Tuesday, March 31, 2009


Tough talk from Obama about America's failing auto industry. Fix yourself or die! No more easy bailout money! We're making the rules now! Day-um.

Now let me be real clear: I'm not in favor of bailing them out with one more penny, and frankly I'm not even looking for any form of "nationalization," or government-sponsored unwinding, or any of that jazz. They wanna declare Chapter 11, let 'em. They wanna go out of business, that's fine by me. Nevertheless, something strikes me as juuuuuuuust a tad inconsistent about Fauxbama's tough talk here. I can't quite put my finger on it, but this doesn't jibe with some of his other public statements lately.

Very briefly, let's review:

1. Detroit better get its shit together or we're gonna let it fail. Wall St. and the banking industry, on the other hand, are "too big to fail."

2. If the Big Three can't fix themselves, we're forcing them into Chapter 11! On the other hand, we will never "nationalize" Wall St. and the banking industry.

3. Extending on that theme, Detroit's creditors can basically go fuck themselves. Wall St.'s creditors, on the other hand, will be protected. Since many of them are banks themselves, they too are too big to fail.

4. Rick Wagoner, you're gone! The CEOs and other executives of Wall St. institutions, on the other hand, can't be fired because we need their "expertise." This expertise, apparently, focuses primarily on making risky investments and using tax dollars to make themselves richer.

In general, this is so fucked up I can't even explain it without breaking into a smirk. The government can just step into a private company on one hand, nationalize it, fire its CEO, and dictate its business policy . . . while simultaneously giving away our money to the world's wealthiest bankers with no conditions or requirements attached. None of this takes place through any sort of public debate, none of it has a contingency plan more than two steps down the road, none of it makes a shred of economic sense, none of it even passes the smell test of constitutionalism or American political traditions.

What's the goddamn difference between Obama and Hugo Chavez on one hand? Or Mussolini on the other?

I'd say the biggest problem here is how arbitrary the decision-making is, except it's not arbitrary. There's one set of rules for the biggest bankers . . . and another set of rules for everyone else. It's clear who runs this country, and it ain't the auto industry, it ain't Congress, it ain't the press, and it sure as hell ain't you & me.

Bow down to Wall St., people. They're your bosses. You work for them. You pay your taxes to them. They make the rules. Just hope they're kind enough to let you live where you want and raise your children under your own rules. Because if they decide not to, there doesn't seem to be a damn thing we can do about it.

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Monday, March 30, 2009


The more I think about Geithner's Public Private Partnership Investment Program, the more it makes me angry. Because it signals a shift a sorts. A clear demonstration -- in the open, as always, no "conspiracies" here -- that We, The People, will underwrite Wall St. . . . for Wall St.'s gain & profit. This is no emergency "bailout." This is the long-awaited "plan" to "clean up" the big banks' balance sheets, to rid them (and "us," we're told) of all those gosh-darn toxic assets that have been dogging us.

And what does the plan boil down to? We, The People, pay for all the garbage. Which stays in private hands. So that if, and when, that garbage regains any value, it remains in private hands. And the banks get above-market value to remove that garbage from their balance sheets. That's pretty much it. Socialized Risk & Privatized Profit at its most naked.

Think of it this way: I'm a rich guy in a rich town. Greenwich, CT. Or Malibu, CA. 5th Ave. For the Michiganers among us, think of Grosse Pt. or Bloomfield Hills. I've "come upon hard times lately," due to poor decisions, both personal & financial. Both of my luxury homes have fallen into embarrassing levels of disrepair, and my business -- the largest in town -- is in very bad shape. Laying off my workers, who no longer shop at the local stores, and the ripple effect is taking shape. Bad stuff.

So the town ombudsmen and muckety-mucks decide that they will shift your tax money away from local schools and parks and buses and paving . . . and use it instead for the following: Along with a consortium of nine-of-the-remaining-ten richest guys in town, they will buy my two enormous mansions for approximately 75% of their traditional "market value." You know, to ease my financial straits, so I can stop worrying and start focusing on my business again. Re-hire some of those workers I fired. Help the cycle of support for local business again (95% of which is owned by those nine guys).

But the nine guys will only put up about 10 or 15% of the money to buy my homes. They can't afford more because they have to "keep up with their businesses" (where they've been laying people off hand-over-fist) and "pay off their their homes" (which are already owned outright, just like mine). So the deal is as follows: In 2006, a board of "real estate experts" (all of whom worked for me or the other nine guys) determined that one of my homes was worth $20 million and the other was worth a cool $10 mill. But due to the current economic difficulties, today they tag them only at $13 m and $7 m. Tough times all around.

So, the nine private guys collectively agree to pony up $2 million while the ombudsmen & muckety-mucks scrape together the remaining $18 million to buy my homes so I can start to spend my billions on my businesses. About $6 million of the $18 million comes from current tax revenues & the remaining $12 million via municipal bonds they promise won't adversely affect the local budget. Actually, no one steps forward to buy the bonds, but the nine businessmen promise to buy them in six months if the town increases the yield. No deal is struck, but the town advances the funds anyway.

The other nine fellas (with the support of the town officials) are kind enough to let me stay in the $7 million home that they bought so long as I promise to pay back rent (of $3,000/month) once my business starts to hum again, which hasn't happened yet since I was disappointed to discover that the recovery is slow and I can't re-hire any of the workers I laid off, and in fact "have to" fire 5,000 more. And the other guys decide to hold onto the $13 million home, publicly making a big show out of waiting for the highest bidder to emerge.

And they, too, are terribly disappointed to see that the recovery to the local scene is slow to come and collectively fire 10,000 more workers.
Skip five years ahead: The economy has slowly recovered after a dreadful downturn that saw 25% of the town's people out-of-work. Many left the town, never to return. Many others saw their dreams of retirement shattered. Others lowered their standards of living dramatically. And the town itself, saddled with tremendous debt from the municipal bonds, has no infrastructure or local business to speak of (the nine guys bought about $3 million worth after the town agreed to raise the yield, but the rest of the debt was just floated). Only the wealthy stretch of houses at the edge of town has retained any of its pre-downturn luster, with homes worth 85-125% of their 2006 value.

My "$7 million home" was worth $12 million when I sold it to an oil shiekh, thanks to the renovations I put into it. I never paid the back rent, since the town was so thankful for the baseball field I built on the site of one of my old businesses after I shut it down and made a nifty profit on the land and raw materials. And I bought back my "$13 million" home from the other nine guys for $7 million, which made them happy since they paid only $2 million for it. It's worth $23 million now, and my family is very happy to be living there again.

And we're all very thankful for the generosity of the little people who helped us out when times were so rough. We're even thinking of paying them back by re-hiring them at below-market wages. But not yet, since our overseas businesses are doing so well.

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Thursday, March 26, 2009


Well, well, well. Look who's taking advantage of the "Geithner Plan." Ritholtz has a short piece about Citi and BOA buying toxic assets lately:
As Treasury Secretary Tim Geithner orchestrated a plan to help the nation’s largest banks purge themselves of toxic mortgage assets, Citigroup and Bank of America have been aggressively scooping up those same securities in the secondary market

* * *
both banks have been [aggressive] in their buying, sometimes paying higher prices than competing bidders are willing to pay.
This is the logical outcome of Timmy's "Plan." If you know the government is gonna broker a bunch of deals to buy garbage at above-market prices (through outright purchase, leveraging, guarantees, etc), why the hell wouldn't you buy up as much of that garbage as possible at the current market prices? That's good business, right?

Especially when you consider that the money they'll spend to make these market-rate purchases came directly from the taxpayers in the form of "bailouts."

I believe this is called playing with house money. And we're the house. But unlike Vegas (and Wall St.), in this example the house always loses.

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Wednesday, March 25, 2009


Last night Obama tried to suggest that Geithner's ability to actually propose a plan was some sort of step in the right direction. Me, I'd like to a see a plan that accomplish something without soaking the taxpayers. But hey, I'm so goddamn picky, demanding justice and fairness and democratic process and competence and all those silly abstractions.

