We Got Robbed

MW: In your book The Great Financial Crisis, you are critical of Paulson's capital injections into the banks saying that "at most they buy the necessary time in which the vast mass of questionable loans can be liquidated in an orderly fashion, restoring solvency but at a far lower rate of economic activity--that of a serious recession or depression." On Friday, Timothy Geithner told CNBC that "We will preserve the system that is owned and managed by the private sector." This suggests that the Treasury Secretary might not liquidate the toxic assets at all, but try maintain the appearance that these underwater banks are solvent. What do you think will happen if Geithner refuses to nationalize the banks?

JBF: I would not interpret Geithner’s statement that way. Rather we are experiencing one of the greatest robberies in history. I have written on the question of nationalization for the “Notes from the Editors” forthcoming in the March 2009 Monthly Review. All the attempts to rescue the financial system at this time go in the direction of nationalization. The federal government is providing more and more of the capital and assuming financial responsibility for the banks. However, they are doing everything they can to keep the banks in private hands, resulting in a kind of de facto nationalization with de jure private control. Whether the federal government is forced eventually toward full nationalization (that is, assuming direct control of the banks) is a big question. But even that is unlikely to change the nature of what is going on, which is a classic case of the socialization of losses of financial institutions while leaving untouched the massive gains still in the hands of those who most profited from the whole extreme period of financial speculation.

To get an idea of what is happening one has to understand that the federal government, as I have already indicated, has committed itself thus far in this crisis $9.7 trillion in support programs primarily for financial institutions. The Federal Reserve (together with the Treasury) now has converted itself into what is called a “bad bank.” It has been swapping Treasury certificates for toxic financial waste, such as collateralized debt obligations. As a result the Federal Reserve has become the banker of last resort for toxic waste with the share of Treasuries in the Fed’s balance sheet dropping from about 90 percent to about 20 percent over the course of the crisis, with much of the rest now made up of financial toxic waste.

Obviously, full, straightforward nationalization would be more rational than this. But one has also to remember the system of power—both economic and political—that we are dealing with at present. The classic case of full bank nationalization was Italian corporatist capitalism of the 1920s and ‘30s, and was carried out by the fascist regime. Without suggesting that we are headed this way now it should be clear from this that nationalization of banks itself is no panacea.

The fact that Geithner, Obama’s pick for Treasury Secretary, is overseeing the enormous robbery taking place, probably exceeding any theft in history, with the ordinary taxpayers picking up the tab, should certainly cause one to ask questions about the “progressive” nature of the new administration.

MW: Former Fed chief Alan Greenspan has dismissed criticism of his monetary policies saying that no one could have seen the humongous credit bubble developing in housing. In your book, however, you make this observation: "It was the reality of economic stagnation beginning in the 1970s...that led to the emergence of the 'new financialized capitalist regime's kind of 'paradoxical financial Keynesianism' whereby demand in the economy was stimulated primarily 'thanks to asset bubbles.’” (p 129) The statement suggests that the Fed knew exactly what it was doing when it slashed rates and created a speculative frenzy. Debt-fueled asset bubbles are a way of shifting wealth from one class to another while avoiding the stagnation of the underlying economy. Can this problem be fixed through regulation and better oversight or is it something that is intrinsic to capitalism itself?

JBF: Greenspan is of course trying desperately to salvage his reputation and to remove any sense that he is culpable. I would agree that the Fed knew what it was doing up to a point, and deliberately promoted an asset bubble in housing—what Stephanie Pomboy called “The Great Bubble Transfer” following the bursting of the New Economy tech bubble in 2000. The view that no one saw the dangers of course is false. It reminds me of Paul Krugman’s face-saving claim in his The Return of Depression Economics and the Crisis of 2008 that while some people thought that financial and economic problems of the 1930s might repeat themselves, these were not “sensible people.” According to Krugman, “sensible people” like himself (that is, those who expressed the consensus of those in power) knew that these things could never happen—but turned out to be wrong. It is true, as Greenspan says, no one could have foreseen precisely what really happened. And certainly there were a lot of blinders at the top. But there were lots of warnings and concerns. For example, I drafted an article (“The Great Fear”) for the April 2005 issue of Monthly Review that referred to “rising interest rates (threatening a bursting of the housing bubble supporting U.S. consumption)” as one of the key “perils of a stagnating economy.” Other close observers of the economy were saying the same thing.

The Federal Reserve Board, indeed, was internally debating in these years whether to adopt a policy of pricking the asset bubbles before they got further out of control. But Greenspan and Bernanke were both against such a dangerous operation, claiming that this could bring the whole rickety financial structure down. Since they didn’t know what to do about asset bubbles they simply sat on their hands and tried to talk the market up. The dominant view was that the Federal Reserve could stop a financial avalanche by putting a rock in the right place the moment there was a sign of trouble. So Bernanke went ahead, closed his eyes and prayed, raising interest rates to restrict inflation (an action demanded by the financial elite) and the rest is history.

At all times it was those at the commanding heights of the financial institutions that called the shots, and the Fed followed their wishes. Greenspan himself is no dummy. He wrote in Challenge Magazine in March-April 1988 of the dangers associated with housing bubbles. But as a Federal Reserve Board chairman he pursued financialization to the hilt, since there was no other option for the system. Needless to say, such financialization was associated with the growing disparities in wealth and income in the country. Debt itself is an instrument of power and those at the bottom were chained by it, while those at the top were using it to leverage rising fortunes. The total net worth of the Forbes 400 richest Americans (an increasing percentage of whom were based in finance) rose from $91.8 billion in 1982 to $1.2 trillion in 2006, while most people in the society were finding it harder and harder to make ends meet. None of this was an accident. It was all intrinsic to monopoly-finance capital.

Jim Willie

BLACK HOLES

A truly astounding event has taken place in the last several years. The public, the captains of industry, and the investment community have been exposed (if not victimized) by a great financial black hole. Of course, the bond industry has been at its center, selling securitized debt as bonds, laced with fraud, improperly linked to property titles, blessed by false debt ratings. Focus instead on the Collateralized Debt Obligation, a leveraged instrument with a bond core. The CDO has been a remarkably destructive device acting like a black hole in more perfect form than anything seen in modern history. It took future financial revenue streams, locked them into a bond security, leveraged it up five-fold, slapped on a few credit derivatives like inadequate bandaids and bandages, and sold them as CDO bonds. The credit derivatives served only to fool the public, and satisfy the debt rating agencies, enough to approve with a 'AAA' rating. The streams of revenue came from mortgages, as well as other diverse businesses, like from car loans, aircraft leases, and even from movie box offices. So the CDO bond sucked in future revenue, enabled vast bond trades, doled out hefty fees to Wall Street, and contributed to the financial sector destruction. The wealth and value of corporate entities that once were in possession of these future revenues streams have been lost. Their lack of liquidation means the drainage continues from future revenue, and future wealth continues to be destroyed. The active CDO trading bought a lunch, a paycheck, and a bonus for a corrupt Wall Street employee. Until liquidated, the CDO bonds continue to act, sucking value from the future. THINK BLACK HOLE! The fight against such a powerful force will send gold upward in price, not downward. The deflationist knuckleheads have it backwards, and have failed to notice that gold has risen in price since November.

