Topic(s): Corporate Crime | Comments Off on Rene — TROUBLE IN BANKTOPIA: THE FINANCIAL SYSTEM IS BLOWING UP

This is a meta-article of analysis on the latest crisis -rg
By Mike Whitney
Online Journal Sep 29, 2008, 00:18
The financial system is blowing up. Don’t listen to the experts;
just look at the numbers.
Last week, according to Reuters, “U.S. banks borrowed a record amount
from the Federal Reserve nearly $188 billion a day on average, showing
the central bank went to extremes to keep the banking system afloat
amid the biggest financial crisis since the Great Depression.”
The Fed opened the various “auction facilities” to create the
appearance that insolvent banks were thriving businesses, but they
are not. They’re dead; their liabilities exceed their assets. Now
the Fed is desperate because the hundreds of billions of dollars of
mortgage-backed securities (MBS) in the banks’ vaults have bankrupted
the entire system and the Fed’s balance sheet is ballooning by the
day. The market for MBS will not bounce back in the foreseeable future
and the banks are unable to rollover their short-term debt.
Game over.
The Federal Reserve itself is in danger. So, it’s on to Plan B, which
is to dump all the toxic sludge on the taxpayer before he realizes
that the whole system is cratering and his life is about to change
forever. It’s called the Paulson Plan, a $700 billion boondoggle
which has already been disparaged by every economist of20merit in
the country.
From Reuters: “Borrowings by primary dealers via the Primary Dealer
Credit Facility, and through another facility created on Sunday
[Sept. 21] for Goldman Sachs, Morgan Stanley, and Merrill Lynch,
and their London-based subsidiaries, totaled $105.66 billion as of
Wednesday, the Fed said.”
See what I mean, they’re all broke. The Fed’s revolving loans are
just a way to perpetuate the myth that the banks aren’t flatlining
already. Bernanke has tied strings to the various body parts and jerks
them every so often to make it look like they’re alive. But the Wall
Street model is broken and the bailout is pointless.
Last week, there was a digital run on the banks that most people never
even heard about, a “real time” crash. An article in the New York Post
by Michael Gray gave a blow by blow description of how events unfolded.
Here’s a clip from Gray’s “Almost Armageddon”: “The market was 500
trades away from Armageddon on Thursday . . . Had the Treasury and
Fed not quickly stepped into the fray that morning with a quick $105
billion injection of liquidity, the Dow could have collapsed to the
8,300-level — a 22 percent decline! — while the clang of the opening
bell was still echoing around the cavernous exchange floor. According
to traders, who spoke on the condition of anonymity, money market
funds were=2 0inundated with $500 billion in sell orders prior to
the opening. The total money-market capitalization was roughly $4
trillion that morning.
“The panicked selling was directly linked to the seizing up of the
credit markets — including a $52 billion constriction in commercial
paper — and the rumors of additional money market funds ‘breaking
the buck,’ or dropping below $1 net asset value.
“The Fed’s dramatic $105 billion liquidity injection on Thursday
(pre-market) was just enough to keep key institutional accounts from
following through on the sell orders and starting a stampede of cash
that could have brought large tracts of the US economy to a halt.” (New
York Post)
Commercial paper is the lubricant that keeps the financial markets
When confidence vanishes, because the stewards of the system in
Washington are buffoons, investors withdraw their money, normal
business operations become impossible, and the markets collapse. End
of story. So, rather than restore the public’s confidence by strong
leadership and behavior designed to reassure investors; President Bush
decided to give a major prime-time speech stating that if Paulson’s
emergency bailout package was not passed immediately, the nation’s
economy would vaporize into the ether. Go figure?
Last week, the commercial paper market, much of which is backed
by mortgage-backed securities, shrunk by a whopping $61 billion to
$1.702 trillion, the lowest level since early 2006. So, Paulson’s
bailout will effectively underwrite CP as well as the whole alphabet
soup of mortgage-backed derivatives for which there is currently
no market. The US taxpayer is not only getting into the plummeting
real estate market, he is also backstopping the entire financial
system including defaulting car loan securities, waning student
loan securities, flailing home equity loan securities and faltering
credit card securities. The whole mountainous pile of horsecrap
debt is about to be stacked on the back of the maxed-out taxpayer
and the ever-shriveling greenback. Paulson assures us that it’s a
“good deal.” Booyah, Hank!
Paulson’s $700 billion boondoggle
How did Treasury Secretary Paulson figure out that recapitalizing the
banking system would cost $700 billion? Or did he just estimate the
amount of money that could be loaded on the back of the Treasury’s
flatbed truck when it sputters off to shower his buddies at
G-Sax with freshly minted greenbacks? The point is that Paulson’s
calculations were not assisted by any economists at all, and they
cannot be trusted. It is a purely arbitrary, “back of the envelope”
type figuring.