Anyway, economist Willem Buiter of Maverecon breaks down some of the details of Geithner's Public Private Partnership Investment Program ("PPIP") (H/T Yves). He makes a lot of points, many of them very detailed, and not all of which I agree with at a policy level. Nevertheless, he explains some of the larger points of what Geithner's plan calls for, and who it really helps . . . and hurts. A few highlights:

The present and previous administrations have not helped themselves by failing to realise that it is possible to saving banking - the activities, that is, lending, deposit-taking and borrowing - without saving the existing banks. If they did realise this, they failed to act on the realisation.

The US Treasury is putting at most $100 bn into the PPIP pot. “Using $75 to $100 billion in TARP capital and capital from private investors, the Public-Private Investment Program will generate $500 billion in purchasing power to buy legacy assets - with the potential to expand to $1 trillion over time.” The programme is hoped to do up to $1000 bn worth of toxic and bad legacy asset purchases. Hope is good. Cash is better. Where is the remaining $900 bn going to come from?

The answer is loans or loan guarantees from the FDIC and the Federal Reserve and co-investment with private sector investors. The answer differs for the two components of the PPIP, the Legacy Loan Program and the Legacy Securities Program. I will take them in turn.

* * *

The total amount of money put at risk by the private investor [under the legacy loan program example of $84] is $ 6, the private equity investment. The Treasury would also be on the hook for $6, its 5o% share of the total equity investment. The FDIC would lend $72 or guarantee lending of that amount. That’s what meant by the FDIC being “…willing to leverage the pool at a 6-to-1 debt-to-equity ratio.”

First note that the public sector as a whole (Treasury plus FDIC) is at risk for $78 out of a total investment of $84. The public sector has the same upside as the private sector (through its $6 worth of equity). However, the private sector gets this upside by putting only $6 at risk, against the public sector’s $84 at risk. Small wonder the stock markets loved this. If there were a stock market for taxpayer equity, it would have tanked by a commensurate amount.

It must be recognised that the FDIC is in this picture only for cosmetic, window-dressing reasons. The FDIC has no resources of its own to spend on leveraging the PPIP. It cannot raise taxes and it cannot print money. It obtains revenue from the insurance premia paid by the banks whose deposits it insures, but that is hardly a secure source of income at the moment, let alone one that can be expanded drastically, should the need arise. What little money the FDIC has is earmarked to meet future claims of depositors insured under its Deposit Insurance scheme (Congress has temporarily increased FDIC deposit insurance from $100,000 to $250,000 per depositor through December 31, 2009). The FDIC has no money to spare. Indeed, if any major deposit-taking bank were to go belly-up, the FDIC would have to rush to the Treasury for money.

* * *
Under the Legacy Securities Program, the Treasury will provide equity of $100 for every $100 of private equity put in. The Treasury will also lend up to $200 for each $100 of private equity. So the Treasury puts at risk $300 to gain the same upside that the private sector will only put $100 at risk for. Nice work if you can get it (if you work in the private sector). Again, the tax payers’ stock takes a hammering.

* * *

The Legacy Securities Program further enhances the quasi-fiscal role of the [Federal Reserve], and turns the Fed even more blatantly into an off-balance sheet and off-budget special purpuse vehicle of the US Treasury. It does this by extending the scope of the Term Asset-Backed Securities Lending Facility (TALF) to legacy asset-backed securities (especially mortgage-backed securities, residential and commercial and consumer debt-backed securities). The original TALF was created to lend up to $1000 bn to private institutions willing to invest in newly originated mortgage-backed securities. The US Treasury only guarantees up to $100 bn of this proposed lending, so in the worst-case scenario, the Fed could be in the hole for $900 bn, through its exposure to private credit risk.

* * *

The role of the Fed in the PPIP, through the expanded TALF, is deplorable. First, the main redeeming feature of the TALF was that it was focused on new securitisations of mortgages, in an attempt to revive the market for new securitised mortgages and through it new mortgage lending. Diverting these resources to the ex-post insurance of losses that have already been made on legacy MBS (commercial and residential) and legacy consumer debt-backed securities is a serious waste of scarce public resources.

* * *

None of this addresses the issue of the massive private sector credit risk the Fed is taking on its balance sheet, a risk greatly enhanced by the modification of the TALF to include legacy toxic assets. Even if the short-run consequences for the monetary base of enhanced Fed operations under the TALF are sterilised, the Fed will, should it suffer major capital losses on its investments in private sector securities, have no option but to expand the monetary base to maintain its solvency, unless the US Treasury comes to its rescue. The terms of the TALF (with the US Treasury guaranteeing only 10 cents on the dollar, if the full $ 1 trillion is lent by the Fed) suggest that the US Treasury cannot and will not come to the rescue of the Fed. Monetisation of the Fed’s capital losses and inflation will be the inevitable consequence of the lack of fiscal firepower of the US sovereign.

This threat of future inflation from Fed decapitalisation through losses on its portfolio of private assets is in addition to the threat of future inflation caused by doubts about the reversibility of the Fed’s forthcoming purchases of Treasury securities through its quantitative easing (QE) policy. The recent Chinese comments on finding/creating a substitute for the US dollar as the international reserve currency demonstrate that concerns about the medium-term and long-term inflation consequences of the Fed’s QE, its credit easing and its quasi-fiscal rescue efforts of large US banking and shadow-banking institutions, are growing.

That last point is especially important, as it explains why this is not just about "tax dollars." It's ultimately about the "hidden tax" of inflation that will destroy our wages, our savings, and our equity (if we're fortunate enough to have any of those things!). Not only are we paying now to save the banks, but we'll pay later for the privilege of having saved them.

And as to whether any of this will save the banking system, that remains to be seen. As does the larger question of whether saving the banking system will even help the economy.

Maybe I'm being overly reductionist, but as for Geithner Plan II (aka, Paulson Plan III), I ain't seeing it.


Tuesday, March 24, 2009


John Carney of Clusterstock adds his take on the Geithner "Plan," arguing that it's "a budget dodge" by the Obama administration: (H/T Yves). A highlight or two:
Politicians love guarantees because they don’t require current expenditures. In fact, they often pretend a guarantee or a loan is free money—as if a guarantee something that probably won’t ever have to be paid off and all loans from the government will get paid back. As we’ve learned throughout this crisis, that’s a dangerous fiction. If you say you have a bazooka in your pocket, eventually the market will demand you produce it and start blowing things up.

* * *
[The administration] decrees the TARP money to be "equity", and then goes off to the FDIC to provide "debt". Both of these sources of funds are US government risk capital which will be used to buy up toxic legacy assets. There's no economic reason to make the debt/equity distinction. But there is a political reason: Congress would have to approve any more equity spending, but FDIC guarantees can be issued to an unlimited degree without Congressional approval.

* * *
Insurance provides a much more politically palatable way of bailing out the banks. Politicians won’t have to spend a dime on day one. They’ll claim that much of the insurance will prove unnecessary because the asset values will recover. We're sure someone will say that taxpayers could even make money on the insurance, if the premiums charged to banks wound up being higher than the pay outs on the insurance. The budget makers will come up with a rose-tinted estimate of eventually payouts, and that estimate will be based on the idea that the troubled assets will recover their value.
But he also explains why that's nonsense, with what he calls the Dislocation Ideology:
We’d guess that the program to purchase assets turned out to be horrifyingly expensive. Banks are unwilling to shed the assets at steep discounts. Many bankers still believe that a lot of their troubled portfolios will be worth more once the “market dislocation” clears up. That assumption that these debt linked securities will be worth far more than current market pricing indicates we’re calling the Dislocation Ideology.

But even if they were willing to give up on this Dislocation Ideology, they wouldn’t sell their bad assets to the government at market prices because this would render them insolvent. When the government got around to figuring out what it would cost to overpay enough for the troubled assets that banks would come clean, the number was almost certainly beyond anything they had contemplated.
Add to this the point that Applesaucer explained in the comments yesterday -- that "banks who sell into this program will find a way to buy the same assets coming out" -- and you begin to see the depths of the latest boondoggle.

