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Paulson’s $100 billion “Bankers Bankruptcy Fund” and the G-7
Fiasco
By Mike Whitney
10/22/07 "ICH" -- - -Friday’s bloodbath on Wall Street proved
that the troubles in the credit markets have not been relieved
by the Fed’s rate cuts. The Dow Jones slipped 367 points on the
20th anniversary of Black Monday, the stock market’s biggest
one-day loss in history. Since Friday, Asian markets have
plunged; stocks are down sharply in Japan, Australia, Hong Kong,
Indonesia, the Philippines, Taiwan and South Korea. The global
sell-off is a reaction to ongoing problems in the subprime
market and deeper-rooted systemic issues related to the US’s
structured-debt model.
The sudden downturn in the stock market provided a fitting
backdrop for Treasury Secretary Paulson’s appearance at the G-7
meetings in Washington DC. Paulson has largely shrugged off the
decline in housing and the growing volatility in the equities
markets. As the representative for the world’s biggest economy,
Paulson instructed the other nations on how best to adjust their
currencies and on the dangers of “sovereign wealth funds”. No
one was listening. Foreign ministers and central bankers are
less receptive to the scolding of US officials. America needs to
put its own house in order before it gives advice to anyone
else.
What everyone at the meetings really wanted to know was why the
United States destabilized the global economic system by selling
hundreds of billions of dollars of worthless mortgage-backed
securities to banks and pension funds around the world? Aren’t
there any regulators in the US anymore?
And how Paulson going to make amends to the institutions and
investors who lost their shirts in this massive mortgage-scheme?
Unfortunately, the Treasury Secretary didn’t address any of
these questions. He offered no recommendations for fixing the
problems in the credit markets and he refused to explain what he
would do to shore up the faltering dollar. Instead, he
reiterated the same lame mantra that the US follows a “strong
dollar policy”.
Baloney. The Federal Reserve has been trashing the greenback for
the last 7 years without pause. Paulson needs to rethink his
approach and start telling the truth. Markets thrive on
credibility and transparency; that’s what strengthens investor
confidence. If Paulson thinks that the people are dupes; he’s in
for a shock.
Last month’s net foreign inflows show how quickly capital can
evaporate when confidence is lost. Foreign investors pulled $163
billion out of US securities and Treasuries in August alone. Net
capital inflows have turned negative and that money won’t be
returning until the United States shows that it’s “got its act
together”.
Are you listening, Henry?
The multi-trillion dollar subprime swindle was the greatest
financial fraud in history. Investors are looking for
accountability. They want to hear someone in the Bush
administration and at the Central Bank stand up, take
responsibility, and offer concrete regulatory changes to fix the
system.
Are you listening, Henry?
No one is interested in another scam like the new $100 billion
“Bankers Bankruptcy Fund”. All that does is provide the
over-extended and under-capitalized investment banks another
chance to dump their poisonous Mortgage-backed slop on the
gullible public. Forget about it. That plan needs to be tossed
in the circular receptacle. If Paulson really wants to know what
people think about his new Mega-fund he should listen to Nick
Parsons, the head of markets strategy at National Australia
Bank. Parsons summed up the fund’s goals saying:
``By insulating the junk from the sellers of junk, the holders
of junk should be spared the problems of junk. The one flaw in
this cunning plan, however, would be if investors took fright at
being reminded just how much junk is still in the system.''
Parsons is right. Junk bonds are still junk whether they’re
logged on an SIV’s debit-sheet or wrapped in Treasury Dept
red-ribbon. What difference does it make? It’s still garbage.
Write down the losses and get on with it.
It’s worth noting that Paulson—who felt vindicated in
reproaching China for currency manipulation; also blasted Iran
saying,
"We discussed ways to deal with Iran's pursuit of a nuclear
capability and ballistic missiles, its vast financial support to
lethal terrorist groups, and the deceptive financial tactics
employed by Iran to evade sanctions and mask illicit
transactions."
Give it a rest, Hank.
Apart from the fact that the United Nations nuclear-watchdog
agency (IAEA) has found “no evidence” that Iran is conducting a
nuclear weapons program; it’s none of Paulson’s business anyway.
He needs to devote more time to cleaning up his own mess and
less time criticizing others for their fabricated offenses.
The rest of the world is already fuming at the US for creating
the problems that threaten to send the global economy into a
prolonged tailspin.
Developing countries that joined the G-7 meetings lambasted the
US for generating “serious problems of financial fragility”
which are endangering the “prosperity of the world economy”.
(Bloomberg)
The G-24 is demanding “increased surveillance of advanced
economies, putting as much focus in evaluating their
vulnerabilities as it does in emerging-market economies.''
Indeed. And yet Paulson and his colleagues at the Fed continue
to blame everyone else. No one in China or Iran cooked up this
“structured finance” rip-off which sent millions of homeowners
into foreclosure, shuttered 160 mortgage lenders, and undermined
the global banking system. That was the work of the Wall Street
con-artists and their accomplices at the Fed.