A new black hole has been exposed. It is the USGovt devotion to Wall Street and the banking elite. In the process, gigantic zombie banks are being constructed and provided with intravenous lines. Their characteristics are considerably weaker than those constructed in Japan, aided by strong keiretsus (conglomerates). The funds made available by the USCongress have gone into the Wall Street black hole. They claim their deal flow has improved. Show me! Meanwhile the fifty states have announced a $350 billion deficit. The federal system has shown itself to be a subservient tool to the financial elite, ever since Goldman Sachs took the role of managing the USDept of Treasury. Robert Rubin was the founding father of financial failure. Now his protégé Tim Geithner is Treasury Secretary, and the states find themselves in ruin. At least twenty of them have begun to serve notice to the federal agencies in the form of the Tenth Amendment.

THE CHAOS FACTOR

The factor not yet integrated into gold price forecasts is from chaos. How will the gold price respond to further deterioration of the USEconomy, enough to qualify as a slow gallop from unemployment to chaos? People have begun to object to USGovt support of the owners of failed mortgages, a step beyond their derision of fraud kings on Wall Street. Soon, people might not pay mortgages or car payments or credit card bills. Their knowledge of video games is surely greater than the work of Henry David Thoreau, a hero of mine. His Walden Pond in Concord outside Boston was once a frequent spot by me for hikes and swims in a majestic setting after a bicycle ride to the idyllic location. Households exercising civil disobedience might strive to be rescued themselves. How will the gold price respond to further deterioration of the system from public defiance? Foreign creditors have served notice to the USGovt, to control its debt and to defend its USDollar currency. The nation can do neither. The US Secretary of State as a post has been demoted into an emissary for the Dept of Treasury. How will the gold price respond to greater isolation? The answers are easy. The gold & silver prices will rise and rise and rise, first from lack of proper policy toward remedy, and then from foreign imposition of a remedy, in the form of new global reserve currencies, three of them. Don't lose heart by the slowness of the pace toward remedy. Take advantage of it.

G.D.P. Shrank at 6.2% Rate

---

February 28, 2009

In Revision, G.D.P. Shrank at 6.2% Rate at the End of 2008

By CATHERINE RAMPELL

The economy at the end of last year contracted at a far faster rate than initially estimated, a government report released Friday said.

The decline in the gross domestic product — a measure of a country’s total output of goods and services — in the last quarter of 2008 was the worst since the 1982 recession, and indicates that the recession has been deeper than previously believed. Economists are expecting a similar drop in the first quarter of 2009 as well.

“What a ghastly report,” said John Ryding, chief economist at RDQ Economics. “Since the recession started in December 2007, this will almost certainly be the longest postwar recession, and now potentially the deepest one as well.”

With the exception of government spending, every major component of the economy shrank.

Output fell 6.2 percent at an annualized rate in the fourth quarter of 2008, revised downward from a previous estimate of a 3.8 percent decline. The drop was even steeper than many economists had feared — the consensus estimate had been a 5.4 percent decline — and was much lower than the 0.5 percent contraction from the previous quarter.

The Dow Jones industrial average and the broader S.&.P. 500 were down 0.95 percent and 1.32 percent in mid-morning trading.

The announcement comes on the heels of a new budget from the Obama administration that assumes what some economists had called, even before Friday’s bitter G.D.P. report, an overly optimistic view of the 2009 American economy. The

The economy took the biggest hits in exports, retail sales, equipment and software and residential fixed investment.

The downward revisions, though, came primarily because of a contraction in inventories of unsold goods, which the government had previously said had grown. Lower consumer sales sliced off some of the previously reported economic output, as well.

A wider trade gap than previously reported — that is, fewer American goods being purchased abroad — also pushed G.D.P. further downward. Exports fell at an annualized rate of 23.6 percent last quarter.

Some hail the decline in inventories as potentially good news.

“The only plus to take out of this is that inventories weren’t as high, and that implies you don’t have to cut as much this quarter to get them back under control,” Nigel Gault, chief United States economist at IHS Global Insight, said..

Mr. Gault added that inventories were still too large, given the declines in consumer spending, and he expected companies to further scale back their production this quarter.

During previous recessions, businesses’ inventories have declined much further than they did in the last quarter, said Robert Barbera, chief economist at ITG.

“In terms of inventory drawdown, we ain’t seen nothing yet,” he said. “Historically, was the decline in inventories in the fourth quarter impressive? No. Historically, in a tough recession, inventories fall at four or five times the pace of the fourth-quarter decline.”

Among the more distressing aspects of the report, according to Joseph Brusuelas, a director at Moody’s Economy.com, were the numbers for business investment. Investment in equipment and software, for example, fell at an annualized rate of 28.8 percent.

“We’re not going to have a consumer-led recovery out of the recession,” Mr. Brusuelas said. It will instead be led by the technology industry and businesses’ spending on capital investments, he said, which makes the fourth-quarter G.D.P. figures numbers “somewhat troubling.”

Many economists had been skeptical of the previously reported numbers in several sectors, inventories in particular. Some say the biggest surprises in Friday’s report were the magnitude of the revisions and the change in prices.

Prices fell in the last quarter of 2008, but they fell slightly less than previously reported, meaning that on an inflation-adjusted basis consumers spent even less than believed.

Households also saved much more of their paychecks than initially estimated.

“Much of the money that would have been spent on gasoline during the gasoline price decline in large part was saved rather than spent,” said Dean Maki, co-head of United States economics research at Barclays Capital.

Friday’s revision, which will be followed by a final number from the Bureau of Economic Analysis next month, usually garners little attention from analysts. But because the contraction was more severe than previously reported, and because the government has been grappling with how to remedy the recession, many are looking to the numbers for a clue for where the economy is headed.

Government officials and Wall Street analysts expect that the G.D.P. decline has bled into 2009, and many are anticipating a similar drop of around 5 or 6 percent for the first quarter of this year.

“This quarter will be at least as bad as the last one,” Mr. Barbera said.

The 2010 national budget released Thursday by the White House projected a 1.2 percent decline in G.D.P. over the course of 2009. The economy grew 1.1 percent during the full 2008 calendar year.

Consumer sentiment has also reflected the downturn. According to a report released Friday, from Reuters and the University of Michigan, an index of consumer sentiment fell for the first time in three months to 56.3 from 61.2 in January.

Banks, the gift that just keeps on taking

Jobless hit with bank fees on benefits

Unemployed workers outraged over charges to inquire on benefits

The Associated Press

updated 6:23 p.m. ET, Thurs., Feb. 19, 2009

First, Arthur Santa-Maria called Bank of America to ask how to check the balance of his new unemployment benefits debit card. The bank charged him 50 cents.

He chose not to complain. That would have cost another 50 cents.

So he took out some of the money and then decided to pull out the rest. But that made two withdrawals on the same day, and that was $1.50.

