Swans Commentary » swans.com October 6, 2008  



Blips #74
 From The Martian Desk


by Gilles d'Aymery





"If all the rich people in the world divided up their money among themselves there wouldn't be enough to go around."
—Christina Stead (1903 - 1983)
"A billion here, a billion there, pretty soon it adds up to real money."
—Senator Everett Dirksen (1896 - 1969)


(Swans - October 6, 2008)   THEY CAVED IN, of course, and you should not be particularly surprised. We've had a government of the DOW, by the DOW, and for the DOW -- that is, our masters of finance -- for decades. All the lawmakers in charge of banking committees and the like have been paid off (campaign contributions) by the same financial institutions that they are now trying to bail out, all the while providing a helping hand to the bigger fishes to swallow the weaker ones -- it's called "consolidation." The lawmakers sold this stinky bill of goods by recalibrating their PR messages. "It's not about Wall Street," they said. "It's about Main Street." They went on to explain that the credit arteries have clogged up; that without unclogging them the entire body (the economy) would suffocate; that the sky was falling and if we did not act NOW darkness would set in all over the country and the world, without any possible daylight to come. We owe it to our children and grandchildren to act now so that they may have a future -- education loans, school loans, consumer loans, etc. -- without ever noticing, or refusing to say, that today's burden will be handed over to and carried on by our children and grandchildren and great-grandchildren and great-great-grandchildren. They sold more debts to solve too much debt. To add insult to injury they added $150 billion in sweeteners to the $700 billion bailout package without addressing the underlying causes of this quite possibly manufactured crisis. Heck of a job.

WILL IT WORK and could a different rescue package that includes support for real people on Main Street -- many of them entering Back Street and tent cities -- work? On the first question the evident answer is a howling NO. On the second question, the answer is a resounding YES. Let me explain, but first allow me a little detour.

WHAT'S SO INFURIATING, as I showed in my last Blips, is that the foxes (them) are the ones guarding the henhouse (us). Don't take this as a populist statement. There is no link or relationship between them and us. They are multi-millionaires or billionaires. We are just getting by as well as we can. You do not know any of them. None of us has been invited to their cheery table, not even for a chat. They don't know Main Street. They don't care about Main Street. They care about their living standards and keeping Main Street in check. Why do you think the military is now officially taking over the "well-being" of the population by having 8,000 troops become part of Northcom, ready at a moment's notice to move into any troubled spots in the country (read, rabble's civic disruptions). No conspiracy theories here; just facts -- and the mourning of the posse comitatus. These people are very afraid and want to keep to their hoarding of our money as long as they can. There is much more than meets the eye in this fabricated crisis.

WE WERE TOLD initially that this was a crisis of liquidities that led to the freezing of the credit markets caused by the housing bubble. We were then told that the drop of value in housing led to mortgage defaults, which in turn created "toxic" debts within financial institutions. So, the latest thinking imbedded in the so-called rescue plan (the word "bailout" instigated fear) is that buying the toxic debts from the banking system in the order of $700 billion (and $150 billion in pork) will unclog the arteries of the credit system, bring liquidities back to the system, allow the economy to get back to its good old cycle of more credits (i.e., more debts) to grease the wheels of consumption (i.e., more consumer debts), and may even pay for itself and make money for the taxpayers/investors. What hogwash, what pure, undiluted bullshit!

IT'S THE OTHER WAY AROUND. There is no liquidity problem at all. The Fed and other central banks have injected over 1 trillion dollars since the beginning of the crisis. Money is flying all over the world in the hundreds of billions, if not trillions, of dollars, ready to be invested at a moment's notice when an opportunity raises its head. The dilemma is that there are few or little opportunities to invest in actual wealth creation. All our current masters of finance want to do is to push more debts on over-extended debtors -- the consumers, the common people -- who just cannot carry the burden of their interest-bearing loans and sure enough cannot borrow more as they are already drowning in their ocean of debts and facing steep increases in the price of energy and foodstuff.