Consider this article in Sunday’s UK Telegraph:
“Barclays and Royal Bank of Scotland have lined up emergency
funds of up to $30 billion from the US Federal Reserve to bail
out American clients caught up in the global credit crunch.
The Fed's board of governors wrote to both banks 10 days ago,
granting them access to funds for customers "in need of
short-term liquidity"
The letter to RBS made particular reference to investors holding
mortgage-backed securities -- which have been at the centre of
the sub-prime crisis. (“Barclay’s, RBS prepare emergency credit
with Fed”, UK Telegraph)
Great. Another humongous bail out for the victims of America’s
deregulated mortgage-laundering racket. Is that China’s fault?
Another article appeared in yesterday’s New York Times by
economics reporter Gretchen Morgenson, “Get Ready for the Big
Squeeze”:
“Anyone who thinks that we have hit bottom in the increasingly
scary lending world is paying little mind to the remarkably low
levels of reserves that the big banks have set aside for loan
losses. Indeed, loss provisions as a percentage of total loans
held for investment plummeted to a historic low in the second
quarter of 2007…. Part of the problem for banks is a result of
an almost two-decade drop in loan loss reserves….. Now that a
credit bust looms, banks have far fewer reserves on their
balance sheets than they might have had in previous cycles.”
Still want to talk about China and Iran’s problems?
The present gang of Wall Street warlords have transformed the
world’s most transparent and resilient markets into an opaque
galaxy of complex debt-instruments and shady “off-balance
sheets” operations. It’s no better than a carnival shell-game.
As the banks continue to get rocked from explosions in the
housing industry; the unwinding derivatives and carry trades
will precipitate a mass exodus from the equities markets. That
rout will be matched by a corresponding downward slide in the
real estate market which is expected to continue until 2010.
Crisis dynamics have returned to the credit markets. Surging oil
and food prices are bearing down on maxed-out consumers and
slowing retail spending. Discretionary income is vanishing from
rising inflation and shrinking home equity. Wages have remained
stagnant for over a decade while personal savings have dipped to
minus digits. On top of it all, consumer debt is at record-highs
and the danger of default has expanded beyond housing to every
area of personal finance.
A report in Sunday’s Financial Times sheds light on this new and
worrisome development:
“Poor quarterly results from banks across the US over the past
two weeks suggest credit problems once confined to high-risk
mortgage borrowers are spreading across the consumer landscape,
posing new risks to the economy and weighing heavily on the
markets.
US banks have raised reserves for loan losses by at least $6bn
over the second quarter and by even larger amounts from last
year, indicating financial executives believe consumers will be
increasingly unable to make payments on a variety of loans.
Banks are adding to reserves not just for defaults on mortgages,
but also on home equity loans, car loans and credit cards.
“What started out merely as a subprime problem has expanded more
broadly in the mortgage space and problems are getting worse at
a faster pace than many had expected,” said Michael Mayo,
Deutsche Bank analyst.” (“US Loan Default problems Widen”
Financial Times)
The aftershocks from Alan Greenspan’s “cheap credit” policies
will be felt for decades. The American consumer is more
over-leveraged and economically vulnerable than any time in
history. Simply put; he owes money on everything----cars,
mortgages, electronics, student loans, and credit cards. The
path to indentured serfdom is paved with the Fed’s low interest
green paper.
Record US trade imbalances coupled with a steadily-declining
dollar, is negatively impacting European industry as well as the
Euro. Further weakening is likely to trigger a stampede away
from dollar-backed assets and securities. The plan to strangle
the dollar to reduce US balance of payments is pure lunacy---an
idea as zany as invading Iraq. No country has ever devalued its
way to prosperity. (Steven Roach) Destroying the dollar will
destroy the country.
Global credit markets are now facing unprecedented disruptions
due to the mortgage-derivatives fraud which originated in the
United States before spreading across the world. $400 billion in
asset-backed commercial paper (ABCP) has failed to roll over,
the mortgage securitization process has stalled, the colossal
leveraged buyout deals (LBOs) are DOA, and millions of bankrupt
homeowners are being driven from their houses. The big
investment banks have been forced to take $280 billion of new
debt on their balance sheets since the middle of August. This is
limiting their ability to issue new loans and generate profits.
The banking system has already smashed into the iceberg and the
decks are quickly filling with water.
Interest rates cuts will do nothing to slow the inexorable
deterioration in the housing or stock markets. Cheap credit will
not dispose of the toxic debt clogging the system or slow the
pace of defaults. Trillions of dollars in market capitalization
will be lost.
The system is blinking red. These problems cannot be ignored or
swept under the rug any longer.
Leadership is critical in times of economic crisis. This isn’t
the time for prevarication, obfuscation or public relations
gimmicks. We need leaders who will tell the truth, make remedial
policy recommendations, and forestall the growing probability of
social disorder.
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