Every now and then the world is visited by one of these delusive seasons, when the credit system .... expands to full luxuriance: everybody trusts everybody; a bad debt is a thing unheard of; the broad way to certain and sudden wealth lies plain and open; and men are tempted to dash forward boldly from the facility of borrowing. Promissory notes, interchanged between scheming individuals, are liberally discounted at the banks..... Every one now talks in [bodacious amounts]; nothing is heard but gigantic operations in trade; great purchases and sales of real property, and immense sums [are] made at every transfer. All, to be sure, as yet exists in promise; but the believer in promises calculates the aggregate as solid capital..... Now is the time for speculative and dreaming or designing men. They relate their dreams and projects to the ignorant and credulous, dazzle them with golden visions, and set them maddening after shadows. The example of one stimulates another; speculation rises on speculation; bubble rises on bubble; every one helps .... to swell the windy superstructure. Speculation is the romance of trade, and casts contempt upon all its sober realities. It renders the [financier] a magician, and the Exchange a region of enchantment..... No operation is thought worthy of attention that does not double or treble the investment. No business is worth following that does not promise an immediate fortune..... The subterranean garden of Aladdin is nothing to the realms of wealth that break upon [the] imagination. Could this delusion always last, .... life .... would indeed be a golden dream; but it is as short as it is brilliant.
~ Washington Irving (1783-1859) in Crayon Papers about the Mississippi Bubble of 1719. As related by Dallas Fed's Richard Fisher.
28 September 2008
rasipedia - The mad monk on the scromage ahead
UPDATED RASIPEDIA (9-26-08):
Table of Contents:
Section 1: The correct fiatsco amount (currently as of 9-26-08) of the "Hanktator Act" bailout bill
Section 2: Timeline of "Fannie/Freddie Big Bang" leading to worldwide, systemic financial collapse
Section 3: What will happen if the "Hanktator Act" is not enacted
Section 4: The four questions that were never asked during the Congressional hearings on the "Hanktator Act"
Section 5: Layman's explanation of the systemic, worldwide financial collapse
Section 6: Special section: The Fed's unprecedented move to backstop the entire $4 trillion money market fund sector
Section 7: All government and central bank efforts to date to combat the systemic global financial system collapse
Individual Sections of the Rasipedia:
Section 1: the correct fiatsco amount (currently, as of 9-26-08 and subject to change at any moment) of the Hanktator Act":
According to WSJ blog, found here:
How long will this limitation last before being DC wakes up and figures out it will cause instant "Great Depression II"?
...the "Infinite Fiat" provision of the "Hanktator Act" has been removed and the text changed to the following:
"4. Funding Authority
a. Treasury Secretary's request for $700 billion is authorized, with $250 billion available immediately and an additional $100 billion released upon his or her certification that funds are needed
b. final $350 billion is subject to a Congressional joint resolution of disapproval"
...which translates to:
NO LONGER a rolling pool, whereby TRILLIONS of fiatscos worth of dead assets would have been launderd through and the losses handed to the taxpayer.
Now, Congress will "dole out" the fiatscos to Hanktator, with accountiblity along the way having to be shown by Hanktator to his overseers on Capitol Hill.
(Ras Note):If this new provision is allowed to stay in the bill, then it's "Game Over" instantly for the world's financial system because multiple trillions of fiatscos are needed to try to resurrect all the failed players holding the dead "assets". So, look for this provision to be changed.
Otherwise we are scroomed.
And Hanktator knows it.
Section 2: Timeline of "Fannie/Freddie Big Bang" leading to worldwide, systemic financial collapse
In order to help put into context the swiftly-moving events surrounding this systemic, worldwide financial collapse, below is a timeline of the "Fannie/Freddie Big Bang" that touched off the derivatives implosion, which is why so many instituions failed simultaneously, worldwide.
To wit:
Timeline of "Fannie/Freddie Big Bang" CDS implosion, leading to current total, systemic, global financial collapse:
1. September 7th, 2007: Treasury takes over the failed Fannie and Freddie and FHLBs.
2. September 7th, 2008: All counterparties to the multiple tens-of-trillions of fiatscos of CDS positions are instantly vaporized. (They immediately start failing that very week).
3. September 8th, ISDA issues an emergency press release confirming that there are huge (but undisclosed) amounts of CDS trades outstanding on Fannie/Freddie debt. Calls for emergency conference call with Federal Reserve New York in attendance
4. September 8th to present: The failed gamblers scramble to construct a list of the failed trades.
5. September 16th: The Fed, feds, and ISDA step in and try one last ditch attempt to make a market in all the destroyed derivatives positions during the emergency "ISDA Sunday Swap Meet", which is a complete, abject, utter failure
6. Immediately after this failed "Sunday Swap Meet", the following players instantly are ruined (but not all topple over immediately) :
a. Lehman Brothers
b. Merrill Lynch
c. AIG
d. Morgan Stanley
e. Goldman Sachs
f. (Update): WaMu topples less than three weeks later
And the Grand Total of just the top financial institution failures so far:
1. Fannie Mae failed ($2.5 tril.)
2. Freddie Mac failed ($2.5 tril.)
3. FHLB system failed ($1.3 tril)
5. Merril failed (.8 tril)
4. Lehman failed ($.7 tril)
5. AIG failed ($500 bil. in CDS)
6. Goldman Sachs effectively failed ($2 tril)
7. Morgan Stanley effectively failed ($1.5 tril)
8. WaMu failed ($300 billion)
Sub Total: Approximately $12.3 trillion
Time-frame: Approximately three weeks.
But also vaporized, were virtually every:
1. Hedge fund
2. Pension fund
3. Insurance fund
4. Mutual fund
5. Money Market fundboth in the U.S. and in all other major countries, worldwide.
Sub Total: Who knows? Probably trillions more
ALSO vaporized, and even more dangerously so:
1. Some percentage of the $62 trillion credit default swaps market
2. Some percentage of the $650 trillion overall derivatives markets
Sub Total: Who knows? I don't even want to guess anymore.
Section 3: What will happen if the "Hanktator Act is not enacted
Not passing the "Hanktator Act" will cause the near instantaneous collapse of:
1. All bank accounts by 95%
2. All 401(k)/IRA/mutual fund/money market fund by the same amount
3. Collapse of all McMansion prices by at least 70%
4. No more car loans or other loans for five years, or at interest rates that would be outrageously expensive.
5. A virtual guarantee that tens of millions would be thrown out of work
However, even when the "Hanktor Act" is passed, these horrid events probably won't be prevented, just delayed for a few weeks to months.
Section 4: The four questions that were never asked during the Congressional hearings on the "Hanktator Act"
The four questions that were never asked during the Congressional hearings on the "Hankzooka Act" are:
1. Of WHAT exactly do all these instruments consist? (Categorically: MBS, CDOs/Squareds/Cubeds, CDS, other derivativtes)
2. Exactly WHO is holding them?:
3. WHAT are the actual, verifiable, CASH FLOWS on the instruments that the destroyed financial sector are trying to foist on the American taxpayer?
3.(a) WHAT is a reasonable estimate of the "worth" of these assets, based upon number 3 above?
4. WHAT "assets" has the Federal Reserve accepted in exchange for the fiat/Treasuries flung under the various "TAF-like" programs? From WHOM has the Fed accepted these "assets?" WHAT is the cashflow from these "assets?" At WHAT price did the Fed value these "assets"? Will the Fed be swapping these "assets" back out to the players with whom they did these deals? (And then will the players be dumping these assets onto the Treasury under the "Hanktator Act"?)
(Ras): Four simple questions. The truthful answers to which would instantly collapse our entire economy and financial system even more so than it already has.
Which is why we haven't heard them asked, nor will we hear them answered.
Section 5: Layman's explanation of the systemic, worldwide financial system collapse
Layman's explanation of our situation:
1. The current "Ponzi Pyramid of Death" monetary system is crumbling.
2. Right now, virtually every single large bank, medium-sized bank, hedge fund, pension fund, mutual fund, money market fund, stock broker and insurance company has failed or is failing. All the phony paper they have been trading back and forth is virtually worthless.
3. Somewhere between $10-$20 TRILLION (estimates are hard to make due to the opaque nature of the derivatives markets) in debt and derivatives "value" has been wiped off the books of the above-mentioned players.
4. The players are failing left-and-tight. ALL of the biggest, oldest Wall Street banks, plus the largest insurance company plus the two largest mortgage companies (Fannie and Freddie), plus the entire money market, plus the largest S&L, allfailed in the span of three weeks. The rest of the thousands of institutions worldwide are mortally wounded will be toppling over soon.
5. Governments and central banks worldwide have already pumped approximately $5 trillion collectively to date to fight this systemic, sychronized, worldwide, complete, utter collapse. So far, their efforts have failed.
6. At this point, the fight will continue to the death. During these next few weeks, months, and even years the "economic convulsions" between the "Ponzi Pyramid" debt collapse destruction-deflation and government and central bank reflation/monetization/nationalization efforts will rage, with the back-and-forth battles getting wilder and wilder, until:
7. The entire world is plunged into financial demise, with the people of all the nations suffering mightily. "Great Depression II" will ensue for the next five to ten years.
8. During this time, if the world doesn't blow itself up in all the wars that will surely follow, tens of millions of people in the U.S. are going to learn to fear debt and living beyond their means. This is a good thing.
9.Eventually, hopefully, the U.S. pulls through in one piece, the people's stock, bond, and housing assets are decimated, many have lost their jobs, but we all learn discipline, humility and sobriety and as a result, our national character grows.
10. We come through chastened and humble. Exactly what we need.
Section 6: Special section: The Fed's unprecedented move to backstop the entire $ trillion money market fund sector
The Fed's unprecedented move to backstop all Money Market funds:
First, a link to the Fed's "Interim Final Rule" on their loaning to the failed financial institutions enough fiatscos to try to revive the moribund ABCP scheme:
But we''re not desperate or anything. We just thought we''d do this outta the blue, on a Friday morning, because we weren''t very busy
Now, the KEY phrase from this document is this (with my emphasis added):
"To reduce liquidity and other strains being experienced by money market mutual funds, the Federal Reserve System adopted on September 19, 2008, a special lending facility that enables depository institutions and bank holding companies to borrow from the Federal Reserve Bank of Boston on a NON-RECOURSE basis if they use the proceeds of the loan to purchase certain types of asset-backed commercial paper (ABCP) from money market mutual funds (ABCP Lending Facility)."
Did you catch that part about "non-recourse"?
Do you know what that means?
Well, it means that when--not if--the ABCP the institutions hand the Fed in return for freshly-flung fiatscos goes bad, then THE FED WILL JUST EAT THE LOSS AND NOT, I REPEAT NOT, TRY TO RECOVER THE FIATSCOS FROM THE INSITUTIONS!!!
Section 7: All government and central bank efforts to date to combat the systemic, global financial system collapse
Government and CentralBank efforts from March, 2008 to present to fight Financial Collapse:
The sum, fiatsco-wise and in terms of actual actions, of the efforts of the various TPTB branches to fight the debt destruction convulsions and the related costs incurred to do so (so far).
To wit:
Federal Reserve efforts undertaken in the last one and one-half years to fight the credit collapse:
1. Dropped Fed Funds rates 325 basis points, some of these moves being surprise rate cuts.
2. Also pounded down discount rates by similar amounts and means.
3. Created unprecedented, even borderline Constitution-contravening, multi-hundred-billion fiatsco TAF, TSLF, PDCF,"Fed,LLC", "Fed, AIG", "Fed Euro-swap" programs Then, extended time-frames, amounts and frequency of many of those programs.
4. Instituted the stunning "Fed-FDIC" program on Friday, September 19th, whereby the Fed backstops ALL money market funds (total fiatsco exposure amount: over $4 trillion by itself), accepting worthless ABCP paper with NO-RECOURSEto try to stop a run on the funds by panicked bagholders.
5. Accepted hundreds and hundreds of billions (and now perhaps trillions) of fiatscos of totally dead "assets" from failed Wall Street firms and will not disclose what those "assets" are, nor from whom they were accepted.
6. Offered JPM "sweatheart loan" as part of Lehman liquidation
7. Suspended "Rule 23(a)", allowing commercial banks to fling fiatscos to their failed investment banking arms
8. Began outright purchases of Agency debt on Friday, September 19th
9. Allowed Goldman Sachs and Morgan Stanley to--with no waiting period--change from investment banks into commercial banks. Changed "rules" so that Morgan Stanley can continue to perform investment banking functions. Changed the "rules" regarding minority ownership of these giants
10. Did a special $25 billion "TAF" to Goldman and Morgan
11. Raised "SOMA" account credit limits by 25% from $3 billion to $4 billion
(Total liquidity/reflation/monetization effort costs on the part of the Fed):
Hundreds of billions of fiatscos, to literally trillions of fiatscos, depending on how much more fiat they are willing to fling to prop the money market funds and other failures, but I will only estimate $1.25 trillion so far.
(Ras): That is one impressive list of accomplishments by the Fed in their battle against the debt destruction convulsions. Breaking all previous rules, precedents and protocols, the Fed is well on its way to playing out Bernanke''s promised "Roadmap to Weimar" as laid out in his famous 2002 speech:
"Deflation: Making Sure it Doesn''t Happen Here".
However, these stunning, creative, and even nefarious moves on the part of the Federal Reserve don''t represent the total effort by TPTB to stave off economic collapse.
Far from it.
Next we will focus on the Treasury/Administration/SEC/FDIC gang''s efforts and see just what rabbits they have pulled out of their collective hats. Trust me, they have produced an entire litter of "reflation bunnies" in their attempts to keep this collapsing system intact.
And here they are:
Treasury/Administration/Congress/SEC/FDIC efforts:
1. Congress proffered "Economic Stimulus Checks for Sheeple" program of $150 billion
2. Treasury floated various failed "Super SIV" programs before turning to the "big gun" efforts described below
3. Treasury (Hank Paulson) demanded, and received, from Congress an $800 billion (so far) "Bazooka" to nationalize Fannie, Freddie, FHLBs.
4. Within six-weeks, Hank used that bazooka to take over the GSEs, injecting an initial $200 billion into these fallen frauds and also instituted a Federal Reserve-like function of monetizing GSE MBS. Also, offering "liquidity" for MBS
5. Treasury pulled off two emergency funding Treasury auctions totalling $200 billion to give Federal Reserve more ammo to fire at collapsing financial institutions worldwide
6. Treasury demanded "Hanktator" emergency legislation from Congress, giving Treasury literally dictatorial powers over the entire financial system. Further demanded authority to keep shuffling dead assets from Wall Street banks into government (and taxpayer''s) lap
7. Treasury/FDIC/SEC rranged "shotgun weddings" between failed Wall Street banks, commercial banks and major mortgage originators
8. On Friday,September 19th., Treasury announced they were turning the GSEs loose to once again start snapping up dead MBS from the failed financial system
9.The FDIC quietly allowed banks and S&Ls to practice "foreclosure forebearance" which gives these failed institutions the authority to pretend that all their deadbeat real estate loans are "performing". Also, have quietly shut down or married off failed banks (And are just beginning this last effort, with perhaps thousands more to go.)
10.The SEC ruled that "Short-Selling Seditionists" are a financial threat and released a 799-member "untouchable" list of failed financial institutions which cannot be shorted. This action came after a smaller version of same was instituted in July. Have continually added to this list, including many non-financial stocks.
11. The FDIC arranged an unusual THURSDAY NIGHT takeover of WaMu, dealing off its deposits to JPM. Additionally, and no surprise at all, WaMu's derivatives positions were also transferred to JPM.
12. FDIC decided that the collapse of WaMu did NOT constitute a "Credit Default" therefore no CDS payments need be triggered. This is a HUGE event because the FDIC just basically negated ALL CDS contracts, in my opinion.
What kind of monkey wrench this will throw into the $62 trillion CDS machine/monster (now having shrunk an alarming $4 trillion in a very short time, as noted by ISDA) is anybody's guess. But MY guess is that this maneuver could result in chaos in the CDS markets because the players were operating under one set of rules and now those rules have been thrown out the window.
For instance, how does one value CDS contract where they have bought "protection" on an underlying instrument and, even when a "credit event" as spelled out in the contract (assuming there IS a contract, which is always "iffy" with these CDS gamblers) that protection is arbitrarily declared "null and void" by the regulators?
We shall shortly see how this sudden shifting of the rules plays out going forward.
(Total nationalization/stimulus/reflation effort costs on the part of Treasury):
Estimated $2.3-plus trillion so far, with open-ended commitment going forward.
(Ras):Once again I have to confess pure,unbridled shock and awe at the impressive array of weapons that this particular branch of TPTB has amassed--and used--in their battle against the evil forces of deflationary debt collapse convulsions.
Yet, despite outlining the above massive and unprecedented steps taken, we''ve not yet completed our quest to document all TPTB''s powers and programs undertaken to date.
Let us do so now:
Congressional efforts:
1. Passed the proposed $150 billion "economic stimulus" program suggested by Treasury/Administration
2. Passed the "Save the Homedebting Sheeple Act" with an estimated cost of $300 billion (but will surely be much more)
3. Then tacked on the "Bazooka" provision to allow Treasury to nationalize Fannie/Freddie for another $800 billion (so far)
4. Are currently wrangling with passing the afore-mentioned "Hanktator" act, giving Treasury unprecedented dictatorial powers over the failed financial system and perhaps multiple-trillions of fiatscos to do so.
5. Just passed $25 billion aid to auto manufacturers
(Total stimulus/reflation effort costs on the part of Congress, avoiding double-counting costs already attributed to Fed/Treasury above):
$300 billion to $1 trillion.
(Grand Total ALL Reflation/Nationalization/Monetization Costs to Date, U.S. only):
Approximately $ 4 trillion. So far.
(Grand Total ALL Reflation/Nationalization/Monetization Costs to Date, worldwide):
Approximately $ 5 trillion. So far.
Table of Contents:
Section 1: The correct fiatsco amount (currently as of 9-26-08) of the "Hanktator Act" bailout bill
Section 2: Timeline of "Fannie/Freddie Big Bang" leading to worldwide, systemic financial collapse
Section 3: What will happen if the "Hanktator Act" is not enacted
Section 4: The four questions that were never asked during the Congressional hearings on the "Hanktator Act"
Section 5: Layman's explanation of the systemic, worldwide financial collapse
Section 6: Special section: The Fed's unprecedented move to backstop the entire $4 trillion money market fund sector
Section 7: All government and central bank efforts to date to combat the systemic global financial system collapse
Individual Sections of the Rasipedia:
Section 1: the correct fiatsco amount (currently, as of 9-26-08 and subject to change at any moment) of the Hanktator Act":
According to WSJ blog, found here:
How long will this limitation last before being DC wakes up and figures out it will cause instant "Great Depression II"?
...the "Infinite Fiat" provision of the "Hanktator Act" has been removed and the text changed to the following:
"4. Funding Authority
a. Treasury Secretary's request for $700 billion is authorized, with $250 billion available immediately and an additional $100 billion released upon his or her certification that funds are needed
b. final $350 billion is subject to a Congressional joint resolution of disapproval"
...which translates to:
NO LONGER a rolling pool, whereby TRILLIONS of fiatscos worth of dead assets would have been launderd through and the losses handed to the taxpayer.
Now, Congress will "dole out" the fiatscos to Hanktator, with accountiblity along the way having to be shown by Hanktator to his overseers on Capitol Hill.
