The solution to the trust issues in our financial system is elegant and it will work.And more... read it.
1. 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. Enact this requirement beginning with the 3Q 2008 reporting period which begins next month.
Total taxpayer cost: $0.00
2. 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 to get this done; any that are not listed in 90 days are declared void; let the participants sue each other if they can't prove capital adequacy.
Total taxpayer cost: $0.00
3. Force leverage by all institutions to no more than 12:1. The SEC intentionally dropped broker/dealer leverage limits in 2004; prior to that 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.
Total taxpayer cost: $0.00
Denninger on Bailing out Foreign Companies: Real reason for bailout?
(Another website on the same issue.)
I doubt it is THE real reason, but many nations hold US treasuries and they may be threatening to sell them, which would destroy the dollar overnight. It's a real risk, enunciated by the Chinese a few months ago: The so-called Nuclear Option. It is VERY interesting that Paulson says any bill without bailouts for foreigners will be vetoed.
Like Denninger, I ask: Wasn't this supposed to be about helping Americans? What the hell business do we have socializing foreign companies??? I can't even begin to imagine how much debt that means for US taxpayers.
I think it is very instructive that such a pernicious item in the bill is not being covered by the mainstream media.
UPDATE: Excellent comments from Chomsky, via The Oil Drum:
...This wonderful anti-market system designed by self-proclaimed market enthusiasts is now being implemented in the United States, to deal with the very ominous crisis of financial markets. In general, markets have well-known inefficiencies. One is that transactions do not take into account the effect on others who are not party to the transaction. These so-alled "externalities" can be huge. That is particularly so in the case of financial institutions. Their task is to take risks, and if well-managed, to ensure that potential losses to themselves will be covered. To themselves. Under capitalist rules, it is not their business to consider the cost to others if their practices lead to financial crisis, as they regularly do. In economists' terms, risk is underpriced, because systemic risk is not priced into decisions. That leads to repeated crisis, naturally. At that point, we turn to the IMF solution. The costs are transferred to the public, which had nothing to do with the risky choices but is now compelled to pay the costs - in the US, perhaps mounting to about $1 trillion right now. And of course the public has no voice in determining these outcomes, any more than poor peasants have a voice in being subjected to cruel structural adjustment programs.A basic principle of modern state capitalism is that cost and risk are socialized, while profit is privatized. That principle extends far beyond financial institutions...
UPDATE: New video from Karl Denninger: $700 billion Bailout Watch 9/30.
UPDATE: Senate attaching tax cuts to putlipstick on the pig. don't mind the tax cuts, but they're meaningless in terms of the bailout. This is bribery, pure and simple.
UPDATE: Did you fax or sign/send a petition? Do some checking here. Some good commentary/info, too: http://supportedthebailout.org/
It's Tuesday morning (now night/Wednesday morning) where most of you are, and Thursday - Ooops! Wednesday! They REALLY don't want you to have time to study this! - will bring another attempt to usurp the power of the People of the United States of America and force them to pay for the bills of the nation's richest people. Of course, with most of the wealthy paying literally no taxes, we already are. But this is ridiculous!
There are a few things you need to know:
This bailout was preplanned according to the official White House Spokesman, Tony Fratto:
Fratto insisted that the plan was not slapped together and had been drawn up as a contingency over previous months and weeks by administration officials. He acknowledged lawmakers were getting only days to peruse it, but he said this should be enough.If this possibility was discussed for "weeks and months," why are lawmakers just hearing about it? It is quite normal for there to be behind-closed-door meetings between the Executive Branch and the Legislative. Why present this as an eleventh hour, not-time-for-due-process emergency? The why in a moment. More of the how.
First, we were told - a week ago - if this package wasn't passed immediately, the economy would crash. Where is the crash? Sure, we had a stock market drop of historic proportions, but it wasn't a crash and one third of the losses on Monday happened before the "No" vote. But let's not get distracted: Where is the derailed economy?