For hundreds of thousands of workers losing their jobs during the recession, there's a new twist to their financial pain: Even when they're collecting unemployment benefits, they're paying the bank just to get the money — or even to call customer service to complain about it.

Thirty states have struck such deals with banks that include Citigroup Inc., Bank of America Corp., JP Morgan Chase and US Bancorp, an Associated Press review of the agreements found. All the programs carry fees, and in several states the unemployed have no choice but to use the debit cards. Some banks even charge overdraft fees of up to $20 — even though they could decline charges for more than what's on the card.

"They're trying to use my money to make money," said Santa-Maria, a laid-off engineer who lives just outside Albuquerque, N.M. "I just see banks trying to make that 50 cents or a buck and a half when I should be given the service for free."

The banks say their programs offer convenience. They also provide at least one way to tap the money at no charge, such as using a single free withdrawal to get all the cash at once from a bank teller. But the banks benefit from human nature, as people end up treating the cards like all the other plastic in their wallets.

Making money on interest
Some banks, depending on the agreement negotiated with each state, also make money on the interest they earn after the state deposits the money and before it's spent. The banks and credit card companies also get roughly 1 percent to 3 percent off the top of each transaction made with the cards.

"It's a racket. It's a scam," said Rachel Davis, a 38-year-old dental technician from St. Louis who was laid off in October. Davis was given a MasterCard issued through Central Bank of Jefferson City and recently paid $6 to make two $40 withdrawals.

Neither banks nor credit card companies will say how much money they are making off the programs, or what proportion of the revenue comes from user versus merchant fees or interest. It's difficult to estimate the profits because they depend on how often recipients use their cards and where they use them.

But the potential is clear.

In Missouri, for instance, 94,883 people claimed unemployment benefits through debit cards from Central Bank. Analysts say a recipient uses a card an average of six to 10 times a month. If each cardholder makes three withdrawals at an out-of-network ATM, at a fee of $1.75, the bank would collect nearly $500,000. If half of the cardholders also call customer service three times in any given week, the bank's revenue would jump to more than $521,000. That would yield $6.3 million a year.

Rachel Storch, a Democratic state representative, received a wave of complaints about the fees from autoworkers laid off from a suburban St. Louis Chrysler plant. She recently urged Gov. Jay Nixon to review the state's contract with Central Bank with an eye toward reducing the fees.

"I think the contract is unfair and potentially illegal to unemployment recipients," she said.

Central Bank did not return two messages seeking comment.

Glenn Campbell, a spokesman for Rep. Russ Carnahan, D-Mo., said the congressman would support a review of the debit card programs nationwide.

Another 10 states — including the unemployment hot spots of California, Florida and South Carolina — are considering such programs or have signed contracts. The remainder still use traditional checks or direct deposit.

With the national unemployment rate now at 7.6 percent, the market for bank-issued unemployment cards is booming. In 2003, states paid only $4 million of unemployment insurance through debit cards. By 2007, it had ballooned to $2.8 billion, and by 2010 it will likely rise to $10.5 billion, according to a study conducted by Mercator Advisory Group, a financial industry consulting firm.

The economic stimulus plan signed by President Barack Obama this week will increase federal unemployment benefits by $40 billion this year. Subsequently, there will be more money from which banks can collect fees. The U.S. Department of Labor allows the fees as long as states create a way for recipients to get their money for free, spokeswoman Suzy Bohnert said.

"Beyond that, the individual decides how to manage his drawdowns using the debit card," she said in an e-mail.

Industry lingo
A typical contract looks like the agreement between Citigroup and the state of Kansas, which took effect in November. The state expects to save $300,000 a year by wiring payments to Citigroup instead of printing and mailing checks.

Citigroup's bill to the state: zero. The bank collects its revenue from fees paid by merchants and the unemployed.

"If you use your card the right way, you're not going to pay fees at all," said Paul Simpson, Citigroup's global head of public sector, health care and wholesale cards.

But that's not always practical.

Santa-Maria, the laid-off New Mexico engineer, said he didn't pay any fees the first time he was laid off, for several months in 2007. His unemployment benefits were paid by paper checks. He found a new job last year but was laid off again last fall.

This time, he was issued a Bank of America debit card — a "prepaid" card in industry lingo — but he was surprised to learn he had to pay fees to get his money. He asked the bank to waive them. It said no. That's when Santa-Maria called back to ask how to check his account online. He logged on and saw that the call cost him a half dollar. To avoid more fees, Santa-Maria found a Bank of America ATM at a strip mall and withdrew $80 at no charge. When he got back to his car, he decided to take out the rest of his money — $250 — and deposit it in his bank account.

Afterward, Santa-Maria logged on to his account and saw a charge of $1.50 for two withdrawals in one day.

New Mexico authorities bargained with Bank of America to get lower fees for unemployment recipients, said Carrie Moritomo, a spokeswoman for the state Department of Workforce Solutions. The state saves up to $1.5 million annually by not printing checks.

Banks could issue unemployment debit cards with no fees for cardholders, but that would likely mean that states would have to pay more of the administrative costs, said Mark Harrington, director of marketing for Citigroup's prepaid card services. If a state demanded no cardholder fees and could pay the difference, Citigroup might enter such a contract.

"We would be open to that," Harrington said. "We're not looking to structure any programs where we would lose money, but we're definitely flexible."

Simpson noted that the cards can save money for jobless workers who have no bank accounts. In the past, these people had to use corner check-cashing shops that charged fees as high as 2 percent, or $6 for a $300 check. Now, they can swipe their cards at McDonald's, Wal-Mart or elsewhere for free.

Kenna Gortler, a laid-off paper mill worker in Oregon, said her union is advising members to avoid the debit cards and sign up to get their benefits through direct deposit. More than 300 of her fellow workers have lost their jobs at the mill in the last three months, and horror stories about ATM fees and overdraft charges are starting to filter back to others who are just now signing up for their benefits.

"It's discouraging," Gortler said. "People have limited funds and they don't need to be giving money to the banks. They need to be keeping that money to feed their families and pay bills."

more on Stocks & economy | Economy in turmoil

FDIC shutters four banks in one day

Oregon, Nebraska, Florida, Illinois bank failures bring year's total to 13

By John Letzing, MarketWatch

Last update: 11:06 p.m. EST Feb. 13, 2009

SAN FRANCISCO (MarketWatch) -- Loup City, Neb.-based Sherman County Bank, Cape Coral, Fla.-based Riverside Bank of the Gulf Coast, Pittsfield, Ill.-based Corn Belt Bank and Trust Company, and Beaverton, Ore.-based Pinnacle Bank were closed by regulators Friday, bringing the number of U.S. bank failures for 2009 to 13 and 38 total since the start of the credit crisis, the Federal Deposit Insurance Corp. said.

Nebraska has not seen a bank failure since 1990, according to the FDIC. However, Riverside Bank follows Fla.-based Ocala National Bank, which failed on Jan. 30. Prior to Corn Belt Bank, the last Illinois bank to fail was National Bank of Commerce on Jan. 16.

Nebraska's Sherman County Bank had roughly $129.8 million in assets as of Feb. 12 and $85.1 million in deposits, the FDIC said.