(Ras Note):If this new provision is allowed to stay in the bill, then it's "Game Over" instantly for the world's financial system because multiple trillions of fiatscos are needed to try to resurrect all the failed players holding the dead "assets". So, look for this provision to be changed.
Otherwise we are scroomed.
And Hanktator knows it.
Section 2: Timeline of "Fannie/Freddie Big Bang" leading to worldwide, systemic financial collapse
In order to help put into context the swiftly-moving events surrounding this systemic, worldwide financial collapse, below is a timeline of the "Fannie/Freddie Big Bang" that touched off the derivatives implosion, which is why so many instituions failed simultaneously, worldwide.
To wit:
Timeline of "Fannie/Freddie Big Bang" CDS implosion, leading to current total, systemic, global financial collapse:
1. September 7th, 2007: Treasury takes over the failed Fannie and Freddie and FHLBs.
2. September 7th, 2008: All counterparties to the multiple tens-of-trillions of fiatscos of CDS positions are instantly vaporized. (They immediately start failing that very week).
3. September 8th, ISDA issues an emergency press release confirming that there are huge (but undisclosed) amounts of CDS trades outstanding on Fannie/Freddie debt. Calls for emergency conference call with Federal Reserve New York in attendance
4. September 8th to present: The failed gamblers scramble to construct a list of the failed trades.
5. September 16th: The Fed, feds, and ISDA step in and try one last ditch attempt to make a market in all the destroyed derivatives positions during the emergency "ISDA Sunday Swap Meet", which is a complete, abject, utter failure
6. Immediately after this failed "Sunday Swap Meet", the following players instantly are ruined (but not all topple over immediately) :
a. Lehman Brothers
b. Merrill Lynch
c. AIG
d. Morgan Stanley
e. Goldman Sachs
f. (Update): WaMu topples less than three weeks later
And the Grand Total of just the top financial institution failures so far:
1. Fannie Mae failed ($2.5 tril.)
2. Freddie Mac failed ($2.5 tril.)
3. FHLB system failed ($1.3 tril)
5. Merril failed (.8 tril)
4. Lehman failed ($.7 tril)
5. AIG failed ($500 bil. in CDS)
6. Goldman Sachs effectively failed ($2 tril)
7. Morgan Stanley effectively failed ($1.5 tril)
8. WaMu failed ($300 billion)
Sub Total: Approximately $12.3 trillion
Time-frame: Approximately three weeks.
But also vaporized, were virtually every:
1. Hedge fund
2. Pension fund
3. Insurance fund
4. Mutual fund
5. Money Market fundboth in the U.S. and in all other major countries, worldwide.
Sub Total: Who knows? Probably trillions more
ALSO vaporized, and even more dangerously so:
1. Some percentage of the $62 trillion credit default swaps market
2. Some percentage of the $650 trillion overall derivatives markets
Sub Total: Who knows? I don't even want to guess anymore.
Section 3: What will happen if the "Hanktator Act is not enacted
Not passing the "Hanktator Act" will cause the near instantaneous collapse of:
1. All bank accounts by 95%
2. All 401(k)/IRA/mutual fund/money market fund by the same amount
3. Collapse of all McMansion prices by at least 70%
4. No more car loans or other loans for five years, or at interest rates that would be outrageously expensive.
5. A virtual guarantee that tens of millions would be thrown out of work
However, even when the "Hanktor Act" is passed, these horrid events probably won't be prevented, just delayed for a few weeks to months.
Section 4: The four questions that were never asked during the Congressional hearings on the "Hanktator Act"
The four questions that were never asked during the Congressional hearings on the "Hankzooka Act" are:
1. Of WHAT exactly do all these instruments consist? (Categorically: MBS, CDOs/Squareds/Cubeds, CDS, other derivativtes)
2. Exactly WHO is holding them?:
3. WHAT are the actual, verifiable, CASH FLOWS on the instruments that the destroyed financial sector are trying to foist on the American taxpayer?
3.(a) WHAT is a reasonable estimate of the "worth" of these assets, based upon number 3 above?
4. WHAT "assets" has the Federal Reserve accepted in exchange for the fiat/Treasuries flung under the various "TAF-like" programs? From WHOM has the Fed accepted these "assets?" WHAT is the cashflow from these "assets?" At WHAT price did the Fed value these "assets"? Will the Fed be swapping these "assets" back out to the players with whom they did these deals? (And then will the players be dumping these assets onto the Treasury under the "Hanktator Act"?)
(Ras): Four simple questions. The truthful answers to which would instantly collapse our entire economy and financial system even more so than it already has.
Which is why we haven't heard them asked, nor will we hear them answered.
Section 5: Layman's explanation of the systemic, worldwide financial system collapse
Layman's explanation of our situation:
1. The current "Ponzi Pyramid of Death" monetary system is crumbling.
2. Right now, virtually every single large bank, medium-sized bank, hedge fund, pension fund, mutual fund, money market fund, stock broker and insurance company has failed or is failing. All the phony paper they have been trading back and forth is virtually worthless.
3. Somewhere between $10-$20 TRILLION (estimates are hard to make due to the opaque nature of the derivatives markets) in debt and derivatives "value" has been wiped off the books of the above-mentioned players.
4. The players are failing left-and-tight. ALL of the biggest, oldest Wall Street banks, plus the largest insurance company plus the two largest mortgage companies (Fannie and Freddie), plus the entire money market, plus the largest S&L, allfailed in the span of three weeks. The rest of the thousands of institutions worldwide are mortally wounded will be toppling over soon.
5. Governments and central banks worldwide have already pumped approximately $5 trillion collectively to date to fight this systemic, sychronized, worldwide, complete, utter collapse. So far, their efforts have failed.
6. At this point, the fight will continue to the death. During these next few weeks, months, and even years the "economic convulsions" between the "Ponzi Pyramid" debt collapse destruction-deflation and government and central bank reflation/monetization/nationalization efforts will rage, with the back-and-forth battles getting wilder and wilder, until:
7. The entire world is plunged into financial demise, with the people of all the nations suffering mightily. "Great Depression II" will ensue for the next five to ten years.
8. During this time, if the world doesn't blow itself up in all the wars that will surely follow, tens of millions of people in the U.S. are going to learn to fear debt and living beyond their means. This is a good thing.
9.Eventually, hopefully, the U.S. pulls through in one piece, the people's stock, bond, and housing assets are decimated, many have lost their jobs, but we all learn discipline, humility and sobriety and as a result, our national character grows.
10. We come through chastened and humble. Exactly what we need.
Section 6: Special section: The Fed's unprecedented move to backstop the entire $ trillion money market fund sector
The Fed's unprecedented move to backstop all Money Market funds:
First, a link to the Fed's "Interim Final Rule" on their loaning to the failed financial institutions enough fiatscos to try to revive the moribund ABCP scheme:
But we''re not desperate or anything. We just thought we''d do this outta the blue, on a Friday morning, because we weren''t very busy
Now, the KEY phrase from this document is this (with my emphasis added):
"To reduce liquidity and other strains being experienced by money market mutual funds, the Federal Reserve System adopted on September 19, 2008, a special lending facility that enables depository institutions and bank holding companies to borrow from the Federal Reserve Bank of Boston on a NON-RECOURSE basis if they use the proceeds of the loan to purchase certain types of asset-backed commercial paper (ABCP) from money market mutual funds (ABCP Lending Facility)."
Did you catch that part about "non-recourse"?
Do you know what that means?
Well, it means that when--not if--the ABCP the institutions hand the Fed in return for freshly-flung fiatscos goes bad, then THE FED WILL JUST EAT THE LOSS AND NOT, I REPEAT NOT, TRY TO RECOVER THE FIATSCOS FROM THE INSITUTIONS!!!
Section 7: All government and central bank efforts to date to combat the systemic, global financial system collapse
Government and CentralBank efforts from March, 2008 to present to fight Financial Collapse:
The sum, fiatsco-wise and in terms of actual actions, of the efforts of the various TPTB branches to fight the debt destruction convulsions and the related costs incurred to do so (so far).
To wit:
Federal Reserve efforts undertaken in the last one and one-half years to fight the credit collapse:
1. Dropped Fed Funds rates 325 basis points, some of these moves being surprise rate cuts.
2. Also pounded down discount rates by similar amounts and means.
3. Created unprecedented, even borderline Constitution-contravening, multi-hundred-billion fiatsco TAF, TSLF, PDCF,"Fed,LLC", "Fed, AIG", "Fed Euro-swap" programs Then, extended time-frames, amounts and frequency of many of those programs.
4. Instituted the stunning "Fed-FDIC" program on Friday, September 19th, whereby the Fed backstops ALL money market funds (total fiatsco exposure amount: over $4 trillion by itself), accepting worthless ABCP paper with NO-RECOURSEto try to stop a run on the funds by panicked bagholders.
5. Accepted hundreds and hundreds of billions (and now perhaps trillions) of fiatscos of totally dead "assets" from failed Wall Street firms and will not disclose what those "assets" are, nor from whom they were accepted.
6. Offered JPM "sweatheart loan" as part of Lehman liquidation
7. Suspended "Rule 23(a)", allowing commercial banks to fling fiatscos to their failed investment banking arms
8. Began outright purchases of Agency debt on Friday, September 19th
9. Allowed Goldman Sachs and Morgan Stanley to--with no waiting period--change from investment banks into commercial banks. Changed "rules" so that Morgan Stanley can continue to perform investment banking functions. Changed the "rules" regarding minority ownership of these giants
10. Did a special $25 billion "TAF" to Goldman and Morgan
11. Raised "SOMA" account credit limits by 25% from $3 billion to $4 billion
(Total liquidity/reflation/monetization effort costs on the part of the Fed):
Hundreds of billions of fiatscos, to literally trillions of fiatscos, depending on how much more fiat they are willing to fling to prop the money market funds and other failures, but I will only estimate $1.25 trillion so far.
(Ras): That is one impressive list of accomplishments by the Fed in their battle against the debt destruction convulsions. Breaking all previous rules, precedents and protocols, the Fed is well on its way to playing out Bernanke''s promised "Roadmap to Weimar" as laid out in his famous 2002 speech:
"Deflation: Making Sure it Doesn''t Happen Here".
However, these stunning, creative, and even nefarious moves on the part of the Federal Reserve don''t represent the total effort by TPTB to stave off economic collapse.
Far from it.
Next we will focus on the Treasury/Administration/SEC/FDIC gang''s efforts and see just what rabbits they have pulled out of their collective hats. Trust me, they have produced an entire litter of "reflation bunnies" in their attempts to keep this collapsing system intact.
And here they are:
Treasury/Administration/Congress/SEC/FDIC efforts:
1. Congress proffered "Economic Stimulus Checks for Sheeple" program of $150 billion
2. Treasury floated various failed "Super SIV" programs before turning to the "big gun" efforts described below
3. Treasury (Hank Paulson) demanded, and received, from Congress an $800 billion (so far) "Bazooka" to nationalize Fannie, Freddie, FHLBs.
4. Within six-weeks, Hank used that bazooka to take over the GSEs, injecting an initial $200 billion into these fallen frauds and also instituted a Federal Reserve-like function of monetizing GSE MBS. Also, offering "liquidity" for MBS
5. Treasury pulled off two emergency funding Treasury auctions totalling $200 billion to give Federal Reserve more ammo to fire at collapsing financial institutions worldwide
6. Treasury demanded "Hanktator" emergency legislation from Congress, giving Treasury literally dictatorial powers over the entire financial system. Further demanded authority to keep shuffling dead assets from Wall Street banks into government (and taxpayer''s) lap
7. Treasury/FDIC/SEC rranged "shotgun weddings" between failed Wall Street banks, commercial banks and major mortgage originators
8. On Friday,September 19th., Treasury announced they were turning the GSEs loose to once again start snapping up dead MBS from the failed financial system
9.The FDIC quietly allowed banks and S&Ls to practice "foreclosure forebearance" which gives these failed institutions the authority to pretend that all their deadbeat real estate loans are "performing". Also, have quietly shut down or married off failed banks (And are just beginning this last effort, with perhaps thousands more to go.)
10.The SEC ruled that "Short-Selling Seditionists" are a financial threat and released a 799-member "untouchable" list of failed financial institutions which cannot be shorted. This action came after a smaller version of same was instituted in July. Have continually added to this list, including many non-financial stocks.
11. The FDIC arranged an unusual THURSDAY NIGHT takeover of WaMu, dealing off its deposits to JPM. Additionally, and no surprise at all, WaMu's derivatives positions were also transferred to JPM.
12. FDIC decided that the collapse of WaMu did NOT constitute a "Credit Default" therefore no CDS payments need be triggered. This is a HUGE event because the FDIC just basically negated ALL CDS contracts, in my opinion.
What kind of monkey wrench this will throw into the $62 trillion CDS machine/monster (now having shrunk an alarming $4 trillion in a very short time, as noted by ISDA) is anybody's guess. But MY guess is that this maneuver could result in chaos in the CDS markets because the players were operating under one set of rules and now those rules have been thrown out the window.
For instance, how does one value CDS contract where they have bought "protection" on an underlying instrument and, even when a "credit event" as spelled out in the contract (assuming there IS a contract, which is always "iffy" with these CDS gamblers) that protection is arbitrarily declared "null and void" by the regulators?
We shall shortly see how this sudden shifting of the rules plays out going forward.
(Total nationalization/stimulus/reflation effort costs on the part of Treasury):
Estimated $2.3-plus trillion so far, with open-ended commitment going forward.
(Ras):Once again I have to confess pure,unbridled shock and awe at the impressive array of weapons that this particular branch of TPTB has amassed--and used--in their battle against the evil forces of deflationary debt collapse convulsions.
Yet, despite outlining the above massive and unprecedented steps taken, we''ve not yet completed our quest to document all TPTB''s powers and programs undertaken to date.
Let us do so now:
Congressional efforts:
1. Passed the proposed $150 billion "economic stimulus" program suggested by Treasury/Administration
2. Passed the "Save the Homedebting Sheeple Act" with an estimated cost of $300 billion (but will surely be much more)
3. Then tacked on the "Bazooka" provision to allow Treasury to nationalize Fannie/Freddie for another $800 billion (so far)
4. Are currently wrangling with passing the afore-mentioned "Hanktator" act, giving Treasury unprecedented dictatorial powers over the failed financial system and perhaps multiple-trillions of fiatscos to do so.
5. Just passed $25 billion aid to auto manufacturers
(Total stimulus/reflation effort costs on the part of Congress, avoiding double-counting costs already attributed to Fed/Treasury above):
$300 billion to $1 trillion.
(Grand Total ALL Reflation/Nationalization/Monetization Costs to Date, U.S. only):
Approximately $ 4 trillion. So far.
(Grand Total ALL Reflation/Nationalization/Monetization Costs to Date, worldwide):
Approximately $ 5 trillion. So far.
27 September 2008
Our Financial System is Teetering at the Precipice
For our country's sake, I hope our Washington politicians can work out a mindful financial sector bailout package over the weekend. Not that I am pro-bailout or for government intervention. It's just that our financial system is teetering at the precipice. Last night's federal takeover and “sale” of Washington Mutual, our nation's largest bank failure to date, was yet another major body blow. Confidence has now been shaken so brutally that our policymakers can do little to repair the damage. Yet at this point, stop-gap measures to restrain collapse seem more appealing to me than no measures at all.
The Financial Structure that fueled myriad Credit Bubbles, asset Bubbles, economic Bubbles and overliquefied the entire world is today no longer viable. Wall Street finance is at this point an unmitigated bust, with a few of the “holdout” sectors (i.e. the Credit default market and the hedge fund community) now succumbing. The great Financial Alchemy of transforming endless risky loans into perceived safe and liquid “money”-like instruments has run its historic course. And with risky loans – household, financial sector, business, municipal and speculator – having come to play such a prominent role in the nature of spending and “output”, the near elimination of risky lending will prove a momentous financial and economic development. The U.S. Bubble economy is today in dire straits.
We've reached the point where it has become difficult to secure new borrowing unless one is of quite sound Credit standing. This is the case for individuals seeking to buy automobiles and homes; to afford myriad discretionary and luxury goods and services; to finance educations; or to make the types of big ticket purchases that had been bolstering our Bubble Economy. Lenders are now moving aggressively to cut home equity and Credit card lines. And, importantly, recent developments have significantly tightened Credit Availability for businesses of all sizes. Securitization markets have been largely shut down for awhile now. Now acute stress has incapacitated the money markets.
Unless some dramatic development reverses the current course, it will not be long before a self-reinforcing cycle of company payroll and spending cutbacks takes hold. At the same time, the municipal bond market is in disarray. The economic impact from major cutbacks in state and local government spending will be significant. Today's finance-related economic headwinds are Cat-4 (and gaining) Hurricane Systemic Credit Seizure, compared to last year's Tropical Storm Subprime. Federal Reserve dictated interest rates are extremely low – and the Fed and global central bankers have injected unfathomable amounts of liquidity – yet Credit Conditions have turned the tightest they've been in decades.
Lehman was Major Inflection Point
The Lehman bankruptcy marked a major inflection point in the confidence of contemporary “money.” It was a decisive blow against confidence of money market instruments – the very foundation of our monetary system. “Money” has now tightened significantly for virtually all players that had previously enjoyed cheap short-term financings. This list certainly includes the hedge fund community.
The Lehman bankruptcy also marked a major inflection point in confidence for the various “daisy chain” players involved in intermediating risky loans into contemporary “money.” The market was convinced Lehman was “too big to fail.” Its failure inflicted thousands of market participants with losses – from Primary Reserve Money Fund investors caught with short-term Lehman paper to holders of Lehman's long-term bonds. Investors all over the world were impacted. The hedge fund community suffered mightily. The status of hundreds of billions of derivatives and counterparty obligations was suddenly up in the air or in the hands of the bankruptcy court. And, importantly, huge losses were suffered in the Credit Default Swap marketplace – the marrow of one of history's most spectacular speculative manias.
Trying to add a bit of simplicity to the Complexity of a Credit Market Breakdown, I'll say the Lehman collapse marked a critical inflection point in at least five major respects:
First, the Crisis of Confidence jumped the “firebreak” from risk assets to contemporary “money,” shattering trust in various facets of contemporary finance that were built over decades.
Second, it required the marketplace to reexamine exposures to various direct and indirect counterparty risks, a terminal blow for derivatives markets.
Third, it pushed the Credit default swap marketplace into full-fledged dislocation and instigated a long-overdue regulator onslaught.
Fourth, it decisively burst the “leveraged speculating community”/hedge fund Bubble. This has ushered in another round of problematic de-leveraging and accelerated the reversal of “Ponzi Finance” dynamics.
Fifth, it instilled global fear with respect to the risks of participating in the inter-bank lending market with American institutions.
Basically, the Lehman collapse marked the end of “Wall Street” risk intermediation as a significant component of system financial intermediation. Going forward, Credit growth will be chiefly generated by the banking system, supported by various forms of government backing (Fed, FDIC, Washington bailouts/recapitalizations, etc.), the government-operated GSEs, and various forms of federal government debt issuance. Importantly, this new financial structure will ensure minimal risky lending as well as significantly reduced risk taking. And from a global perspective, I believe newfound fears of lending to the American financial sector marks the beginning of the end of our economy's capacity for trading new financial claims for imports of energy and goods.