Meet the New Paulson Plan, same as the Old Paulson Plan. We're paying. A lot. And the banks -- the same banks who got us into this mess -- survive, receive new injections of capital, and then get to keep whatever is of value at the end. Or they can just buy up what's worth buying, with the proceeds of the money we so generally "lent" to them.

And what do we get? The bag.

And it's empty. Except for the bill at the bottom.


Monday, March 23, 2009


So at some point today, Timmy "The Bagman" Geithner will roll out the "details" of the latest plan to shift trillions of dollars to the world's wealthiest and most powerful. You and I and our descendants are so generous.

By the end of the day, all the "specifics" will be available to make fun of, and folks who know a lot more than I do will have opined. Most of them -- and likely all of them who aren't beholden to The Insiders -- will rip the plan to shreds. Nevertheless, it won't surprise me if the market goes up. After all, this plan is for the benefit of the largest institutions; I suspect they'll be very pleased.

Anyhow, it looks like the basics of the plan will be a combination of Treasury and FDIC donations, low-interest loans, and guarantees for any private actor reckless/greedy/connected enough to step in and buy the worthless garbage that our government brokers the sale of. The key flaw is that the banks that own the garbage assets stay in business and receive money in exchange for their balance sheet bullshit. The other flaw is that if the garbage assets ever end up being worth anything, they'll be in private hands to a significant degree.

Our money. Our loans. Our guarantees. The bank's benefit: cleaned up balance sheets. The private "purchaser's" benefit: no-risk investments, whereby they at a steep discount for assets that they will own if the value goes up. Our benefit: not sure that's part of the plan.

And, of course, two other things to remember:

One, if no private buyer opts to buy this garbage, the government will end up buying all of it. That's another bailout. Explain to me the difference between giving money to a cancer victim, and buying the cancer and putting it inside of your own body.

Two, the Federal Reserve ultimately backs up the maneuverings of the Treasury and the FDIC, so this is another step in the direction of the complete destruction of the dollar through currency debasement. The end game is becoming clear: unless Fauxbama hears the mob coming with pitchforks and turns into the Obama that the American people and the world want, the Insiders will loot every penny they can get their hands on, and it won't stop until there's nothing left. When either the Treasury is completely insolvent and/or the dollar is so debased, so essentially valueless, that it ceases to be the world's reserve currency.

Whatever specifics Timmy gives us today, remember this: unless his "plan" involves the U.S. government taking complete control of the banks -- kicking their officers, directors, shareholders, and 99% of their creditors to the curb in the process -- it's yet another step in The Looting. So long as the banks remain in private hands, every dollar we give them is just another bailout.

Don't let Timmy's fancy alphabet soup program titles and disembling semantics get in the way of the facts. Ownership is ownership and bailouts are bailouts. Today's plan will be one but not the other.

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Sunday, March 22, 2009


I'm sure many of you have heard the buzz about Matt Tiabbi's article in Rolling Stone about the AIG bailout & the roots of the financial mess. Well, it's a damn strong article, and it really sums up some of the things we've spoken about here. The Insiderism, the Oligarchy, the complicity of Paulson, Geithner, Bernanke. It's absolutely required reading. Read the whole thing -- some of it is frankly devastating -- but I especially like his takedown of the Federal Reserve on pp. 6-7:
In the pre-crisis days, the Fed used to manage the money supply by periodically buying and selling securities on the open market through so-called Repurchase Agreements, or Repos. The Fed would typically dump $25 billion or so in cash onto the market every week, buying up Treasury bills, U.S. securities and even mortgage-backed securities from institutions like Goldman Sachs and J.P. Morgan, who would then "repurchase" them in a short period of time, usually one to seven days. This was the Fed's primary mechanism for controlling interest rates: Buying up securities gives banks more money to lend, which makes interest rates go down. Selling the securities back to the banks reduces the money available for lending, which makes interest rates go up.

If you look at the weekly H4 reports going back to the summer of 2007, you start to notice something alarming. At the start of the credit crunch, around August of that year, you see the Fed buying a few more Repos than usual — $33 billion or so. By November, as private-bank reserves were dwindling to alarmingly low levels, the Fed started injecting even more cash than usual into the economy: $48 billion. By late December, the number was up to $58 billion; by the following March, around the time of the Bear Stearns rescue, the Repo number had jumped to $77 billion. In the week of May 1st, 2008, the number was $115 billion — "out of control now," according to one congressional aide. For the rest of 2008, the numbers remained similarly in the stratosphere, the Fed pumping as much as $125 billion of these short-term loans into the economy — until suddenly, at the start of this year, the number drops to nothing. Zero.

The reason the number has dropped to nothing is that the Fed had simply stopped using relatively transparent devices like repurchase agreements to pump its money into the hands of private companies. By early 2009, a whole series of new government operations had been invented to inject cash into the economy, most all of them completely secretive and with names you've never heard of. There is the Term Auction Facility, the Term Securities Lending Facility, the Primary Dealer Credit Facility, the Commercial Paper Funding Facility and a monster called the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (boasting the chat-room horror-show acronym ABCPMMMFLF). For good measure, there's also something called a Money Market Investor Funding Facility, plus three facilities called Maiden Lane I, II and III to aid bailout recipients like Bear Stearns and AIG.

While the rest of America, and most of Congress, have been bugging out about the $700 billion bailout program called TARP, all of these newly created organisms in the Federal Reserve zoo have quietly been pumping not billions but trillions of dollars into the hands of private companies (at least $3 trillion so far in loans, with as much as $5.7 trillion more in guarantees of private investments). Although this technically isn't taxpayer money, it still affects taxpayers directly, because the activities of the Fed impact the economy as a whole. And this new, secretive activity by the Fed completely eclipses the TARP program in terms of its influence on the economy.

* * *

None other than disgraced senator Ted Stevens was the poor sap who made the unpleasant discovery that if Congress didn't like the Fed handing trillions of dollars to banks without any oversight, Congress could apparently go fuck itself — or so said the law. When Stevens asked the GAO about what authority Congress has to monitor the Fed, he got back a letter citing an obscure statute that nobody had ever heard of before: the Accounting and Auditing Act of 1950. The relevant section, 31 USC 714(b), dictated that congressional audits of the Federal Reserve may not include "deliberations, decisions and actions on monetary policy matters." The exemption, as Foss notes, "basically includes everything." According to the law, in other words, the Fed simply cannot be audited by Congress. Or by anyone else, for that matter.

* * *

In essence, the Fed was telling Congress to lay off and let the experts handle things. "It's like buying a car in a used-car lot without opening the hood, and saying, 'I think it's fine,'" says Dan Fuss, an analyst with the investment firm Loomis Sayles. "The salesman says, 'Don't worry about it. Trust me.' It'll probably get us out of the lot, but how much farther? None of us knows."

When one considers the comparatively extensive system of congressional checks and balances that goes into the spending of every dollar in the budget via the normal appropriations process, what's happening in the Fed amounts to something truly revolutionary — a kind of shadow government with a budget many times the size of the normal federal outlay, administered dictatorially by one man, Fed chairman Ben Bernanke.
Finally, as he closes the piece he gets to an essential understanding of how all this outrageous shit went down:
The real question from here is whether the Obama administration is going to move to bring the financial system back to a place where sanity is restored and the general public can have a say in things or whether the new financial bureaucracy will remain obscure, secretive and hopelessly complex. It might not bode well that Geithner, Obama's Treasury secretary, is one of the architects of the Paulson bailouts; as chief of the New York Fed, he helped orchestrate the Goldman-friendly AIG bailout and the secretive Maiden Lane facilities used to funnel funds to the dying company. Neither did it look good when Geithner — himself a protégé of notorious Goldman alum John Thain, the Merrill Lynch chief who paid out billions in bonuses after the state spent billions bailing out his firm — picked a former Goldman lobbyist named Mark Patterson to be his top aide.