Second, not only have we had no crash, not only did they put this package together over "weeks and months", but we find out the Treasury had a secret conference call with Big Money in which they stated... wait for it... the money isn't needed for weeks. To wit:
Greenwald has explosive news:Say what? A private call between Treasury and Wall St.? Um... are THEY voting on the King Henry Paulson Bailout, Socialism and Welfare for Bankers and Financiers Act? No. Hmmm... so just what was said, then? Here's a bit:
UPDATE III: Matt Stoller has some important revelations and observations about today's vote -- here. The "private" conference call which Treasury Department officials held with Wall St. analysts (and which bloggers infiltrated) referenced by Stoller is revealed in detail here.
1. The tranching is a mere formality...But what I really want to know is, why is this call happening at all? The people who created this mess have no business having anything to do with cleaning it up. (This leads to a serious problem with Paulson, Bernanke and Bush, but more on that further down.)
2. However, they do not plan any action immediately, will wait a couple of weeks... They want to focus their efforts on stronger companies but also made noise about protecting the financial system...
5. The exec comp provisions sound like a joke, They DO NOT affect existing contracts, they affect only contracts entered into during the two years of the authority of this program and then affect only golden parachutes...
Third, here's what Karl Denninger, one of those predicting this crash for a long time, observed about Monday:
People, you are being lied to. There is no emergency. They sky is not falling. (Well, it is,but not the way they say it is.) So, why they rush? Does this remind you of anything? Say, the Patriot Act? That sure turned out well: Don't read it, just vote! What was it Fratto said up there? They don't need much timeto think about it?
Thank God we got a "NO" vote today folks.
No, not because the market tanked.
And no, I was not short up to my eyeballs.
I scalp traded the morning but was out when the blowup came, as I didn't expect it - I really did think the bill would pass, my and many other's efforts to stop it notwithstanding.
"Sept. 29 (Bloomberg) -- The Federal Reserve will pump an additional $630 billion into the global financial system, flooding banks with cash to alleviate the worst banking crisis since the Great Depression.
The Fed increased its existing currency swaps with foreign central banks by $330 billion to $620 billion to make more dollars available worldwide. The Term Auction Facility, the Fed's emergency loan program, will expand by $300 billion to $450 billion. The European Central Bank, the Bank of England and the Bank of Japan are among the participating authorities.
The Fed's expansion of liquidity, the biggest since credit markets seized up last year, came hours before the U.S. House of Representatives rejected a $700 billion bailout for the financial industry. The crisis is reverberating through the global economy, causing stocks to plunge and forcing European governments to rescue four banks over the past two days alone."
Now let's think about this folks.
The Fed threw $630 billion into the market before the vote, and yet the S&P 500 was down 40 handles anyway, and in fact tanked after the vote.
Note carefully - Paulson's plan was $700 billion, and Bernanke spent $630 billion - almost the entire amount proposed - but failed to fix the problem.
Now do you see what I've been saying?
This legislation will have profound effects on this nation and the world. It is a prime determiner of how deep and how long this recession/depression/collapse will be. And at the end of the day, it's robbing you to pay for Wall Street's bankruptcies. This is socialism on a massive scale. This is nothing more than a flow of money and capital into the hands of the richest, most powerful people in the country. And, as Fratto said, it's no accident. They knew this was coming the entire time they kept saying the economy was "sound" and "fundamentally strong."
Martial Law, And You're Not Invited
Did you know Pelosi could invoke Martial Law and institute new rules in the House? She did. Normal processes were subverted, meeting not held, Congresspersons not consulted. This bill was made available for a mere 24 hours. That's enough time for our Representatives to read through it, consult their experts, discuss it with their constituents, right? And it's enough time for you, a layperson, to figure it all out and advise your Congressperson how to vote, right?
Wrong. This isn't democracy, especially when these extraordinary actions, as we've already seen above, are based on a false emergency. Yet another lie from this Administration and its henchmen.
Who caused this problem? There were many players, but there a couple of events/actions/choices without which this could not have happened. In reality, it all started with the beginning of fractional banking long, long ago and the duplicitous creation of the Fed in 1913 under cover of night on Christmas Eve. You can learn more about those events here, but those are not our topic just now. We're concerned with more recent events.
First among these was the elimination of the Glass-Steagall Act in 1999.