Over time the Changed Financial Landscape will have a profound impact on the underlying economic structure. Our economy will have no alternative than to get by on less Credit, less risk intermediation, and fewer imports. In the near-term, the effects will be a rapid and pronounced slowdown our economy's “output.” And while we'll only know over time, I'd bet this new financial structure will allocate much less finance to entrepreneurial activities, productive endeavors and the asset markets – while at the same time providing ample (government-directed) purchasing power to ensure stubborn consumer price inflation.
The Financial Structure that fueled myriad Credit Bubbles, asset Bubbles, economic Bubbles and overliquefied the entire world is today no longer viable. Wall Street finance is at this point an unmitigated bust, with a few of the “holdout” sectors (i.e. the Credit default market and the hedge fund community) now succumbing. The great Financial Alchemy of transforming endless risky loans into perceived safe and liquid “money”-like instruments has run its historic course. And with risky loans – household, financial sector, business, municipal and speculator – having come to play such a prominent role in the nature of spending and “output”, the near elimination of risky lending will prove a momentous financial and economic development. The U.S. Bubble economy is today in dire straits.
We've reached the point where it has become difficult to secure new borrowing unless one is of quite sound Credit standing. This is the case for individuals seeking to buy automobiles and homes; to afford myriad discretionary and luxury goods and services; to finance educations; or to make the types of big ticket purchases that had been bolstering our Bubble Economy. Lenders are now moving aggressively to cut home equity and Credit card lines. And, importantly, recent developments have significantly tightened Credit Availability for businesses of all sizes. Securitization markets have been largely shut down for awhile now. Now acute stress has incapacitated the money markets.
Unless some dramatic development reverses the current course, it will not be long before a self-reinforcing cycle of company payroll and spending cutbacks takes hold. At the same time, the municipal bond market is in disarray. The economic impact from major cutbacks in state and local government spending will be significant. Today's finance-related economic headwinds are Cat-4 (and gaining) Hurricane Systemic Credit Seizure, compared to last year's Tropical Storm Subprime. Federal Reserve dictated interest rates are extremely low – and the Fed and global central bankers have injected unfathomable amounts of liquidity – yet Credit Conditions have turned the tightest they've been in decades.
Lehman was Major Inflection Point
The Lehman bankruptcy marked a major inflection point in the confidence of contemporary “money.” It was a decisive blow against confidence of money market instruments – the very foundation of our monetary system. “Money” has now tightened significantly for virtually all players that had previously enjoyed cheap short-term financings. This list certainly includes the hedge fund community.
The Lehman bankruptcy also marked a major inflection point in confidence for the various “daisy chain” players involved in intermediating risky loans into contemporary “money.” The market was convinced Lehman was “too big to fail.” Its failure inflicted thousands of market participants with losses – from Primary Reserve Money Fund investors caught with short-term Lehman paper to holders of Lehman's long-term bonds. Investors all over the world were impacted. The hedge fund community suffered mightily. The status of hundreds of billions of derivatives and counterparty obligations was suddenly up in the air or in the hands of the bankruptcy court. And, importantly, huge losses were suffered in the Credit Default Swap marketplace – the marrow of one of history's most spectacular speculative manias.
Trying to add a bit of simplicity to the Complexity of a Credit Market Breakdown, I'll say the Lehman collapse marked a critical inflection point in at least five major respects:
First, the Crisis of Confidence jumped the “firebreak” from risk assets to contemporary “money,” shattering trust in various facets of contemporary finance that were built over decades.
Second, it required the marketplace to reexamine exposures to various direct and indirect counterparty risks, a terminal blow for derivatives markets.
Third, it pushed the Credit default swap marketplace into full-fledged dislocation and instigated a long-overdue regulator onslaught.
Fourth, it decisively burst the “leveraged speculating community”/hedge fund Bubble. This has ushered in another round of problematic de-leveraging and accelerated the reversal of “Ponzi Finance” dynamics.
Fifth, it instilled global fear with respect to the risks of participating in the inter-bank lending market with American institutions.
Basically, the Lehman collapse marked the end of “Wall Street” risk intermediation as a significant component of system financial intermediation. Going forward, Credit growth will be chiefly generated by the banking system, supported by various forms of government backing (Fed, FDIC, Washington bailouts/recapitalizations, etc.), the government-operated GSEs, and various forms of federal government debt issuance. Importantly, this new financial structure will ensure minimal risky lending as well as significantly reduced risk taking. And from a global perspective, I believe newfound fears of lending to the American financial sector marks the beginning of the end of our economy's capacity for trading new financial claims for imports of energy and goods.
Over time the Changed Financial Landscape will have a profound impact on the underlying economic structure. Our economy will have no alternative than to get by on less Credit, less risk intermediation, and fewer imports. In the near-term, the effects will be a rapid and pronounced slowdown our economy's “output.” And while we'll only know over time, I'd bet this new financial structure will allocate much less finance to entrepreneurial activities, productive endeavors and the asset markets – while at the same time providing ample (government-directed) purchasing power to ensure stubborn consumer price inflation.
Why President Bush Should Fire Ben Bernanke and Hank Paulson
A Workable, Private Bank Assistance Plan or Why President Bush Should Fire Ben Bernanke and Hank Paulson
September 26, 2008
"We got to start with some other plan, not the Paulson plan."
Senator Richard Shelby (R-AL)
"Most of the banks in the US are not broke, not in trouble, but they don't trust each other because they don't know which banks are bad. We've got to get the bad ones out."
William Seidman
First we want to start with an apology to our friends at Bloomberg News, the AP and anybody else with whom we have discussed the sufficiency of the FDIC's resources over the past several months. We were not clear enough in our description of the cost of resolving the 110 banks we expect to fail between June 30 of this year and July 1, 2009 and how this cost relates to the cash resources available to the FDIC. In fact, the cost of resolving insolvent banks, the visible amount in the Deposit Insurance Fund, and the actual monies available to the FDIC, are not connected at all.
As luck would have it, the takeover of Washington Mutual by JPMorgan Chase (NYSE:JPM) after the close yesterday, an action that will result in no loss to the FDIC or depositors, provides a road map for a workable assistance plan from Washington. Let's first walk through an inventory of the vast financial resources available to the FDIC as it ramps up to handle what is going to be an increasing number of bank resolutions and sales over the next few months, resolutions that will result in losses. Then we'll comment on the impending death of the Paulson plan and provide our view of a workable alternative financed largely by the banking industry and private investors.
Why the FDIC Will Not Run Out of Money
The first line of defense for the insured depositors of US banks is regulatory takeovers and sales such as the WaMu transaction, where the acquirer assumes all deposits and buys all of the assets after a resolution by the FDIC. The FDIC takes no loss and private investors bear whatever risk remains in the assets of the failed bank. The equity and bond holders of WaMu naturally remained with the failed, publicly listed holding company and will be wiped out in bankruptcy. See our previous comment in The IRA about the difference between a bank and a bank holding company from a public company creditor/shareholder perspective ("What is to be Done?: Interview with Bert Ely").
The next line of defense for depositors in US banks is the income of the banking industry. The FDIC has open-ended authority to tax the US banking industry through deposit premiums. While the visible income of the industry is shrinking rapidly due to the diversion of funds into loan loss provisions, in the first half of 2008, provisions ($81 billion) plus net operating income totaled over $100 billion.
Moreover, behind the income of the banking industry is $1.3 trillion in tangible equity capital, a base of support that alone should be sufficient to absorb any losses the industry may generate. While the FDIC may not be able to tax the industry in real time to absorb all of these losses as and when they occur, the fact is that this capital base is the first line of defense for all depositors of all US banks - insured or otherwise.
As the FDIC noted in an open letter to Bloomberg News posted yesterday: "The fund's current balance is $45 billion - but that figure is not static. The fund will continue to incur the cost of protecting insured depositors as more banks may fail, but we continually bring in more premium income. We will propose raising bank premiums in the coming weeks to ensure that the fund remains strong. And, at the same time, we will propose higher premiums on higher risk activity to create economic incentives for poorly managed banks to change their risk profiles. The fund is 100 percent industry-backed. Our ability to raise premiums essentially means that the capital of the entire banking industry - that's $1.3 trillion - is available for support."
A final note on the FDIC's "visible" reserves, the fiscal relationship with the Treasury, and what it means in terms of the safety and soundness of bank deposits from our statement to the media yesterday:
"The FDIC does not and will not run out of money. Like all federal trust funds, the FDIC's insurance 'trust fund' does not exist. The reserves shown in the fund simply evidence the amount of money contributed by the banking industry into the fund. Like all federal trust funds, the cash raised by FDIC insurance premiums goes into the Treasury's general fund. When the agency needs cash, then the Treasury makes the money available. When the positive balance shown in the FDIC insurance fund is depleted, the FDIC simply runs a negative balance with the Treasury, a loan that the banking industry will repay over time. Indeed, the FDIC is preparing to raise the industry's insurance premiums to generate even more cash to deal with the rising levels of bank failures. Also, in the remote chance that the FDIC ever reached the statutory borrowing limit from Treasury, the Congress will simply raise the limit."
Nuff said. And yes David Evans, we still love you.
A Private Sector Alternative to the Paulson Plan
We salute Senator Dick Shelby and the House Republicans for digging in their heels and saying no to the ridiculous proposal from Treasury Secretary Hank Paulson. The Paulson Plan, which was vigorously supported by Fed Chairman Ben Bernanke, never had a chance to work because it starts from a false premise, namely that by allowing banks to swap illiquid assets for Treasury bonds, banks will sell or finance this collateral to make room for new loans.
Anyone who works in the banking industry knows that most large banks have basically shut down new business origination. The managers of these institutions, especially those with solvency issues, are still trying to avoid writing off losses on illiquid assets because they know that to do so will result in a takeover by the FDIC and career death for all of the managers who made these bad decisions. And yet it is precisely a market-based resolution that is in the best interest of the US taxpayer, the economy and the well-managed banks in the US that did not slither into the subprime, derivative swamp.
We are glad to see that President George Bush finally took our advice and invited the two presidential candidates to the White House to discuss the financial crisis. But unfortunately, Bush still does not understand that Paulson, Bernanke and the other incompetent, conflicted former Goldman Sachs (NYSE:GS) banksters and academic economists who populate the US Treasury and Federal Reserve Board (excluding all bank supervision personnel, naturally) are the biggest obstacles to forging a workable plan to help re-liquefy the banking system.
We hear from several sources who were in the room that the meeting between Bush, John McCain (R-AZ) and Barrack Obama (D-IL) quickly devolved into a pissing contest between the two presidential candidates. Obama initially took control of the meeting, this while Nancy Pelosi (D-CA) and Harry Reid (D-NV) sat in silence. McCain then began to mumble something incomprehensible about "a plan" but we see no evidence that the AZ senator has formulated a serious proposal. So nasty and sharp was the exchange between McCain and Obama that President Bush had to get in between the two men. Who says the first debate is going to be delayed?
Just look at the accomplishments of the team of Paulson and Bernanke ("P&B"), the latter of whom has been the craven lap dog of the former GS CEO from day one. The Bear, Stearns fiasco was bad enough, but failing to find a smooth transition to the troubles at Lehman Brothers makes a complete mockery of Paulson's claims to be trying to restore liquidity to the US financial system. Indeed, with friends like Paulson, Bernanke and Barney "Napoleon" Frank (D-MA), why should the American people be afraid of Al-Qaida?
You see, when P&B let Lehman be forced into a bankruptcy filing last week, more was lost than just thousands of jobs and billions of dollars in losses to shareholders and creditors. These losses are, at the end of the day, attributable to SEC Chairman Christopher Cox and the happy squirrels at the FASB. As our friend Brian Wesbury from FT Advisors in Chicago wrote:
"It seems clear that much of the current crisis has been exacerbated by mark-to-market accounting, which has created massive, and unnecessary, losses for financial firms. These losses, caused because the current price of many illiquid securities are well below the true hold-to-maturity value, could have been avoided. The current crisis is actually smaller than the 1980s and 1990s bank and savings and loan crisis, but is being made dramatically worse by the current accounting rules." Amen brother Wesbury.
When Lehman failed, what was left of the CP market, mostly paper issued by prime borrowers, got flushed down the dumper as well. We hear from the channel that once Lehman filed, nearly every prime CP issuer in the US hit their standby lines of credit with various commercial banks. So much for recapitalizing the banking system. We expect that when the Q3 data from the FDIC is released, it will show a precipitous drop in unused credit lines at some of the major domestic and foreign banks domiciled in the US. You think P&B understand this? Dream on.
But there is more. We also hear from some very well-placed sources on Capitol Hill that when the Fed's Board of Governors was presented with an $80 billion price tag for supporting Lehman the day before the bankruptcy filing, there were not five votes at the big Fed table to support the loan. When the Board does not take action, there is no record of the meeting, no transcript, no tape. Several member of the House familiar with the details reportedly will be calling for a forensic investigation of the Fed's internal records, phone and email regarding this non-decision by the central bank. But they key fact is that Ben Bernake could not make the other governors take necessary action to forestall the uncontrolled collapse of Lehman. Recalling the "leadership" role played by every Fed chairman since Arthur Burns, what use is a Fed chairman who can't get five votes when absolutely required?
As a result, it is further suggested, when JPMorgan Chase (NYSE:JPM) presented an ultimatum to Lehman management that weekend, the only choice was bankruptcy. We hear that JPM told Lehman that if they did not file, then JPM was going to put them out of business by closing down their clearing account. To get a sense for the conversation which reportedly occurred between JPM and the doomed broker dealer, recall the scene from the film The Godfather when Robert Duval gives an imprisoned capo under federal protection the option of picking the manner of his own death. Unfortunately and unlike the movie, as JPM eliminated a major investment banking competitor by compelling the suicide of a long-time clearing customer, no surety was provided for the members of the Lehman family.
The tragedy of the failure of Lehman is that by failing to obtain Fed support for an expenditure of $80 billion needed to manage an orderly sale or bank holding company conversion of the still-solvent broker dealer, P&B have created the very crisis of confidence that they now seek to solve via a $700 billion bailout of truly insolvent financial institutions. If this very public act of grotesque incompetence is not sufficient reason for President Bush immediately to demand the resignation of both Hank Paulson and Ben Bernanke, then what actions would be sufficient? How much more damage must P&B commit before President Bush and the republicans in Congress demand their heads?
Fortunately, the takeover of Washington mutual by JPM last night provides the Congress and the other inhabitants of Washington a road map for a truly workable assistance package based on private capital rather than mountains of public debt and moral hazard. As Bill Seidman suggested on CNBC last night, the FDIC, backed by the Fed, OCC and Treasury, must aggressively begin to triage and close insolvent banks, large or small. Once these institutions pass through the cleansing process of an FDIC resolution and receivership, a process that cleans the assets of any legal or other liability, crowds of investors and solvent commercial banks will be waiting on the other side to finance the re-liquefaction of these assets.
We believe that the Congress should provide an initial $500 billion in authority for the new Treasury secretary to direct into capital assistance for solvent financial institutions. Institutions taking such assistance must agree to issue warrants to the Treasury, either against common equity or the upside potential of illiquid but still performing assets on the books of these banks. If these assets are sold, the warrants must convey with the assets so that the Treasury and the taxpayer benefit, at least to some degree from the upside gain as the markets recover.
Likewise, failed assets that are sold out of a resolution by the FDIC may also carry warrants for the Treasury, depending on whether the acquirers are willing to pay close to fair market value or fire sale prices for the assets and assume all insured deposits. In the case of JPM's purchase of WaMu, all depositors are fully protected and there will be no cost to the FDIC's Deposit Insurance Fund, thus no warrant cover is required. This transaction is the optimal model for cleaning up the other bad banks, to paraphrase Bill Seidman, but not all resolutions will work so smoothly and result in no loss to the FDIC.
The key principle we believe must be part of any assistance package approved by the Congress is to try, wherever possible, to keep the troubled assets of the banks in private hands. If the government must take ownership of bank assets, then the FDIC is the proper vehicle to play that role. Apart from the FDIC, which is an independent, self-funded agency, the US government has absolutely no competence when it comes to owning or managing financial assets. The GSE fiasco makes that clear. But by providing the authority for the Treasury to selectively support capital infusions into solvent banks, and the aggressive closure and sale of insolvent banks, we can quickly clean up this latest nightmare on Wall Street and get the US economy back on track.
September 26, 2008
"We got to start with some other plan, not the Paulson plan."
Senator Richard Shelby (R-AL)
"Most of the banks in the US are not broke, not in trouble, but they don't trust each other because they don't know which banks are bad. We've got to get the bad ones out."
William Seidman
First we want to start with an apology to our friends at Bloomberg News, the AP and anybody else with whom we have discussed the sufficiency of the FDIC's resources over the past several months. We were not clear enough in our description of the cost of resolving the 110 banks we expect to fail between June 30 of this year and July 1, 2009 and how this cost relates to the cash resources available to the FDIC. In fact, the cost of resolving insolvent banks, the visible amount in the Deposit Insurance Fund, and the actual monies available to the FDIC, are not connected at all.
As luck would have it, the takeover of Washington Mutual by JPMorgan Chase (NYSE:JPM) after the close yesterday, an action that will result in no loss to the FDIC or depositors, provides a road map for a workable assistance plan from Washington. Let's first walk through an inventory of the vast financial resources available to the FDIC as it ramps up to handle what is going to be an increasing number of bank resolutions and sales over the next few months, resolutions that will result in losses. Then we'll comment on the impending death of the Paulson plan and provide our view of a workable alternative financed largely by the banking industry and private investors.
Why the FDIC Will Not Run Out of Money
The first line of defense for the insured depositors of US banks is regulatory takeovers and sales such as the WaMu transaction, where the acquirer assumes all deposits and buys all of the assets after a resolution by the FDIC. The FDIC takes no loss and private investors bear whatever risk remains in the assets of the failed bank. The equity and bond holders of WaMu naturally remained with the failed, publicly listed holding company and will be wiped out in bankruptcy. See our previous comment in The IRA about the difference between a bank and a bank holding company from a public company creditor/shareholder perspective ("What is to be Done?: Interview with Bert Ely").
The next line of defense for depositors in US banks is the income of the banking industry. The FDIC has open-ended authority to tax the US banking industry through deposit premiums. While the visible income of the industry is shrinking rapidly due to the diversion of funds into loan loss provisions, in the first half of 2008, provisions ($81 billion) plus net operating income totaled over $100 billion.
Moreover, behind the income of the banking industry is $1.3 trillion in tangible equity capital, a base of support that alone should be sufficient to absorb any losses the industry may generate. While the FDIC may not be able to tax the industry in real time to absorb all of these losses as and when they occur, the fact is that this capital base is the first line of defense for all depositors of all US banks - insured or otherwise.
As the FDIC noted in an open letter to Bloomberg News posted yesterday: "The fund's current balance is $45 billion - but that figure is not static. The fund will continue to incur the cost of protecting insured depositors as more banks may fail, but we continually bring in more premium income. We will propose raising bank premiums in the coming weeks to ensure that the fund remains strong. And, at the same time, we will propose higher premiums on higher risk activity to create economic incentives for poorly managed banks to change their risk profiles. The fund is 100 percent industry-backed. Our ability to raise premiums essentially means that the capital of the entire banking industry - that's $1.3 trillion - is available for support."
