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Trouble in Banktopia
By Mike Whitney
27/09/08 "ICH"
-- - The financial system is blowing up. Don't listen to the
experts; just look at the numbers. Last week, according to
Reuters, "U.S. banks borrowed a record amount from the Federal
Reserve nearly $188 billion a day on average, showing the
central bank went to extremes to keep the banking system afloat
amid the biggest financial crisis since the Great Depression."
The Fed opened the various "auction facilities" to create the
appearance that insolvent banks were thriving businesses, but
they are not. They're dead; their liabilities exceed their
assets. Now the Fed is desperate because the hundreds of
billions of dollars of mortgage-backed securities (MBS) in the
banks vaults have bankrupt the entire system and the Fed's
balance sheet is ballooning by the day. The market for MBS will
not bounce back in the foreseeable future and the banks are
unable to roll-over their short term debt. Game over. The
Federal Reserve itself is in danger. So, it's on to Plan B;
which is to dump all the toxic sludge on the taxpayer before he
realizes that the whole system is cratering and his life is
about to change forever. It's called the Paulson Plan, a $700
billion boondoggle which has already been disparaged by every
economist of merit in the country.
From Reuters:
"Borrowings by primary dealers via the Primary Dealer Credit
Facility, and through another facility created on Sunday for
Goldman Sachs, Morgan Stanley, and Merrill Lynch, and their
London-based subsidiaries, totaled $105.66 billion as of
Wednesday, the Fed said."
See what I mean; they're all broke. The Fed's rotating loans are
just a way to perpetuate the myth that the banks aren't
flat-lining already. Bernanke has tied strings to the various
body parts and jerks them every so often to make it look like
they're alive. But the Wall Street model is broken and the
bailout is pointless.
Last week, there was a digital run on the banks that most people
never even heard about; a "real time" crash. An article in the
New York Post by Michael Gray gave a blow by blow description of
how events unfolded. Here's a clip from Gray's "Almost
Armageddon":
"The market was 500 trades away from Armageddon on
Thursday...Had the Treasury and Fed not quickly stepped into the
fray that morning with a quick $105 billion injection of
liquidity, the Dow could have collapsed to the 8,300-level - a
22 percent decline! - while the clang of the opening bell was
still echoing around the cavernous exchange floor. According to
traders, who spoke on the condition of anonymity, money market
funds were inundated with $500 billion in sell orders prior to
the opening. The total money-market capitalization was roughly
$4 trillion that morning.
The panicked selling was directly linked to the seizing up of
the credit markets - including a $52 billion constriction in
commercial paper - and the rumors of additional money market
funds "breaking the buck," or dropping below $1 net asset
value."
The Fed's dramatic $105 billion liquidity injection on Thursday
(pre-market) was just enough to keep key institutional accounts
from following through on the sell orders and starting a
stampede of cash that could have brought large tracts of the US
economy to a halt." (New York Post)
Commercial paper is the lubricant that keeps the financial
markets functioning. When confidence vanishes (because the
stewards of the system in Washington are buffoons), investors
withdraw their money, normal business operations become
impossible, and the markets collapse. End of story. So, rather
than restore the public's confidence by strong leadership and
behavior designed to reassure investors; President Bush decided
to give a major prime-time speech stating that if Paulson's
emergency bailout package was not passed immediately, the
nation's economy would vaporize into the ether. Go figure?
Last week, the commercial paper market, (much of which is backed
by mortgage-backed securities) shrunk by a whopping $61. billion
to $1.702 trillion, the lowest level since early 2006. So,
Paulson's bailout will effectively underwrite CP as well as the
whole alphabet soup of mortgage-backed derivatives for which
there is currently no market. The US taxpayer is not only
getting into the plummeting real estate market, he is also
backstopping the entire financial system including defaulting
car loan securities, waning student loan securities, flailing
home equity loan securities and faltering credit card
securities. The whole mountainous pile of horsecrap-debt is
about to be stacked on the back of the maxed-out taxpayer and
the ever-shriveling greenback. Paulson assures us that its a
"good deal". Booyah, Hank!
PAULSON'S $700 BILLION BOONDOGGLE
How did Treasury Secretary Paulson figure out that
recapitalizing the banking system would cost $700 billion? Or
did he just estimate the amount of money that could be loaded on
the back of the Treasury's flatbed truck when it sputters off to
shower his buddies at G-Sax with freshly minted greenbacks? The
point is, that Paulson's calculations were not assisted by any
economists at all, and they cannot be trusted. It is a purely
arbitrary, "back of the envelope" type figuring. According to
Bloomberg: Swiss investor Marc Faber, known for a long track
record of good calls, believes the damage may come to $5
trillion:
"Marc Faber, managing director of Marc Faber Ltd. in Hong Kong,
said the U.S. government's rescue package for the financial
system may require as much as $5 trillion, seven times the
amount Treasury Secretary Henry Paulson has requested....
