AGI Selling Assets and Restructuring

but then this...
AIG Scrambles for Cash, Asks Feds

Bank of America Reaches Deal for Merril Lynch

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Christopher Whalen, managing director of Institutional Risk Analytics, a research firm, predicts that approximately 110 banks with $850-billion in assets could close by next July. That's out of 8,400 federally insured institutions, he said, which together hold $13-trillion in assets.

Individual customers are starting to get nervous about the financial health of their banks for the first time in generations, he said. Whalen's firm analyzes the safety and soundness of banks for business clients, but began receiving inquiries from individuals in the past two months for the first time, he said.

“If we don't get ahead of this, we are going to face a run on the retail banks by [the American] election day,” he said.

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I guess by then the speculators figured Thiessen and Martin had had enough fun damaging the Canadian economy with downloading of cutbacks onto provinces and jumping all over any sign of inflation with "pre-emptive" interest rate increases.

Anyway, that was off-topic. The damage to the US economy wrought by the likes of Volcker, Greenspan, Reagan, Bush I, the Repubs who didn't mind trashing Clinton, Clinton when he was trying to appease right-wing sentiment, and Bush II, has finally come home to roost. The agricultural sector in the USA is dominated by large businesses with monopoly pricing power and the manufacturing sector is limping along, unable to take up any slack in the economy because nobody knows how, or has the equipment, to actually make stuff anymore.

The service sector, bifurcated into crap jobs like McDonald's and what-have-you at the bottom, and financial stuff at the top, is now taking its own hits as financial sector jobs become shaky, and rising unemployment has already struck at the McJobs in any case.

According to Shadow Government Statistics the help-wanted indexes tend to be a good indicator of recessions or expansions, and for the last five years the HW index has been the lowest ever for a long time while their adjusted GDP deflator shows the US to be in the fourth or fifth consecutive year of an inflationary recession.

[ 15 September 2008: Message edited by: DrConway ]

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The damage to the US economy wrought by the likes of Volcker, Greenspan, Reagan, Bush I, the Repubs who didn't mind trashing Clinton, Clinton when he was trying to appease right-wing sentiment, and Bush II, has finally come home to roost.

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And were not the Conseratives and Republicans in power in Canada and the U.S. repectively during the 1920's?

It seems that the economic mission of right wing administrations is to bankrupt the government. Governments with money, you see, might be tempted to spend it on people, otherwise. And then there's all the tory fun of spreading misery through cuts and general economic turmoil.

One way to make yourself rich is to make everyone else poor. It's all relative.

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Originally posted by Tommy_Paine:
One way to make yourself rich is to make everyone else poor. It's all relative.

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BUT BUT BUT EXPANDING PIE AND WE CAN ALL GET RICH REALLY.

I always have to laugh at the way right-wingers have to contort themselves when faced with evidence that it's not moral fiber that's the problem in a pyramidal, hierarchically structured society.

If we all got rich, we'd all be millionaires and it wouldn't matter anyway, because dinner out would cost $2000 and a house would be a billion bucks.

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Originally posted by Albireo:
I'll bet if you tuned into FOX News, you could find a commentator saying that the Repuglicans have done a great job, but the markets clearly fear an Obama presidency.

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Originally posted by DrConway:
Guess what, looks like the collateral damage from this is going to spread through the US economy. Buddy of mine in the US just told me one of the institutions that went poop holds the mortgage on his place and will probably foreclose to try and get money.

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Originally posted by ElizaQ:
China has lowered interest rates for the first time since 2002 which is causing some waves in analyist corners considering what's happening as we speak on Wall Street. Wish I had paid more attention in school when all this financial stuff was covered.

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I did enjoy economics & finance, but what has occurred on Wall Street the last 10 years is quite divorced from "classic economics".

Feeling confused by what is occurring is normal - it's a sign that someone is trying to comprehend (a paradox), but the financial machinations of the last decade are very complex.

I have found John Mauldin to be pretty good at explaining mortgage-backed securities, etc. @
http://www.investorsinsight.com/

He's one of those guys that 'manage money for rich people', but he's also a good writer.

So far financial institutions around the world have "fessed up" (booked, shown on their books) about $500 billion of losses from these securities that were bought, based on the assumption that real estate prices would go up FOREVER !

Bloomberg News has had some articles estimating that total losses related to mortage-backed securities will be in the range of 1.2 to 1.6 Trillion. In other words, we are approaching the half way point, in terms of the financial corps. getting honest about their losses from the real estate / financial trickery of the last decade.

When the US took on Fannie & Freddie, they added $5 trillion to a $9 Trillion US national debt. so now, the interest on the debt @3% is ($14 Trillion x 3% = $420 billion - a year). I don't think that will ever be paid off.

What we are watching is historical. I am glad to finally see some honesty in the financial press, "worst financial crisis in 100 years", I think both Greenspan and Paul Krugman have said this recently.

