwhile, back at the ranch, Yahoo informs us, as if we didn't know, that global markets are tumbling.

And, just in case you forgot who was responsible for starting this trip to Hell, here's ancient, wrinkly human impersonator Alan Greenspan, whining about how "nobody could have predicted ..." &mdash well he didn't actually say that, he used a lot more flowery language in his Financial Times piece, but that's what he meant. Here, check out this duplicitousness:
The problems, at least in the early stages of this crisis, were most pronounced among banks whose regulatory oversight has been elaborate for years. To be sure, the systems of setting bank capital requirements, both economic and regulatory, which have developed over the past two decades will be overhauled substantially in light of recent experience. Indeed, private investors are already demanding larger capital buffers and collateral
The "banks whose regulatory oversight" had been elaborate for years saw their regulatory oversight disappear after Greenspan came to office. Greenspan personally presided over the deregulation. As a result, all the safeguards that had carefully been constructed to protect the consumer and taxpayer vanished, to be replaced by "the invisible hand" of the Free Market &mdash which was happily picking the pockets of the taxpayer at an accelerated pace. Now Mr. Greenspan wants you to feel sorry for him because the mathematical elegance of his predictive models has proved to be nothing but a pile of, let's see, what's the word? Shit. That's right. A pile of shit. And we're knee-deep in it without a boat or a paddle to call our own.

Thank you very much, Mr. Greenspan. And, of course, thanks to the Boy with The Reverse Midas Touch.

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At 7:47 PM, Blogger One Fly said...

excellant read Pcat!

At 9:14 PM, Blogger McBlogget said...

Luxembourg, the Cayman Islands, and Bermuda were all recently cited as money laundering states. Now we know where the money gets "cleaned".


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