In fact, most of Geithner's early moves reek strongly of Paulsonism. He has continually talked about partnering with private investors to create a so-called "bad bank" that would systemically relieve private lenders of bad assets — the kind of massive, opaque, quasi-private bureaucratic nightmare that Paulson specialized in. Geithner even refloated a Paulson proposal to use TALF, one of the Fed's new facilities, to essentially lend cheap money to hedge funds to invest in troubled banks while practically guaranteeing them enormous profits.

* * *

As complex as all the finances are, the politics aren't hard to follow. By creating an urgent crisis that can only be solved by those fluent in a language too complex for ordinary people to understand, the Wall Street crowd has turned the vast majority of Americans into non-participants in their own political future. There is a reason it used to be a crime in the Confederate states to teach a slave to read: Literacy is power. In the age of the CDS and CDO, most of us are financial illiterates. By making an already too-complex economy even more complex, Wall Street has used the crisis to effect a historic, revolutionary change in our political system — transforming a democracy into a two-tiered state, one with plugged-in financial bureaucrats above and clueless customers below.

The most galling thing about this financial crisis is that so many Wall Street types think they actually deserve not only their huge bonuses and lavish lifestyles but the awesome political power their own mistakes have left them in possession of. When challenged, they talk about how hard they work, the 90-hour weeks, the stress, the failed marriages, the hemorrhoids and gallstones they all get before they hit 40.

"But wait a minute," you say to them. "No one ever asked you to stay up all night eight days a week trying to get filthy rich shorting what's left of the American auto industry or selling $600 billion in toxic, irredeemable mortgages to ex-strippers on work release and Taco Bell clerks. Actually, come to think of it, why are we even giving taxpayer money to you people? Why are we not throwing your ass in jail instead?"

But before you even finish saying that, they're rolling their eyes, because You Don't Get It. These people were never about anything except turning money into money, in order to get more money; values-wise they're on par with crack addicts, or obsessive sexual deviants who burgle homes to steal panties. Yet these are the people in whose hands our entire political future now rests.

Analyses of the roots of this disaster have bounced around the blogosphere for months now. Over the last month or so it's begun to hit the mainstream press. Anyone who sits quietly watching the business-as-usual "solutions" that Bernanke & Geithner (and yes, Obama too) are proposing without instantly seething in outrage is either an Insider himself, or a complete idiot. This shit has got to stop and the only way that'll happen is if we all make an effort to understand it, and then make so much noise they fear not only election day doom but the mob with torches and pitchforks.

This has to stop.

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Friday, March 20, 2009


Pretty busy with work, so I don't really have time to put together a full post. But Cunning Realist has a sharp -- and blunt -- take on Obama's first 50 days or so. It's a pretty short post, and it's always worth checking out what he has to say, but here's the core of it:
Since Inauguration Day it's been obvious that Obama either never really wanted to "fix" this, or was convinced by administration insiders and/or top Democrats to lay off. When I wrote in early February that I was losing confidence in him because of his sudden lassitude on executive compensation, I got a few nasty emails about how I needed to give him a chance. But presidents can be made or broken by symbolic, high profile issues early in their first term -- especially when "change" was the overarching issue that brought them to office.
We're waiting. But meanwhile, Geithner and Summers continue Paulson's policies, and the same hack heads the federal reserve.
Update -- Here's his first big chance: seems that Geithner admits that he knew about the loophole in the "Stimulus" legislation that allowed AIG executives to receive bonuses from taxpayer money.

Guess what Mr. Obama? Time to make your first big administration "change." And all it takes is a quick request for Timmy to stop by the Oval Office on his way home today.

The second change would be putting someone with a little integrity into the position after you kick Geithner's ass to the curb (and make him pay his goddamn back taxes). Paul Volcker would be a nice place to start.

Replacing Summers and firing Bernanke would be nice places to continue.


Thursday, March 19, 2009


Jesse posts on the level of knowledge, conflict-of-interest, and straight-out culpability of various D.C. insiders in the whole AIG bonus scandal. Just to remind you (in case you've lost sight of the issue), we're talking about the billions of dollars that AIG executives and institutional counter-parties received from the American people as a reward for making stupid, if not fraudulent decisions that already made them rich at the expense of everyone else. That scandal.

And among the names implicated? Apart from those we already know like Hank "Goldman Sachs" Paulson, "Helicopter" Ben Bernanke, "Heckuva Job" Timmy Geithner, and Larry "Winter of Our Discontent Turned to Inglorious" Summers? Well, this time it's just a couple fellas named Chris Dodd and Barack Obama. A few highlights, and then I urge to read Jesse's post, which is short and contains links:
while the Senate was constructing the $787 billion stimulus last month, Dodd added an executive-compensation restriction to that very bill. The provision, now called “the Dodd Amendment” by the Obama Administration, provides an “exception for contractually obligated bonuses agreed on before Feb. 11, 2009.”

* * *
Obama may be grandstanding about AIG’s bonuses now, but it’s worth noting that Obama himself is the second biggest benefactor of AIG political contributions. Second only to Senator Chris Dodd, who is quietly trying to tip-toe away from legislation he inserted into Obama’s “stimulus” spending spree that protected AIG’s bonuses.
Meanwhile, Paul Kanjorski claims he alerted Treasury about this bonus issue six or seven times in the last few weeks. And finally, Jesse reminds us that last September was the key decision point on bailing out AIG -- when the only non-official present at the meeting where Treasury/The Fed decided to bail out AIG was none other than Lloyd Blankfein, the Chairman of Goldman Sachs. And as we knew then, and certainly know now, Goldman Sachs is a major counter-party at risk with the AIG Financial Products Division.

None of this is mysterious now, and it wasn't then.



Well, that didn't take too long, did it? Yesterday I noted that the Fed was wondering which of a number of options to take, and by midday they opted for a few of them, deciding to add an astonishing $1.2 trillion to its already burgeoning balance sheet. $750 billion in mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac. These are, of course, "toxic assets," unlikely to retain anything close to their book value. And the Fed also announced it will purchase $300 billion in long term treasuries, thereby finally taking the long-awaited and long-feared leap into direct debt monetization.

This latter step is especially frightening for many reasons. One consequence is that the cost of treasuries will therefore rise, while the yield will drop. I can't see that China -- which has already expressed concern about the health of the American economy -- will like this. Yet we need them to keep buying US debt. It's too soon to say for sure but I think one part of the Fed's decision reflects a fear of on-going Chinese reluctance to purchase treasuries.

Apart from the more obvious strategy of artificially "stimulating" the economy. Which will eventually lead to nothing but price inflation.

Bernanke and friends just added another brick to the pyramid.
Update -- Yves analyzes some of the economic causes and consequences of the Fed's decision.

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Wednesday, March 18, 2009


Following up a bit from yesterday's discussion, as the latest Federal Open Market Committee continues, the Fed is apparently wondering what to do (since it can't lower interest rates that are already at or essentially at zero, and it clearly sees "do nothing" as a non-option). Among the options it's bouncing around:
* hold its lending rate between zero and 0.25 percent for the rest of this year and for most -- if not all of -- next year

* buying long-term Treasury securities

* boost its purchases of debt issued or guaranteed by mortgage giants Fannie Mae and Freddie Mac

* spur lending for auto, education, credit card and other consumer loans. The Fed later this month will start providing up to $200 billion in financing to investors to buy up such debt
As Applesaucer explained so eloquently in yesterday's comments, all of these options amount -- in the end -- to nothing other than the creation of "money" from thin air. Some destroy the Fed's balance sheet more than others. Some "stimulate" the GDP more than others, but in the end they devalue the currency, and add nothing of value to the economy. If the government decrees today that at the snap of the finger everyone now has twice as many dollars as he had when he woke this morning you're not one cent richer.

