is today an incredibly speculative financial sector hell bent
on sustaining Credit and asset Bubbles - and perfectly content
to adulterate our functional system of "money" in the process.
The Federal Reserve is perceived to condone the whole affair and
is openly willing to employ all measures to avoid bursting Bubbles.
And in a contemporary world of acutely fragile finance structures,
this ensures that bust avoidance translates briskly to bubble
perpetuation and speculator delight."
- Doug Noland "Credit Bubble Bulletin"
one defend a system that creates wealth by making the majority
- Henry C. K. Liu
in the Treasury Dept - working with their colleagues at Citigroup,
J.P. Morgan and Bank of America - have concocted a scheme to rescue
the banks from their massive losses in mortgage-backed securities.
The group is planning to set up a US$100 billion emergency fund
which will purchase non-performing assets for short term debt.
In truth, the fund is a bailout which provides the financial giants
with an excuse for not reporting their enormous losses from bad
first appeared in Saturday's Wall Street Journal and was followed
on Monday with a second headline piece:
BY BANKS IS BET TO SPUR MARKET"
high stakes plan to RESCUE BANKS FROM LOSSES on mortgage securities
amounts to a big bet that a consortium of financial giants - AT
THE PRODDING OF THE US GOVERNMENT - can PERSUADE INVESTORS TO
POUR MORE MONEY INTO THE TROUBLED CREDIT MARKET."
the Treasury Dept is directly involved in a scam that saves the
banks while trying to "persuade" investors to "pour more money"
into toxic mortgage-backed sludge. Treasury Dept officials clearly
have a different idea of "moral hazard" than the rest of us.
are presently holding hundreds of billions of dollars in mortgage-backed
securities (MBSs) that they cannot sell - because there are no
buyers - and don't want to take back on their balance sheets because
they'll be forced to increase their capital reserves. So they've
decided to launch a public relations campaign to promote some
goofy-sounding fund, called the "Master-Liquidity Enhancement
Conduit" or M-LEC, which will allow the banks to place their unwanted
bonds in Limbo until some future date when the public appetite
for garbage CDOs improves.
WSJ does a good job of disguising the real motive behind the new
"Super-Conduit" (aka the Bailout fund) but in the last paragraph,
buried in Section C-3, they reveal the truth:
goal is to reassure investors and make them more willing to buy
its short-term debt." So, the fund is really just a way of rearranging
the marketplace until the next crop of gullible investors sprouts
up and buys more mortgage-backed garbage.
are the regulators? The SEC and Treasury should be forcing the
banks to be straightforward with the public and let them know
about the hanky-panky they've been up to with their risky SIVs
(structured investment vehicles). Citigroup alone has nearly $80
billion in off-balance sheets operations which are in distress.
The bank accounts for "25% of the global SIV market. As of August,
assets held by SIVs totaled $400 billion".
goal is to reassure investors and make them more willing
to buy its short-term debt." So, the fund is really just
a way of rearranging the marketplace until the next crop
of gullible investors sprouts up and buys more mortgage-backed
are set up as a way to make money without taking the risk onto
their balance sheets. "They issue their own short-term debt, usually
at relatively low rates... then use the proceeds to buy higher
yielding assets such as securities tied to mortgages." (WSJ)
Bear Stearns blew up in late July, investors have been steering
clear of any securities connected to real estate, which means
the SIVs are getting the Double Whammy - they can't sell their
asset-backed commercial paper (because it's mortgage-backed) and
they have to find buyers for their collateralized debt obligations
(CDOs). To a large extent, the market is still frozen despite
the upbeat cheerleading on the business pages. Clearly, the worst
is yet to come.
How bad is
in yesterday's Financial Times said that, "Only $9.9 billion of
home equity loan securitizations have come to market since July
1 - A 95% DECLINE FROM THE $200.9 BILLION IN THE FIRST HALF OF
THIS YEAR AND A ROUGHLY 92% DECREASE FROM THE SAME PERIOD LAST
are in trouble. Big trouble. Main sources of revenue have dried
up overnight and they're stuck with hundreds of billions of debt.
That's why the papers broke the story on Saturday when there was
NO chance of triggering a stock market crash.
horror of investors around the world when they discover that the
major investment banks are running these shabby "off-balance sheets"
operations while concealing their real financial condition from
their investors. Consider the disgust the public feels when they
see Treasury officials bailing out the banks instead of ordering
them to report their losses and get on with business.
alone has nearly US$80 billion in off-balance sheets operations
which are in distress... Citigroup appears to be the greatest
beneficiary of the current plan. They have a number of Enron-type
SIVs which could be at risk.
Wall Street nonchalantly leaps from one swindle to the next never
considering the damage it's doing to the credibility of the market.