A final note on the FDIC's "visible" reserves, the fiscal relationship with the Treasury, and what it means in terms of the safety and soundness of bank deposits from our statement to the media yesterday:
"The FDIC does not and will not run out of money. Like all federal trust funds, the FDIC's insurance 'trust fund' does not exist. The reserves shown in the fund simply evidence the amount of money contributed by the banking industry into the fund. Like all federal trust funds, the cash raised by FDIC insurance premiums goes into the Treasury's general fund. When the agency needs cash, then the Treasury makes the money available. When the positive balance shown in the FDIC insurance fund is depleted, the FDIC simply runs a negative balance with the Treasury, a loan that the banking industry will repay over time. Indeed, the FDIC is preparing to raise the industry's insurance premiums to generate even more cash to deal with the rising levels of bank failures. Also, in the remote chance that the FDIC ever reached the statutory borrowing limit from Treasury, the Congress will simply raise the limit."
Nuff said. And yes David Evans, we still love you.
A Private Sector Alternative to the Paulson Plan
We salute Senator Dick Shelby and the House Republicans for digging in their heels and saying no to the ridiculous proposal from Treasury Secretary Hank Paulson. The Paulson Plan, which was vigorously supported by Fed Chairman Ben Bernanke, never had a chance to work because it starts from a false premise, namely that by allowing banks to swap illiquid assets for Treasury bonds, banks will sell or finance this collateral to make room for new loans.
Anyone who works in the banking industry knows that most large banks have basically shut down new business origination. The managers of these institutions, especially those with solvency issues, are still trying to avoid writing off losses on illiquid assets because they know that to do so will result in a takeover by the FDIC and career death for all of the managers who made these bad decisions. And yet it is precisely a market-based resolution that is in the best interest of the US taxpayer, the economy and the well-managed banks in the US that did not slither into the subprime, derivative swamp.
We are glad to see that President George Bush finally took our advice and invited the two presidential candidates to the White House to discuss the financial crisis. But unfortunately, Bush still does not understand that Paulson, Bernanke and the other incompetent, conflicted former Goldman Sachs (NYSE:GS) banksters and academic economists who populate the US Treasury and Federal Reserve Board (excluding all bank supervision personnel, naturally) are the biggest obstacles to forging a workable plan to help re-liquefy the banking system.
We hear from several sources who were in the room that the meeting between Bush, John McCain (R-AZ) and Barrack Obama (D-IL) quickly devolved into a pissing contest between the two presidential candidates. Obama initially took control of the meeting, this while Nancy Pelosi (D-CA) and Harry Reid (D-NV) sat in silence. McCain then began to mumble something incomprehensible about "a plan" but we see no evidence that the AZ senator has formulated a serious proposal. So nasty and sharp was the exchange between McCain and Obama that President Bush had to get in between the two men. Who says the first debate is going to be delayed?
Just look at the accomplishments of the team of Paulson and Bernanke ("P&B"), the latter of whom has been the craven lap dog of the former GS CEO from day one. The Bear, Stearns fiasco was bad enough, but failing to find a smooth transition to the troubles at Lehman Brothers makes a complete mockery of Paulson's claims to be trying to restore liquidity to the US financial system. Indeed, with friends like Paulson, Bernanke and Barney "Napoleon" Frank (D-MA), why should the American people be afraid of Al-Qaida?
You see, when P&B let Lehman be forced into a bankruptcy filing last week, more was lost than just thousands of jobs and billions of dollars in losses to shareholders and creditors. These losses are, at the end of the day, attributable to SEC Chairman Christopher Cox and the happy squirrels at the FASB. As our friend Brian Wesbury from FT Advisors in Chicago wrote:
"It seems clear that much of the current crisis has been exacerbated by mark-to-market accounting, which has created massive, and unnecessary, losses for financial firms. These losses, caused because the current price of many illiquid securities are well below the true hold-to-maturity value, could have been avoided. The current crisis is actually smaller than the 1980s and 1990s bank and savings and loan crisis, but is being made dramatically worse by the current accounting rules." Amen brother Wesbury.
When Lehman failed, what was left of the CP market, mostly paper issued by prime borrowers, got flushed down the dumper as well. We hear from the channel that once Lehman filed, nearly every prime CP issuer in the US hit their standby lines of credit with various commercial banks. So much for recapitalizing the banking system. We expect that when the Q3 data from the FDIC is released, it will show a precipitous drop in unused credit lines at some of the major domestic and foreign banks domiciled in the US. You think P&B understand this? Dream on.
But there is more. We also hear from some very well-placed sources on Capitol Hill that when the Fed's Board of Governors was presented with an $80 billion price tag for supporting Lehman the day before the bankruptcy filing, there were not five votes at the big Fed table to support the loan. When the Board does not take action, there is no record of the meeting, no transcript, no tape. Several member of the House familiar with the details reportedly will be calling for a forensic investigation of the Fed's internal records, phone and email regarding this non-decision by the central bank. But they key fact is that Ben Bernake could not make the other governors take necessary action to forestall the uncontrolled collapse of Lehman. Recalling the "leadership" role played by every Fed chairman since Arthur Burns, what use is a Fed chairman who can't get five votes when absolutely required?
As a result, it is further suggested, when JPMorgan Chase (NYSE:JPM) presented an ultimatum to Lehman management that weekend, the only choice was bankruptcy. We hear that JPM told Lehman that if they did not file, then JPM was going to put them out of business by closing down their clearing account. To get a sense for the conversation which reportedly occurred between JPM and the doomed broker dealer, recall the scene from the film The Godfather when Robert Duval gives an imprisoned capo under federal protection the option of picking the manner of his own death. Unfortunately and unlike the movie, as JPM eliminated a major investment banking competitor by compelling the suicide of a long-time clearing customer, no surety was provided for the members of the Lehman family.
The tragedy of the failure of Lehman is that by failing to obtain Fed support for an expenditure of $80 billion needed to manage an orderly sale or bank holding company conversion of the still-solvent broker dealer, P&B have created the very crisis of confidence that they now seek to solve via a $700 billion bailout of truly insolvent financial institutions. If this very public act of grotesque incompetence is not sufficient reason for President Bush immediately to demand the resignation of both Hank Paulson and Ben Bernanke, then what actions would be sufficient? How much more damage must P&B commit before President Bush and the republicans in Congress demand their heads?
Fortunately, the takeover of Washington mutual by JPM last night provides the Congress and the other inhabitants of Washington a road map for a truly workable assistance package based on private capital rather than mountains of public debt and moral hazard. As Bill Seidman suggested on CNBC last night, the FDIC, backed by the Fed, OCC and Treasury, must aggressively begin to triage and close insolvent banks, large or small. Once these institutions pass through the cleansing process of an FDIC resolution and receivership, a process that cleans the assets of any legal or other liability, crowds of investors and solvent commercial banks will be waiting on the other side to finance the re-liquefaction of these assets.
We believe that the Congress should provide an initial $500 billion in authority for the new Treasury secretary to direct into capital assistance for solvent financial institutions. Institutions taking such assistance must agree to issue warrants to the Treasury, either against common equity or the upside potential of illiquid but still performing assets on the books of these banks. If these assets are sold, the warrants must convey with the assets so that the Treasury and the taxpayer benefit, at least to some degree from the upside gain as the markets recover.
Likewise, failed assets that are sold out of a resolution by the FDIC may also carry warrants for the Treasury, depending on whether the acquirers are willing to pay close to fair market value or fire sale prices for the assets and assume all insured deposits. In the case of JPM's purchase of WaMu, all depositors are fully protected and there will be no cost to the FDIC's Deposit Insurance Fund, thus no warrant cover is required. This transaction is the optimal model for cleaning up the other bad banks, to paraphrase Bill Seidman, but not all resolutions will work so smoothly and result in no loss to the FDIC.
The key principle we believe must be part of any assistance package approved by the Congress is to try, wherever possible, to keep the troubled assets of the banks in private hands. If the government must take ownership of bank assets, then the FDIC is the proper vehicle to play that role. Apart from the FDIC, which is an independent, self-funded agency, the US government has absolutely no competence when it comes to owning or managing financial assets. The GSE fiasco makes that clear. But by providing the authority for the Treasury to selectively support capital infusions into solvent banks, and the aggressive closure and sale of insolvent banks, we can quickly clean up this latest nightmare on Wall Street and get the US economy back on track.
Inevitable financial and economic dislocation
And this gets right to the heart of the matter – where the analytical rubber meets the road. A massive inflation of government obligations; a major government intrusion into all matters financial and economic; and an unprecedented circumvention of free market forces have been unleashed – but to what end? I believe it is a grave predicament that such a rampage of radical policymaking has been unleashed in order to maintain inflated asset markets and to sustain a Bubble Economy. Normally, such desperate measures would be employed only after a crash and in the midst of a major economic downturn – not in efforts specifically to forestall the unwind. Not only will such measures not work, I believe they will only exacerbate today’s already extreme Global Monetary Disorder. They will definitely worsen the inevitable financial and economic dislocation.
I have over the past several years repeatedly taken issue with the revisionist view that had the Fed recapitalized the banking system after the ’29 stock market crash the Great Depression would have been avoided. Some have suggested that $4bn from the Fed back then would have replenished lost banking system capital and stemmed economic collapse. But I believe passionately that this is deeply flawed and dangerous analysis. An injection of a relatively small $4bn would have mattered little. What might have worked – albeit only temporarily – would have been the creation of many tens of billions of new Credit required to arrest asset and debt market deflation and refuel the Bubble Economy. Importantly, however, at that point only continuous and massive Credit injections would have kept the system from commencing its inevitable lurch into a downward financial and economic spiral.
Importantly, market, asset and economic Bubbles are voracious Credit gluttons. I would argue that the system today continues to operate at grossly inflated – Bubble - levels. The upshot of years of Credit excess are grossly distorted asset prices, household incomes, corporate cash flows and spending, government receipts and expenditures, system investment and economy-wide spending and, especially, imports. So to generally stabilize today’s maladjusted system will, as we are now witnessing, require massive government intervention. Enormous government-supported Credit growth will be necessary this year, next year, and the years after that. To be sure, a protracted and historic cycle of Misdirected Credit Runs Unabated.
Today’s efforts to sustain the Bubble Economy create an untenable situation. Washington is now in the process of spending Trillions to bolster a failed financial structure, while focusing support on troubled mortgages, housing, and household spending. Regrettably, this is a classic case of throwing good ‘money’ after bad. Not yet understood by our policymakers, literally Trillions of new Credit will at some point be necessary to finance an epic restructuring of the U.S. economic system. Our economy will have no choice but to adjust to less household spending, major changes in the pattern of spending (i.e. less “upscale” and services), fewer imports, more exports, and less energy consumption. Moreover, our economy must adjust and adapt to being much less dependent on finance and Credit growth – which will require our “output” to be much more product-based as opposed to “services”-based. We’ll be forced to trade goods for goods.
The current direction of Bubble-sustaining policymaking goes the wrong direction in almost all aspects. At some point, the markets will recognize this Bubble Predicament, setting the stage for a very problematic crisis of confidence for the dollar and our federal debt markets.
I have over the past several years repeatedly taken issue with the revisionist view that had the Fed recapitalized the banking system after the ’29 stock market crash the Great Depression would have been avoided. Some have suggested that $4bn from the Fed back then would have replenished lost banking system capital and stemmed economic collapse. But I believe passionately that this is deeply flawed and dangerous analysis. An injection of a relatively small $4bn would have mattered little. What might have worked – albeit only temporarily – would have been the creation of many tens of billions of new Credit required to arrest asset and debt market deflation and refuel the Bubble Economy. Importantly, however, at that point only continuous and massive Credit injections would have kept the system from commencing its inevitable lurch into a downward financial and economic spiral.
Importantly, market, asset and economic Bubbles are voracious Credit gluttons. I would argue that the system today continues to operate at grossly inflated – Bubble - levels. The upshot of years of Credit excess are grossly distorted asset prices, household incomes, corporate cash flows and spending, government receipts and expenditures, system investment and economy-wide spending and, especially, imports. So to generally stabilize today’s maladjusted system will, as we are now witnessing, require massive government intervention. Enormous government-supported Credit growth will be necessary this year, next year, and the years after that. To be sure, a protracted and historic cycle of Misdirected Credit Runs Unabated.
Today’s efforts to sustain the Bubble Economy create an untenable situation. Washington is now in the process of spending Trillions to bolster a failed financial structure, while focusing support on troubled mortgages, housing, and household spending. Regrettably, this is a classic case of throwing good ‘money’ after bad. Not yet understood by our policymakers, literally Trillions of new Credit will at some point be necessary to finance an epic restructuring of the U.S. economic system. Our economy will have no choice but to adjust to less household spending, major changes in the pattern of spending (i.e. less “upscale” and services), fewer imports, more exports, and less energy consumption. Moreover, our economy must adjust and adapt to being much less dependent on finance and Credit growth – which will require our “output” to be much more product-based as opposed to “services”-based. We’ll be forced to trade goods for goods.
The current direction of Bubble-sustaining policymaking goes the wrong direction in almost all aspects. At some point, the markets will recognize this Bubble Predicament, setting the stage for a very problematic crisis of confidence for the dollar and our federal debt markets.
Get a core position in gold and silver
Protection and Profit from
Bailouts Doomed to Fail
by DeepCaster LLC, deepcaster.com | September 26, 2008
Print
Consider Rep. Ron Paul’s wisdom on the Fed/Treasury Proposed Bailout Scheme:
“Whenever a Great Bipartisan Consensus is announced, and a compliant media assures everyone that the wondrous actions of our wise leaders are being taken for our own good, you can know with absolute certainty that disaster is about to strike.
The events of the past week are no exception.
The bailout package that is about to be rammed down Congress' throat is not just economically foolish. It is downright sinister. It makes a mockery of our Constitution, which our leaders should never again bother pretending is still in effect. It promises the American people a never-ending nightmare of ever-greater debt liabilities they will have to shoulder. Two weeks ago, financial analyst Jim Rogers said the bailout of Fannie Mae and Freddie Mac made America more communist than China! "This is welfare for the rich," he said. "This is socialism for the rich. It's bailing out the financiers, the banks, the Wall Streeters."
That describes the current bailout package to a T. And we're being told it's unavoidable.
The claim that the market caused all this is so staggeringly foolish that only politicians and the media could pretend to believe it. But that has become the conventional wisdom, with the desired result that those responsible for the credit bubble and its predictable consequences - predictable, that is, to those who understand sound, Austrian economics - are being let off the hook. The Federal Reserve System is actually positioning itself as the savior, rather than the culprit, in this mess!
The Treasury Secretary is authorized to purchase up to $700 billion in mortgage-related assets at any one time. That means $700 billion is only the very beginning of what will hit us.
Financial institutions are "designated as financial agents of the Government." This is the New Deal to end all New Deals.
Then there's this: "Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency." Translation: the Secretary can buy up whatever junk debt he wants to, burden the American people with it, and be subject to no one in the process.
There goes your country.
Even some so-called free-market economists are calling all this "sadly necessary." Sad, yes. Necessary? Don't make me laugh.
Our one-party system is complicit in yet another crime against the American people. The two major party candidates for president themselves initially indicated their strong support for bailouts of this kind - another example of the big choice we're supposedly presented with this November: yes or yes. Now, with a backlash brewing, they're not quite sure what their views are. A sad display, really.
Although the present bailout package is almost certainly not the end of the political atrocities we'll witness in connection with the crisis, time is short. Congress may vote as soon as tomorrow. With a Rasmussen poll finding support for the bailout at an anemic seven percent, some members of Congress are afraid to vote for it. Call them! Let them hear from you! Tell them you will never vote for anyone who supports this atrocity.
The issue boils down to this: do we care about freedom? Do we care about responsibility and accountability? Do we care that our government and media have been bought and paid for? Do we care that average Americans are about to be looted in order to subsidize the fattest of cats on Wall Street and in government? Do we care?
When the chips are down, will we stand up and fight, even if it means standing up against every stripe of fashionable opinion in politics and the media?
Times like these have a way of telling us what kind of a people we are, and what kind of country we shall be. (emphasis added)
In liberty,
Ron Paul
September 24, 2008"
To determine how to protect and even profit from the recent outrageous Bailouts culminating with the impending Mother of All Bailouts, the TARP (Troubled Assets Rescue Plan) Scheme, it is essential to understand why they are doomed to fail.
The Bailouts are doomed to fail primarily because, if any Bill similar to the original Fed-Treasury proposal passes, the U.S. Treasury (that is to say U.S. Taxpayers) will be encumbered with several trillions of dollars of additional debts for which there is no possible way of paying, other than, ultimately, dramatically debasing the U.S. Dollar.
The Fatal Flaw of the TARP Bailout Scheme is that the average American Taxpayer is already swamped with debt, and adding an even greater debt burden will ensure that defaults will continue and increase. And the defaults will not be limited to mortgages, but will extend to consumer credit card, and commercial loans as well.
Moreover, the Average American Taxpayer/Consumer is about 70% of the U.S. GDP. As the purchasing power and, indeed, solvency of this huge group of Americans is increasingly impaired by increasing debt, the U.S. Economy will be further impelled into a Hyperinflationary Recession, or even Depression.
That is why the proposed TARP Bailout cannot succeed. Just consider what the un-elected Powers-That-Be, led by Ben Bernanke at the private for-profit U.S. Federal Reserve and Hank Paulson at the U.S. Treasury, are attempting to commit (via the TARP Plan) the U.S. Taxpayer directly, and investors and others indirectly, to paying or insuring:
Financial Institutions would be allowed to sell their illiquid “Troubled Assets” to the Treasury in exchange for U.S. Taxpayer-provided cash - - for cash yet!! This cash would be obtained from the Federal Reserve, which prints it for nothing out of thin air, in return for Treasury Securities on which the interest would have to be paid in the future by American Taxpayers. The cost of this delightful plan will potentially be several trillion, and not the original $700 billion, because, inter alia, Taxpayer defaults and diminished purchasing power would continue to increase.
The original Fed/Bush Administration plan was to provide “only” $700 billion to cover mortgage-related securities “at any one time” (i.e. the Secretary could come back for more). The proposal has now been expanded to allow the buying any “troubled assets” (this provision alone would guarantee the U.S. Taxpayer obligations will be at least a trillion dollars).
The Fed indicated they would make de facto unlimited funds available to financial institutions to purchase asset-backed commercial paper for Money Market Funds. The cost of this could be in the hundreds of billions.
The Treasury, in addition, indicated it would secure “up to $50 billion” in distressed Money Market Funds Investments at financial companies. These are the ones that are not FDIC insured. Of course, the $50 billion is just a “starter number.”
The foregoing covers those “Troubled” Mortgage “Assets” and other “Troubled Assets” which were not covered by the earlier combined bailout of Fannie Mae and Freddie Mac. That bailout already will cost at least $1 trillion and probably $2 to $3 Trillion in Taxpayer money, as Deepcaster earlier pointed out.
Taxpayers would also cover the wholly inadequate FDIC insurance reserves. That ultimate liability could be over a Trillion Dollars, if there are, as we expect, 1000 bank failures, as suggested by billionaire Wilbur Ross. Indeed, if as many as half of all the banks in the U.S. could fail (as recently suggested by Ken Lewis of Bank of America), the liability could be even greater. Consider that it took just a couple of days for the Official Estimates of the cost of this FDIC Capitalization Plan to triple from $50 to $150 billion. At that rate of increase…who knows that the ultimate number will be?
As well, Taxpayers and investors will get to pay in spades through the Loss of Purchasing Power via the Hyperinflation that this geyser of Fed money printing will cause. Deepcaster expects M3 to have to go to well over 20% annualized (from its current 14% annualized level, according to shadowstats.com) to cover the “cash” necessary.