But debtors -- including, of course, the U.S. Treasury and the Federal Reserve -- can pay their obligations in the watered-down currency that creditors (including you, as a holder of Federal Reseve Notes, also known as dollar bills) are legally required to accept as "tender for all debts, public and private."

Whatever the FOMC decides today, or in the near future, remember that they're just figuring out the best way to perpetuate the ponzi scheme. And robbing you blind in the process.

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Tuesday, March 17, 2009


I just want to throw out an idea out for discussion. A few days ago, Neighborhood regular and frequent commenter Applesaucer & I were discussing the nature of the federal reserve system & central banking in general. More specifically, Applesaucer threw out the idea that the federal reserve system is just a gigantic ponzi scheme.

I agree.

In brief, that dollar bill in your wallet is described as a "federal reserve note." A debt instrument. In other words, the federal reserve issues these notes, with the implied promise to pay the bearer what that debt instrument is worth. In this case, US$1. Or US$100, what have you. Easy so far.

But here's where it gets dicey. What backs that debt instrument? Another currency? No. A tangible asset like land or cattle or crops? No. Gold or silver? Hell no! That's clearly not the case, as the federal reserve -- while hording a sizable chunk of the world's gold reserves -- doesn't have nearly enough gold to cover its debts.

None of the above. The federal reserve's debts are backed by the full faith and credit of the U.S. government. Meaning that the U.S. government backs and covers these debts should we all decide to make a run on the federal reserve banks. And where does the U.S. government get the "money" to cover those debts. Well . . . uhhhhh . . . it borrows money to generate its own debt instruments -- U.S. Treasury bonds, T-bills, Treasury notes, each varying by maturity. And from whom does the US government borrow that money? Let's see, we have the U.S. citizenry, whose worth is measured in the amount of federal reserve notes it holds.

And then there's China, who have shown a recent reluctance to keep lending money to the US government. And if things get really tight, the US government can get the "money" to back the debts of the federal reserve banks by borrowing money from . . . the federal reserve.

And where will the federal reserve get the "money" to lend to the US Treasury? Easy! It'll create federal reserve notes from thin air. Which is cool, because after-all, the US government -- with its full faith and credit -- will back those federal reserve notes that the federal reserve is lending to the US government.

And on and on it goes. Get the idea? The inevitable end result? Insolvency & Default. Or Currency Devaluation & Inflation. That's it. There are no other possibilities. This is what constitutes an economy in 21st century America. I have a different name for it:

A Ponzi Scheme.

Anyhow, as I said, this is the fruit of an e-mail discussion. I may well have made some errors here in my description, and I'm sure Applesaucer will correct me. Please, everyone join in. Questions, comments, thoughts, disagreements, suggestions.



Today's WSJ reports that in the face of recent populist anger over bonuses paid from governmental bail-out money, Wall St. firms are examining the possibility of increasing base salaries for executives and "top-producing employees." (H/T Yves)

(For the moment let's just behave ourselves and ignore the fact that rewarding Wall St.'s "top level employees" for 2008-09 is tantamount to giving Kevin Smith a raise because he led the 2008 Detroit Lions in rushing.)

A few highlights if I may:

In response to expected bonus restrictions, officials atCitigroup Inc., Morgan Stanley and other financial institutions that got government aid are discussing increasing base salaries for some executives and other top-producing employees, people familiar with the situation said. The crackdown, part of the economic-stimulus package passed by Congress and signed into law by President Obama last month, limits bonus pay for the top five executives of any recipient of taxpayer capital through the Troubled Asset Relief Program, plus the 20 next-highest-compensated employees.

* * *

As banks and securities firms wrestle with growing regulation of compensation practices, substantially increasing the base salaries of top employees could become a popular response, some industry officials say. A larger salary would reduce the relative importance of bonuses but also help financial companies increase those payments, since they usually are calculated as a percentage of total annual compensation.

"The trend is to increase the base pay in light of the reduced bonuses," said Scott Talbott, senior vice president of government affairs at the Financial Services Roundtable. "Without the revenue" that top performers provide, he adds, "these companies can't survive."

Let's again behave ourselves and ignore the fact that they aren't surviving but-for governmental largesse. Back to the sordid tale:

Under the forthcoming rules, bonuses could come to no more than one-third of the total annual compensation paid to employees covered by the restrictions. Some compensation experts view the bonus limits as a mistake that turns the notion of pay for performance on its head, despite Wall Street's culpability for the recession and credit crisis.

"These are not bureaucratic positions where you're paying individuals high salaries," said Michael Karp, chief executive of Options Group. "How can you pay a banker a really high salary without knowing what kind of revenue that person generates?"

Uhhhh, we know they did not generate any revenue. In fact, we know they generated historic, unprecedented, hard-to-fathom losses. Which is why they probably don't deserve anything. Especially since the American taxpayers are paying it! I know I'm but one lone voice in the vast wilderness, but I'm gonna take a wild stab and say I'm a decent proxy for the other citizens. And my decision on their compensation is: Nada. Want a raise? Don't wanna answer to populist demands for a haircut? A got a swell idea: don't accept public money. Otherwise, I'm your boss, I think you suck, and I'll pay you accordingly. Back to the article:

Raising base salaries would play into "a long and dishonorable tradition of responding to any attempt to curb pay excess by just putting it in a different pocket and calling it something else," said Nell Minow, editor of the Corporate Library, a research firm focusing on corporate-governance issues.


Citigroup has received $45 billion in taxpayer-funded capital do far, while Morgan Stanley has received $10 billion. The latest U.S. rescue of Citigroup will leave the federal government holding as much as 36% of the company's common stock.
These firms still stand only because we've propped them up. The money they'll pay to the 25 highest-ranking parasites comes directly from us.

Inside banks and Wall Street firms, some executives are hopeful that the Treasury Department will water down the curbs on bonuses, inserted into the stimulus bill by Sen. Christopher Dodd (D., Conn.), during the department's rule-making process.

With bagman Timmy in charge, who could blame them for their optimism.

The Dodd provision sent shockwaves across Wall Street. Some bankers and compensation experts contend that top revenue-producers could bolt to non-U.S. banks or hedge funds that aren't subject to TARP-related restrictions. "It's possible we will lose some people," J.P. Morgan Chase & Co. Chairman and Chief. "I'll be very sorry if that happens."

He'll be very sorry. I'm sure he will. Anyhow, note the subjunctive tense of those statements. Top-revenue producers could bolt. But franky, at this point, so what if the morons who caused the mess lose their job? Lots of American have lost their job due to nothing more than bad luck. No one bailed them out.

Enough is enough. We have to keep making noise about this.

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Monday, March 16, 2009


I'm sure by now you've all heard about AIG doling out $165 million in bonuses to the same useless executives who drove the company into the ditch with their risky investments and failed policies.

I'm sure you've also heard the Oscar-worthy hand-wringing of enablers Summers, Geithner, and Bernanke: If only we could undo those inviolable contracts between AIG and its employees, we would. We're just so outraged by this miscarriage of justice against the American people. I was so mad when I heard about this I tore my hair out and screamed in anger!

Bullshit, I yell. Yeah, they just found out about this over the weekend. Please.

Maybe if these brilliant, powerful, all-knowing leaders of the American economic recovery had done a shred of due-diligence into AIG's contractual obligations they could've chosen not to loan the $170 billion to the failing company. Or, more accurately, since the Three Stooges obviously did their due diligence and knew full-well about the bonus plan, they could have -- gasp! -- attached contingencies to the $170 billion and demanded that AIG award no bonus money after the bail-out. Make no mistake -- they knew about this bonus money and bailed out AIG anyway. It's too big to fail!

If AIG had said, we'd love to tell all our incompetent executives they'll receive no bonus money, but we're contractually obligated, then Timmy, Larry, and Benny could've informed the failing company that they're contractually bound to the American people not to give away money to thieves, bums, fools, and gamblers.