TO PURCHASE $700 billion in toxic securities is a drop in the bucket in relation to the tens of trillion of worthless paper flooding the balance sheets of banks all over the world. Banks are not collapsing in the U.S. only. The crisis has reached Europe, where banks are being nationalized in Great Britain, Germany, Belgium, France, the Netherlands... Even little Iceland has had to come to the rescue of one of its banks. We are going to throw good money at bad money and it will disappear in the rat hole, all the while and once again benefiting the very same people who are the origin of this mess -- i.e., Treasury Secretary Hank Paulson intends to put private asset management firms in charge of this superfund created at taxpayer expense. Once again, we open the gate of the henhouse and invite the fox in.

HANK PAULSON may be a very decent man, an avid bird watcher, an environmentalist who has been very generous with his wealth, donating much to conservancy causes, but the fact of the matter is he has been an intrinsic actor in the creation of this financial tsunami, and since becoming Treasury Secretary in July 2006, he has consistently been incorrect * in his statements and analysis. When Paulson became the CEO of Goldman Sachs the investment bank had $20 billion in leveraged debts. By the time he left the firm to join the government that amount had grown to $100 billion. He was dubbed by Business Week "Mr. Risk." (By the way, during that period from 1997 to 2006 he and his fellow Wall Streeters took home close to $155 billion in bonuses, according to the N.Y. State Comptroller -- see "It's a Wall Street bonus bonanza," USA Today December 20, 2006.)

* Whether Paulson's analysis was incorrect or deliberately misleading deserves a separate examination. For purposes of this article, I'll assume the former, though I fear the latter is closer to the truth. These people know what they are doing, and what they are doing is crippling the government's ability to fund social services and bankrupting what remains of the People's power.

MR. RISK came to Washington with great ambitions: Further deregulate the markets so that the magic of compounded interests would do their continued miracles. By 2007, what I had predicted came to pass -- bursting bubble -- but our chief of magical finance was all gung-ho on the future. It was just a small mortgage problem, highly manageable, he averred. By the end of January 2008, as all signs pointed to dire problems, he uttered, "The economy is going to continue to grow" -- the economy was evidently contracting. The $150 billion package of tax rebates that was passed at the time -- remember it was going to solve all the problems -- had no effect whatsoever except increasing the size of our budgetary deficit and our trade imbalance with China. Seven weeks later, when Bear Stearns was gobbled up by JP Morgan with a $29 billion package from the Fed, Mr. Risk was all over the Sunday news shows. Here is what he said on FOX News in response to Chris Wallace's questioning. (I am just highlighting a few of his comments.)

WALLACE: All right. Let me ask you about some specific issues that you're facing and the government is facing today. On Friday, the Federal Reserve helped bail out Bear Stearns, the first time that it has taken such action since the great depression.

Are more Wall Street firms in danger, at risk, of going under?

PAULSON: Chris, I've got great confidence in our financial market, our financial institutions. Our markets are resilient. They're flexible. Our institutions, our banks and investment banks, are strong.

And I am very confident with the help of the regulators and market participants we're going to work our way through this.

WALLACE: But forgive me. If I'd asked you this a week ago, you probably would have said that about Bear Stearns. And the fact is that on Friday, they reached a crisis. They would have gone under if it hadn't been for this huge injection of funds.

So my question is are there other Bear Stearnses out there? Are there other firms at risk of going under?

PAULSON: Chris, what I've said - and I'll just repeat it. I've got confidence in our markets and in our financial institutions. You saw action which I - you know, I've been very involved - you know, been on the phone for a couple days right now helping to work through this.

And there is always a decision that needs to be made and to say what's best for the stability of the marketplace, the orderliness of the marketplace. I think we made the right decision. I think the Federal Reserve made the right decision here.