Pulliam summed it up like this in the Oct 12 edition of The Wall
the invention of the ticker tape 140 years ago, America has been
able to boast of having the world's most transparent financial
markets. The tape and its electronic descendants ensured that
crystal-clear prices for stocks and many other securities were
readily available to everyone, encouraging millions to entrust
their money to the markets. These days, after a decade of frantic
growth in mortgage-backed securities and other complex investments
traded off exchanges, that clarity is gone. Large parts of American
financial markets have become a hall of mirrors."
of mirrors" is an understatement. The system is thoroughly opaque
and crooked as a ram's horn. The market's new architecture, "structured
finance", is a dismal rip-off from start to finish. Consider the
mentality of the hucksters who dreamed up "securitizing" subprime
mortgages and selling them off as precious jewels in the secondary
market. This was a blatant con-job. How can the liabilities of
"borrowers with bad credit" be traded to foreign investors and
pension funds like they were valuable assets? And where were the
regulators while this scam was going on?
sufficient evidence that the system is totally out of whack?
avoids transparency like the plague. That is to be expected. But
what about the government? It's the government's job to protect
the investor and maintain the integrity of the system. Is that
what Treasury Dept is doing or are they "LURING investors to buy
debt issued by the rescue fund as part of the plan"? (quote from
the Wall Street Journal)
can the liabilities of "borrowers with bad credit" be traded
to foreign investors and pension funds like they were valuable
idea of protecting the little guy has never occurred to
anyone in the Bush administration. Their job is to shift
wealth from one class to the other via equity bubbles and
Is that how Paulson sees it; like luring turkeys to the chopping
block with a trail of bread crumbs?
idea of protecting the little guy has never occurred to anyone
in the Bush administration. Their job is to shift wealth from
one class to the other via equity bubbles and government bailouts
- anything that advances the corporate agenda.
the banks are sitting on $200 billion in non-performing mortgage-backed
securities (MBSs) and collateralized debt obligations (CDOs).
They also hold another $300 billion in collateralized loan obligations
(CLOs) from mergers and acquisitions which stalled after the Bear
Stearns meltdown. If the present bailout doesn't materialize,
we're likely to see bank closures and a plummeting stock market.
the regulators have considered the probability of a crash before
they allowed trillions of dollars of radioactive-bonds to flood
the market when no one had any idea of their real value? Wouldn't
that have been the prudent thing to do?
we know what they are worth. They're worth nothing. That's why
the banks are running scared and refusing to put them up for auction.
They'd rather sleaze them into a lofty-sounding superfund that
masks their true value.
the last two weeks the stock market soared on the news that the
banks were reporting billions of dollars in losses. Investors
were hoodwinked into believing the banks were being honest and
had "come clean" about their financial condition. What a joke.
In reality, the banks only reported roughly 5% of their potential
losses; the rest were hidden in their off balance sheets operations.
skyrocketed to new heights. Wall Street was euphoric.
we know the truth. It was all baloney.
Wall Street Journal: "The new fund is designed to stave off what
Citigroup and others see as a threat to the financial markets
world-wide: the danger that dozens of huge bank-affiliated funds
will be forced to unload billions of dollars in mortgage-backed
securities and other assets, driving down their prices in a fire
sale... The ultimate fear: If banks need to write down more assets
or are forced to take assets onto their books, that could set
off a broader credit crunch and hurt the economy. It could make
it tough for homeowners and businesses to get loans."
could "hurt the economy" and "make it tough for homeowners and
businesses to get loans?"
the present bailout doesn't materialize, we're likely to
see bank closures and a plummeting stock market.
yes. It's all clear now. The banks only cooked up this colossal
bailout to make things better for us common people. How is it
that we didn't notice that before? Our problem is that we don't
see the magnanimity and altruism which drives the corporate agenda.
New York Times:
(the bailout fund) is expected to start operating in 90 days and
will stay in place for a few years until it has disposed of the
assets it buys, according to people familiar with the negotiations.
its credibility with investors from whom it would raise money,
the conduit will not buy any bonds that are tied to mortgages
made to people with spotty, or subprime, credit histories. Rather,
it will buy debt with the highest ratings - AAA and AA - and debt
that is backed by other mortgages, credit card receipts and other
know about the problems with the ratings agencies and how they
are in bed with the investment banks. We also know that the whole
purpose of the new fund is to off-load mortgage-backed tripe which
is no longer sellable on the market. What we didn't know is that
the New York Times eagerly provides the peppy public relations
narrative to assist big business in dumping its failing assets.
"The conduit will pay market prices for the securities it buys.