The bullshit storm grows stronger. It's up to Cat 4 and blowing harder. Whatever we're hearing out of The Three Stooges' mouths ain't the truth. Up is down, black is white, war is peace. And billions of dollars of corporate charity with taxpayer money brings "outrage" and "shock" to the very people who gave it away.

We're being bamboozled, and they're not even trying to hide it.

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Friday, March 13, 2009


Fairly interesting post from Yves about China's posturing regarding its holdings in, and future purchases of, US Treasuries.

As many of you know, China holds astonishing amounts of US debt. A debt that we will never be able to pay back, should China and other creditors "call" for repayment. Even more frightening, in a sense, and certainly more important in the short term, is China's continuing commitment to buy more treasuries. If they don't, how can we continue to pay our bills? Service our ever-growing debt?

One way, of course, is to raise taxes to the roof. Apart from any questions about the undesirability of doing so, it's unlikely you'll see anyone in DC do that, for purely political reasons. Another is to slash spending. That ain't happening. A third possibility would be for US businesses and citizens to buy treasuries themselves. They have been for a while now. But -- especially with the market experiencing bear market rallies like the one we're seeing this week -- who's gonna loan money to an insolvent borrower for less than 1% interest? Knowing that the borrower can pay you back only in its reserve currency, which it has grossly devalued over the past 6 months (and will likely continue to do)?

Maybe I'm missing something here, but the only scenario I see going forward is for the Federal Reserve to start buying US treasury debt. Monetizing the debt, as they say. And when that happens, that means trillions of dollars worth of brand-new, created out of thin air, fiat currency will start to seep into the economy.

Can you say Inflation?

Anyhow, check out the post.

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Thursday, March 12, 2009


I just read that Jack White is forming another group. In addition to the White Stripes and the Raconteurs, hard workin' Jack will soon release an album with The Dead Weather, a new band including Raconteurs' bassist Jack Lawrence, Queens of the Stone Age member (and erstwhile touring Raconteur) Dean Fertita, as well as Alison Mosshart of the Kills (pictured at right with Mr. White).

I eagerly await.


Wednesday, March 11, 2009


Tuesday, March 10, 2009


Here's a very short video of Chris Whalen from Institutional Risk Analytics discussing Geithner, "nationalization" of the banks, the so-called "stress tests," and a few other issues. Institutional Risk Analytics seems to monitor and analyze banks. As to Whalen, his resume is long -- having worked for the House of Representatives, the Federal Reserve, Bear Stearns and Prudential Securities -- and impressive. Impressive in the sense of knowing what's happening on the inside. I leave it to you to judge it otherwise. The whole video is less than two minutes long. (H/T Jesse)

As you'll see, Whalen asserts that the only reason Obama appointed Geithner as Treasury Secretary was to "protect Goldman Sachs." Hard to argue with that based on the AIG deal. Or based on Geithner's stellar performance while head of the NY Fed.

Why would Obama have made such a choice? I guess we all have to supply our own explanations to that one.

Meanwhile, I think anyone who's followed this story the last couple weeks can agree that Geithner won't last much longer. Time to start turning the weaponry on to Summers.

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Monday, March 09, 2009


A friend sent me the link to a blog post by Karl Denninger at The Market Ticker. I've read a few of his posts before, but not many, so I'll admit I don't know that much about him. He seems a bit more voluntarily marginalized than the folks I normally prefer to link to, but he's really talking sense here so I'll give it a whirl.

He responds -- forcefully -- to Obama's recent conversation with The New York Times in which he “urged Americans not to 'stuff money in their mattresses,'” also explaining that he “do[es]n’t think that people should suddenly mistrust all of our financial institutions.”

I think such a suggestion is grossly irresponsible and borderline reprehensible. Denninger apparently thinks is well over the borderline of the latter, and lets loose. I don't agree with everything he says, and have selected quoted to reflect that. Nonetheless, I think his overall message is sound, and is well worth a quick read. A few highlights (and the various emphases, in the form of ALLCAPS and underlines are his):

You want Americans not to "stuff money in mattresses" and "not suddenly mistrust all of our financial institutions"? Fine. START LOCKING UP THE EMBEZZLERS AND THIEVES, MANY OF WHOM ARE YOUR CRONIES AND DONORS TO BOTH POLITICAL PARTIES. Until you do that, anyone with half a brain in their head will head to The Mattresstm, because it is the only place where one can be certain their money is safe.

* * *

If you think that the market is collapsing because people are worried about "socialism", you're wrong. Yes, that's a concern, and yes, people are worried that you're going "hard left" - but there are winners in such a marketplace.

No, the market is being beaten to a pulp because you have inherited a financial system that has for the last twenty years, under both Democrats and Republicans, been comprised of one fraud after another, starting with "the Internet is growing 50% a quarter" and now winding up with "home prices never go down."

You have inherited this President Obama, but you have also refused to change it. Let's tick it off, shall we?

  • You have refused to step on the neck of the CDS monster by declaring the uncovered writing of these swaps contrary to public policy and thus void, suspending all ability to collect until they are on a public exchange with nightly margin supervision.
  • You have refused to claw back the nearly $50 billion that our government paid to the bankers who caused the mess via bailing out AIG, and attempted to conceal same.
  • You have refused to compel The Federal Reserve to disclose the full details of who it is lending to and on what collateral.
  • You have refused to demand that the banks (and all other firms) produce accurate balance sheets showing the impairment on their so-called "assets".
* * *

We need a banking system Mr. President. We do not need these banks who gamed the rules, demanded unlimited leverage, colluded with one another to create unreasonable and systemic risk and fomented the great economic and financial collapse since the 1930s. You've done nothing to solve this problem Mr. President, instead choosing to continue trying to paper over it, as President Bush and Henry Paulson did.

What do we have left President Obama if not "The Mattress"?

You own this problem now. It is your responsibility. Either act - it is within your power to do it today - or watch our economy and markets implode. Pleading will not get it done; all that does is confirm that you either lack the balls to do the right thing or are personally complicit in the corruption and embezzlement.

This problem is systemic. Maybe, like a lot of people, I want to believe that Obama is not in bed with the Insiders and Oligarchs. But his actions -- starting last fall when he favored the TARP, along with Bush and Cheney and Paulson and Barney Frank and Bernanke -- have suggested that he is under the covers with them. Or he's in waaaaaaaaaayyy over his head.

And I'm not sure which one frightens me more.

But if he's not complicit in this looting and thievery (and I, like most of us, wish desperately to believe he's not), and he's as smart as we all think he is, then he must start acting appropriately. Fire Geithner. Fire Larry Summers. Fire Bernanke, or at least do not re-appoint him when his term ends later this year. Bring in folks who know what they're doing. Who are not former Goldman Sachs executives. Not former NY Federal reserve chairmen. Not former authors of the repeal of Glass-Steagle. Not fucking crooks.

Let's see some of the change he promised us. Because so far it's been business as usual -- Wall Street's business.


Update - This short post at The Business Insider (H/T Naked Capitalism) shows that all the internet chirping about the disastrous Obama/Geithner/Summers policies is starting to hit its target.

Let's keep it noisy.

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Sunday, March 08, 2009


For those interested in some understanding as to why a seemingly decent fella like Obama is continuing to oversee the looting of the treasury that began under straight-out criminals like Bush, Cheney, and Paulson (with the help of full-time hacks & lackeys like Barney Frank, Nancy Pelosi, and Chuck Schumer), Jesse quotes from Robert Weissman:
The entire financial sector (finance, insurance, real estate) drowned political candidates in campaign contributions, spending more than $1.7 billion in federal elections from 1998-2008

* * *
During the decade-long period:

* Commercial banks spent more than $154 million on campaign contributions, while investing $383 million in officially registered lobbying;

* Accounting firms spent $81 million on campaign contributions and $122 million on lobbying;

* Insurance companies donated more than $220 million and spent more than $1.1 billion on lobbying; and

* Securities firms invested more than $512 million in campaign contributions, and an additional nearly $600 million in lobbying. Hedge funds, a subcategory of the securities industry, spent $34 million on campaign contributions (about half in the 2008 election cycle); and $20 million on lobbying. Private equity firms, also a subcategory of the securities industry, contributed $58 million to federal candidates and spent $43 million on lobbying.