And again, I don't know what to say other than what I've just said - is we've got strong financial institutions. Our markets are the envy of the world. They're resilient. They're innovative. They're flexible.

I think we move very quickly to address situations in this country. And as I said, our financial institutions are strong.

(That was on March 16, 2008. See the full transcript.)

"OUR MARKETS ARE THE ENVY OF THE WORLD." Yes, he actually said this in March of this year! German chancellor Angela Merkel had this to say about the envy of the world: "We adopted a decent EU regulation on the national statute books," but "when it came to it, the Americans said, 'That's not for us.'" The next fateful error that Mr. Risk made was the decision to let Lehman Brothers fail and declare Chapter 11, instead of immediately suspending the mark-to-market accounting rule in order to calm the markets. That decision led to the stampede that we have witnessed, loss of total confidence in the financial system, and a series of chain reactions that have engulfed Europe. By September, all the New York investment banks had disappeared in one form or the other. A.I.G. had to be bailed out at a cost of $85 billion. Washington Mutual was gone, Wachovia was on its knees, and on and on and on.

TO UNDERSTAND THE absurdity of Paulson's rescue plan or bailout or giveaway, suffice to take the example of A.I.G. The firm received the 24-month $85 billion bridge loan from the Fed on September 16. Just about two weeks later, on October 3, A.I.G. announced it had already burnt through $61 billion of that loan -- in just two weeks! Credit agencies have decided to once again downgrade the credit ratings of the company, which will create another chain of reactions as far as cities like Bochum, Recklinghausen, and Wuppertal in Germany that entered into complex "Cross-Border Leases" (they'd sell their social services to private equity firms, lease them back, and insure the leases with A.I.G.). Every time the firm's credit rating gets downgraded, it must provide additional collateral. In all probability the remaining of the $85 billion loan will be gone in a matter of days. That's the fate awaiting the $700 billion superfund. Mr. Paulson has yet to explain how he and his private-sector advisers will purchase the mortgage-related toxic debts, at what price and from which financial institutions in the U.S. and around the world (the only way to help the balance sheet of the banks is to have the government overpay for these distressed assets). It makes no sense whatsoever, but none of what Mr. Paulson has done professionally over many years has made any sense, except enriching "banksters" on the back of the common people.

HOW CAN WE trust that a man who has been proven so wrong so many times will get it right this time? And how does he think this rat will unclog the arteries of the credit system when we do not have a credit predicament but a huge debt crisis and an underlying foreclosure problem, which he refuses to address in a serious manner? I want to hammer on this one once more: How come I -- a non-expert -- saw and predicted this mess, and he -- an "expert" -- failed to see the dark clouds that were accumulating in the economic and financial skies? And, evidently, I was not alone (go back and read Michael Doliner's March 10 essay, "A Quick Look At The Credit Crisis," which predicted the meltdown all the way to the bailout). Even some powerful people knew and denounced all these shenanigans. Remember Eliot Spitzer from his days as New York State attorney general, and then governor of New York until he was politically assassinated by the US administration and its allies on Wall Street? You do recall that when he was forced to resign last March, Wall Streeters uncorked bottles of champagne and clapped loudly and joyfully.

ELIOT SPITZER had a long history of going after accounting fraud, financial irregularities, inflated stock offers, predatory lending, etc. In 2002 he sued a bunch of investment banks and successfully had ten banks -- Bear Stearns, Credit Suisse First Boston, Deutsche Bank, Goldman Sachs, J.P. Morgan Chase, Lehman Brothers, Merrill Lynch, Morgan Stanley, Salomon Smith Barney, UBS Warburg -- pay $1.4 billion in fines. In 2005, he went after A.I.G. for accounting fraud. He pursued many cases relentlessly and kept alerting the larger public to the extent of the financial disaster in the making. Once elected to the governorship he continued to highlight the abuses that were committed on the Street. His efforts culminated in a February 14, 2008, article in the Washington Post titled "How the Bush Administration Stopped the States From Stepping In to Help Consumers." Here is the introduction:

Several years ago, state attorneys general and others involved in consumer protection began to notice a marked increase in a range of predatory lending practices by mortgage lenders. Some were misrepresenting the terms of loans, making loans without regard to consumers' ability to repay, making loans with deceptive "teaser" rates that later ballooned astronomically, packing loans with undisclosed charges and fees, or even paying illegal kickbacks. These and other practices, we noticed, were having a devastating effect on home buyers. In addition, the widespread nature of these practices, if left unchecked, threatened our financial markets.

Even though predatory lending was becoming a national problem, the Bush administration looked the other way and did nothing to protect American homeowners. In fact, the government chose instead to align itself with the banks that were victimizing consumers.

Predatory lending was widely understood to present a looming national crisis. This threat was so clear that as New York attorney general, I joined with colleagues in the other 49 states in attempting to fill the void left by the federal government.

(The full article is a must read if you want to grasp the order of magnitude of this pathogen. See:

ONE MONTH later he was history, and to make sure that the man keeps silent the Department of Justice keeps dangling a sword of Damocles over his head -- leaving open his possible criminal prosecution for his involvement into a cross-state-borders prostitution scandal. So, he is by all means gagged, but I am certain that were he able to talk, he would clearly demonstrate how much of a fraudulent rat the Paulson rescue plan really is. What is it that Spitzer knew and Paulson didn't? What is it that Paulson does not know today that hundreds of economists know, from Nobel-price winning economist Joseph Stiglitz to Robert Johnson, the chief economist of the Senate banking committee, and so many others? Why is Paulson keeping betting the credit of the United States on trickle-down economics, a policy that has been an abject failure for 30 years? Why is he willing to only take the bad debts off the banks but leave the good debts alone? And last but not least, what's next when the plan turns out to be a lemon? Any Plan B, or C, or D? Anyway, what is this plan? According to Stiglitz:

You throw enough money at Wall Street, and some of it will trickle down to the rest of the economy. It's like a patient suffering from giving a massive blood transfusion while there's internal bleeding; it doesn't do anything about the basic source of the hemorrhaging, the foreclosure problem. But that having been said, it is better than doing nothing, and hopefully after the election, we can repair the very many mistakes in it.

But this particular way of getting it through, I have to say, really smells. They added-you know, the cost was already $700 billion. They added $150 billion of tax benefits. Some of these are really quite, quite amazing, the kinds of things that they put in: tax credit to American Samoan businesses-you mentioned a couple already in your talk-50 percent tax credit for some expenditures or maintaining railroad tracks, motor sports racetrack property given a seven-year recovery period. You can go down the list. What they did was basically old-fashioned, corrupt bribery. They found out-I was joking that they talked about a reverse auction for the-for buying the distressed assets; they had a reverse auction for buying congressmen, and they put in anything they needed to do to get the congressional support for a basically flawed bill.

(Joseph Stiglitz on Democracy Now! -- October 02, 2008.)

STIGLITZ, HOWEVER, falls into the same trap as the many lawmakers who claimed that the plan was "better than doing nothing." Nobody, but a few Hayek die-hards on the Libertarian fringe, has advocated doing nothing. What has been advocated was to focus our bailout efforts on the real underlying problems: consumer debt, foreclosure, investing in the real productive economy. As Bruce Marks, the CEO of the Neighborhood Assistance Corporation of America in Boston, has been clamoring as loudly as he could, "It's the foreclosures, stupid." There are as many as 18 million empty houses and condominiums currently in the U.S. Five million families are potentially facing foreclosure in the coming two years. We must stop this hemorrhage instead of trying to bailout the global financial casino. I called upon a moratorium on home foreclosure and a renegotiation of mortgages of people who lived in their homes (not the speculators) but were facing eviction as early as January 2008 (see my Blips #64).