Now then, let's first examine the nuts and bolts of this law. What this law did was break the figurative wall between banks, brokers, insurance companies and other financial services companies. The Glass Steagall Act, among many things, separated all sorts of financial services and placed careful limits on what sorts of financial services anyone company can perform.The stage was set for massive levels of abuse. It has taken less than ten years for that act play a major role in propelling the US into financial chaos. Thank you, Bill Clinton. I used to be a fan.The Glass-Steagall Act of 1933 established the Federal Deposit Insurance Corporation (FDIC) in the United States and included banking reforms, some of which were designed to control speculation. Some provisions such as Regulation Q that allowed the Federal Reserve to regulate interest rates in savings accounts were repealed by the Depository Institutions Deregulation and Monetary Control Act of 1980. Provisions that prohibit a bank holding company from owning other financial companies were repealed on November 12, 1999As you can see, that wall was broken down with this act.
The next step in creating the current meltdown was the monetary policy of George Bush and Alan Greenspan. Afraid of letting the nation go through recession early in his term, and especially after 9/11, Bush wanted the economy stimulated. Go shopping, he told us. And Greenspan obliged by keeping interest rates so low money was literally essentially free for lenders. No risk was too high when every cent paid in return was pure profit.
Part of the mantra was that everyone should be able to buy a home. Greenspan kept rates so low, virtually anybody could. Just months before beginning to raise rates to slow down the housing bubble he started, he was telling lenders to find ever more creative ways to write mortgages. Incredible, no? Bush did his part by having his administration enforce... pretty much nothing.
With little or no regulation and extremely low interest rates, lenders of all stripes gave home loans to almost anyone who had a job. This was an inherently risky business. Top spread risk and to get the loans off their books so they could write more loans (far more money is earned in the short term by loan fees than by interest earnings), financiers got creative and created an alphabet soup of financial investments (CDOs, SIVs, etc.). They took loans, put them all together in one portfolio and sold them. Investors liked the income from payments and lenders got rid of their balances and their risk. But these things were sold and resold. The values never accurately assigned.
As home prices skyrocketed, a huge, huge new financial market was created, but all out of thin air. As more and more loans failed, these instruments became more toxic. And they failed, and are failing in great numbers because the loans were given to people who could not afford them and because the terms of the loans trapped people with sudden rises in payments. For example, many of the loans were interest only with the payments set to reset after a period of a few years. The new payment is often double or more the payment before. But all those buyers thought they'd be able to refinance. But then the bubble burst, resets started knocking people out of their homes and the economy started sliding.
And here we are.
Foxes in The Hen House
Who is Paulson? He is formerly of GoldmanSachs. Yes, that Goldman Sachs.
So we now have the former CEO of Goldman Sachs, of one of the creators of the FrankenDebt destroying the financial system, in charge of fixing the problem. But you don't hear this from Paulson. You don't hear it in the mainstream media. But Paulson IS the fox in the hen house. This is an obvious conflict of interest. He should be nowhere near the plan.
Forty years ago there were almost no investment banks, securitised debt or derivatives. The huge increase in global liquidity and credit since the early 1980s has been almost exclusively driven by investment banks through the creation of securitised debt and derivatives, which now represent nearly 90 per cent of total liquidity.
At the beginning of the year there were five major US investment banks - Goldman Sachs, with assets of US$1061 billion (or US$1.06 trillion), Morgan Stanley US$1045 billion, Merrill Lynch US$1020 billion, Lehman Brothers US$689 billion and Bear Stearns US$424 billion.
Bear Stearns and Lehman Brothers have disappeared and Merrill Lynch is being taken over by Bank of America. These companies created a huge amount of toxic securitised debt and derivatives that have plunged in value.
And he wants no oversight and no possibility of involvement of the Judicial Branch in this crisis he helped create? He's already bending the rules to bail outer Sterns, etc. How much more so if given carte blanche?
We already mentioned Bush and Greenspan. How about Obama and McCain? Why do they support this? Well, McCain is easy to figure: his wife is filthy rich and he's been a free-market, no regulation guy forever. Ever heard of the Keating Five Savings and Loan scandal? McCain. What about Obama? What happened to his populist beginnings? Read here.