* * *
A great many of those lobbyists entered and exited through the revolving door connecting the lobbying world with government. Surveying only 20 leading firms in the financial sector (none from the insurance industry or real estate), we found that 142 industry lobbyists during the period 1998-2008 had formerly worked as "covered officials" in the government. "Covered officials" are top officials in the executive branch (most political appointees, from members of the cabinet to directors of bureaus embedded in agencies), Members of Congress, and congressional staff.

Nothing evidences the revolving door -- or Wall Street's direct influence over policymaking -- more than the stream of Goldman Sachs expatriates who left the Wall Street goliath, spun through the revolving door, and emerged to hold top regulatory positions. Topping the list, of course, are former Treasury Secretaries Robert Rubin and Henry Paulson, both of whom had served as chair of Goldman Sachs before entering government. Goldman continues to be well represented in government, with among others, Gary Gensler, President Obama's pick to chair the Commodity Futures Trading Commission, and Mark Patterson, a former Goldman lobbyist now serving as chief of staff to Treasury Secretary Timothy Geithner.

All of this awesome influence buying has enabled Wall Street to establish the framework for debates in Washington, and to obtain very specific deregulatory actions, with devastating consequences.
As Jesse also added:
The problem continues . . . . The carriers of the infection are still at work. The system is distorted, sick, incapable of self-cure. Feeding intravenous liquidity to obtain the appearance of health will not work, only allow the disease to progress. Strong medicine is required. We will have no recovery until we have reform. We will have no reform until the banks are restrained, and balance is restored. The looting of the public Treasury will continue while the Congress and the Executive take their direction from Wall Street.
The problem is frighteningly simple, though the solutions will be very difficult, both in terms of implementation as well as commitment. In a nation where moneyed interests can influence politicians, those with the most money will have the greatest influence. And we're seeing that right now. A series of outrageous policies, all of them financed by the American people to bail out a microscopic sliver at the very top of the demographic pyramid, carried out daily without any concern for the opinion of the population.

We're no longer dominated by the military-industrial complex, but by the Financial Complex. And just as (relatively) recent history has shown that a grassroots movement can eventually end unpopular wars, or remove especially loathsome political regimes from power, we have to educate ourselves as to what's happening. We have to understand and admit what's happening.

And then keep making noise. A lot of it. If this issue continues to catch fire at the rate it has lately, Obama is gonna fire Geithner and maybe Summers too. If we really stay loud, maybe Bernanke goes too. And if that goes down, I suspect Obama will replace them with adults. Volcker and others of his quality and responsibility if we're really lucky.

At bottom, all the elected officials know that if & when the American people finally get wise and get angry, no amount of lobbyist money will buy the votes to prevent them from getting tossed out on their asses. Think '32. '80. '94. '06 and '08. We all need to get wise and stay loud.

There's nothing else to do.

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Saturday, March 07, 2009


Barry Ritholtz continues his uncharacteristic rage over what's happening right under our collective noses:
[W]hat was misleadingly described as systemic risk turned out to be in large part little more than a counter-party bailout — money for the very same people who helped cause the problem. Only the $25 billion figure I mentioned was off by 100% — the WSJ is reporting this morning it was $50 billion dollars, almost a third of $173 billion total AIG loot.

* * *

Now you know why the Fed was so reluctant to reveal who the counterparties were.

This is a giant FUCK YOU to the American taxpayer. Isn’t there some Congressmen (besides Ron Paul) who are morally offended by the Paulson plan, which is slowly becoming the Geithner plan? Isn’t there anything that can be done?

* * *

This is simply unconscionable . . .

This isn't some sort of marginal tinfoil hat thing. The smartest, best-informed (and honest) Wall St. experts are expressing nothing short of screaming, ranting, sputtering outrage over this.

Those who refuse to acknowledge what's happening in the clear light of day are insane. Truly insane, in that they deny reality in favor of their wishes.


Update - Yves at Naked Capitalism also posts on this same topic. Good one, as usual. A highlight or two:

Bottom line: covert subsidies were given to bank via AIG. Remember, Henry Paulson, who had perilously few inhibitions about shoveling money at banks, even when the pretexts were often dubious and the checks non-existent, nevertheless was afraid to overpay openly for dud assets, which is why he retreated from his original conception of the TARP as as way to hoover up bad debt.

* * *
Wake up and smell the coffee. The public purse is being looted and we the great unwashed are being fed pablum. Just because the perps work for once esteemed institutions and are typically treated with deference does not change the nature of the undertaking.

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Friday, March 06, 2009


This issue relates somewhat to what I've talked about recently: the seeming paradox of the Federal Reserve, its constituent banks, its board of governors, and the 22 or so-odd institutions first in line for its money. As mentioned, the Fed is private (though it has quasi-governmental features), and the NY Fed, responsible for much of the various bailout money over the last six months, is completely private.

The paradox, of course, comes from the fact that the President appoints the chairman of this private institution. And that the private institution has a monopoly over the right to issue the currency all American citizens are bound to use as legal tender. A monopoly despite the fact that it isn't required to own anything of value backing that legal tender. Which means it can inflate, and thereby devalue, that currency. And has inflated it at a 95% rate in the 96 years of its existence.

So what's the issue I'm talking about today? Well, as you may know, Bloomberg News sued the Federal Reserve last fall under the Federal Freedom of Information Act ("FOIA"), seeking an injunction forcing the Fed to disclose the identity and amounts of TARP money it "lent" to various banks and institutions. And without wading into all the details, one of the Fed's defenses asserts that the NY Fed (which "lent" the money and houses most of the documentation) is not a federal agency, and therefore doesn't fall under the reach of FOIA.

They put forth other defenses, all of them equally nauseating, but that's the one that really gets me boiling. Anyhow, do a search for Bloomberg LP v. Board of Governors of the Federal Reserve System, and prepare to wretch if not rave.

Have a nice weekend . . . until you remember that most Treasury/Federal Reserve shenanigans have gone down over weekends. When you wake up Monday morning, don't be surprised to learn that we've bailed out Citibank to the tune of hundreds of billions of dollars.

And don't be surprised if that private bank that destroys your currency tells you it's none of your goddamn business what it's done with your money in an effort to dole it out to its friends. Nah, don't do any of that Monday morning.

Just Wake Up.

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Thursday, March 05, 2009


Wow. The normally calm, measured, and rational-to-the-point-of-being-unemotional Barry Ritholtz lets loose on the AIG bailout. Damn, check some of this out:

When AIG first faltered, there were two companies jammed under one roof. One was a highly regulated, state supervised, life insurance company. In fact, the biggest such firm in the world. The other firm was an unregulated structured finance firm, specializing in credit default swaps and other derivatives. The first firm was Triple AAA rated. They had a long history of steady growth, profitability, excellent management. They made money (as the commercial goes) the old fashioned way: They earned it. This half of the company held the most important insurance in many families’ financial lives: Their life insurance.

* * *

The other part of the firm was none of the above. It was neither regulated nor transparent. It existed only in the shadow banking world, a nether region of speculation, and of big derivative bets. This part of the company engaged in the most speculative of trading with hedge funds, banks, rank speculators, gamblers from around the world. Huge derivative bets were placed, with billions of dollars riding on the outcome. It served a far more limited societal function than the Life insurance portion, other than a legal pursuit of profit. This part of AIG was nothing more than a giant structured finance hedge fund.

* * *

It was exempt from any form of regulation or supervision, thanks to the Commodities Futures Modernization Act. This ruinous piece of legislation was sponsored by former Senator Phil Gramm (R), supported by Alan Greenspan (R), former Treasury Secretary (and Citibank board member) Robert Rubin (D), and current presidential advisor Larry Summers (D). It was signed into law by President Clinton (D). It was the single most disastrous piece of bipartisan legislation ever signed into law.