``The $700 billion is really
nothing,'' Faber said in a television interview. ``The treasury
is just giving out this figure when the end figure may be $5
trillion.''(Bloomberg News)
Most people who follow these matters would trust Faber's
assessment way over Paulson's. In his latest blog entry,
economist Nouriel Roubini said that "no professional economist
was consulted by Congress or invited to present his/her views at
the Congressional hearings on the Treasury rescue plan." Roubini
added:
"The Treasury plan is a disgrace: a bailout of reckless bankers,
lenders and investors that provides little direct debt relief to
borrowers and financially stressed households and that will come
at a very high cost to the US taxpayer. And the plan does
nothing to resolve the severe stress in money markets and
interbank markets that are now close to a systemic meltdown."
Roubini is right on all counts. So far, more than a 190
prominent economists have urged Congress not to pass the $700
bailout bill. There is growing consensus that the so-called
"rescue package" does not address the central economic issues
and has the potential to make a bad situation even worse.
BANKER'S COUP?
Financial industry rep. Paulson is the ringleader in a banker's
coup the results of which will decide America's economic and
political future for years to come. The coup leaders have
drained tens of billions of dollars of liquidity from the
already-strained banking system to trigger a freeze in interbank
lending and hasten a stock market crash. This, they believe,
will force Congress to pass Paulson's $770 billion bailout
package without further congressional resistance. It's
blackmail.
As yet, no one knows whether the coup-backers will succeed and
further consolidate their political power via a massive economic
shock to the system, but their plan continues to move jauntily
forward while the economy follows its inexorable slide to
disaster.
The bailout has galvanized grassroots movements which have
flooded congressional FAXs and phone lines. Callers are
overwhelmingly opposed to any bailout for banks that are
buckling under their own toxic mortgage-backed assets. One
analyst said that the calls to Congress are 50 percent "No" and
50 percent "Hell, No". There is virtually no popular support for
the bill.
From Bloomberg News: "Erik Brynjolfsson, of the Massachusetts
Institute of Technology's Sloan School, said his main objection
"is the breathtaking amount of unchecked discretion it gives to
the Secretary of the Treasury. It is unprecedented in a modern
democracy."
"I suspect that part of what we're seeing in the freezing up of
lending markets is strategic behavior on the part of big
financial players who stand to benefit from the bailout," said
David K. Levine, an economist at Washington University in St.
Louis, who studies liquidity constraints and game theory." (Mish's
Global Economic Trend Analysis)
Brynjolfsson's suspicions are well-founded. "Market Ticker's"
Karl Denninger confirms that the Fed has been draining the
banking system of liquidity in order to blackmail Congress into
passing the new legislation. Here's Denninger:
"The Effective Fed Funds rate has been trading 50 basis points
or more below the 2% target for five straight days now, and for
the last two days, it has traded 75 basis points under. The IRX
is demanding an immediate rate cut. The Slosh has been
intentionally drained by over $125 billion in the last week and
lowering the water in the swamp exposed one dead body -
Washington Mutual - which was immediately raided on a no-notice
basis by JP Morgan. Not even WaMu's CEO knew about the raid
until it was done....The Fed claims to be an "independent
central bank." They are nothing of the kind; they are now acting
as an arsonist. The Fed and Treasury have claimed this is a
"liquidity crisis"; it is not. It is an insolvency crisis that
The Fed, Treasury and the other regulatory organs of our
government have intentionally allowed to occur."
Bingo. This is a banker's coup cooked up and facilitated by the
deep-money guys who operate stealthily behind the political
sideshow. The only time they emerge from their stinkholes is
when they're flushed out by a crisis that threatens their
continued dominance. Grassroots resistance, spearheaded by
Internet bloggers (like Mish, Roubini and Denninger) are
demonstrating that they can mobilize tens of thousands of
"peasants with pitchforks" and be a factor in political decision
making. It also helps to have elected officials, like Senator
Richard Shelby, who stand firm on principle and don't faint at
the first whiff of grapeshot (like his weak-kneed Democratic
counterparts) Shelby has shouldered the full-weight of executive
pressure which has descended on him like a Appalachian
rockslide. As a result, there's still a slight chance that the
bill will have to be shelved and the industry reps will have to
go back to Square 1.