According to Bloomberg: Swiss investor Marc Faber, known for a
long track record of good calls, believes the damage may come to $5
trillion: “Marc Faber, managing director of Mar c Faber Ltd. in Hong
Kong, said the U.S. government’s rescue package for the financial
system may require as much as $5 trillion, seven times the amount
Treasury Secretary Henry Paulson has requested . . .
“‘The $700 billion is really nothing,’ Faber said in a television
interview. ‘The treasury is just giving out this figure when the end
figure may be $5 trillion.'” (Bloomberg News)
Most people who follow these matters would trust Faber’s assessment way
over Paulson’s. In his latest blog entry, economist Nouriel Roubini
said that “no professional economist was consulted by Congress or
invited to present his/her views at the congressional hearings on
the Treasury rescue plan.”
Roubini added, “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.”
Roubini is right on all counts. So far, more than a 190 prominent
economists have urged Congress not to pass the $700 bailout bill. There
is growing consensus that the so-called “rescue package” does not
address the central economic issues and has the potential to make a
bad situation even worse.
Banker’s coup?
Financial industry rep. Paulson is the ringleader in a banker’s
coup the results of which will decide America’s economic and
political future for years to come. The coup leaders have drained
tens of billions of dollars of liquidity from the already strained
banking system to trigger a freeze in interbank lending and hasten a
stock market crash. This, they believe, will force Congress to pass
Paulson’s $770 billion bailout package without further congressional
resistance. It’s blackmail.
As yet, no one knows whether the coup backers will succeed and further
consolidate their political power via a massive economic shock to
the system, but their plan continues to move jauntily forward while
the economy follows its inexorable slide to disaster.
The bailout has galvanized grassroots movements which have flooded
congressional FAX and phone lines. Callers are overwhelmingly opposed
to any bailout for banks that are buckling under their own toxic
mortgage-backed assets. One analyst said that the calls to Congress
are 50 percent “No” and 50 percent “Hell, No.” There is virtually no
popular support for the bill.
From Bloomberg News: “Erik Brynjolfsson, of the Massachusetts
Institute of Technology’s Sloan School, said his main objection
‘is the breathtaking amount of unchecked discretion it gives to the
Secretary of the Treasury. It is unprecedented in a modern democracy.'”
“‘I suspect that part of what we’re seeing in the freezing up of
lending markets is strategic behavior on the part of big financial
players who stand to benefit from the bailout,’ said David K. Levine,
an economist at Washington University in St. Louis, who studies
liquidity constraints and game theory.”
(Mish’s Global Economic Trend Analysis)
Brynjolfsson’s suspicions are well-founded. “Market Ticker’s”
Karl Denninger confirms that the Fed has been draining the banking
system of liquidity in order to blackmail Congress into passing the
new legislation.
Here’s Denninger: “The effective Fed Funds rate has been trading 50
basis points or more below the 2% target for five straight days now,
and for the last two days, it has traded 75 basis points under. The IRX
is demanding an immediate rate cut. The Slosh has been intentionally
drained by over $125 billion in the last week and lowering the water
in the swamp exposed one dead body — Washington Mutual — which was
immediately raided on a no-notice basis by JP Morgan. Not even WaMu’s
CEO knew about the raid until it was done. . .
. The Fed claims to be an ‘independent central bank.’ They are nothing
of the kind; they are now acting as an arsonist. The Fed and Treasury
have claimed this is a =E 2liquidity crisis’; it is not. It is an
insolvency crisis that The Fed, Treasury and the other regulatory
organs of our government have intentionally allowed to occur.”
Bingo. This is a banker’s coup cooked up and facilitated by
the deep-money guys who operate stealthily behind the political
sideshow. The only time they emerge from their stinkholes is when
they’re flushed out by a crisis that threatens their continued
dominance. Grassroots resistance, spearheaded by Internet bloggers
(like Mish, Roubini and Denninger) are demonstrating that they can
mobilize tens of thousands of “peasants with pitchforks” and be a
factor in political decision-making. It also helps to have elected
officials, like Senator Richard Shelby, who stand firm on principle
and don’t faint at the first whiff of grapeshot (like his weak-kneed
Democratic counterparts).
Shelby has shouldered the full weight of executive pressure which
has descended on him like an Appalachian rockslide. As a result,
there’s still a slight chance that the bill will have to be shelved
and the industry reps will have to go back to Square One.