But it remains unclear how officials will determine the price
of some bonds that have not been actively traded since August,
because the difference between what buyers are willing to pay
and what sellers want has widened significantly."
they'll pay full price because they want to be "made whole" again.
The truth is, however, that these derivatives will probably only
fetch pennies on the dollar unless they get another Wall Street
Stracke, market analyst from the research firm CreditSights, said
the effort appears to be "an attempt to soothe tense investors
in the debt market, rather than to provide substantive relief
to the worst-hit mortgage securities".
"For me, this is more of a P.R. blitz."
of the forthcoming Master-Liquidity Enhancement Conduit or M-LEC
further underlines the gravity of the problems facing the banking
system. The fund creates a "buyer of last resort" so that these
dubious assets won't be sold on the market at fire-sale prices.
the last two weeks the stock market soared on the news that
the banks were reporting billions of dollars in losses.
Investors were hoodwinked into believing the banks were
being honest and had "come clean" about their financial
condition. What a joke.
appears to be the greatest beneficiary of the current plan. They
have a number of Enron-type SIVs which could be at risk.
problems that are surfacing in the banking sector today are the
direct result of Greenspan's loose monetary policies coupled with
the dismantling of the regulatory regime that was created following
the 1929 stock market crash. We are now back to Square 1. All
of the various scams and swindles which permeated that hyper-inflated
market are now back in full-force foreshadowing a steep decline
in investor confidence, increased market manipulation, and an
unavoidable economic calamity.
finance" has transformed US markets into a carnival sideshow.
Productivity and real growth have been replaced with never-ending
credit expansion and speculative abuses. Reckless monetary policies
and the behemoth current account deficit have destabilized the
global economy a set the stage for a fiscal Armageddon.
subprime mortgage crisis and subsequent shrinking of asset-backed
commercial paper (ABCP) has thrown a wrench in the funding of
daily corporate operations. These are the harbingers of an impending
recession. As mortgages continue to default at a record pace;
the aftershocks will continue to rumble through the credit markets
where subprime loans have been "securitized" into bonds and leveraged
at maximum levels. It's just one domino knocking down the next.
financial system is at greater risk now than any time in the last
80 years. Regrettably, the only remedies coming from the Fed are
more currency-destroying rate cuts or hundreds of billions of
dollars in repos to remove mortgage-backed bonds from the banks'
balance sheets. Neither of these solutions addresses the critical
issues; they do not stabilize the market, reinvigorate lending,
or restore investor confidence. They are merely band aids on a
sucking chest-wound. They won't stop the bleeding.
Fed's monetary policies promote financial speculation which inevitably
leads to equity bubbles. Under Greenspan's stewardship, the country
has lurched from the 1990's bond bubble, to the dot.com bubble,
to the subprime meltdown, to the liquidity crisis, to the credit
crunch - all engineered at the Federal Reserve with ancillary
assistance from the charlatans in the banking industry.
Greenspan's stewardship, the country has lurched from the
1990's bond bubble, to the dot.com bubble, to the subprime
meltdown, to the liquidity crisis, to the credit crunch
- all engineered at the Federal Reserve with ancillary assistance
from the charlatans in the banking industry.
article in China Worker, "Credit Crunch threatens Global Downturn"
summarizes our present predicament like this:
globalization has rebounded on the system. Capitalist leaders
boasted that the near total integration of financial markets across
the globe would provide lenders and borrowers everywhere with
instant access to a completely liquid money market. New types
of financial securities and sophisticated derivatives would spread
the risk of borrowing so widely that it would eliminate risk entirely.
economies were growing and bubbles inflating, it appeared that
- through derivatives trading - losses would be widely diffused
among speculators, reducing risk to very low levels. Not even
the most astute financial analysts could predict what would happen
in the event of recession. The unanswerable question was: Who
would ultimately bear the risks arising from widespread defaults
or bankruptcies? The veteran investor, Warren Buffet, warned that
derivatives would prove to be 'weapons of mass destruction'.
fantasy of financial alchemy transforming high risk gambling into
low risk money-making has now been shattered."
author is right. "Structured finance" is a fraud. Risk has not
been eliminated. In fact, it has exploded and become a system-wide
problem. The dead wood is everywhere.
banks are being crushed by a debt-load they generated through
"securitization". They need to accept responsibility for their
poor judgment (or greed?) and report their losses. The Super-Conduit
is just a dodge to put off the unavoidable day of reckoning. The
whole wretched plan should be scrapped. No amount of financial
chicanery will eradicate billions of dollars in bad bets. It's
time for the banks to face the hangman.
Mike Whitney is a well respected freelance writer living in Washington
state, interested in politics and economics from a libertarian
perspective. He can be reached at firstname.lastname@example.org.
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