LET'S PUT these $700 billion into some kind of perspective. When the House rejected the Paulson bill one week ago, the DOW fell almost 778 points, shaving $1.2 trillion off the market in just one day -- almost twice as much as the bailout. Now, here is another perspective from a New York Times reader from Chicago who posted a comment on September 26, 2008:

To keep the atrocity of this in perspective, let's consider what $700B would buy for those of us who are RESPONSIBLE small business owners--those of us that always operate in the black, pay our rightful taxes and employ half of Main Street. $700B is the equivalent of giving EVERY incorporated business in the country $120,000--all 5.8 million of them. That won't go far at Lehman Brothers, but it could do a lot for many of the 4.3 million incorporated businesses with less than 20 employees. $700B is also the equivalent of paying the ENTIRE payroll of EVERY one of those incorporated business in America with less than 20 employees for an ENTIRE year!

If the government wants to save the economy, maybe it should consider investing in the segment of the economy that fuels the economy for most Americans instead of the part that has been draining it for decades.

THAT PERSON who signed just his or her initials, D. N., focused on the real economy, on the people working hard every day to make the economic engine keep going. We are being told that small businesses cannot have access to credit. Well, create a federal lending institution that would lend at very low interest rates part of these $700 billion to the businesses that create productive jobs (that are not consumption driven) and to municipalities for investing on direly needed infrastructure projects. That would go a long way to grease the wheels of our economy.

GO FURTHER, the outstanding mortgage market in the U.S. is worth about $12 trillion. Those $700 billion are the equivalent of 5.83 percent of the total. Now follow me for a second. At present, about one percent of the total is in foreclosure. That's $120 billion. Say the percentage goes up to two or three percent -- that's still only $240 or $360 billion, not $700 billion. When the F.D.I.C. took over IndyMac last July, it immediately imposed a moratorium on foreclosures and renegotiated terms with homeowners. In Philadelphia, PA., the city government implemented a program last June that required that all owner-occupied properties up for foreclosure proceedings have their mortgages reviewed by the lending institutions, the borrowers, AND the Court of Common Pleas. Since then 80 percent of the scheduled foreclosures have been averted. It's a win-win program for all -- the municipality, the borrowers, and the banks. For the banks, forgiving some arrears and renegotiating the loans are cheaper than foreclosure proceedings. For the borrowers it allows them to keep their houses and not join the long lines of distressed people who have lost their jobs, their houses, and find themselves having to live in tent cities that are increasingly being seen all over the country. And of course, for the municipality, it helps stabilize the local housing market and to avoid seeing its resources diverted toward anti-poverty programs. Keep in mind that the actual cost to the taxpayers would be much less than the $120, $240, or $360 billion mentioned above because all of these houses have value. Maybe the total cost would not amount to more that 30 percent of the entire program. Mr. Paulson, at the stroke of his pen, could do much better good for the taxpayers, the American people, and the economy than throwing $700 billion in the rat hole of a US financial sector whose assets were estimated at $62.5 trillion in 2007 and the international banking system.

THE FINANCIAL FUNDAMENTALISTS could easily put an end to this mayhem by suspending the mark-to-market accounting rule, keep short-sellers at bay a while longer, be prepared to stop trading on the Exchange if indexes fall more than a certain percentage in any one day. Finally, our risk takers, our great "innovators," could use their creative geniuses to find a way to annul these huge liabilities that are credit-default swap contracts. Just erase them, annul them. And when they help those institutions with our money they could at least act like Warren Buffet and obtain preferred stocks in those companies and a secure, fixed yearly yield, as Mr. Buffet did with his cash infusions in both Goldman Sachs and General Electric.