Wood River, Neb.-based Heritage Bank has agreed to assume all of the failed bank's deposits, and will purchase roughly $21.8 million worth of its assets, the FDIC said.

The FDIC estimated the cost of the failure to its deposit-insurance fund will be $28 million.

Sherman County Bank's four offices will reopen Tuesday as branches of Heritage Bank, the FDIC said.

Florida's Riverside Bank had roughly $539 million in assets as of Dec. 31 and $424 million in total deposits, the FDIC said.

Naples, Fla.-based TIB Bank has agreed to assume the failed bank's deposits, though it will not assume $142.6 million in brokered deposits held by the bank, according to the agency.

TIB Bank will purchase roughly $125 million in the failed bank's assets, the FDIC added.

The FDIC estimated the cost to its deposit insurance fund as a result of the failure of Riverside Bank will be $201.5 million.

Illinois-based Corn Belt Bank had roughly $271.8 million in assets as of Dec. 31 and $234.4 million in deposits, the FDIC said.

Carlinville, Ill.-based Carlinville National Bank will assume Corn Belt Bank's deposits and will buy roughly $60.7 million worth of its assets, the FDIC said, though it will not assume $92 million in brokered deposits held by the bank.

Corn Belt Bank's two offices will reopen Tuesday as branches of the Carlinville National Bank.

The FDIC estimated the cost of Corn Belt Bank's failure to its deposit-insurance fund will be $100 million.

Washington Trust Bank of Spokane, Wash. will assume all of the deposits of Pinnacle Bank. As of Dec. 31, Pinnacle Bank had total assets of approximately $73 million and total deposits of $64 million. In addition to assuming all of the deposits of the failed bank, including those from brokers, Washington Trust Bank agreed to purchase approximately $72 million in assets at a discount of $7.6 million. The FDIC will retain the remaining assets for later disposition.

The FDIC and Washington Trust Bank entered into a loss-share transaction. Washington Trust Bank will share in the losses on approximately $66 million in assets covered under the agreement. The FDIC estimates that the cost to the Deposit Insurance Fund will be $12.1 million.

John Letzing is a MarketWatch reporter based in San Francisco.

Twenty-five people at the heart of the meltdown ...

The worst economic turmoil since the Great Depression is not a natural phenomenon but a man-made disaster in which we all played a part. In the second part of a week-long series looking behind the slump, Guardian City editor Julia Finch picks out the individuals who have led us into the current crisis

Poll: Who led us down the Road to Ruin?

Comments (…)

• Julia Finch, with additional reporting by Andrew Clark and David Teather
• The Guardian, Monday 26 January 2009
• larger | smaller
• Article history

Former Federal Reserve chairman Alan Greenspan, who backed sub-prime lending. Photograph: Mark Wilson/Getty Images

Alan Greenspan, chairman of US Federal Reserve 1987- 2006
Only a couple of years ago the long-serving chairman of the Fed, a committed free marketeer who had steered the US economy through crises ranging from the 1987 stockmarket collapse through to the aftermath of the 9/11 attacks, was lauded with star status, named the "oracle" and "the maestro". Now he is viewed as one of those most culpable for the crisis. He is blamed for allowing the housing bubble to develop as a result of his low interest rates and lack of regulation in mortgage lending. He backed sub-prime lending and urged homebuyers to swap fixed-rate mortgages for variable rate deals, which left borrowers unable to pay when interest rates rose.

For many years, Greenspan also defended the booming derivatives business, which barely existed when he took over the Fed, but which mushroomed from $100tn in 2002 to more than $500tn five years later.

Billionaires George Soros and Warren Buffett might have been extremely worried about these complex products - Soros avoided them because he didn't "really understand how they work" and Buffett famously described them as "financial weapons of mass destruction" - but Greenspan did all he could to protect the market from what he believed was unnecessary regulation. In 2003 he told the Senate banking committee: "Derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn't be taking it to those who are willing to and are capable of doing so".

In recent months, however, he has admitted at least some of his long-held beliefs have turned out to be incorrect - not least that free markets would handle the risks involved, that too much regulation would damage Wall Street and that, ultimately, banks would always put the protection of their shareholders first.

He has described the current financial crisis as "the type ... that comes along only once in a century" and last autumn said the fact that the banks had played fast and loose with shareholders' equity had left him "in a state of shocked disbelief".

Mervyn King, governor of the Bank of England

When Mervyn King settled his feet under the desk in his Threadneedle Street office, the UK economy was motoring along just nicely: GDP was growing at 3% and inflation was just 1.3%. Chairing his first meeting of the Bank's monetary policy committee (MPC), interest rates were cut to a post-war low of 3.5%. His ambition was that monetary policy decision-making should become "boring".

How we would all like it to become boring now. When the crunch first took hold, the Aston Villa-supporting governor insisted it was not about to become an international crisis. In the first weeks of the crunch he refused to pump cash into the financial system and insisted that "moral hazard" meant that some banks should not be bailed out. The Treasury select committee has said King should have been "more pro-active".

King's MPC should have realised there was a housing bubble developing and taken action to damp it down and, more recently, the committee should have seen the recession coming and cut interest rates far faster than it did.

Politicians

Bill Clinton, former US president

Clinton shares at least some of the blame for the current financial chaos. He beefed up the 1977 Community Reinvestment Act to force mortgage lenders to relax their rules to allow more socially disadvantaged borrowers to qualify for home loans.

In 1999 Clinton repealed the Glass-Steagall Act, which ensured a complete separation between commercial banks, which accept deposits, and investment banks, which invest and take risks. The move prompted the era of the superbank and primed the sub-prime pump. The year before the repeal sub-prime loans were just 5% of all mortgage lending. By the time the credit crunch blew up it was approaching 30%.

Gordon Brown, prime minister

The British prime minister seems to have been completely dazzled by the movers and shakers in the Square Mile, putting the City's interests ahead of other parts of the economy, such as manufacturers. He backed "light touch" regulation and a low-tax regime for the thousands of non-domiciled foreign bankers working in London and for the private equity business.

George W Bush, former US president

Clinton might have started the sub-prime ball rolling, but the Bush administration certainly did little to put the brakes on the vast amount of mortgage cash being lent to "Ninja" (No income, no job applicants) borrowers who could not afford them. Neither did he rein back Wall Street with regulation (although the government did pass the Sarbanes-Oxley Act in the wake of the Enron scandal).

Senator Phil Gramm

Former US senator from Texas, free market advocate with a PhD in economics who fought long and hard for financial deregulation. His work, encouraged by Clinton's administration, allowed the explosive growth of derivatives, including credit swaps.

In 2001, he told a Senate debate: "Some people look at sub-prime lending and see evil. I look at sub-prime lending and I see the American dream in action."

According to the New York Times, federal records show that from 1989 to 2002 he was the top recipient of campaign contributions from commercial banks and in the top five for donations from Wall Street. At an April 2000 Senate hearing after a visit to New York, he said: "When I am on Wall Street and I realise that that's the very nerve centre of American capitalism and I realise what capitalism has done for the working people of America, to me that's a holy place."