* * *

Here is the question that every single taxpayer should be asking themselves: WHY AM I PAYING $1000 TO BAIL OUT THIS GIANT HEDGE FUND? Of all the many horrific decisions that Hank Paulson made, this may be his very worst. That is a very special description, given his track record of incompetence and cluelessness. What should have been done?

Simple: When we nationalized AIG, we should have immediately spun out the good, solvent life insurance company. It is a highly viable standalone entity. The hedge fund should have been wound down in an orderly fashion. Match up the offsetting trades, the rest go to zero. End of story.

* * *

Right now, we are into this clusterfuck for $166 billion — every last penny of which is a needless waste. Taxpayers should not be bailing out hedge fund trades. This insanity must cease immediately.

Again, wow. Not much to add, since Ritholtz says it better than I ever could. At the core of my opinion (since I have different thoughts from him about what "deregulation" is, what it means) is the belief that if you get governmental protection, if you're first in line for cheap loans, if your industry is subject to loopholes and access the rest of us schmucks don't get, then we damn well have the right to make the rules that you play under.

But from what I understand about what Clinton and Gramm and Greenspan and Rubin and Summers did, huge banks and other companies got to have it both ways: all the perks with none of the rules.

And the acolytes of these enablers (Geithner learned his craft at the lap of Rubin, Bernanke served on the Fed Board of Governors under Greenspan), if not the active perpetrators (the utterly loathsome Larry Summers), are continuing to roll out the gravy train.

At our expense.

And as Ritholtz says, "every single taxpayer should be asking themselves: Why am I paying $1000 to bail out this giant hedge fund? ... Taxpayers should not be bailing out hedge fund trades. This insanity must cease immediately."


Update (Of sorts): This post by Steve Randy Waldman at Interfluidity (H/T Naked Capitalism) is somewhat on-point with the concept I tried (clumsily) to explain at the tail end of this post. I haven't thought enough about what he's actually advocating, and the post is a bit arcane for non-financial types like me. That said, he makes the larger point that:

Private-sector banking has not existed in the United States since first the Fed and then the FDIC undertook to insure bank risks. There is no use getting all ideological about keeping banks private, because they never have been.

* * *

I don't think we should give much deference to traditional banking, on the theory that we know it works. On the contrary, we know that it does not work. Banking crises are not aberrations. They are infrequent but regular occurrences almost everywhere there are banks. I challenge readers to make the case that banking, in its long centuries, has ever been a profitable industry, net of the costs it extracts from governments, counterparties, and investors during its low frequency, high amplitude breakdowns. Banking is lucrative for bankers, and during quiescent periods it has served a useful role in financial intermediation. But in aggregate, has banking has ever been a successful industry for capital providers? A "healthy" banking system is arguably just a bubble, worth investing in only if you're smart enough or lucky enough to get out before the crash, or if you expect to be bailed out after the fall.

Again, I haven't thought about this enough to say I agree with whatever it is that Waldman favors (assuming he has something in mind). I'm just throwing some kindling on the fire I'm trying to stoke: that our collective understanding of "free markets" and "laissez faire" and "deregulation" will forever be skewed unless we come to grips with the fact that, in America, because of the Federal Reserve system and the financial industry's leverage on Capital Hill, the banking system is subsidized, guaranteed, favored, and ultimately rigged.

And if it wants continued largesse, we need to extract some real concessions.

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Tuesday, March 03, 2009


Yves over at Naked Capitalism addresses some of what we talked about in yesterday's comments thread. In other words, what "nationalization" really means in the context of all that's going on:
Bernanke and Geithner believe that the current lousy state of financial markets is the result of irrational pessmimism. If the government throws enough liquidity at the market, animal spirits will return and all will be well.

Nationalism arrived at this way, call it reluctant nationalism, could well make reprivatization more difficult than the more traditional kind (think the FDIC receivership, except the government can't dispose of the assets by Monday, so it has to keep them for a while, perhaps as long as a few years, to figure out what the highest and best exit strategy is for the various components)

* * *
Nationalization as takeout, by contrast, puts the government officialdom in charge and ought to involve changes in top management and the board.

Similarly, reluctant nationalization keeps the behemoth financial firms intact, while the "nationalization as takeout" version assumes stripping out of bad assets, and a possible breakup of the firms. One or both would reduce the size of the remaining entities, which would make it easier to find new management candidates.
This is all a work in process. As long as the ideas keeping flowing, some of them will reach the ears of those who actually wanna do something good for the economy. So long as they're loud and constant, to get through the noise of those who have other goals in mind.

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Monday, March 02, 2009


In the latest report from the "Not Even Remotely Surprising Unless You Haven't Been Paying Attention, Or Haven't Wanted To" Files, we learn that the U.S. government (uhhh, that'd be "You & I") will bailout AIG for the 4th time in less than six months. A few "highlights":
The Treasury Department and the Federal Reserve announced jointly early Monday that they will supply another $30 billion on an "as needed" basis to facilitate "the orderly completion of the company's global divestiture program" and "help stabilize the company and in doing so help stabilize the financial system," in light of the "significant challenges" due to the rapid deterioration in certain financial markets in the last two months of the year.
Where to begin? Before even getting into the substance of what a mistake this is, let's examine the actors, shall we? The Treasury Department and the Federal Reserve.

One a division of the executive branch and the other a quasi-governmental, privately-owned bank headed by an unelected chairman. And, since we're doing this lil' Q&A thing, let's ask who heads that division of the executive branch? Only the former head of the completely private NY facility of that quasi-governmental, privately-owned bank. This isn't Democracy. Now let's ask why these unelected thieves are doing what they're doing:
AIG has been unable to find buyers for pieces of its company that it hoped to sell to repay the government on its existing aid package, which totals some $150 billion.
Read that carefully. AIG is Looking for buyers to raise capital to repay the government that already "lent" it over a hundred billion dollars because it couldn't find any buyers the first time around. Before it added an additional $150 billion to its balance sheet.

And why can't AIG can't "find buyers"? Because it had nothing to sell except a rancid mound of rotting garbage. Who the hell buys rotting garbage? The answer is, of course, "no one." Which is why the enablers in D.C. are fostering this deal, laying the bill onto citizens and taxpayers who have no recourse to remove these gentlemen from their positions because they neither hired nor elected them.

And why would these unelected gents do this? I mean, they must have a good reason to engage in such a shameless expropriation of the nation's wealth, no? For whom would they do such a thing? Who benefits from the survival of AIG as a private institution? Why not nationalize it, wipe out its debt, clean out its worthless "assets" and start over, right?
perhaps the biggest concern about AIG is the dizzying array of complex financial instruments it structured for commercial banks, investment banks and hedge funds around the globe.
"The biggest concern." Yet, the question we need to ask is whose biggest concern? I'm not concerned, are you? Any of your neighbors staying up at night worrying about this? Know anyone who knows anyone that shares this concern that "commercial banks, investment banks and hedge funds around the globe" are gonna lose their shirts due to idiotic investments they made in a "dizzying array of complex financial instruments"?

This article from Bloomberg last fall explains why this is really going on. If AIG went into bankrupcy, it's biggest creditors would get the shaft, receiving (literally) pennies on the dollar for what the insurance company owed them. If they were that lucky; they might get zero. And among those creditors: Goldman Sachs, Morgan Stanley, Merrill Lynch (recently acquired by Bank of America).

As I said at the start of the post,
none of this is even remotely surprising unless you haven't been paying attention, or haven't wanted to.

Wake up.

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Sunday, March 01, 2009


This is a great video (H/T Barry Ritholtz). It features an interview with Michael Hudson, a professor at University of Missouri, Kansas City. He's a former Wall St. insider, and he served as Chief Economic Advisor for Dennis Kucinich’s 2008 presidential campaign, also holding the same position in Kucinich’s Congressional campaign. Hudson speaks about debt, oligarchy, democracy, and historical antecedents to our economic woes.

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