Personally, I don't think the term 'crisis' is accurate, since what is happening was planned. It was obvious that real estate prices would not go up forever, the mainstream media and a lot of the general public just had trouble admitting it, and Wall Street was happy to feed the delusion (top 30 hedge fund managers in 2007 - average salary - $500 million).

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Originally posted by Albireo:
I'll bet if you tuned into FOX News, you could find a commentator saying that the Repuglicans have done a great job, but the markets clearly fear an Obama presidency.

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On Free Dominion, a lot of people are arguing this recession is caused by the politics of tolerance. Their reasoning is that the governments forced the banks to make loans to African Americans, and that's why there's a mortgage crisis.

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Originally posted by N.Beltov:
Over 100 years ago Karl Marx predicted that capitalism would be unable to take care of those impoverished by it, and would, therefore, collapse. What we see now is that those enriched by capitalism - those at the "tippy top" to use Thomas Frank's expression - have to be continually bailed out to preserve the system. If we don't keep the rich rich, then capitalism might collapse. It's a mad, mad, mad, mad world we live in. And this has become a general condition - planned even (as SwimmingLee suggests).

The only thing that's missing to turn the whole rotten apple cart over is the understanding that such mischief is totally necessary.

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As banks reeled and presidential campaigns scrambled to react to the crisis on Wall Street Monday, color one man unsurprised.

“I predicted this,” said Ralph Nader, the independent presidential candidate. “All this I’ve written about five, 10 years ago.”

In a meeting with Politico reporters and editors, Nader laid the blame for the current economic upheaval squarely at the feet of corporate America.

“Pure greed, coupled with concentrated power on Wall Street and elsewhere” brought about the crisis, Nader said.

Though Nader would not comment specifically on the news of the Lehman Bros. decision to declare bankruptcy — “I just heard about it this morning,” he explained — he argued that banks and other corporations had engaged in “a massive, imprudent acceptance and transfer of risk.”

Nader, who made his reputation as a consumer advocate, concluded: “The rubber band eventually snapped.”

It wasn’t just banks that Nader criticized. In a letter to congressional leaders, Nader also attacked the idea of a government loan to major automakers, alleging that Congress was rushing to pass “panic legislation without due deliberations, without even having public congressional hearings.”

As Sens. Barack Obama and John McCain attempt to present themselves as plausible economic stewards, Nader told Politico both major party candidates fall short of addressing the root causes of the latest bank failures. According to Nader, Obama and McCain are too worried about containing fallout to take on the banks’ irresponsible behavior.

“Look at how they are knee-jerking similar approaches,” Nader said, chiding the Democratic and Republican presidential nominees for their support, earlier this year, for bailing out Bear Stearns. “McCain, Obama: Rubber stamp. No detail. We will go along with the bill.”

“They’re twins,” Nader continued. “If you look at their economic policies, other than taxes and so on … they’ll curtsy to the, quote, prestige of the Treasury.”

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Originally posted by 500_Apples:

On Free Dominion, a lot of people are arguing this recession is caused by the politics of tolerance. Their reasoning is that the governments forced the banks to make loans to African Americans, and that's why there's a mortgage crisis.

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Originally posted by Doug:

Not due to inadequate sales of white sheets? That makes about as much sense, especially considering that the laws against not providing mortgages to black neighbourhoods have been in place for decades.

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On Free Dominion, a lot of people are arguing this recession is caused by the politics of tolerance. Their reasoning is that the governments forced the banks to make loans to African Americans, and that's why there's a mortgage crisis.

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Apples, only idiots from the far right think like this. I highly doubt most people are far right idiots. I also cannot believe that these supposedly superior dumbasses are blaming this on African Americans. Just goes to show how utterly twisted and disgusting that lot of freaks are. Nasty nasty people.

Human beings have a tendency to prefer simple, uncomplicated answers over harder ones. This, for the most part, was probably an evolutionary survival advantage when making a snap decision about whether to attack the big bear about to eat you was a good idea, and if you survived, what to tell someone else, which probably was, "If you see a bear, run away and very fast, or if you have a big spear, kill it fast."

As opposed to something like "depending on whether the bear is actually hungry, et cetera, for another thousand words, and in conclusion your behavior towards the bear should ideally depend on a dozen factors you can't possibly analyze in the time allotted but yes, it's good to know anyway even if you eat eaten trying to figure it out."

Conservative governments bad for economic and financial health - Jack Layton

[ 16 September 2008: Message edited by: Fidel ]

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In an extraordinary turn, the Federal Reserve agreed Tuesday night to take a nearly 80 percent stake in the troubled giant insurance company, the American International Group, in exchange for an $85 billion loan.

The decision, only two weeks after the Treasury took over the quasi-government mortgage finance companies Fannie Mae and Freddie Mac, is the most radical intervention in private business in the central bank’s history.

...

But the bailout is likely to prove controversial, because it effectively puts taxpayer money at risk while protecting bad investments made by A.I.G. and other institutions does business with.