He eventually left Capitol Hill to work for UBS as an investment banker.

Wall Street/Bankers

Abby Cohen, Goldman Sachs chief US strategist

The "perpetual bull". Once rated one of the most powerful women in the US. But so wrong, so often. She failed to see previous share price crashes and was famous for her upwards forecasts. Replaced last March.

Kathleen Corbet, former CEO, Standard & Poor's

The credit-rating agencies were widely attacked for failing to warn of the risks posed by mortgage-backed securities. Kathleen Corbet ran the largest of the big three agencies, Standard & Poor's, and quit in August 2007, amid a hail of criticism. The agencies have been accused of acting as cheerleaders, assigning the top AAA rating to collateralised debt obligations, the often incomprehensible mortgage-backed securities that turned toxic. The industry argues it did its best with the information available.

Corbet said her decision to leave the agency had been "long planned" and denied that she had been put under any pressure to quit. She kept a relatively low profile and had been hired to run S&P in 2004 from the investment firm Alliance Capital Management.

Investigations by the Securities and Exchange Commission and the New York attorney general among others have focused on whether the agencies are compromised by earning fees from the banks that issue the debt they rate. The reputation of the industry was savaged by a blistering report by the SEC that contained dozens of internal emails that suggested they had betrayed investors' trust. "Let's hope we are all wealthy and retired by the time this house of cards falters," one unnamed S&P analyst wrote. In another, an S&P employee wrote:

"It could be structured by cows and we would rate it."

"Hank" Greenberg, AIG insurance group

Now aged 83, Hank - AKA Maurice - was the boss of AIG. He built the business into the world's biggest insurer. AIG had a vast business in credit default swaps and therefore a huge exposure to a residential mortgage crisis. When AIG's own credit-rating was cut, it faced a liquidity crisis and needed an $85bn (£47bn then) bail out from the US government to avoid collapse and avert the crisis its collapse would have caused. It later needed many more billions from the US treasury and the Fed, but that did not stop senior AIG executives taking themselves off for a few lavish trips, including a $444,000 golf and spa retreat in California and an $86,000 hunting expedition to England. "Have you heard of anything more outrageous?" said Elijah Cummings, a Democratic congressman from Maryland. "They were getting their manicures, their facials, pedicures, massages while the American people were footing the bill."

Andy Hornby, former HBOS boss

So highly respected, so admired and so clever - top of his 800-strong class at Harvard - but it was his strategy, adopted from the Bank of Scotland when it merged with Halifax, that got HBOS in the trouble it is now. Who would have thought that the mighty Halifax could be brought to its knees and teeter on the verge of nationalisation?

Sir Fred Goodwin, former RBS boss

Once one of Gordon Brown's favourite businessmen, now the prime minister says he is "angry" with the man dubbed "Fred the Shred" for his strategy at Royal Bank of Scotland, which has left the bank staring at a £28bn loss and 70% owned by the government. The losses will reflect vast lending to businesses that cannot repay and write-downs on acquisitions masterminded by Goodwin stretching back years.

Steve Crawshaw, former B&B boss

Once upon a time Bradford & Bingley was a rather boring building society, which used two men in bowler hats to signify their sensible and trustworthy approach. In 2004 the affable Crawshaw took over. He closed down B&B businesses, cut staff numbers by half and turned the B&B into a specialist in buy-to-let loans and self-certified mortgages - also called "liar loans" because applicants did not have to prove a regular income. The business broke down when the wholesale money market collapsed and B&B's borrowers fell quickly into debt. Crawshaw denied a rights issue was on its way weeks before he asked shareholders for £300m. Eventually, B&B had to be nationalised. Crawshaw, however, had left the bridge a few weeks earlier as a result of heart problems. He has a £1.8m pension pot.

Adam Applegarth, former Northern Rock boss

Applegarth had such big ambitions. But the business model just collapsed when the credit crunch hit. Luckily for Applegarth, he walked away with a wheelbarrow of cash to ease the pain of his failure, and spent the summer playing cricket.

Dick Fuld, Lehman Brothers chief executive

The credit crunch had been rumbling on for more than a year but Lehman Brothers' collapse in September was to have a catastrophic impact on confidence. Richard Fuld, chief executive, later told Congress he was bewildered the US government had not saved the bank when it had helped secure Bear Stearns and the insurer AIG. He also blamed short-sellers. Bitter workers at Lehman pointed the finger at Fuld.

A former bond trader known as "the Gorilla", Fuld had been with Lehman for decades and steered it through tough times. But just before the bank went bust he had failed to secure a deal to sell a large stake to the Korea Development Bank and most likely prevent its collapse. Fuld encouraged risk-taking and Lehman was still investing heavily in property at the top of the market. Facing a grilling on Capitol Hill, he was asked whether it was fair that he earned $500m over eight years. He demurred; the figure, he said, was closer to $300m.

Ralph Cioffi and Matthew Tannin

Cioffi (pictured) and Tannin were Bear Stearns bankers recently indicted for fraud over the collapse of two hedge funds last year, which was one of the triggers of the credit crunch. They are accused of lying to investors about the amount of money they were putting into sub-prime, and of quietly withdrawing their own funds when times got tough.

Lewis Ranieri

The "godfather" of mortgage finance, who pioneered mortgage-backed bonds in the 1980s and immortalised in Liar's Poker. Famous for saying that "mortgages are math", Ranieri created collateralised pools of mortgages. In 2004 Business Week ranked him alongside names such as Bill Gates and Steve Jobs as one of the greatest innovators of the past 75 years.

Ranieri did warn in 2006 of the risks from the breakneck growth of mortgage securitisation. Nevertheless, his Texas-based Franklin Bank Corp went bust in November due to the credit crunch.

Joseph Cassano, AIG Financial Products

Cassano ran the AIG team that sold credit default swaps in London, and in effect bankrupted the world's biggest insurance company, forcing the US government to stump up billions in aid. Cassano, who lives in a townhouse near Harrods in Knightsbridge, earned 30 cents for every dollar of profit his financial products generated - or about £280m. He was fired after the division lost $11bn, but stayed on as a $1m-a-month consultant. "It seems he single-handedly brought AIG to its knees," said John Sarbanes, a Democratic congressman.

Chuck Prince, former Citi boss

A lawyer by training, Prince had built Citi into the biggest bank in the world, with a sprawling structure that covered investment banking, high-street banking and wealthy management for the richest clients. When profits went into reverse in 2007, he insisted it was just a hiccup, but he was forced out after multibillion-dollar losses on sub-prime business started to surface. He received about $140m to ease his pain.

Angelo Mozilo, Countrywide Financial

Known as "the orange one" for his luminous tan, Mozilo was the chairman and chief executive of the biggest American sub-prime mortgage lender, which was saved from bankruptcy by Bank of America. BoA recently paid billions to settle investigations by various attorney generals for Countrywide's mis-selling of risky loans to thousands who could not afford them. The company ran a "VIP programme" that provided loans on favourable terms to influential figures including Christopher Dodd, chairman of the Senate banking committee, the heads of the federal-backed mortgage lenders Fannie Mae and Freddie Mac, and former assistant secretary of state Richard Holbrooke.