Market Ticker has provided charts from the Federal Reserve that
prove that Bernanke has withdrawn $125 billion from the banking
system in the last 4 days alone to create a crisis situation
that will incite credit market mayhem and increase the liklihood
of passing the bill. This is coercion of the worst kind.
http://market-ticker.denninger.net/archives/2008/09/24.html
The country's economic predicament is steadily deteriorating.
Orders for manufactured durable goods were off 4.5 percent last
month while inventories continued to rise. Unemployment is
soaring and the housing crash continues to accelerate. Credit
Suisse now expects 10.3 million foreclosures (total) in the next
few years. Numbers like that are not accidental, but part of a
larger scheme to use monetary policy as a way to shift wealth
from one class to another while degrading the nation's overall
economic well-being. More alarming, the country's primary
creditors are now staging a rebellion that is likely to cut off
the flow of capital to US markets sending the dollar plummeting
and triggering a deflationary credit collapse. This is from
Reuters:
"Chinese regulators have asked domestic banks to stop lending to
U.S. financial institutions in the interbank money markets to
prevent possible losses during the financial crisis, the South
China Morning Post reported Thursday. The China Banking
Regulatory Commission's ban on interbank lending of all
currencies applied to U.S. banks, but not to lenders from other
countries, the report added."
Bloomberg News reports that Dallas Federal Reserve Bank
President Richard Fisher has broken with tradition and lambasted
the proposed bailout saying that it "would plunge the U.S.
government deeper into a fiscal abyss."
From Bloomberg: "The plan by Treasury Secretary Henry Paulson to
buy troubled assets from financial institutions would put 'one
more straw on the back of the frightfully encumbered camel that
is the federal government ledger,' Fisher said today in the text
of a speech in New York. 'We are deeply submerged in a vast
fiscal chasm.'...The seizures and convulsions we have
experienced in the debt and equity markets have been the
consequences of a sustained orgy of excess and reckless
behavior, not a too-tight monetary policy," Fisher said to the
New York University Money Marketeers Club." (Bloomberg)
Surely, the cure for hyperbolic "credit excesses and reckless
behavior" cannot be "more of the same." In fact, Paulson's
bailout does not even address the core issues which have been
obscured by demagoguery and threats. The worthless assets must
be written-down, insolvent banks must be allowed to go bust, and
the crooks and criminals who engineered this financial blitz on
the nation's coffers must be held to account.
The carnage from Greenspan's low interest rate, "easy money"
binge is now visible everywhere. Inflated home and stock values
are crashing as the gas continues to escape from the massive
equity bubble. The FDIC will have to be recapitalized--perhaps,
$500 billion--to account for the anticipated loss of deposits
from failing banks caught in the cross-hairs of asset-deflation
and steadily contracting credit. Recession is coming, but
economic collapse can still be avoided if Paulson's misguided
plan is abandoned and corrective action is taken to put the
country on solid financial footing. Market Ticker lays out
framework for a workable solution to the crisis, but they must
be acted on swiftly to rebuild confidence that major systemic
changes are underway:
1--Force all off-balance sheet "assets" back onto the balance
sheet, and force the valuation models and identification of
individual assets out of Level 3 and into 10Qs and 10Ks. Do it
now. (Editor: In other words, no more Enron-type accounting
mumbo-jumbo and no more allowing the banks assign their own
"values" to dodgy assets)
2--Force all OTC derivatives onto a regulated exchange similar
to that used by listed options in the equity markets. This
permanently defuses the derivatives time bomb. Give market
participants 90 days; any that are not listed in 90 days are
declared void; let the participants sue each other if they can't
prove capital adequacy.(Ed: If trading derivatives contracts can
damage the "regulated" system, than that trading must take place
under strict government regulations)
3--Force leverage by all institutions to no more than 12:1. The
SEC intentionally dropped broker/dealer leverage limits in 2004;
prior to that date 12:1 was the limit. Every firm that has
failed had double or more the leverage of that former 12:1
limit. Enact this with a six month time limit and require 1/6th
of the excess taken down monthly. (Ed: The collapse in the
"structured finance" model is mainly due to too much leverage.
For example, Fannie Mae and Freddie Mac had $80 of debt for
every $1 dollar od capital reserves when they were taken into
government conservatorship)
If there's going to be a bailout, let's get it right. Paulson's
$700 billion bill does nothing to fix the deep structural
problems in the financial markets; it merely pushes the day of
reckoning a little further into the future while shifting the
burden of payment for toxic assets onto the taxpayer. It's a
real turkey. The entire system needs transformational change so
that the activities of Wall Street mesh with the broader
objectives of the society it's supposed to serve. Paulson's
business-model is busted; it does no one any good to try to glue
it back together.
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