As proposed, the Plan would allow the Secretary of the Treasury to pay up to full notional value of the troubled assets, rather than current much diminished, or nonexistent Market Value - - i.e., it would allow payment of “Top Dollar” to the Major Financial Institution beneficiaries even though the Market Value, if any, is Orders of Magnitude less.
The Treasury Secretary’s decisions “would not be reviewable by any court…”
Thus, understandably, as of the date of this writing (Friday, September 26, 2008) the Plan is under severe attack in Congress.
Nonetheless, political pressure ensures that some Plan will be enacted, and will likely contain several of the aforementioned provisions.
Assuming that is so, it is likely the most serious negative consequences of all these planned Bailouts can thus be summarized in two statements:
The Bailouts are in fact Bailouts of Wall Street and certain “favored” Major Financial and other Institutions at the expense of the American Taxpayer and Small Investors and Businesses. This makes a mockery of the free enterprise capitalist system.
It is Socialism for Certain of the Rich: allowing Privatization of Earlier Profits while forcibly Commonizing Current Losses.
Other than enriching the Financial Institutions favored by The Fed and Treasury, The Bailouts cannot succeed because the American Taxpayer who will ultimately be obligated for these additional trillions is sorely financially stressed already.
Since the average American Taxpayer/Consumer is 70% of the U.S. GDP, no Solution can be achieved without a restoration of the Financial Health of those Taxpayers/Consumers. But the American Taxpayer is already facing unemployment of about 14% annualized and Consumer Price Inflation in excess of 13% annualized (shadowstats.com). Consider what those numbers will likely be when Trillions in extra debt is loaded on. Consider how many additional defaults and insolvencies there will be. Bottom line: any Plan at all similar to the one proposed cannot succeed.
Indeed, Deepcaster’s view is that if any Bailout Plan is to be passed, American Taxpayers should insist that they get a better deal than Warren Buffet got when he bought into Goldman Sachs.
A Strategy for Profit and Protection
Normally, (that is to say in a Genuine Free Market situation) the go-to “Safe Haven” Assets in times of Financial Crisis would be the Precious Monetary Metals Gold and Silver, as well as other assets such as Strategic Commodities. We say “normally” because nearly every time another Financial Market Crisis has come prominently into the public eye in recent years The Cartel* of Central Bankers has successfully taken down the price of what would normally be the Safe Haven Assets - - the Precious Monetary Metals. A prime example occurred during the much-publicized demise of Bear Stearns in March, 2008, which was accompanied by a vicious Takedown of Gold and Silver. In a non-manipulated Market, given the fact that Bear Stearns reflected great weaknesses in the Financial System, Gold and Silver should have skyrocketed.
*We encourage those who doubt the scope and power of Intervention by a Fed-led Cartel of Key Central Bankers and favored financial institutions to read Deepcaster’s July, 2008 Letter containing a summary overview of Intervention entitled “Market Intervention, Data Manipulation - - Increasing Risks, The Cartel End Game, and Latest Forecast” at www.deepcaster.com. Also consider the substantial evidence collected by the Gold AntiTrust Action Committee at www.gata.org for information on precious metals price manipulation. Virtually all of the evidence for Intervention has been gleaned from publicly available records. Deepcaster’s profitable recommendations displayed at www.deepcaster.com have been facilitated by attention to these “Interventionals.”
Yet, the September, 2008 Crisis appears to be different. Gold has launched from the mid $700s/oz. to around $900/oz. during the past few days of September, 2008. Similarly, Crude Oil experienced a $25 spike on Monday, September 22, 2008.
So the question is, is it different this time around? Have Gold and Silver finally thrust off the shackles of Cartel Intervention? Or will The Cartel be able once again to cap and take down the prices of these Precious Monetary Metals and Strategic Commodities? Deepcaster has addressed this question in a Forecast he recently issued for the likely fate of Gold, Silver, Crude Oil & the U.S. Dollar in the Alerts Cache at www.deepcaster.com.
One thing is certain: The Cartel will certainly attempt again to take down Gold, Silver and Crude Oil at the earliest opportunity because the Strategic Commodities and Precious Monetary Metals are Competitors as Stores and Measures of Value with the Central Bankers’ Treasury Securities and Fiat Currencies.
Yet there is a Strategy which accommodates Cartel Interventional attempts and at the same time provides excellent Profit Opportunities, whether the Interventional attempts are successful or not.
A major premise of The Strategy is that one can certainly remain a Hard Assets Partisan (as Deepcaster is) while at the same time insulating oneself from future Takedowns. The following points provide an outline of The Strategy (particularly as applied to the Gold and Silver Markets) and are designed to help avoid Portfolio unpleasantness, or even possible financial ruin, in the future, as well as to profit along the way:
Recognize that The Cartel is still Potent, as difficult as that may be psychologically for Deepcaster and other Hard Asset Partisans to acknowledge. The Cartel is still the Biggest Player in many markets and, if the timing and market context are propitious, the Biggest Player makes Market Price. In addition, The Cartel has the advantage of de facto controlling the structure and regulation of various marketplaces and that is a tremendous advantage; just as the Hunt Brothers years ago discovered much to their dismay and misfortune, when they tried to corner the Silver Market.
Accumulate Hard Assets near the Interim Bottoms of Cartel- induced Takedowns.
In order to know when one is near the bottom of a Cartel-generated takedown, it is essential to take account of the Interventionals as well as the Technicals and Fundamentals.
For example, regarding Gold & Silver, near such Interim Bottoms, accumulate a combination of the Physical Commodity (Deepcaster prefers “low premium to melt” bullion coins) and well-managed Juniors with large reserves. (Deepcaster provides a list of such Junior Candidates in our December 20, 2007 Alert “A Strategy for Profiting from Cartel Intervention” available in the Alerts Cache at www.deepcaster.com.) The “Physical” and “Juniors” are for holding for the long-term as a Core Position.
Then, to the extent one wishes to speculate on the next “long” move, one should buy the major producers or long-term call options on them. These latter positions are for ultimate liquidation at the next Interim Top and are not for holding for the long-term.
However, there will be a time when The Cartel price capping is ineffective and Gold & Silver make record moves upward. The benefit of this Strategy is that one will likely be long in one’s speculative positions when this happens.
Near the next Interim Top, liquidate the long options and majors. Again, in order to know when we are close to the next Interim Top, it is essential to monitor the Interventionals, as well as Fundamentals and Technicals.
Near that Top, sell short or buy puts on Majors. We re-emphasize the Majors as preferred vehicles for trading positions because such positions are more liquid and tend to be quite responsive to Cartel moves.
At the next Interim Bottom, cover your shorts and liquidate your puts and go long again to begin the process all over again. We emphasize that it is essential to consider the Interventionals as well as the Fundamentals and Technicals in order to determine the approximate Interim Tops and Bottoms.
Finally, Hard Assets Partisans have the opportunity to become involved in Political Action to diminish the power of the Central Banker Cartel. It is truly outrageous that the average unsuspecting citizen, and prospective retiree, can and does put his hard won assets in Tangible Assets only to have those assets effectively de-valued by Cartel Takedowns. This is extremely injurious to many average citizens in many countries who are saving for the rainy day or retirement and have their retirement and/or reserves effectively taken from them. In order to help prevent this and similar outrages, we recommend taking three steps:
Become involved in the movement to abolish the U.S.
Federal Reserve (a private for-profit Cartel of International Banks) as Deepcaster, ex-Presidential candidate Rep. Ron Paul, and legendary investor Jim Rogers, all have advocated. Rep. Paul has introduced a Federal Reserve Abolition Act, H.R.2755.
Join the Gold AntiTrust Action Committee which works to eliminate the manipulation of the Gold and Silver markets (www.gata.org). GATA is a non-profit organization which makes a great contribution by gathering evidence regarding the suppression of prices of Gold, Silver and other commodities.
Work to defeat The Cartel ‘End Game.’ Deepcaster has laid out the evidence regarding the Ominous Cartel “End Game.” Clearly The Cartel is sacrificing the U.S. Dollar to prop up Favored International Financial Institutions and to maintain its power. But this sacrifice cannot continue forever.
One of several key components of The Cartel’s Ominous “End Game” is the planned replacement of the U.S. Dollar with the Amero. This would give even greater de facto power to the international Cartel of Central Bankers. We encourage readers to review the evidence for the entire multifaceted “End Game” Program in the following: Deepcaster’s Alert of 8/13/06 “Massive Financial Geopolitical Scheme Not Reported by Big Media” and Deepcaster’s June, 2007 Letter “Profiting From the Push to Denationalize Currencies and Deconstruct Nations” - - both available at www.deepcaster.com. Fortunately there is even a resolution in the U.S. Congress that would stop this “End Game” attempt (H.Res.40 - - Goode, R-Va).
Conclusion
The Starting Point for Protection and Profit is to determine how much of one’s investable assets one wishes to have in a Core Position of Gold, Silver and other Tangible Assets and then, importantly, to determine which investment vehicles in which to hold them. This Core Position is truly a long-term position and should represent a significant portion of one’s investable assets.
Regarding deployment of the balance of assets devoted to one’s Tangible Assets Portfolio, we recommend The Strategy outlined above.
Since the cornerstone of The Cartel’s Power lies in maintaining the legitimacy of their Fiat Currencies and Treasury Securities, the last thing they want is to have Gold, Silver and Tangible Assets held by investors as Measures and Stores of Value. In obtaining, and adding to, one’s own Core Position near the bottom of Cartel-induced Takedowns, one not only can help bolster one’s Core Assets for the future, but also can help defeat the Cartel’s nefarious ‘End Game’ initiative.
Essential to this Strategy, of course, is paying close attention to the Interventionals - - such attention has facilitated Deepcaster’s profitable recommendations displayed at www.deepcaster.com. A dramatic side benefit of this strategy is that it helps insulate one against vicious Cartel Takedowns such as the one of March 18-20, 2008.
If this aforementioned Strategy is employed effectively, it can result both in an increasing Core Position in Gold and Silver, and in considerable profit along the way.
Bailouts Doomed to Fail
by DeepCaster LLC, deepcaster.com | September 26, 2008
Consider Rep. Ron Paul’s wisdom on the Fed/Treasury Proposed Bailout Scheme:
“Whenever a Great Bipartisan Consensus is announced, and a compliant media assures everyone that the wondrous actions of our wise leaders are being taken for our own good, you can know with absolute certainty that disaster is about to strike.
The events of the past week are no exception.
The bailout package that is about to be rammed down Congress' throat is not just economically foolish. It is downright sinister. It makes a mockery of our Constitution, which our leaders should never again bother pretending is still in effect. It promises the American people a never-ending nightmare of ever-greater debt liabilities they will have to shoulder. Two weeks ago, financial analyst Jim Rogers said the bailout of Fannie Mae and Freddie Mac made America more communist than China! "This is welfare for the rich," he said. "This is socialism for the rich. It's bailing out the financiers, the banks, the Wall Streeters."
That describes the current bailout package to a T. And we're being told it's unavoidable.
The claim that the market caused all this is so staggeringly foolish that only politicians and the media could pretend to believe it. But that has become the conventional wisdom, with the desired result that those responsible for the credit bubble and its predictable consequences - predictable, that is, to those who understand sound, Austrian economics - are being let off the hook. The Federal Reserve System is actually positioning itself as the savior, rather than the culprit, in this mess!
The Treasury Secretary is authorized to purchase up to $700 billion in mortgage-related assets at any one time. That means $700 billion is only the very beginning of what will hit us.
Financial institutions are "designated as financial agents of the Government." This is the New Deal to end all New Deals.
Then there's this: "Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency." Translation: the Secretary can buy up whatever junk debt he wants to, burden the American people with it, and be subject to no one in the process.
There goes your country.
Even some so-called free-market economists are calling all this "sadly necessary." Sad, yes. Necessary? Don't make me laugh.
Our one-party system is complicit in yet another crime against the American people. The two major party candidates for president themselves initially indicated their strong support for bailouts of this kind - another example of the big choice we're supposedly presented with this November: yes or yes. Now, with a backlash brewing, they're not quite sure what their views are. A sad display, really.
Although the present bailout package is almost certainly not the end of the political atrocities we'll witness in connection with the crisis, time is short. Congress may vote as soon as tomorrow. With a Rasmussen poll finding support for the bailout at an anemic seven percent, some members of Congress are afraid to vote for it. Call them! Let them hear from you! Tell them you will never vote for anyone who supports this atrocity.
The issue boils down to this: do we care about freedom? Do we care about responsibility and accountability? Do we care that our government and media have been bought and paid for? Do we care that average Americans are about to be looted in order to subsidize the fattest of cats on Wall Street and in government? Do we care?
When the chips are down, will we stand up and fight, even if it means standing up against every stripe of fashionable opinion in politics and the media?
Times like these have a way of telling us what kind of a people we are, and what kind of country we shall be. (emphasis added)
In liberty,
Ron Paul
September 24, 2008"
To determine how to protect and even profit from the recent outrageous Bailouts culminating with the impending Mother of All Bailouts, the TARP (Troubled Assets Rescue Plan) Scheme, it is essential to understand why they are doomed to fail.
The Bailouts are doomed to fail primarily because, if any Bill similar to the original Fed-Treasury proposal passes, the U.S. Treasury (that is to say U.S. Taxpayers) will be encumbered with several trillions of dollars of additional debts for which there is no possible way of paying, other than, ultimately, dramatically debasing the U.S. Dollar.
The Fatal Flaw of the TARP Bailout Scheme is that the average American Taxpayer is already swamped with debt, and adding an even greater debt burden will ensure that defaults will continue and increase. And the defaults will not be limited to mortgages, but will extend to consumer credit card, and commercial loans as well.
Moreover, the Average American Taxpayer/Consumer is about 70% of the U.S. GDP. As the purchasing power and, indeed, solvency of this huge group of Americans is increasingly impaired by increasing debt, the U.S. Economy will be further impelled into a Hyperinflationary Recession, or even Depression.
That is why the proposed TARP Bailout cannot succeed. Just consider what the un-elected Powers-That-Be, led by Ben Bernanke at the private for-profit U.S. Federal Reserve and Hank Paulson at the U.S. Treasury, are attempting to commit (via the TARP Plan) the U.S. Taxpayer directly, and investors and others indirectly, to paying or insuring:
Financial Institutions would be allowed to sell their illiquid “Troubled Assets” to the Treasury in exchange for U.S. Taxpayer-provided cash - - for cash yet!! This cash would be obtained from the Federal Reserve, which prints it for nothing out of thin air, in return for Treasury Securities on which the interest would have to be paid in the future by American Taxpayers. The cost of this delightful plan will potentially be several trillion, and not the original $700 billion, because, inter alia, Taxpayer defaults and diminished purchasing power would continue to increase.
The original Fed/Bush Administration plan was to provide “only” $700 billion to cover mortgage-related securities “at any one time” (i.e. the Secretary could come back for more). The proposal has now been expanded to allow the buying any “troubled assets” (this provision alone would guarantee the U.S. Taxpayer obligations will be at least a trillion dollars).
The Fed indicated they would make de facto unlimited funds available to financial institutions to purchase asset-backed commercial paper for Money Market Funds. The cost of this could be in the hundreds of billions.
The Treasury, in addition, indicated it would secure “up to $50 billion” in distressed Money Market Funds Investments at financial companies. These are the ones that are not FDIC insured. Of course, the $50 billion is just a “starter number.”
The foregoing covers those “Troubled” Mortgage “Assets” and other “Troubled Assets” which were not covered by the earlier combined bailout of Fannie Mae and Freddie Mac. That bailout already will cost at least $1 trillion and probably $2 to $3 Trillion in Taxpayer money, as Deepcaster earlier pointed out.
Taxpayers would also cover the wholly inadequate FDIC insurance reserves. That ultimate liability could be over a Trillion Dollars, if there are, as we expect, 1000 bank failures, as suggested by billionaire Wilbur Ross. Indeed, if as many as half of all the banks in the U.S. could fail (as recently suggested by Ken Lewis of Bank of America), the liability could be even greater. Consider that it took just a couple of days for the Official Estimates of the cost of this FDIC Capitalization Plan to triple from $50 to $150 billion. At that rate of increase…who knows that the ultimate number will be?
As well, Taxpayers and investors will get to pay in spades through the Loss of Purchasing Power via the Hyperinflation that this geyser of Fed money printing will cause. Deepcaster expects M3 to have to go to well over 20% annualized (from its current 14% annualized level, according to shadowstats.com) to cover the “cash” necessary.
As proposed, the Plan would allow the Secretary of the Treasury to pay up to full notional value of the troubled assets, rather than current much diminished, or nonexistent Market Value - - i.e., it would allow payment of “Top Dollar” to the Major Financial Institution beneficiaries even though the Market Value, if any, is Orders of Magnitude less.
The Treasury Secretary’s decisions “would not be reviewable by any court…”
Thus, understandably, as of the date of this writing (Friday, September 26, 2008) the Plan is under severe attack in Congress.
Nonetheless, political pressure ensures that some Plan will be enacted, and will likely contain several of the aforementioned provisions.
Assuming that is so, it is likely the most serious negative consequences of all these planned Bailouts can thus be summarized in two statements:
The Bailouts are in fact Bailouts of Wall Street and certain “favored” Major Financial and other Institutions at the expense of the American Taxpayer and Small Investors and Businesses. This makes a mockery of the free enterprise capitalist system.
It is Socialism for Certain of the Rich: allowing Privatization of Earlier Profits while forcibly Commonizing Current Losses.
Other than enriching the Financial Institutions favored by The Fed and Treasury, The Bailouts cannot succeed because the American Taxpayer who will ultimately be obligated for these additional trillions is sorely financially stressed already.
Since the average American Taxpayer/Consumer is 70% of the U.S. GDP, no Solution can be achieved without a restoration of the Financial Health of those Taxpayers/Consumers. But the American Taxpayer is already facing unemployment of about 14% annualized and Consumer Price Inflation in excess of 13% annualized (shadowstats.com). Consider what those numbers will likely be when Trillions in extra debt is loaded on. Consider how many additional defaults and insolvencies there will be. Bottom line: any Plan at all similar to the one proposed cannot succeed.
Indeed, Deepcaster’s view is that if any Bailout Plan is to be passed, American Taxpayers should insist that they get a better deal than Warren Buffet got when he bought into Goldman Sachs.
A Strategy for Profit and Protection
Normally, (that is to say in a Genuine Free Market situation) the go-to “Safe Haven” Assets in times of Financial Crisis would be the Precious Monetary Metals Gold and Silver, as well as other assets such as Strategic Commodities. We say “normally” because nearly every time another Financial Market Crisis has come prominently into the public eye in recent years The Cartel* of Central Bankers has successfully taken down the price of what would normally be the Safe Haven Assets - - the Precious Monetary Metals. A prime example occurred during the much-publicized demise of Bear Stearns in March, 2008, which was accompanied by a vicious Takedown of Gold and Silver. In a non-manipulated Market, given the fact that Bear Stearns reflected great weaknesses in the Financial System, Gold and Silver should have skyrocketed.
*We encourage those who doubt the scope and power of Intervention by a Fed-led Cartel of Key Central Bankers and favored financial institutions to read Deepcaster’s July, 2008 Letter containing a summary overview of Intervention entitled “Market Intervention, Data Manipulation - - Increasing Risks, The Cartel End Game, and Latest Forecast” at www.deepcaster.com. Also consider the substantial evidence collected by the Gold AntiTrust Action Committee at www.gata.org for information on precious metals price manipulation. Virtually all of the evidence for Intervention has been gleaned from publicly available records. Deepcaster’s profitable recommendations displayed at www.deepcaster.com have been facilitated by attention to these “Interventionals.”