Stan O'Neal, former boss of Merrill Lynch

O'Neal became one of the highest-profile casualties of the credit crunch when he lost the confidence of the bank's board in late 2007. When he was appointed to the top job four years earlier, O'Neal, the first African-American to run a Wall Street firm, had pledged to shed the bank's conservative image. Shortly before he quit, the bank admitted to nearly $8bn of exposure to bad debts, as bets in the property and credit markets turned sour. Merrill was forced into the arms of Bank of America less than a year later.

Jimmy Cayne, former Bear Stearns boss

The chairman of the Wall Street firm Bear Stearns famously continued to play in a bridge tournament in Detroit even as the firm fell into crisis. Confidence in the bank evaporated after the collapse of two of its hedge funds and massive write-downs from losses related to the home loans industry. It was bought for a knock down price by JP Morgan Chase in March. Cayne sold his stake in the firm after the JP Morgan bid emerged, making $60m. Such was the anger directed towards Cayne that the US media reported that he had been forced to hire a bodyguard. A one-time scrap-iron salesman, Cayne joined Bear Stearns in 1969 and became one of the firm's top brokers, taking over as chief executive in 1993.

Others

Christopher Dodd, chairman, Senate banking committee (Democrat)

Consistently resisted efforts to tighten regulation on the mortgage finance firms Fannie Mae and Freddie Mac. He pushed to broaden their role to dodgier mortgages in an effort to help home ownership for the poor. Received $165,000 in donations from Fannie and Freddie from 1989 to 2008, more than anyone else in Congress.

Geir Haarde, Icelandic prime minister

He announced on Friday that he would step down and call an early election in May, after violent anti-government protests fuelled by his handling of the financial crisis. Last October Iceland's three biggest commercial banks collapsed under billions of dollars of debts. The country was forced to borrow $2.1bn from the International Monetary Fund and take loans from several European countries. Announcing his resignation, Haarde said he had throat cancer.

The American public
There's no escaping the fact: politicians might have teed up the financial system and failed to police it properly and Wall Street's greedy bankers might have got carried away with the riches they could generate, but if millions of Americans had just realised they were borrowing more than they could repay then we would not be in this mess. The British public got just as carried away. We are the credit junkies of Europe and many of our problems could easily have been avoided if we had been more sensible and just said no.

John Tiner, FSA chief executive, 2003-07

No one can fault 51-year-old Tiner's timing: the financial services expert took over as the City's chief regulator in 2003, just as the bear market which followed the dotcom crash came to an end, and stepped down from the Financial Services Authority in July 2007 - just a few weeks before the credit crunch took hold.

He presided over the FSA when the so-called "light touch" regulation was put in place. It was Tiner who agreed that banks could make up their own minds about how much capital they needed to hoard to cover their risks. And it was on his watch that Northern Rock got so carried away with the wholesale money markets and 130% mortgages. When the FSA finally got around to investigating its own part in the Rock's downfall, it was a catalogue of errors and omissions. In short, the FSA had been asleep at the wheel while Northern Rock racked up ever bigger risks.

An accountant by training, with a penchant for Porsches and proud owner of the personalised number plate T1NER, the former FSA boss has since been recruited by the financial entrepreneur Clive Cowdery to run a newly floated business that aims to buy up financial businesses laid low by the credit crunch. Tiner will be chief executive but, unusually, will not be on the board, so his pay and bonuses will not be made public.

... and six more who saw it coming

Andrew Lahde

A hedge fund boss who quit the industry in October thanking "stupid" traders and "idiots" for making him rich. He made millions by betting against sub-prime.

John Paulson, hedge fund boss
He has been described as the "world's biggest winner" from the credit crunch, earning $3.7bn (£1.9bn) in 2007 by "shorting" the US mortgage market - betting that the housing bubble was about to burst. In an apparent response to criticism that he was profiting from misery, Paulson gave $15m to a charity aiding people fighting foreclosure.

Professor Nouriel Roubini
Described by the New York Times as Dr Doom, the economist from New York University was warning that financial crisis was on the way in 2006, when he told economists at the IMF that the US would face a once-in-a-lifetime housing bust, oil shock and a deep recession.

He remains a pessimist. He predicted last week that losses in the US financial system could hit $3.6tn before the credit crunch ends - which, he said, means the entire US banking system is in effect bankrupt. After last year's bail-outs and nationalisations, he famously described George Bush, Henry Paulson and Ben Bernanke as "a troika of Bolsheviks who turned the USA into the United Socialist State Republic of America".

Warren Buffett, billionaire investor
Dubbed the Sage of Omaha, Buffett had long warned about the dangers of dodgy derivatives that no one understood and said often that Wall Street's finest were grossly overpaid. In his annual letter to shareholders in 2003, he compared complex derivative contracts to hell: "Easy to enter and almost impossible to exit." On an optimistic note, Buffett wrote in October that he had begun buying shares on the US stockmarket again, suggesting the worst of the credit crunch might be over. Now is a great time to "buy a slice of America's future at a marked-down price", he said.

George Soros, speculator
The billionaire financier, philanthropist and backer of the Democrats told an audience in Singapore in January 2006 that stockmarkets were at their peak, and that the US and global economies should brace themselves for a recession and a possible "hard landing". He also warned of "a gigantic real estate bubble" inflated by reckless lenders, encouraging homeowners to remortgage and offering interest-only deals. Earlier this year Soros described a 25-year "super bubble" that is bursting, blaming unfathomable financial instruments, deregulation and globalisation. He has since characterised the financial crisis as the worst since the Great Depression.

Stephen Eismann, hedge fund manager
An analyst and fund manager who tracked the sub-prime market from the early 1990s. "You have to understand," he says, "I did sub-prime first. I lived with the worst first. These guys lied to infinity. What I learned from that experience was that Wall Street didn't give a shit what it sold."

Meredith Whitney, Oppenheimer Securities
On 31 October 2007 the analyst forecast that Citigroup had to slash its dividend or face bankruptcy. A day later $370bn had been wiped off financial stocks on Wall Street. Within days the boss of Citigroup was out and the dividend had been slashed.

• Tomorrow in part three of the Road to Ruin series - The Barons of Bankruptcy - how going bust can be a profitable business

J.P. Morgan's Abusive Excutives Bonuses

J.P. Morgan's Abusive Excutives Bonuses
http://optionsforemployees.com/articles/article.php?id=146

As readers will recall, J.P. Morgan received the first large bail-out from the New York FED of $55 Billion, guaranteed by Bear Stearns' worthless assets, to prop up its own liquidity position and buy Bear Stearns stock.

J.P. Morgan also recently received another $25 Billion in TARP payments from the Treasury.

This article is about how J.P. Morgan's executives , instead of receiving easy to detect cash bonuses, received very large bonuses in the form of Stock Appreciation Rights (SARs) and Restricted Stock Units. These equity compensation securities are not easy to understand or value by other than experts in the field.

SARs are very similar to employee stock options and Restricted Stock Units are very similar to Restricted Stock.