Let them know you're mad as hell, and you're not going to take it anymore!
Those who have been right all along say NO! and HELL NO!
Bailout cure worse than diseaseKarl Denninger - Website Forums YouTube Channel
By Peter Schiff
...Though the government and Wall Street assure us that these bold moves will save the housing market, and the economy as a whole, from collapse, the reality is that the solution is far worse than the problem. As painful as the failure of Freddie and Fannie would have been, bailing them out will hurt even more. In other words, it's not the disease that will kill us but the cure.
...By taking all of the risks out of mortgage lending (provided of course that the loans are conforming), the government is telling lenders not to worry about the loans they make because if borrowers do not repay, the government will.
...As a result of this bailout bill, the share of mortgages owned or insured by Freddie and Fannie will likely swell from near 50% today to over 80% within a year or two, turning a $5 trillion problem into a $10 trillion fiasco...
The grim reality is that trillions of dollars were borrowed and spent that will never be repaid.
...CNBC once nicknamed me "Dr Doom", but compared with what I see coming now, they should have then called me "Dr Sunshine". Take a look at a presentation I made back in November 2006... (Click here to watch the video on YouTube. )
Every real estate prediction I made at that conference, which was considered outrageous at the time by those in attendance, has already come true. As confident as I was then about this impending crisis, I am even more confident now that the government has just thrown gasoline onto the fire
(Copyright 2008 Euro Pacific Capital.)
The Automatic Earth
Debt Rattle 9/30/08There are others.... but I don't have time. My favorite, of course,is...
The real world drama, the one not made for TV, certainly carries a lot more tragedy. We are living in the days of falling records, which will in time lead to the days of falling people.
As Wall Street fell more than it ever has in history, US home prices kept on plunging at an uncharted pace. But that’s all just a side show compared to what happens in money markets. Lending rates are surging to new highs so fast it’s time to get dizzy. It makes no difference anymore that central banks unleashed another $620 billion into the black hole, credit is utterly frozen.
For comparison, stock markets lost $1.2 trillion yesterday. Do you need a better proof that what goes in the House over $700 billion is posturing, and bad drama posing as reality TV? Money and credit is leaking out of the world economy so fast you'd need a Paulson plan every single day to keep it cranking along.
Every penny available is hoarded by banks trying to save their butts. You will next see central banks cutting interest rates as if the pit is indeed bottomless. That is an attempt at creating another carry trade. And no, that will not have any effect either. They can not make banks lend to each other who have far more debts than whatever portion of that $620 billion, or the next and the next after that, it is that they can get their hands on. They are gone, drowning in a sea of losing bets, and all the lifeboats left are leaking. Bad.
Here’s where the B-movie remake of the great Greeks meets the theatre of the absurd:”House Republican conservatives are likely to keep pressing for a mandatory insurance program they initially proposed for mortgage-backed securities. They may also try to force the Securities and Exchange Commission to suspend mark-to-market accounting and require bank regulators to assess the real value of the troubled assets...”
If you still need a translation of that: the real value of the troubled assets is zero. And the real market has already marked it there.
PS Allow me to add something to that: The Real Markets have marked the "troubled assets" down to zero. They're just waiting for the assets to come out of their hiding places. And what we see happening now, is that the real markets are losing patience. They will increasingly start forcing the troubled assets out of their dark holes. And while I am not the only voice talking about this, I think it's still poorly understood: this poses a very serious concern that the economic system, as it exists today, will collapse in its entirety. $700 billion is just one tenth of one percent of the estimated $700 trillion in outstanding derivatives. It's like owing $100, and offering a dime as full and final payment.
(Kidding. Everything I know on this subject has come from those linked, and still others not specifically mentioned or linked here,including a lot of excellent info from The Oil Drum, linked to the right.)
Can they save the economy? No. - January 7, 2008
The Crash - January 8, 2008
It's time for Americans to reassert their ownership of this nation. WE are America. Not the conglomerates, not the politicians. WE are America.
Tell them to vote NO!
Go get 'em.