Yet, the September, 2008 Crisis appears to be different. Gold has launched from the mid $700s/oz. to around $900/oz. during the past few days of September, 2008. Similarly, Crude Oil experienced a $25 spike on Monday, September 22, 2008.
So the question is, is it different this time around? Have Gold and Silver finally thrust off the shackles of Cartel Intervention? Or will The Cartel be able once again to cap and take down the prices of these Precious Monetary Metals and Strategic Commodities? Deepcaster has addressed this question in a Forecast he recently issued for the likely fate of Gold, Silver, Crude Oil & the U.S. Dollar in the Alerts Cache at www.deepcaster.com.
One thing is certain: The Cartel will certainly attempt again to take down Gold, Silver and Crude Oil at the earliest opportunity because the Strategic Commodities and Precious Monetary Metals are Competitors as Stores and Measures of Value with the Central Bankers’ Treasury Securities and Fiat Currencies.
Yet there is a Strategy which accommodates Cartel Interventional attempts and at the same time provides excellent Profit Opportunities, whether the Interventional attempts are successful or not.
A major premise of The Strategy is that one can certainly remain a Hard Assets Partisan (as Deepcaster is) while at the same time insulating oneself from future Takedowns. The following points provide an outline of The Strategy (particularly as applied to the Gold and Silver Markets) and are designed to help avoid Portfolio unpleasantness, or even possible financial ruin, in the future, as well as to profit along the way:
Recognize that The Cartel is still Potent, as difficult as that may be psychologically for Deepcaster and other Hard Asset Partisans to acknowledge. The Cartel is still the Biggest Player in many markets and, if the timing and market context are propitious, the Biggest Player makes Market Price. In addition, The Cartel has the advantage of de facto controlling the structure and regulation of various marketplaces and that is a tremendous advantage; just as the Hunt Brothers years ago discovered much to their dismay and misfortune, when they tried to corner the Silver Market.
Accumulate Hard Assets near the Interim Bottoms of Cartel- induced Takedowns.
In order to know when one is near the bottom of a Cartel-generated takedown, it is essential to take account of the Interventionals as well as the Technicals and Fundamentals.
For example, regarding Gold & Silver, near such Interim Bottoms, accumulate a combination of the Physical Commodity (Deepcaster prefers “low premium to melt” bullion coins) and well-managed Juniors with large reserves. (Deepcaster provides a list of such Junior Candidates in our December 20, 2007 Alert “A Strategy for Profiting from Cartel Intervention” available in the Alerts Cache at www.deepcaster.com.) The “Physical” and “Juniors” are for holding for the long-term as a Core Position.
Then, to the extent one wishes to speculate on the next “long” move, one should buy the major producers or long-term call options on them. These latter positions are for ultimate liquidation at the next Interim Top and are not for holding for the long-term.
However, there will be a time when The Cartel price capping is ineffective and Gold & Silver make record moves upward. The benefit of this Strategy is that one will likely be long in one’s speculative positions when this happens.
Near the next Interim Top, liquidate the long options and majors. Again, in order to know when we are close to the next Interim Top, it is essential to monitor the Interventionals, as well as Fundamentals and Technicals.
Near that Top, sell short or buy puts on Majors. We re-emphasize the Majors as preferred vehicles for trading positions because such positions are more liquid and tend to be quite responsive to Cartel moves.
At the next Interim Bottom, cover your shorts and liquidate your puts and go long again to begin the process all over again. We emphasize that it is essential to consider the Interventionals as well as the Fundamentals and Technicals in order to determine the approximate Interim Tops and Bottoms.
Finally, Hard Assets Partisans have the opportunity to become involved in Political Action to diminish the power of the Central Banker Cartel. It is truly outrageous that the average unsuspecting citizen, and prospective retiree, can and does put his hard won assets in Tangible Assets only to have those assets effectively de-valued by Cartel Takedowns. This is extremely injurious to many average citizens in many countries who are saving for the rainy day or retirement and have their retirement and/or reserves effectively taken from them. In order to help prevent this and similar outrages, we recommend taking three steps:
Become involved in the movement to abolish the U.S.
Federal Reserve (a private for-profit Cartel of International Banks) as Deepcaster, ex-Presidential candidate Rep. Ron Paul, and legendary investor Jim Rogers, all have advocated. Rep. Paul has introduced a Federal Reserve Abolition Act, H.R.2755.
Join the Gold AntiTrust Action Committee which works to eliminate the manipulation of the Gold and Silver markets (www.gata.org). GATA is a non-profit organization which makes a great contribution by gathering evidence regarding the suppression of prices of Gold, Silver and other commodities.
Work to defeat The Cartel ‘End Game.’ Deepcaster has laid out the evidence regarding the Ominous Cartel “End Game.” Clearly The Cartel is sacrificing the U.S. Dollar to prop up Favored International Financial Institutions and to maintain its power. But this sacrifice cannot continue forever.
One of several key components of The Cartel’s Ominous “End Game” is the planned replacement of the U.S. Dollar with the Amero. This would give even greater de facto power to the international Cartel of Central Bankers. We encourage readers to review the evidence for the entire multifaceted “End Game” Program in the following: Deepcaster’s Alert of 8/13/06 “Massive Financial Geopolitical Scheme Not Reported by Big Media” and Deepcaster’s June, 2007 Letter “Profiting From the Push to Denationalize Currencies and Deconstruct Nations” - - both available at www.deepcaster.com. Fortunately there is even a resolution in the U.S. Congress that would stop this “End Game” attempt (H.Res.40 - - Goode, R-Va).
Conclusion
The Starting Point for Protection and Profit is to determine how much of one’s investable assets one wishes to have in a Core Position of Gold, Silver and other Tangible Assets and then, importantly, to determine which investment vehicles in which to hold them. This Core Position is truly a long-term position and should represent a significant portion of one’s investable assets.
Regarding deployment of the balance of assets devoted to one’s Tangible Assets Portfolio, we recommend The Strategy outlined above.
Since the cornerstone of The Cartel’s Power lies in maintaining the legitimacy of their Fiat Currencies and Treasury Securities, the last thing they want is to have Gold, Silver and Tangible Assets held by investors as Measures and Stores of Value. In obtaining, and adding to, one’s own Core Position near the bottom of Cartel-induced Takedowns, one not only can help bolster one’s Core Assets for the future, but also can help defeat the Cartel’s nefarious ‘End Game’ initiative.
Essential to this Strategy, of course, is paying close attention to the Interventionals - - such attention has facilitated Deepcaster’s profitable recommendations displayed at www.deepcaster.com. A dramatic side benefit of this strategy is that it helps insulate one against vicious Cartel Takedowns such as the one of March 18-20, 2008.
If this aforementioned Strategy is employed effectively, it can result both in an increasing Core Position in Gold and Silver, and in considerable profit along the way.
Bad News For The Bailout
Lawmakers on Capitol Hill seem determined to work together to pass a bill that will get the credit markets churning again. But will they do it this week, as some had hoped just a few days ago? Don't count on it.
"Do I expect to pass something this week?" Senate Majority Leader Harry Reid, D-Nev., mused to reporters Tuesday. "I expect to pass something as soon as we can. I think it's important that we get it done right, not get it done fast."
Sen. Sherrod Brown, D-Ohio, says his office has gotten "close to zero" calls in support of the $700 billion plan proposed by the administration. He doubts it'll happen immediately either. "I don't think it has to be a week" he says. "If we do it right, then we need to take as long as it needs."
The more Congress examines the Bush administration's bailout plan, the hazier its outcome gets. At a Senate Banking Committee hearing Tuesday, lawmakers on both sides of the aisle complained of being rushed to pass legislation or else risk financial meltdown.
"The secretary and the administration need to know that what they have sent to us is not acceptable," says Committee Chairman Chris Dodd, D-Conn. The committee's top Republican, Alabama Sen. Richard Shelby, says he's concerned about its cost and whether it will even work.
In fact, some of the most basic details, including the $700 billion figure Treasury would use to buy up bad debt, are fuzzy.
"It's not based on any particular data point," a Treasury spokeswoman told Forbes.com Tuesday. "We just wanted to choose a really large number."
Wow. If it wants to see a bailout bill passed soon, the administration's going to have to come up with some hard answers to hard questions. Public support for it already seems to be waning. According to a Rasmussen Reports poll released Tuesday, 44% of those surveyed oppose the administration's plan, up from 37% Monday.
Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke, who testified before the Senate committee Tuesday, will get a chance to fine tune their answers Wednesday afternoon, when they appear before the House Financial Services Committee.
A spokesman for House Speaker Nancy Pelosi, D-Calif., says she is optimistic that the House will pass a bill this week. But that doesn't mean the Senate, which is by nature more sluggish than its larger counterpart on the other side of Capitol Hill, will be so quick to act.
"They will act first," says Sen. Minority Leader, Mitch McConnell, R-Ky. "Many of our members today were just beginning to have interaction with Secretary Paulson."
Dodd proposed his own counter-proposal to Paulson's plan earlier this week. Among other things, it calls for limits on executive compensation at troubled firms and for the Treasury to take a contingent equity stake in those firms. On Tuesday, Paulson rebuffed both ideas, as it might discourage firms from participating in the bailout program.
Those things aside, lawmakers have plenty of other concerns with Treasury's proposal. Sen. Charles Schumer, D-N.Y., suggested the bailout be doled out perhaps $150 billion at a time, instead of $700 billion all at once. Sen. Mike Enzi, R-Wyo., says it has an initial cost of $2,300 for every man, woman and child in the country. Sen. Jim Bunning, R-Ky., calls it a "financial socialism and it's un-American."
Dodd says that in speaking with his Senate colleagues, all are agreed on three issues: that a bailout bill include some oversight accountability for the Treasury, protection for taxpayers and that it address the continuing foreclosure problem.
He also points to one other concern: Paulson, the bill's chief architect, is scheduled to leave office in just four months.
"I'm not about to give a $700 billion appropriation to a secretary I don't know yet," says Dodd.
--Senior writer Liz Moyer contributed to this article.
"Do I expect to pass something this week?" Senate Majority Leader Harry Reid, D-Nev., mused to reporters Tuesday. "I expect to pass something as soon as we can. I think it's important that we get it done right, not get it done fast."
Sen. Sherrod Brown, D-Ohio, says his office has gotten "close to zero" calls in support of the $700 billion plan proposed by the administration. He doubts it'll happen immediately either. "I don't think it has to be a week" he says. "If we do it right, then we need to take as long as it needs."
The more Congress examines the Bush administration's bailout plan, the hazier its outcome gets. At a Senate Banking Committee hearing Tuesday, lawmakers on both sides of the aisle complained of being rushed to pass legislation or else risk financial meltdown.
"The secretary and the administration need to know that what they have sent to us is not acceptable," says Committee Chairman Chris Dodd, D-Conn. The committee's top Republican, Alabama Sen. Richard Shelby, says he's concerned about its cost and whether it will even work.
In fact, some of the most basic details, including the $700 billion figure Treasury would use to buy up bad debt, are fuzzy.
"It's not based on any particular data point," a Treasury spokeswoman told Forbes.com Tuesday. "We just wanted to choose a really large number."
Wow. If it wants to see a bailout bill passed soon, the administration's going to have to come up with some hard answers to hard questions. Public support for it already seems to be waning. According to a Rasmussen Reports poll released Tuesday, 44% of those surveyed oppose the administration's plan, up from 37% Monday.
Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke, who testified before the Senate committee Tuesday, will get a chance to fine tune their answers Wednesday afternoon, when they appear before the House Financial Services Committee.
A spokesman for House Speaker Nancy Pelosi, D-Calif., says she is optimistic that the House will pass a bill this week. But that doesn't mean the Senate, which is by nature more sluggish than its larger counterpart on the other side of Capitol Hill, will be so quick to act.
"They will act first," says Sen. Minority Leader, Mitch McConnell, R-Ky. "Many of our members today were just beginning to have interaction with Secretary Paulson."
Dodd proposed his own counter-proposal to Paulson's plan earlier this week. Among other things, it calls for limits on executive compensation at troubled firms and for the Treasury to take a contingent equity stake in those firms. On Tuesday, Paulson rebuffed both ideas, as it might discourage firms from participating in the bailout program.
Those things aside, lawmakers have plenty of other concerns with Treasury's proposal. Sen. Charles Schumer, D-N.Y., suggested the bailout be doled out perhaps $150 billion at a time, instead of $700 billion all at once. Sen. Mike Enzi, R-Wyo., says it has an initial cost of $2,300 for every man, woman and child in the country. Sen. Jim Bunning, R-Ky., calls it a "financial socialism and it's un-American."
Dodd says that in speaking with his Senate colleagues, all are agreed on three issues: that a bailout bill include some oversight accountability for the Treasury, protection for taxpayers and that it address the continuing foreclosure problem.
He also points to one other concern: Paulson, the bill's chief architect, is scheduled to leave office in just four months.
"I'm not about to give a $700 billion appropriation to a secretary I don't know yet," says Dodd.
--Senior writer Liz Moyer contributed to this article.
WaMu to Have 'Significant' Effect on CDOs
By Shannon D. Harrington
Sept. 26 (Bloomberg) -- The failure of Washington Mutual Inc. will have a ''significant'' effect on collateralized debt obligations that made bets on the lender's creditworthiness, Standard & Poor's said.
Pieces of 1,526 synthetic CDOs worldwide sold default protection on Seattle-based WaMu, S&P said in a statement today. WaMu was seized yesterday by regulators after customers withdrew $16.7 billion over the past 10 days. After JPMorgan Chase & Co. bought WaMu's bank branch business, the holding company is likely to file for bankruptcy protection, S&P analyst Victoria Wagner said in a separate statement today.
Sellers of credit-default swap protection must pay the buyer face value in exchange for the underlying securities or the cash equivalent after a bankruptcy filing.
Synthetic CDOs already have been roiled by last week's bankruptcy of Lehman Brothers Holdings Inc., which was included in 1,889 deals globally, and the government's takeover of American International Group Inc., which was downgraded three grades to A-. S&P said 1,619 CDOs made bets on AIG.
Many of the deals also will lose payments and loss cushions from contracts linked to Fannie Mae and Freddie Mac, the mortgage-finance companies seized by the government this month. The takeovers triggered a technical default on the credit swaps.
Of the CDOs that sold WaMu default protection, 514 were in the U.S., 752 were in Europe, 122 were in Japan and 138 were elsewhere in the Asia-Pacific region.
The CDOs sell notes to investors that are repaid using the proceeds of credit-default swap premiums. Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt.
Sept. 26 (Bloomberg) -- The failure of Washington Mutual Inc. will have a ''significant'' effect on collateralized debt obligations that made bets on the lender's creditworthiness, Standard & Poor's said.
Pieces of 1,526 synthetic CDOs worldwide sold default protection on Seattle-based WaMu, S&P said in a statement today. WaMu was seized yesterday by regulators after customers withdrew $16.7 billion over the past 10 days. After JPMorgan Chase & Co. bought WaMu's bank branch business, the holding company is likely to file for bankruptcy protection, S&P analyst Victoria Wagner said in a separate statement today.
Sellers of credit-default swap protection must pay the buyer face value in exchange for the underlying securities or the cash equivalent after a bankruptcy filing.
Synthetic CDOs already have been roiled by last week's bankruptcy of Lehman Brothers Holdings Inc., which was included in 1,889 deals globally, and the government's takeover of American International Group Inc., which was downgraded three grades to A-. S&P said 1,619 CDOs made bets on AIG.
Many of the deals also will lose payments and loss cushions from contracts linked to Fannie Mae and Freddie Mac, the mortgage-finance companies seized by the government this month. The takeovers triggered a technical default on the credit swaps.
Of the CDOs that sold WaMu default protection, 514 were in the U.S., 752 were in Europe, 122 were in Japan and 138 were elsewhere in the Asia-Pacific region.
The CDOs sell notes to investors that are repaid using the proceeds of credit-default swap premiums. Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt.
WaMu to Have 'Significant' Effect on CDOs
By Shannon D. Harrington
Sept. 26 (Bloomberg) -- The failure of Washington Mutual Inc. will have a ''significant'' effect on collateralized debt obligations that made bets on the lender's creditworthiness, Standard & Poor's said.
Pieces of 1,526 synthetic CDOs worldwide sold default protection on Seattle-based WaMu, S&P said in a statement today. WaMu was seized yesterday by regulators after customers withdrew $16.7 billion over the past 10 days. After JPMorgan Chase & Co. bought WaMu's bank branch business, the holding company is likely to file for bankruptcy protection, S&P analyst Victoria Wagner said in a separate statement today.
Sellers of credit-default swap protection must pay the buyer face value in exchange for the underlying securities or the cash equivalent after a bankruptcy filing.
Synthetic CDOs already have been roiled by last week's bankruptcy of Lehman Brothers Holdings Inc., which was included in 1,889 deals globally, and the government's takeover of American International Group Inc., which was downgraded three grades to A-. S&P said 1,619 CDOs made bets on AIG.
Many of the deals also will lose payments and loss cushions from contracts linked to Fannie Mae and Freddie Mac, the mortgage-finance companies seized by the government this month. The takeovers triggered a technical default on the credit swaps.
Of the CDOs that sold WaMu default protection, 514 were in the U.S., 752 were in Europe, 122 were in Japan and 138 were elsewhere in the Asia-Pacific region.
The CDOs sell notes to investors that are repaid using the proceeds of credit-default swap premiums. Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt.
Sept. 26 (Bloomberg) -- The failure of Washington Mutual Inc. will have a ''significant'' effect on collateralized debt obligations that made bets on the lender's creditworthiness, Standard & Poor's said.
Pieces of 1,526 synthetic CDOs worldwide sold default protection on Seattle-based WaMu, S&P said in a statement today. WaMu was seized yesterday by regulators after customers withdrew $16.7 billion over the past 10 days. After JPMorgan Chase & Co. bought WaMu's bank branch business, the holding company is likely to file for bankruptcy protection, S&P analyst Victoria Wagner said in a separate statement today.
Sellers of credit-default swap protection must pay the buyer face value in exchange for the underlying securities or the cash equivalent after a bankruptcy filing.
Synthetic CDOs already have been roiled by last week's bankruptcy of Lehman Brothers Holdings Inc., which was included in 1,889 deals globally, and the government's takeover of American International Group Inc., which was downgraded three grades to A-. S&P said 1,619 CDOs made bets on AIG.
Many of the deals also will lose payments and loss cushions from contracts linked to Fannie Mae and Freddie Mac, the mortgage-finance companies seized by the government this month. The takeovers triggered a technical default on the credit swaps.
Of the CDOs that sold WaMu default protection, 514 were in the U.S., 752 were in Europe, 122 were in Japan and 138 were elsewhere in the Asia-Pacific region.
The CDOs sell notes to investors that are repaid using the proceeds of credit-default swap premiums. Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt.
Hank needs trillions so bailout can't work
The actual number of fiatscos needed to keep the U.S. financial system running is in the multiple trillions of fiatscos, NOT the $700 billion that Congress is "only" proposing to spend. If anything less than multiple trillions of fiatscos is supplied, then we continue sliding into "Great Depression II"
In order to make an irrefutable case for this premise, I will construct an approximate timeline which will prove that the Fed and Treasury's efforts to fight the credit collapse was quickly overwhelmed, leading to today's need for multiple-trillions of fiatscos.