These SARs were granted on January 20, 2009, the day that the J.P.Morgan stock reached its lowest in five years. The stock quickly rebounded as illustrated in the graph below. The arrow indicates the day and the price of the stock when the grant was made.

On January 22, 2008 we see a repetition of the grants of SARs with the stock hitting a low point followed by a substantial rebound in the next days.

Let's examine the size of the bonuses of the top 15 executives, at J.P. Morgan, that were granted on January, 20, 2009 and reported two days later.

See the link below:

http://www.secform4.com/insider-trading/19617.htm


Stock Appreciation Rights Granted

SARs Amounts Name of Exercise Value 2/4/09
Granted Grantee Price

700,000 Winters 19.49 $11,300,000
700,000 Black 19.49 $11,300,000
500,000 Staley 19.49 $8,100,000
300,000 Scharf 19.49 $4,890,000
250,000 Drew 19.49 $4,075,000
200,000 Miller 19.49 $3,260,000
200,000 Rauchenberger 19.49 $3,260,000
200,000 Smith 19.49 $3,260,000
200,000 Zubrow 19.49 $3,260,000
200,000 Bisignano 19.49 $3,260,000
200,000 Mandelbaum 19.49 $3,260,000
200,000 Cavanaugh 19.49 $3,260,000
200,000 Cutler 19.49 $3,260,000
200,000 Maclin 19.49 $3,260,000
100,000 Daley 19.49 $1,630,000
----------------------------------------------------------------------------------------
Total value (2/6/09) of SARs Granted = $81,405,000




Restricted Stock Units Granted

RSUs Amounts Name of Market Value RSUs Value
Granted Grantee of stock 2/4/09 2/4/09

115,474 Staley 24.10 $2,782,923
102,644 Miller 24.10 $2,473,720
102,644 Scharf 24.10 $2,473,720
102,644 Smith 24.10 $2,473,720
102,644 Bisignano 24.10 $2,473,720
102,644 Cavanaugh 24.10 $2,473,720
102,644 Drew 24.10 $2,473,720
102,644 Maclin 24.10 $2,473,720
89,813 Zubrow 24.10 $2,164,493
89,813 Cutler 24.10 $2,164,493
59,662 Daley 24.10 $1,364,542
35,926 Rauchenberger 24.10 $865,816
--------------------------------------------------------------------------------------------------
Total value (2/6/09) of RSUs Granted = $30,500,000

Total value (2/6/09)of Grants to top 15 executives= $111,905,000

These totals are far more than the top executives of Merrill Lynch were to receive as their year end bonuses in cash and equity. The New York Attorney General is supposedly investigating Merrill's executives for criminal wrong doing

Merrill CEO, Thain was granting himself just $10 million whereas at least three Morgan executives exceeded that in equity compensation alone.

An interesting question arises from an examination of the fact that for the past two years grants were made on or around January 20. It just happened that the stock dropped prior to the grant and moved upward immediately after the grants. Its hard to accept the idea that those executives just got very lucky for two years in a row. Yes, I am suggesting collusion in the manipulation of the stock to accommodate the grants of options etc.

Some refer to this as spring-loading the options grants.

Is J.P. Morgan immune from investigation?

Now what we find is that bankers' errand boy extraordinaire CEO, James Dimon, is popping off about the ridiculous idea that J.P. Morgan does not need further bail-out money after Morgan grabbed $55 Billion in the Bear Sterns deal and another $25 Billion of TARP money in banker welfare payments. See:

http://www.bloomberg.com/apps/news?pid=20601109&sid=azVLk.22AkLI


If they do not need the bail-outs, let Morgan and Goldman return the welfare payments.

Perhaps also an explanation is in order of why James Dimon is not prosecuted for violations of Title 18 Section 208 U.S.C. in his role as Director of the New York Federal Bank in approving the J.P. Morgan/Bear Stearns deal.

The link below is the Title 18 Section 208. See for yourself if his actions constitute a violation of the Statute.

http://law.onecle.com/uscode/18/208.html


Neither J.P. Morgan, Goldman Sachs or any other bank will return the TARP monies because the actual values of the Preferred Stock and Warrant packages were 50% lower than what the taxpayers were forced to pay. And the actual values of those packages have dropped considerably in every case since the welfare payments to Goldman, Morgan, Bank of America etc. were made.

Perhaps the Oracle of Omaha will accept 5% when the going rate is 11%.

In the case of Bank of America and Merrill, the warrants purchased by the Treasury are down over 88% since the bail-out.

John Olagues

P.S.

A full reading of the SEC Form 4.com link above shows that there were sales of stock by most of the 15 executives at 23.2 in the days following the issues of the SARs and RSUs granted when the stock was 19.49. Mr. Jamie Dimon also sold 137,033 shares of stock at 23.2.

The sales and the grants are trades of equity securities within 6 months and are considered matching trades for Section 16 b of the Securities Act of 1934. Section 16 b requires those profits from the buys and sales to be "short swing" profits and are returnable to J.P. Morgan.

Now, securities attorneys will say that the grants of the SARs and RSUs are exempt under SEC Rule 16 b-3. They will also claim that since the shares sold were formerly restricted stock which has become vested with a tax liability, that the sale to pay those taxes are exempt from Section 16 b of the Act of 1934.

However, thse SEC Rule effectively defeat the Statute and therefore is beyond the SEC's Rule making authority and is void. SEC Rule 16 b-3 is just another part of the SEC accommodating the executive compensation abuses including back-dating and spring loading.

If you are a holder of JP Morgan stock you can request that Jamie and his boys return their "short swing" profits. If they do not return the money, any share holder has a private right of action against Jamie and his boys to get the profits returned to the share holders.

P.P.S

Also in the linked secform4.com info is a mention that Jamie purchased 500,000 of JPM stock on Jan 16, 2009, and spent another $10,000,000 on another form of JPM stock on the same day, one day after the earnings report of Jan 15, 2009. The 17th was a Saturday and Monday the 19th was MLKs holiday. He just couldn't wait until Tuesday, when all the options were granted.

I am not certain but I believe that those purchases violate JPMs black- out period and is a violation of SEC Rule 10 b-5.

Comments

hyena
2-8-2009 at 6:00pm

You may remember the ilast nsult to injury - the post dating of options to the senior employees of particularly technology companies in the early 2000's. The giveaway here was that the options were miraculously issued at the stock prices yearly lows, My hunch is that this may have ocurred here. Just a hunch...

G$
2-8-2009 at 6:00pm

realist

ALL these idiots and ANYONE who has EVER worked at Goldman should go to jail FOREVER!!!!!!! Milken goes to jail never did a thing worng and these scumbag get new jets = i hope they and Warren the cheerleader eat dogfood for their last meals or are victims of the civil unrest which probally happens in this coutry via their actions .....

Shawn H
2-8-2009 at 6:00pm

You forgot about the $138B the fed gifted them during the Lehman bailout. http://tinyurl.com/6j5p7j

mr. d
2-13-2009 at 6:00pm

lets not forget the 10 billion they received indirectly via AIG the day AIG received their bailout. This money was related to positions JP had with AIG in default swaps.