Market Ticker has provided charts from the Federal Reserve that prove
that Bernanke has withdrawn $125 billion from the banking system
“in the last four days” alone to create a crisis situation that will
incite credit market mayhem and increase the likelihood of passing
the bill. 0D This is coercion of the worst kind.
The country’s economic predicament is steadily deteriorating. Orders
for manufactured durable goods were off 4.5 percent last month while
inventories continued to rise. Unemployment is soaring and the housing
crash continues to accelerate. Credit Suisse now expects 10.3 million
foreclosures (total) in the next few years. Numbers like that are
not accidental, but part of a larger scheme to use monetary policy as
a way to shift wealth from one class to another while degrading the
nation’s overall economic well-being. More alarming, the country’s
primary creditors are now staging a rebellion that is likely to cut
off the flow of capital to US markets sending the dollar plummeting
and triggering a deflationary credit collapse.
This is from Reuters: “Chinese regulators have asked domestic banks to
stop lending to U.S. financial institutions in the interbank money
markets to prevent possible losses during the financial crisis,
the South China Morning Post reported Thursday. The China Banking
Regulatory Commission’s ban on interbank lending of all currencies
applied to U.S. banks, but not to lenders from other countries,
the report added.”
Bloomberg News reports that Dallas Federal Reserve Bank President
Richard Fisher has broken with tradition and lambasted the proposed
bailout saying that it “would plunge the U.S. government deeper into
a fiscal abyss.9 D
From Bloomberg: “The plan by Treasury Secretary Henry Paulson to buy
troubled assets from financial institutions would put ‘one more straw
on the back of the frightfully encumbered camel that is the federal
government ledger,’ Fisher said today in the text of a speech in
New York. ‘We are deeply submerged in a vast fiscal chasm. . . . The
seizures and convulsions we have experienced in the debt and equity
markets have been the consequences of a sustained orgy of excess and
reckless behavior, not a too-tight monetary policy,’ Fisher said to
the New York University Money Marketeers Club.”
Surely, the cure for hyperbolic “credit excesses and reckless behavior”
cannot be “more of the same.” In fact, Paulson’s bailout does not
even address the core issues which have been obscured by demagoguery
and threats.
The worthless assets must be written down, insolvent banks must be
allowed to go bust, and the crooks and criminals who engineered this
financial blitz on the nation’s coffers must be held to account.
The carnage from Greenspan’s low interest rate, “easy money” binge is
now visible everywhere. Inflated home and stock values are crashing
as the gas continues to escape from the massive equity bubble. The
FDIC will have to be recapitalized — perhaps, $500 billion —
to account for the anticipated loss of deposits from failing banks
caught in the crosshairs of asset-deflation and steadily contracting
credit. Recession is coming, but economic collapse can still be avoided
if Paulson’s misguided plan is abandoned and corrective action is
taken to put the country on solid financial footing.
Market Ticker lays out a framework for a workable solution to the
crisis, but they must be acted on swiftly to rebuild confidence that
major systemic changes are underway:
Force all off-balance sheet “assets” back onto the balance sheet,
and force the valuation models and identification of individual
assets out of Level 3 and into 10Qs and 10Ks. Do it now. (Editor:
In other words, no more Enron-type accounting mumbo-jumbo and no more
allowing the banks assign their own “values” to dodgy assets.)
Force all OTC derivatives onto a regulated exchange similar to that
used by listed options in the equity markets. This permanently defuses
the derivatives time bomb. Give market participants 90 days; any that
are not listed in 90 days are declared void; let the participants
sue each other if they can’t prove capital adequacy. (Ed: If trading
derivatives contracts can damage the “regulated” system, than that
trading must take place under strict government regulations.)
Force leverage by all institutions to no more than 12:1. The SEC
intentionally dropped broker/dealer leverage limits in 2004; prior
to tha t date 12:1 was the limit. Every firm that has failed had
double or more the leverage of that former 12:1 limit. Enact this
with a six-month time limit and require 1/6th of the excess taken
down monthly. (Ed: The collapse in the “structured finance” model is
mainly due to too much leverage. For example, Fannie Mae and Freddie
Mac had $80 of debt for every $1 dollar of capital reserves when they
were taken into government conservatorship.) If there’s going to be a
bailout, let’s get it right. Paulson’s $700 billion bill does nothing
to fix the deep structural problems in the financial markets; it merely
pushes the day of reckoning a little further into the future while
shifting the burden of payment for toxic assets onto the taxpayer. It’s
a real turkey. The entire system needs transformational change so that
the activities of Wall Street mesh with the broader objectives of the
society it’s supposed to serve. Paulson’s business model is busted;
it does no one any good to try to glue it back together.
Mike Whitney lives in Washington state. He can be reached at