G
Gandalf Grey
Guest
It's Time for Banks to Face the Hangman
By Mike Whitney
Created Oct 18 2007 - 12:14pm
"How can one defend a system that creates wealth by making the majority
poor?"
--Henry C. K. Liu
Officials 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 $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 bets.
The story first appeared in Saturday's Wall Street Journal and was followed
on Monday with a second headline piece:
"RESCUE READIED BY BANKS IS BET TO SPUR MARKET"
WSJ: "The 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."
That's right; 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.
The banks 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 improves.
The 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:
"The 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.
Bloomberg's Mark Gilbert puts it like this:
"It seems the way to reassure investors that it's safe to buy the repackaged
junk that has torpedoed credit markets in recent months is to repackage the
least-junky bits of the junk into more palatable securities. The pyramid
just grew another layer. .
I can't decide whether the Treasury's willingness to patronize such a
misguided effort is evidence that the situation is more desperate than
anyone thought, or a positive sign that financial markets will continue to
evolve and innovate and might eventually wrestle the subprime demon to the
ground."
Indeed.
Where 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".
SIVs 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)
Ever since 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 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 it?
An article 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 YEAR."
The banks 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.
Imagine the 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.
Still, Wall Street nonchalantly leaps from one swindle to the next never
considering the damage it's doing to the credibility of the market.
Susan Pulliam summed it up like this in the Oct 12 edition of The Wall
Street Journal:
"Since 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."
"Hall 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?
Isn't this sufficient evidence that the system is totally out of whack?
Wall Street 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)
"Luring"? Is that how Paulson sees it; like luring turkeys to the chopping
block with a trail of bread crumbs?
The 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.
Presently, the banks are sitting on $200 billion in non-performing
mortgage-backed securities (MBSs) and collateralized debt obligations.
(CDOs) They are 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.
Shouldn't 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?
Now 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.
In the last 2 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.
Equities skyrocketed to new heights. Wall Street was euphoric.
Now we know the truth. It was all baloney.
The 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."
It could "hurt the economy" and "make it tough for homeowners and businesses
to get loans?"
Ahhh, 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.
From the New York Times:
"The conduit (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.
To maintain its credibility with investors from whom it would raising 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 assets."
We already 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.
NY Times: "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."
Of course, 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 PR
face-lift.
Christian 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".
Stracke added, "For me, this is more of a P.R. blitz."
Bingo.
The announcement 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.
Citigroup appears to be the greatest beneficiary of the current plan. They
have a number of Enron-type SIVs which could be at risk.
Again, the 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.
"Structured 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.
The 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.
The 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.
The 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.
An article in China Worker, "Credit Crunch threatens Global Downturn"
summarizes our present predicament it like this:
"Financial 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. While 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'.
The fantasy of financial alchemy transforming high risk gambling into low
risk money-making has now been shattered."
The 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.
The 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
About author Mike Whitney lives in Washington state. He can be reached at
fergiewhitney@msn.com
--
NOTICE: This post contains copyrighted material the use of which has not
always been authorized by the copyright owner. I am making such material
available to advance understanding of
political, human rights, democracy, scientific, and social justice issues. I
believe this constitutes a 'fair use' of such copyrighted material as
provided for in section 107 of the US Copyright
Law. In accordance with Title 17 U.S.C. Section 107
"A little patience and we shall see the reign of witches pass over, their
spells dissolve, and the people recovering their true sight, restore their
government to its true principles. It is true that in the meantime we are
suffering deeply in spirit,
and incurring the horrors of a war and long oppressions of enormous public
debt. But if the game runs sometimes against us at home we must have
patience till luck turns, and then we shall have an opportunity of winning
back the principles we have lost, for this is a game where principles are at
stake."
-Thomas Jefferson
By Mike Whitney
Created Oct 18 2007 - 12:14pm
"How can one defend a system that creates wealth by making the majority
poor?"
--Henry C. K. Liu
Officials 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 $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 bets.
The story first appeared in Saturday's Wall Street Journal and was followed
on Monday with a second headline piece:
"RESCUE READIED BY BANKS IS BET TO SPUR MARKET"
WSJ: "The 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."
That's right; 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.
The banks 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 improves.
The 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:
"The 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.
Bloomberg's Mark Gilbert puts it like this:
"It seems the way to reassure investors that it's safe to buy the repackaged
junk that has torpedoed credit markets in recent months is to repackage the
least-junky bits of the junk into more palatable securities. The pyramid
just grew another layer. .
I can't decide whether the Treasury's willingness to patronize such a
misguided effort is evidence that the situation is more desperate than
anyone thought, or a positive sign that financial markets will continue to
evolve and innovate and might eventually wrestle the subprime demon to the
ground."
Indeed.
Where 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".
SIVs 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)
Ever since 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 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 it?
An article 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 YEAR."
The banks 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.
Imagine the 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.
Still, Wall Street nonchalantly leaps from one swindle to the next never
considering the damage it's doing to the credibility of the market.
Susan Pulliam summed it up like this in the Oct 12 edition of The Wall
Street Journal:
"Since 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."
"Hall 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?
Isn't this sufficient evidence that the system is totally out of whack?
Wall Street 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)
"Luring"? Is that how Paulson sees it; like luring turkeys to the chopping
block with a trail of bread crumbs?
The 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.
Presently, the banks are sitting on $200 billion in non-performing
mortgage-backed securities (MBSs) and collateralized debt obligations.
(CDOs) They are 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.
Shouldn't 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?
Now 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.
In the last 2 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.
Equities skyrocketed to new heights. Wall Street was euphoric.
Now we know the truth. It was all baloney.
The 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."
It could "hurt the economy" and "make it tough for homeowners and businesses
to get loans?"
Ahhh, 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.
From the New York Times:
"The conduit (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.
To maintain its credibility with investors from whom it would raising 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 assets."
We already 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.
NY Times: "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."
Of course, 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 PR
face-lift.
Christian 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".
Stracke added, "For me, this is more of a P.R. blitz."
Bingo.
The announcement 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.
Citigroup appears to be the greatest beneficiary of the current plan. They
have a number of Enron-type SIVs which could be at risk.
Again, the 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.
"Structured 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.
The 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.
The 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.
The 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.
An article in China Worker, "Credit Crunch threatens Global Downturn"
summarizes our present predicament it like this:
"Financial 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. While 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'.
The fantasy of financial alchemy transforming high risk gambling into low
risk money-making has now been shattered."
The 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.
The 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
About author Mike Whitney lives in Washington state. He can be reached at
fergiewhitney@msn.com
--
NOTICE: This post contains copyrighted material the use of which has not
always been authorized by the copyright owner. I am making such material
available to advance understanding of
political, human rights, democracy, scientific, and social justice issues. I
believe this constitutes a 'fair use' of such copyrighted material as
provided for in section 107 of the US Copyright
Law. In accordance with Title 17 U.S.C. Section 107
"A little patience and we shall see the reign of witches pass over, their
spells dissolve, and the people recovering their true sight, restore their
government to its true principles. It is true that in the meantime we are
suffering deeply in spirit,
and incurring the horrors of a war and long oppressions of enormous public
debt. But if the game runs sometimes against us at home we must have
patience till luck turns, and then we shall have an opportunity of winning
back the principles we have lost, for this is a game where principles are at
stake."
-Thomas Jefferson