And here it is:
Timeline of events leading to Fed/Treasury becoming overwhelmed:
March 16th, 2008: Bear Stearns collapses. The Fed steps in and starts with all the "TAF-like" programs including:
TAF, TSLF, PDCF, and even "Fed, LLC" and immediately begins to pump in multiple tens of billions of fiatscos into the Wall Street "Shadow Banking System". (I will give total numbers below for all Fed and Treasury programs). The Fed starts accepting VERY suspect and undisclosed "assets" from Shadow Banking system in exchange for fiatscos and Treasuries.
Between March 16th and July 17th: Fed continues to pump in tens of billions more fiatscsos into Shadow Banking System and taking on more suspect "assets". During this time, Fannie, Freddie and FHLB continue to grow their balance sheets,accepting more and more suspect loans and creating MBS.
July 17th:Fed and Treasury realize that GSEs are failing. Hank and Ben go to Congress and Hank demands "Bazooka". Says he won't need to use it.
Between July 17th and Sept. 7th: Fed continues to expand "TAF-like" programs and even adds "Fed, Euro Swap" to mix in a desperate attempt to keep system from collapsing.
Sept. 7th: Fannie, Freddie and FHLBs officially fail. Treasury steps in, effectively nationalizes them, and immediatly starts pumping in fiatscos. Yet, (and this is an important point) doesn't use the whole "Bazooka" amount to do so.
Sept. 8th thru Sept 18th: As predicted by Ras on Sept. 8th, the ENTIRE financial system begins to implode, with literally every single Wall Street bank and major derivatives player failing outright. Ben and Hank spend this whole time-period performing various bail-out maneuvers, including the desperate "Fed, AIG" prop job for the Shadow Banking System--mostly through the Fed--which begin to strain the Fed's balance sheet and to the breaking point.
Sept. 18th/19th: A run begins on the $4 trillion money markets. The Fed once again steps in and offers a blanket guarantee to the ENTIRE money market segment and even goes so far as to offer NON-RECOURSE loans against ABCP.
And at that point, the Fed's back is broken, because they committed approximately $500 billion of the Fed's $900 billion balance sheet to:
COMPLETELY TOXIC, DEAD "ASSETS", TRADING U.S. TREASURIES AND AGENCIES FOR THEM
...and yet, the credit and derivatives collapse continued unabated.
Now, let's quickly discuss the Fannie/Freddie/FHLB "Bazooka" issue.
Hank Paulson had the authority to shoot an $800 billion slug of fiat right into the heart of the credit collapse AND also had just effectively nationalized the GSEs.
So, here's the point:
If in fact the problem was "ONLY" 700 billion fiatscos AND was only mostly limited to MBS paper, then Hank would have just had the GSEs start snapping up all the dead MBS and the Treasury would have paid for it. Right?
Simple as that.
However, at the point that the Fed became overwhelmed and the credit/derivatives collapse continued unabated, it was at then that Hank KNEW the problem was now measured in the trillions of fiatscos range and was far beyond just MBS, but also included every exotic CDO, CDS and who-knows-what-else exotic derivatives instruments. Because, and this is the important point:
The Fed and Treasury had ALREADY thrown, or committed to throwing over ONE TRILLION FIATSCOS at the collapse, and there was STILL no sign of the collapse abating and in fact, was ACCELERATING!
And for further proof that the meltdown had gotten completely out of control, let's turn back to the Sept.18th/19th money market meltdown and quickly discuss that situation:
Think about how horrid the ABCP market had to be if the Fed was compelled to step in and give NON-RECOURSE "loans" to the money market funds for this trash. ABCP should be the most liquid commercial paper out there because it is NOT ONLY of very short duration BUT ALSO because of that "AB" part which means it is BACKED BY A FRIGGIN' "ASSET"!!! So, if this seemingly safe, liquid market can't be accessed by the money market funds to stave off the panicked bank run, then how bad must have been the tens-of-trillions of fiatscos other derivatives markets?
...which only reinforces the point in spades that the credit markets were (and still are) in absolute seizure.
(Ras Summary and Conclusion: Take off your tin-foil hats and put down your little pitchforks and torches because there is NO "False flag" situation going on here.
And this isn't about trying to save the couple of hundred million in bonuses for Hank's buddies on Wall Street--although to be fair, I will concede that Hank DID make a vain attempt at doing that as a side benefit.
Instead, this is about events so quickly getting away from Hank and Ben's respective Treasury and Federal Reserve systems that they are now scrambling to get the authority to have the U.S. taxpayer step up and, in reality, bail THEMSELVES out (the taxpayer's 401k/IRA/McMansion), because if this collapse cannot be overcome with TRILLIONS of fiatscos of reflation/monetization/nationalization of the entire Shadow Banking System (as well as the traditional banking system), then we really DO proceed straight to "Great Depression II".
(Side note:) Regarding the Fed's efforts during this collapse, I have to give Ben Bernanke credit to this point. For, he is actually attempting to somewhat protect the integrity of the Fed and the U.S. fiatsco by--so far--only making these kinda dubious "loans" and accepting very suspect and undisclosed "collateral" for them.
However, it is apparent that Ben and the Fed are NOT yet willing to resort to the "Final Option" which would be for the Fed to literally outright monetize all these multiple trillions of fiatscos of destroyed debt and derivatives positions. I'm NOT saying that the Fed won't ever ultimately choose to do so, but they clearly are NOT doing that at this point.
So, in conclusion, I believe I have made an irrefutable case that what actually transpired was that the credit and derivatives collapse has spiralled out of control so quickly that the Fed and Treasury wereliterally overwhelmed by the sheer size and speed of it.
So it's gonna come down to this:
Either multiple trillions of fiatscos from somewhere (either the taxpayers/debt enablers or the Fed, or some combination of all three) are pumped into the failed financial system in a desperate attempt to revive it, and we stave off"Great Depression II" for a few more weeks or months
...or:
We proceed directly to "Great Depression II" and massive liquidation of out entire financial and economic system.
And that is why Hank and Ben are demanding "Infinite Fiat" to fight this collapse.
.
In order to make an irrefutable case for this premise, I will construct an approximate timeline which will prove that the Fed and Treasury's efforts to fight the credit collapse was quickly overwhelmed, leading to today's need for multiple-trillions of fiatscos.
And here it is:
Timeline of events leading to Fed/Treasury becoming overwhelmed:
March 16th, 2008: Bear Stearns collapses. The Fed steps in and starts with all the "TAF-like" programs including:
TAF, TSLF, PDCF, and even "Fed, LLC" and immediately begins to pump in multiple tens of billions of fiatscos into the Wall Street "Shadow Banking System". (I will give total numbers below for all Fed and Treasury programs). The Fed starts accepting VERY suspect and undisclosed "assets" from Shadow Banking system in exchange for fiatscos and Treasuries.
Between March 16th and July 17th: Fed continues to pump in tens of billions more fiatscsos into Shadow Banking System and taking on more suspect "assets". During this time, Fannie, Freddie and FHLB continue to grow their balance sheets,accepting more and more suspect loans and creating MBS.
July 17th:Fed and Treasury realize that GSEs are failing. Hank and Ben go to Congress and Hank demands "Bazooka". Says he won't need to use it.
Between July 17th and Sept. 7th: Fed continues to expand "TAF-like" programs and even adds "Fed, Euro Swap" to mix in a desperate attempt to keep system from collapsing.
Sept. 7th: Fannie, Freddie and FHLBs officially fail. Treasury steps in, effectively nationalizes them, and immediatly starts pumping in fiatscos. Yet, (and this is an important point) doesn't use the whole "Bazooka" amount to do so.
Sept. 8th thru Sept 18th: As predicted by Ras on Sept. 8th, the ENTIRE financial system begins to implode, with literally every single Wall Street bank and major derivatives player failing outright. Ben and Hank spend this whole time-period performing various bail-out maneuvers, including the desperate "Fed, AIG" prop job for the Shadow Banking System--mostly through the Fed--which begin to strain the Fed's balance sheet and to the breaking point.
Sept. 18th/19th: A run begins on the $4 trillion money markets. The Fed once again steps in and offers a blanket guarantee to the ENTIRE money market segment and even goes so far as to offer NON-RECOURSE loans against ABCP.
And at that point, the Fed's back is broken, because they committed approximately $500 billion of the Fed's $900 billion balance sheet to:
COMPLETELY TOXIC, DEAD "ASSETS", TRADING U.S. TREASURIES AND AGENCIES FOR THEM
...and yet, the credit and derivatives collapse continued unabated.
Now, let's quickly discuss the Fannie/Freddie/FHLB "Bazooka" issue.
Hank Paulson had the authority to shoot an $800 billion slug of fiat right into the heart of the credit collapse AND also had just effectively nationalized the GSEs.
So, here's the point:
If in fact the problem was "ONLY" 700 billion fiatscos AND was only mostly limited to MBS paper, then Hank would have just had the GSEs start snapping up all the dead MBS and the Treasury would have paid for it. Right?
Simple as that.
However, at the point that the Fed became overwhelmed and the credit/derivatives collapse continued unabated, it was at then that Hank KNEW the problem was now measured in the trillions of fiatscos range and was far beyond just MBS, but also included every exotic CDO, CDS and who-knows-what-else exotic derivatives instruments. Because, and this is the important point:
The Fed and Treasury had ALREADY thrown, or committed to throwing over ONE TRILLION FIATSCOS at the collapse, and there was STILL no sign of the collapse abating and in fact, was ACCELERATING!
And for further proof that the meltdown had gotten completely out of control, let's turn back to the Sept.18th/19th money market meltdown and quickly discuss that situation:
Think about how horrid the ABCP market had to be if the Fed was compelled to step in and give NON-RECOURSE "loans" to the money market funds for this trash. ABCP should be the most liquid commercial paper out there because it is NOT ONLY of very short duration BUT ALSO because of that "AB" part which means it is BACKED BY A FRIGGIN' "ASSET"!!! So, if this seemingly safe, liquid market can't be accessed by the money market funds to stave off the panicked bank run, then how bad must have been the tens-of-trillions of fiatscos other derivatives markets?
...which only reinforces the point in spades that the credit markets were (and still are) in absolute seizure.
(Ras Summary and Conclusion: Take off your tin-foil hats and put down your little pitchforks and torches because there is NO "False flag" situation going on here.
And this isn't about trying to save the couple of hundred million in bonuses for Hank's buddies on Wall Street--although to be fair, I will concede that Hank DID make a vain attempt at doing that as a side benefit.
Instead, this is about events so quickly getting away from Hank and Ben's respective Treasury and Federal Reserve systems that they are now scrambling to get the authority to have the U.S. taxpayer step up and, in reality, bail THEMSELVES out (the taxpayer's 401k/IRA/McMansion), because if this collapse cannot be overcome with TRILLIONS of fiatscos of reflation/monetization/nationalization of the entire Shadow Banking System (as well as the traditional banking system), then we really DO proceed straight to "Great Depression II".
(Side note:) Regarding the Fed's efforts during this collapse, I have to give Ben Bernanke credit to this point. For, he is actually attempting to somewhat protect the integrity of the Fed and the U.S. fiatsco by--so far--only making these kinda dubious "loans" and accepting very suspect and undisclosed "collateral" for them.
However, it is apparent that Ben and the Fed are NOT yet willing to resort to the "Final Option" which would be for the Fed to literally outright monetize all these multiple trillions of fiatscos of destroyed debt and derivatives positions. I'm NOT saying that the Fed won't ever ultimately choose to do so, but they clearly are NOT doing that at this point.
So, in conclusion, I believe I have made an irrefutable case that what actually transpired was that the credit and derivatives collapse has spiralled out of control so quickly that the Fed and Treasury wereliterally overwhelmed by the sheer size and speed of it.
So it's gonna come down to this:
Either multiple trillions of fiatscos from somewhere (either the taxpayers/debt enablers or the Fed, or some combination of all three) are pumped into the failed financial system in a desperate attempt to revive it, and we stave off"Great Depression II" for a few more weeks or months
...or:
We proceed directly to "Great Depression II" and massive liquidation of out entire financial and economic system.
And that is why Hank and Ben are demanding "Infinite Fiat" to fight this collapse.
.
26 September 2008
We need a new Global Monetary Authority
By Jeffrey Garten
Published: September 25 2008 20:02 Last updated: September 25 2008 20:02
Even if the US's massive financial rescue operation succeeds, it should be followed by something even more far-reaching – the establishment of a Global Monetary Authority to oversee markets that have become borderless.
Washington recognises that the crisis has become global. Hank Paulson, Treasury secretary, has said that foreign banks operating in the US will be eligible for federal assistance and he is urging other nations to fashion their own bail-out programmes. Central banks have also been synchronising injections of funds into markets. These should be steps to a more comprehensive international response designed not just to extinguish the current fires, but to rebuild and maintain the capital markets for the longer term.
The current global institutional apparatus is woefully incapable of overseeing the financial system that is evolving. The International Monetary Fund is irrelevant to this crisis, the Group of Seven leading industrial countries lacks legitimacy in a world where China, Brazil and others are big players, and the Bank for International Settlement has no operational role. The US Federal Reserve is too besieged to act as a global central bank.
That vacuum at the centre is dangerous for everyone. The US's dependence on massive inflows of foreign capital, roughly $3bn (€2bn, £1.6bn) a day, will surely increase now as Uncle Sam acquires $1,000bn in new obligations from current bail-outs. For years to come, Wall Street and Washington will be unable to manage without strong co-operation from other markets.
Beyond that, the international dimensions of finance are mind-boggling. Global assets have increased from $12,000bn in 1980 to nearly $200,000bn in 2007, far outstripping the growth of gross domestic product or the expansion of trade. An increasing amount of this capital now resides in Asia and the Gulf, not the US or Europe. A US company such as AIG sold more of its credit default swaps and insurance policies outside the US than within it. UBS employs 30,000 Americans, is listed on the New York Stock Exchange and owns Paine Webber. The capital markets will evolve in the context in which emerging market economies will be growing twice as fast as the rich nations and will, by mid-century, probably account for almost two-thirds of global GDP.
Globalisation will now also create a clash of philosophies. Most governments and investors outside the US never shared the American system of cowboy capitalism. Now they have good reason to demand that some fundamental changes be made in the way the US manages its financial institutions. This can happen with a conscious, negotiated modification in the US financial model, or it could result from foreign investors shifting their funds elsewhere.
All of these considerations point to the eventual need for a new Global Monetary Authority. It would set the tone for capital markets in a way that would not be viscerally opposed to a strong public oversight function with rules for intervention, and would return to capital formation the goal of economic growth and development rather than trading for its own sake.
A GMA would be a reinsurer or discounter for certain obligations held by central banks. It would scrutinise the regulatory activities of national authorities with more teeth than the IMF has and oversee the implementation of a limited number of global regulations. It would monitor global risks and establish an effective early warning system with more clout to sound alarms than the BIS has.
It would act as “bankruptcy court” for financial reorganisations of global companies above a certain size. The biggest global financial companies would have to register with the GMA and be subject to its monitoring, or be blacklisted. That includes commercial companies and banks, but also sovereign wealth funds, gigantic hedge funds and private equity firms.
The GMA's board would have to include central bankers not just from the US, UK, the eurozone and Japan, but also China, Saudi Arabia and Brazil. It would be financed by mandatory contributions from every capable country and from insurance-type premiums from global financial companies – publicly listed, government owned, and privately held alike.
In terms of US and international politics, a Global Monetary Authority is probably an idea whose time has not yet come. That may change as today's crisis evolves.
The writer is the Juan Trippe professor of international trade and finance at the Yale School of Management
Copyright The Financial Times Limited 2008
Published: September 25 2008 20:02 Last updated: September 25 2008 20:02
Even if the US's massive financial rescue operation succeeds, it should be followed by something even more far-reaching – the establishment of a Global Monetary Authority to oversee markets that have become borderless.
Washington recognises that the crisis has become global. Hank Paulson, Treasury secretary, has said that foreign banks operating in the US will be eligible for federal assistance and he is urging other nations to fashion their own bail-out programmes. Central banks have also been synchronising injections of funds into markets. These should be steps to a more comprehensive international response designed not just to extinguish the current fires, but to rebuild and maintain the capital markets for the longer term.
The current global institutional apparatus is woefully incapable of overseeing the financial system that is evolving. The International Monetary Fund is irrelevant to this crisis, the Group of Seven leading industrial countries lacks legitimacy in a world where China, Brazil and others are big players, and the Bank for International Settlement has no operational role. The US Federal Reserve is too besieged to act as a global central bank.
That vacuum at the centre is dangerous for everyone. The US's dependence on massive inflows of foreign capital, roughly $3bn (€2bn, £1.6bn) a day, will surely increase now as Uncle Sam acquires $1,000bn in new obligations from current bail-outs. For years to come, Wall Street and Washington will be unable to manage without strong co-operation from other markets.
Beyond that, the international dimensions of finance are mind-boggling. Global assets have increased from $12,000bn in 1980 to nearly $200,000bn in 2007, far outstripping the growth of gross domestic product or the expansion of trade. An increasing amount of this capital now resides in Asia and the Gulf, not the US or Europe. A US company such as AIG sold more of its credit default swaps and insurance policies outside the US than within it. UBS employs 30,000 Americans, is listed on the New York Stock Exchange and owns Paine Webber. The capital markets will evolve in the context in which emerging market economies will be growing twice as fast as the rich nations and will, by mid-century, probably account for almost two-thirds of global GDP.
Globalisation will now also create a clash of philosophies. Most governments and investors outside the US never shared the American system of cowboy capitalism. Now they have good reason to demand that some fundamental changes be made in the way the US manages its financial institutions. This can happen with a conscious, negotiated modification in the US financial model, or it could result from foreign investors shifting their funds elsewhere.
All of these considerations point to the eventual need for a new Global Monetary Authority. It would set the tone for capital markets in a way that would not be viscerally opposed to a strong public oversight function with rules for intervention, and would return to capital formation the goal of economic growth and development rather than trading for its own sake.
A GMA would be a reinsurer or discounter for certain obligations held by central banks. It would scrutinise the regulatory activities of national authorities with more teeth than the IMF has and oversee the implementation of a limited number of global regulations. It would monitor global risks and establish an effective early warning system with more clout to sound alarms than the BIS has.
It would act as “bankruptcy court” for financial reorganisations of global companies above a certain size. The biggest global financial companies would have to register with the GMA and be subject to its monitoring, or be blacklisted. That includes commercial companies and banks, but also sovereign wealth funds, gigantic hedge funds and private equity firms.
The GMA's board would have to include central bankers not just from the US, UK, the eurozone and Japan, but also China, Saudi Arabia and Brazil. It would be financed by mandatory contributions from every capable country and from insurance-type premiums from global financial companies – publicly listed, government owned, and privately held alike.
In terms of US and international politics, a Global Monetary Authority is probably an idea whose time has not yet come. That may change as today's crisis evolves.
The writer is the Juan Trippe professor of international trade and finance at the Yale School of Management
Copyright The Financial Times Limited 2008
U.S. will lose financial superpower status: Germany
Thu Sep 25, 2008 6:08am EDT
By Noah Barkin
BERLIN (Reuters) - Germany blamed the United States on Thursday for spawning the global financial crisis with a blind drive for higher profits and said it would now have to accept greater market regulation and a loss of its financial superpower status.