SOMETHING ELSE worth considering, and in doing so emulating Warren Buffet: Limit executive compensation to a decent salary -- Mr. Buffet takes home about $165,000 a year and yet is worth almost $50 billion -- and link their good fortunes to the long-term performance of the companies they lead. That should be applied not just to the financial sector but to the whole of corporate America. There is something profoundly inequitable and rotten when, for instance, the executives of the auto-making companies have been paid tens of million of dollars as they drove their companies into the ground, closing factories, laying off hundred of thousands of workers. For too long these people, with a few exceptions, haven't been rewarded for their business acumen and successes but for their failures, and too often for the criminal fraud that has been rampant for the past three decades. For the people who will argue that in such conditions these executives will move to the ski slopes of happy retirement, I'll answer: "Good riddance. There are plenty of decent, honest, knowledgeable, and sophisticated people in America that will be happy to take their place."

TO RECAP, use the taxpayers' monies to help the real economy (small businesses), focusing on productive activities to alleviate the burden of debt of the American people, and to slow down if not fully stop the foreclosure hemorrhage that is crippling our economy and that of the rest of the world. Impose a temporary suspension of the mark-to-market accounting rule. Keep in check short-sellers. Find a way to erase these toxic debts. And don't get blackmailed by Wall Street. When they play the market down, suspend trading of the indexes. Then go to our friends around the world and politely ask them to contribute financially to the bailout of our economy, reminding them that they too benefited from our excesses in consumption. No one in his or her clear mind wants to see the US ship to sink. So let's repair the holes in her keel and stop drilling new ones.

ONCE THE WORST has passed and the financial markets, and the real economy, are stabilized, it will be time to address more fundamental, structural changes, both in the way we do business and in our long-term priorities. From massive investments in alternative energies and energy conservation (taking off the table corn-based biofuels and nuclear plants), to infrastructure, education, and technology, to the much needed single payer system for health care (right there we will be saving over $300 billion a year), to stopping these most destructive wars (over $200 billion a year), bringing our troops home, closing most of our overseas military bases, and cutting the bloated military and so-called "national security" budget (over $1 trillion a year) by at least 75 percent, to nationalizing the Fed (if not the entire financial system), to launching a civic program on the benefits to all of the polity not to incur more debts and get back to a proposition that we ought to all live within our means, to addressing global climate disruptions responsibly (not passing the ball to the next generations), to focusing exclusively on people's needs, not greed, to on and on and on.

I'VE ALREADY gone far beyond my allotted time (and words), but I wish to emphasize that changes can occur...so long as we all understand that we need to throw the bums out and replace these drones with real people. We can do it. I can do it. Ralph Nader and Matt Gonzalez can do it. Can you do it?

FINAL THOUGHT: How do Jan Baughman -- Swans co-editor and partner in life -- and I feel about this ugly happenstance? Well, let's give Mrs. Peggy A. Willens of Brooklyn, New York, the final say (published in The New York Times letters to the editor, October 2, 2008):

I'd like to speak out for those of us who have managed our money sensibly.

Perhaps you know us? We live within our means. When renting makes sense, we rent. We buy homes we can afford, with real down payments and mortgages we can comprehend and predict. We save our money. We invest what we can, in ways we understand.

We pay off credit card balances. We never take out a loan we can't repay. We don't assume that our paycheck will grow. We know the difference between a luxury and a necessity. We see our culture's materialism as a seductive distraction, an invitation to waste and an expensive folly.

And now we have lost a lot of money through no fault of our own. And for years to come, we will be paying for problems caused by others. There are many of us. And we are angry.

INDEED, that's exactly how Jan Baughman and I feel. And I would surmise, though I do not know it for a fact, that Swans contributors do espouse the eloquent words of Mrs. Willens. (They would not contribute to our work if they did not have a sense of solidarity and agreement with our take.)

(NOTE: Print this article and my Blips #73 and mail them to your Representatives in Congress.)

 . . . . .

C'est la vie...

And so it goes...


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Internal Resources

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About the Author

Gilles d'Aymery on Swans (with bio). He is Swans' publisher and co-editor.



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Published October 6, 2008