JetRx
2-14-2009 at 6:00pm

Garbage

Jamie Dimon should receive an academy award for his "soothe talk". Just remember his mentor: Sandy Weill. Along with Alan Greenspan one of the architects of the situation we now find ourselves.

JetRx
2-14-2009 at 6:00pm

Garbage II

...and Cramer has all but fallen over himself for GS. FYI Jimmy Boy: you've no street cred now. The inbreeding and 10x PARLAY of assets needs to be investigated now! First, they bought and paid for our government and now ruined our republic.

Feentiomo
2-15-2009 at 6:00pm

Bill Bonner

The battle is on!
Friday, the Dow jumped up 217 points. Oil held steady at $40. Gold didn’t move either; it remains at $914.
But let’s take a quick look at the combatants...and try to understand what is really going on.
On the one side is General Market. He’s a sly, unpredictable...some would say ‘unbeatable’...foe. He’s also extremely aggressive.
On the other side, there are the feds...the fixers...the meddlers...the central bankers and finance ministers. They have their ground troops, their weapons of mass destruction, their defensive ramparts, and their strategic theories. And many people believe they have the ultimate weapon in this war – the Nuclear Option...
For the last year and a half, General Market has been master of the field. He’s rolled back the fixers everywhere. The world’s stock markets have suffered defeat after defeat – wiping out about half their wealth, about $30 trillion worth. Even markets thought to be “decoupled” with those of the Western world – such as China and India – fell right over as soon as General Market attacked.
As to property...General Market has already captured about 25% of the domestic real estate in the United States...and who knows how much overseas.
In some places, U.S. housing has suffered more damage than from a fire or a tornado. In Lehigh Acres, near Fort Myers, Florida, the New York Times says houses are selling 80% off their peaks. “Fast food restaurants are laying people off or closing. Crime is up, school enrollment is down and one in four residents received food stamps in December, nearly a fourfold increase since 2006.”
It’s back to the ’30s in Lee County, Florida:
“The organizations offering food in Lehigh Acres have seen demand increase by as much as 75% in the last year. And the people being served are no longer just the chronic poor. The line at Faith Lutheran had a mix of ages, races, and former income levels.”
Abandoned houses are stripped of anything that can be sold...and used by drug gangs.
And it’s not just housing that is being abandoned. “Ghost malls,” are coming soon, says one commentator. People without money don’t buy stuff. And so, malls are where they don’t go. Malls become abandoned...deserted...vandalized, taken over by gangs and crazy people.
Hasn’t happened yet? Stay tuned...
General Market has done to world property values about what Sherman did to Atlanta. Nobody knows the total loss, but it is probably near $15 trillion...
And there are huge losses in other areas too. Corporate bond prices – especially in the ‘junk’ category – have collapsed. Hedge funds, banks and investment firms have lost billions in speculations. The value of minerals and oil have fallen 50% - 75%.
What’s the total damage? Rupert Murdoch says it’s around $50 trillion – which is probably not too far off the market.
But the feds aren’t completely beaten. They’re mobilizing all over the world to fight the depression. Yes, the ‘d’ word has escaped the censors. Bill Gross of PIMCO says the US could be headed for a ‘mini-depression.’ And over at MSN Money, Jon Markman wonders if it isn’t already “too late to escape a depression?”
We keep pointing out that you can fight a recession with rate cuts and more public spending, but you can’t beat a depression using those tactics.
Still, the feds are going to try! Today’s news tells us that they’re becoming more and more desperate.
“Obama rolls out his big guns,” says the headline in the International Herald Tribune . The big guns are blasting away in favor of the administration’s Boondogglization program:
Larry Summers told Congress to pass Obama’s stimulus bill “as quickly as possible, to contain what is a very damaging and potentially deflationary spiral.”
Obama himself said we might be on the verge of “catastrophe.” And Summers added, “If there was ever a moment to transcend politics, this is that moment.”
But what good is $1 trillion worth of boondoggle spending going to do? General Market has just erased $50 trillion assets. All together, the feds have probably been able to put back a couple trillion – at most. And most of what they are putting back is just taken from some other front...it is not really a net increase in the feds’ firepower.
*** There are two main schools of thought on the bailouts.
1) they are not targeted properly (the media spends a lot of ink debating whether the bailouts should be loans, asset purchases, direct takeovers, bad banks or other gimcrackery)
2) they are not big enough...(which we will discuss in a minute)
And then, there’s our hooky school of thought too. If there is evidence or experience to suggest that these bailout plans will work we haven’t heard of it. In the two instances in which they were tried, they failed. Plus, there is no theory that makes any sense to us explaining why or how they SHOULD work. Bad bets don’t get better when you lend the bettor more money. They just become more expensive.
But no one is interested in our analysis or our advice. We keep our “President’s Hotline” available. Obama can call anytime he wants. We’ll even pay for the call. But no government has ever asked our counsel; probably, none ever will.
So, let’s return to the advice that the feds are taking seriously:
The U.S. risks “falling into an economic abyss,” says Nobel-prize winning economist Paul Krugman. He says we’re “on the edge of catastrophe.”
Hold on a minute. Krugman’s warning bell sounds for all the world like the one we used to ring regularly. We used words like “abyss”... “catastrophe”.... “disaster”... “Armageddon.”. We needed to yell like that to get readers’ attention. Most ignored us anyway; they thought we were kooky alarmists. Besides, they were sure everything was great and getting better all the time.
Now, we no longer have to use words like ‘apocalypse’ and ‘armageddon.” Thank God. Words like that are hard to spell. Besides the facts shout loudly enough. We don’t need to get anyone’s attention. What’s needed now is quiet reflection.
Krugman is screaming because he thinks the U.S. bailout plan is not bold enough. He’s right about that. You’re not going to offset General Market’s $50 trillion in damages to with $1 trillion in boodoggles. Krugman thinks you need to spend a lot more.
The aforementioned Bill Gross of PIMCO agrees. He says “trillions” will have to be spent.
And so, dear reader, the war goes on.
And it’s getting more and more expensive. General Market does his damage. And the cost of fighting him mounts. Goldman Sachs says the U.S. Treasury will borrow $2.5 trillion this fiscal year.
How are they going to borrow that kind of money without driving up the price of borrowed funds? ‘Borrow from yourself,’ say the simpleton advisors. They’re urging the Fed to buy the Treasury’s paper itself. That way, America won’t be beholden to foreign lenders – notably, the Chinese – and bond yields won’t be forced up by the buying pressure.
But wait a li’l cotton pickin’ minute. Where does the Fed get trillions of dollars to buy U.S. paper? Oh, we forgot...it just creates it ‘out of thin air.’
Two and a half trillion is nothing but a little ‘2’ and a little ‘5’ followed by 11 little zeros. Heck, the Fed has all the zeros you could want. If not, it can always borrow some from Gideon Gono. He just took 12 zeros off the Zimbabwe dollar; maybe we’ll be able to use them in the US.
More tomorrow...on the feds’ counterattack...the lack of pricing power...and the Nuclear Option...