In some of the toughest language since the crisis worsened earlier this month, German Finance Minister Peer Steinbrueck told parliament the financial turmoil would leave "deep marks" but was primarily an American problem.
"The world will never be as it was before the crisis," Steinbrueck, a deputy leader of the center-left Social Democrats, told the Bundestag lower house.
"The United States will lose its superpower status in the world financial system. The world financial system will become more multi-polar."
Steinbrueck, whose efforts to secure greater transparency on hedge funds during Germany's G8 presidency last year collapsed amid objections from Washington and London, attacked what he called an Anglo-Saxon drive for double-digit profits and massive bonuses for bankers and company executives.
"Investment bankers and politicians in New York, Washington and London were not willing to give these up," he said.
He proposed eight measures to address the crisis, including an international ban on "purely speculative" short-selling and an increase in capital requirements for banks in order to offset credit risks.
The collapse of U.S. investment bank Lehman Brothers and financial woes of other financial institutions like insurer AIG have prompted the U.S. government to propose a $700 billion rescue package for the country's financial sector.
AMERICAN PROBLEM
Steinbrueck welcomed U.S. efforts to stem the crisis but said it was neither necessary nor wise for Germany to replicate the U.S. plan for its own institutions, which are under pressure but do not face the same risks as their U.S. counterparts.
The German Bundesbank said earlier this week that the financial market turbulence would hit the earnings of Germany's big commercial lenders, its publicly-owned Landesbanks and its cooperative banks.
Tighter credit in the wake of the crisis could also constrain household consumption and corporate investment, increasing the likelihood the German economy will fall into recession this year.
But Steinbrueck said German regulator Bafin believed German banks could cope with losses and ensure the safety of private savings, calling the turmoil primarily an American problem.
"The financial crisis is above all an American problem. The other G7 financial ministers in continental Europe share this opinion," he said.
"This system, which is to a large degree insufficiently regulated, is now collapsing -- with far-reaching consequences for the U.S. financial market and considerable contagion effects for the rest of the world," Steinbrueck added.
He advocated stronger, internationally coordinated regulation, saying the crisis showed that national action was not enough.
"The International Monetary Fund should become the controlling authority for the application of worldwide financial market standards," he said.
By Noah Barkin
BERLIN (Reuters) - Germany blamed the United States on Thursday for spawning the global financial crisis with a blind drive for higher profits and said it would now have to accept greater market regulation and a loss of its financial superpower status.
In some of the toughest language since the crisis worsened earlier this month, German Finance Minister Peer Steinbrueck told parliament the financial turmoil would leave "deep marks" but was primarily an American problem.
"The world will never be as it was before the crisis," Steinbrueck, a deputy leader of the center-left Social Democrats, told the Bundestag lower house.
"The United States will lose its superpower status in the world financial system. The world financial system will become more multi-polar."
Steinbrueck, whose efforts to secure greater transparency on hedge funds during Germany's G8 presidency last year collapsed amid objections from Washington and London, attacked what he called an Anglo-Saxon drive for double-digit profits and massive bonuses for bankers and company executives.
"Investment bankers and politicians in New York, Washington and London were not willing to give these up," he said.
He proposed eight measures to address the crisis, including an international ban on "purely speculative" short-selling and an increase in capital requirements for banks in order to offset credit risks.
The collapse of U.S. investment bank Lehman Brothers and financial woes of other financial institutions like insurer AIG have prompted the U.S. government to propose a $700 billion rescue package for the country's financial sector.
AMERICAN PROBLEM
Steinbrueck welcomed U.S. efforts to stem the crisis but said it was neither necessary nor wise for Germany to replicate the U.S. plan for its own institutions, which are under pressure but do not face the same risks as their U.S. counterparts.
The German Bundesbank said earlier this week that the financial market turbulence would hit the earnings of Germany's big commercial lenders, its publicly-owned Landesbanks and its cooperative banks.
Tighter credit in the wake of the crisis could also constrain household consumption and corporate investment, increasing the likelihood the German economy will fall into recession this year.
But Steinbrueck said German regulator Bafin believed German banks could cope with losses and ensure the safety of private savings, calling the turmoil primarily an American problem.
"The financial crisis is above all an American problem. The other G7 financial ministers in continental Europe share this opinion," he said.
"This system, which is to a large degree insufficiently regulated, is now collapsing -- with far-reaching consequences for the U.S. financial market and considerable contagion effects for the rest of the world," Steinbrueck added.
He advocated stronger, internationally coordinated regulation, saying the crisis showed that national action was not enough.
"The International Monetary Fund should become the controlling authority for the application of worldwide financial market standards," he said.
US dollar set to be major casualty of Hank Paulson's bailout
Whether or not tomorrow’s accounts of today’s turmoil prove David Owen of Dresdner Kleinwort right; whether or not this is the beginning of the end of the dollar’s pre-eminence in the world’s central banks and foreign exchanges, the economic landscape has undoubtedly changed forever.
The US taxpayer bail-out of America’s banking sector is an event whose significance will reverberate for many years. What it means for free markets, for the way Western economies are run, for the prosperity of the world economy, must remain to be seen.
But as investors scrambled to make sense of last week’s events, already one conclusion was all but irrefutable – the US dollar will have to take another major fall.
The dollar rally that began in July and pushed the pound’s value against the greenback significantly lower has come to an abrupt end as markets face up to the fact that the currency will have to absorb the effects of a sudden shocking increase in America’s budget deficit.
When Treasury Secretary Hank Paulson announced that the world’s biggest economy was about to embark on the world’s biggest bail-out for its financial sector, the first concern economists had was about the long-term prospects for the nation’s finances and its currency.
Might the dollar now be vulnerable to a run? In the longer term, might this signal the beginning of the end for the dollar’s status as the world’s reserve currency?
The US Treasury was already planning to borrow $438bn (£237bn) next year to shore up its budget deficit. That could now rise to $1 trillion or more after the cost of the $700bn mortgage rescue fund is taken into account. Budget deficits of that kind are usually enough to scare many foreign investors away, and indeed the dollar slumped 1.1 cents to $1.8441 against the pound yesterday, and in late trading was down almost two cents against the euro at $1.46880.
Ironically, despite the pound’s comparative strength against the dollar – having risen from just above $1.75 in the past few weeks – it remains extremely weak against other world currencies, due to investors’ fears about the UK’s own home-grown problems.
“The magic trillion-dollar deficit is within sight,” says Simon Derrick, of Bank of New York Mellon, “The combination of the fiscal position and loose monetary policy is likely to be significantly dollar-negative. With an expanding supply of US paper they might want to hold something else as their safe haven, which might mean other currencies and might just as easily mean commodities such as gold.”
When a government opens the spending taps and borrows more, investors invariably take flight, fearing that assets denominated in those currencies will lose their value as inflation rises and the currency weakens.
However, with the Treasury still reluctant to spell out precisely how the rescue package, modelled on the late 1980s’ Resolution Trust Corporation, will work, analysts are still unclear about how far the dollar has to fall.
It is likewise still unknown precisely what effect the quasi-nationalisation of Fannie Mae and Freddie Mac will have for the nation’s finances, though the implications will again almost certainly be negative.
According to Mr Derrick, “the sums have changed so quickly on the fiscal side within the space of two weeks, and clearly the outlook for the US economy relative to where people were forecasting before Freddie and Fannie. Investors will also have a radically different outlook for the future.”
The biggest question, however, is whether the reserve managers in central banks in China and elsewhere will treat this as a justification for selling off some of their massive mountain of dollar-denominated investments. If this were to happen, it could cause a catastrophic drop in the US currency, potentially compromising its status as the world’s reserve currency.
However, with the euro area facing its own economic and financial crises, it looks unlikely to be able to step into the breach. This helps explain the leap yesterday in gold and oil prices as investors seek to buy tangible commodities in place of currencies that may easily be devalued in the coming years.
What was perhaps even more worrying for investors was an item in the small print of Hank Paulson’s rescue plan. It said that, separate to the $700bn markets rescue package, the US Treasury would plunder the Exchange Stabilisation Fund – the US currency reserves, established in the 1930s – in order to pay for an insurance scheme for the money markets.
“The Treasury has committed the nation’s FX reserves to supporting the money market industry,” said Chris Turner, head of foreign exchange strategy at ING. “That suggests to us that the dollar has fallen down the list of the administration’s priorities – a worrying development for foreign investors in the US.”
The fund’s cash is being funnelled into a new scheme designed to protect money market mutual funds, which mirrors the Federal Deposit Insurance scheme for consumers’ bank savings. “What worries us is that the US Treasury has committed the nation’s FX reserves at a time when the dollar is exceptionally vulnerable,” said Mr Turner.
The US taxpayer bail-out of America’s banking sector is an event whose significance will reverberate for many years. What it means for free markets, for the way Western economies are run, for the prosperity of the world economy, must remain to be seen.
But as investors scrambled to make sense of last week’s events, already one conclusion was all but irrefutable – the US dollar will have to take another major fall.
The dollar rally that began in July and pushed the pound’s value against the greenback significantly lower has come to an abrupt end as markets face up to the fact that the currency will have to absorb the effects of a sudden shocking increase in America’s budget deficit.
When Treasury Secretary Hank Paulson announced that the world’s biggest economy was about to embark on the world’s biggest bail-out for its financial sector, the first concern economists had was about the long-term prospects for the nation’s finances and its currency.
Might the dollar now be vulnerable to a run? In the longer term, might this signal the beginning of the end for the dollar’s status as the world’s reserve currency?
The US Treasury was already planning to borrow $438bn (£237bn) next year to shore up its budget deficit. That could now rise to $1 trillion or more after the cost of the $700bn mortgage rescue fund is taken into account. Budget deficits of that kind are usually enough to scare many foreign investors away, and indeed the dollar slumped 1.1 cents to $1.8441 against the pound yesterday, and in late trading was down almost two cents against the euro at $1.46880.
Ironically, despite the pound’s comparative strength against the dollar – having risen from just above $1.75 in the past few weeks – it remains extremely weak against other world currencies, due to investors’ fears about the UK’s own home-grown problems.
“The magic trillion-dollar deficit is within sight,” says Simon Derrick, of Bank of New York Mellon, “The combination of the fiscal position and loose monetary policy is likely to be significantly dollar-negative. With an expanding supply of US paper they might want to hold something else as their safe haven, which might mean other currencies and might just as easily mean commodities such as gold.”
When a government opens the spending taps and borrows more, investors invariably take flight, fearing that assets denominated in those currencies will lose their value as inflation rises and the currency weakens.
However, with the Treasury still reluctant to spell out precisely how the rescue package, modelled on the late 1980s’ Resolution Trust Corporation, will work, analysts are still unclear about how far the dollar has to fall.
It is likewise still unknown precisely what effect the quasi-nationalisation of Fannie Mae and Freddie Mac will have for the nation’s finances, though the implications will again almost certainly be negative.
According to Mr Derrick, “the sums have changed so quickly on the fiscal side within the space of two weeks, and clearly the outlook for the US economy relative to where people were forecasting before Freddie and Fannie. Investors will also have a radically different outlook for the future.”
The biggest question, however, is whether the reserve managers in central banks in China and elsewhere will treat this as a justification for selling off some of their massive mountain of dollar-denominated investments. If this were to happen, it could cause a catastrophic drop in the US currency, potentially compromising its status as the world’s reserve currency.
However, with the euro area facing its own economic and financial crises, it looks unlikely to be able to step into the breach. This helps explain the leap yesterday in gold and oil prices as investors seek to buy tangible commodities in place of currencies that may easily be devalued in the coming years.
What was perhaps even more worrying for investors was an item in the small print of Hank Paulson’s rescue plan. It said that, separate to the $700bn markets rescue package, the US Treasury would plunder the Exchange Stabilisation Fund – the US currency reserves, established in the 1930s – in order to pay for an insurance scheme for the money markets.
“The Treasury has committed the nation’s FX reserves to supporting the money market industry,” said Chris Turner, head of foreign exchange strategy at ING. “That suggests to us that the dollar has fallen down the list of the administration’s priorities – a worrying development for foreign investors in the US.”
The fund’s cash is being funnelled into a new scheme designed to protect money market mutual funds, which mirrors the Federal Deposit Insurance scheme for consumers’ bank savings. “What worries us is that the US Treasury has committed the nation’s FX reserves at a time when the dollar is exceptionally vulnerable,” said Mr Turner.
China recession ahead
"The collapse of emerging market economies will shake investors to the core. The great unwind has only just begun," said Albert Edwards, the bank's global strategist.
"The big surprise in store is what could happen in China. The potential for a deep recession in the US is already on the radar screen, but people will be stunned if China's economy contracts, as I believe it will. Investors could be massively caught out," he said.
"The consensus has a touching belief that emerging markets will prove resilient despite a deep downturn in developed economies. My view is that an outright contraction in global GDP is entirely possible next year."
"The emerging market boom is totally tied up with a decade of ballooning current account deficits in the US. Put that into reverse and you'll be surprised what pops out of the woodwork."
Mr Edwards said the vast accumulation of foreign exchange reserves – led by China with $1.8 trillion – had provided the "rocket fuel" of liquidity for frontier markets. This virtuous circle has now turned vicious as America tightens its belt. Countries in Asia and Latin America are intervening to prop up their currencies, causing reserves to fall.
"We could see monthly trade surpluses in the US within a year. The emerging market liquidity squeeze will intensify ferociously, and assets linked to the region will become toxic waste. That includes previously resilient banks such as HSBC, Standard Chartered and Banco Santander," he said.
The gloomy forecast comes as Fitch Ratings warns of mounting distress for banks in China, where debt has been shunted off books to circumvent state limits on credit growth.
The pattern looks eerily like the use of "conduits" by Western banks at the height of the credit bubble.
The agency's China team, Charlene Chu and Chunling Wen, said banks had used an "underground market" on a large scale to stoke up lending. "These types of credit and/or institutions fall outside the traditional structures of financial supervision, exposing banks to a growing amount of risk that is for the most part hidden By getting a portion of their credit off books, Chinese banks are able to comply with official loan quotas while in practice exceeding them," he said.
Under the mechanism, the loans are packaged into wealth products and sold to investors searching for bumper yields. The parallel with the US sub-prime debacle is striking, although Fitch avoids an explicit parallel.
Moreover, the banks issue "entrusted loans" in which they act as piggy-in-the-middle between two sets of clients, keeping the credits of the portfolio sheet. These loans have reached 1.5 trillion yuan ($220bn).
Even without such off-books liabilities, the banks are facing a crunch as the economy slows hard and the property market stalls. Shenzen house prices are already down 30pc.
"The Chinese banking system is nearing the point at which it can no longer sustain additional large net withdrawals of liquidity without generating further strains on banks' ability to lend," it said.
Morgan Stanley said this month that China's housing market was heading for a "melt-down". Data is patchy and rarely reliable, but it is clear that home sales in Beijing, Shanghai and other Eastern cities have fallen drastically over the summer.
"The big surprise in store is what could happen in China. The potential for a deep recession in the US is already on the radar screen, but people will be stunned if China's economy contracts, as I believe it will. Investors could be massively caught out," he said.
"The consensus has a touching belief that emerging markets will prove resilient despite a deep downturn in developed economies. My view is that an outright contraction in global GDP is entirely possible next year."
"The emerging market boom is totally tied up with a decade of ballooning current account deficits in the US. Put that into reverse and you'll be surprised what pops out of the woodwork."
Mr Edwards said the vast accumulation of foreign exchange reserves – led by China with $1.8 trillion – had provided the "rocket fuel" of liquidity for frontier markets. This virtuous circle has now turned vicious as America tightens its belt. Countries in Asia and Latin America are intervening to prop up their currencies, causing reserves to fall.
"We could see monthly trade surpluses in the US within a year. The emerging market liquidity squeeze will intensify ferociously, and assets linked to the region will become toxic waste. That includes previously resilient banks such as HSBC, Standard Chartered and Banco Santander," he said.
The gloomy forecast comes as Fitch Ratings warns of mounting distress for banks in China, where debt has been shunted off books to circumvent state limits on credit growth.
The pattern looks eerily like the use of "conduits" by Western banks at the height of the credit bubble.
The agency's China team, Charlene Chu and Chunling Wen, said banks had used an "underground market" on a large scale to stoke up lending. "These types of credit and/or institutions fall outside the traditional structures of financial supervision, exposing banks to a growing amount of risk that is for the most part hidden By getting a portion of their credit off books, Chinese banks are able to comply with official loan quotas while in practice exceeding them," he said.
Under the mechanism, the loans are packaged into wealth products and sold to investors searching for bumper yields. The parallel with the US sub-prime debacle is striking, although Fitch avoids an explicit parallel.
Moreover, the banks issue "entrusted loans" in which they act as piggy-in-the-middle between two sets of clients, keeping the credits of the portfolio sheet. These loans have reached 1.5 trillion yuan ($220bn).
Even without such off-books liabilities, the banks are facing a crunch as the economy slows hard and the property market stalls. Shenzen house prices are already down 30pc.
"The Chinese banking system is nearing the point at which it can no longer sustain additional large net withdrawals of liquidity without generating further strains on banks' ability to lend," it said.
Morgan Stanley said this month that China's housing market was heading for a "melt-down". Data is patchy and rarely reliable, but it is clear that home sales in Beijing, Shanghai and other Eastern cities have fallen drastically over the summer.
25 September 2008
Your Urgent Help Needed
Dear Nigerian:
I need to ask you to support an urgent secret business relationship with a transfer of funds of great magnitude.
I am Ministry of the Treasury of the Republic of America. My country has had crisis that has caused the need for large transfer of funds of 800 billion dollars US. If you would assist me in this transfer, it would be most profitable to you.
I am working with Mr. Phil Gram, lobbyist for UBS, who will be my replacement as Ministry of the Treasury in January. As a Senator, you may know him as the leader of the American banking deregulation movement in the 1990s. This transactin is 100% safe.
This is a matter of great urgency. We need a blank check. We need the funds as quickly as possible. We cannot directly transfer these funds in the names of our close friends because we are constantly under surveillance. My family lawyer advised me that I should look for a reliable and trustworthy person who will act as a next of kin so the funds can be transferred.
Please reply with all of your bank account, IRA and college fund account numbers and those of your children and grandchildren to wallstreetbailout@treasury.gov so that we may transfer your commission for this transaction. After I receive that information, I will respond with detailed information about safeguards that will be used to protect the funds.
Yours Faithfully Minister of Treasury Paulson
I need to ask you to support an urgent secret business relationship with a transfer of funds of great magnitude.
I am Ministry of the Treasury of the Republic of America. My country has had crisis that has caused the need for large transfer of funds of 800 billion dollars US. If you would assist me in this transfer, it would be most profitable to you.
I am working with Mr. Phil Gram, lobbyist for UBS, who will be my replacement as Ministry of the Treasury in January. As a Senator, you may know him as the leader of the American banking deregulation movement in the 1990s. This transactin is 100% safe.
This is a matter of great urgency. We need a blank check. We need the funds as quickly as possible. We cannot directly transfer these funds in the names of our close friends because we are constantly under surveillance. My family lawyer advised me that I should look for a reliable and trustworthy person who will act as a next of kin so the funds can be transferred.
Please reply with all of your bank account, IRA and college fund account numbers and those of your children and grandchildren to wallstreetbailout@treasury.gov so that we may transfer your commission for this transaction. After I receive that information, I will respond with detailed information about safeguards that will be used to protect the funds.
Yours Faithfully Minister of Treasury Paulson
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