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Not surprisingly, Barney Frank hits the nail on the head:

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Representative Barney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee, said Mr. Paulson had not requested, and did not appear to need, any new legislative authority for the bailout.

“The secretary and the chairman of the Fed, two Bush appointees, came down here and said, ‘We’re from the government, we’re here to help them,’ ” Mr. Frank said. “I mean this is one more affirmation that the lack of regulation has caused serious problems. That the private market screwed itself up and they need the government to come help them unscrew it.”

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So much for the 'invisible hand' of the market and 'rugged individualism', eh?

[ 16 September 2008: Message edited by: ghoris ]

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Actually the only people I can find saying that it's not a mess is the Feds, plus a few pundits. Most all others are saying, okay it's bad, but today wasn't as bad as was feared, but yeah it's bad.

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People tend to read people saying "its not a catastrophe in the making" as saying "its not a mess." The two are implicitly equated.

Even Paul Krugman thinks a catastrophe is not the most likely outcome. But the very fact it is a possibility is alarming enough, and at a minimum, has a very material effect on how long it takes to get to the other end of spreading the consequences of the mess around to nearly everyone.

IE, some of us lose our jobs, some of us have our retirement incomes substantially effected, all of us pay more for less... regardless of whether we had anything to do with the mess.

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Originally posted by DrConway:
The fact that Stephen Harper even has to tell us the Canadian economy is in real good shape honest to god (you can almost see the earnest boy scout salute) is indicative of the fact that he knows what a pile of quicksand he's been standing on and how lucky he is there's an election, so whoever gets the most seats in October has to deal with this mess.

Or, if the Cons win again, he can quickly rush to hide all the embarrassing information (such as did he know in advance there were going to be some severe problems in the US), and grin and wave while giving more tax cuts to rich people.

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Well, Canada should do better than the USA;

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Jack Layton promised Tuesday to protect Canada’s economy from a U.S.-style meltdown by revamping banking regulations, although the solutions he proposed are measures already in place in the U.S. — measures that failed to prevent the economic crisis.

“If I’m elected prime minister, the federal government will undertake an immediate top-to-bottom review of how banks, insurance companies and other financial providers are regulated in this country, to protect Canadians,” the NDP leader told workers outside a John Deere plant slated for shutdown.

“We’ve got to ensure that our financial institutions are properly capitalized and that they fully disclose all of their risks to their investors, and that they don’t substitute flawed ratings systems for real risk management.”

When asked whether he had specific changes in mind, Layton could only mention two measures adopted in the U.S. years ago — increased shareholder rights to monitor the operations of company directors, and the Sarbanes-Oxley Act, adopted in 2002 after the Enron scandal. The law established new standards for public companies and accounting firms.

Those measures did not prevent the sub-prime mortgage crisis and its continuing effects on the American economy.

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C'mon, Jacko, get on the ball!

[ 17 September 2008: Message edited by: DrConway ]

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Originally posted by M. Spector:
Jack Layton is on the case: Never mind. Nothing to see here, folks.

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Originally posted by Doug:

Financial reform proposals that don't relate directly to banking would be in provincial jurisdiction here.

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Our big six banks were arguing for mergers so they could gamble in the casino economy on a more equal footing with their American counterparts. The NDP has protested bank mergers for years saying that banks need to stick to banking. According to former Liberal Party member Mel Hurtig, Canadian banks have, and using Canadians' money, financed about 60 percent of the foreign takeovers of of corporate Canada and crown assets since 1985, and mostly by rich Americans.

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Originally posted by Agent 204:

Are they allowed to do that? Call in a loan early if the payments are being made??

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Originally posted by Doug:
Not due to inadequate sales of white sheets? That makes about as much sense, especially considering that the laws against not providing mortgages to black neighbourhoods have been in place for decades.

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The "equal lending to blacks created the housing bubble" line was created by the neocon propagandists and is being distributed through the usual channels.

I don't think the general public in the US is buying it though, almost all whites live in all-white neighbourhoods and they know damn well that their own friends and family were playing the RE speculation game.

As for the NDP, what we should be saying, and haven't said as far as I know, is that the US crisis was caused by loose and excessive mortgage lending, and that CMHC should be demanding higher down payments and stricter qualifications for mortgages that it guarantees, and banks should be required to do the same. As far as I know the NDP did not even object to the absurd 0/40 mortgage insurance brought in by the Cons and recently dropped when they saw the SHTF.

Loose lending practices do not make housing more affordable, they make it less affordable.

[ 17 September 2008: Message edited by: brookmere ]

I’ve long said that before the cascading failures start, we will see a round of consolidations. We have today arrived at that point. Wachovia and Morgan Stanley are in merger talks, the US government seeks a buyer for WaMu, Lloyds buys UK mortgage lender HBOS (HSBC wants in, but refuses to pay a single penny for HBOS shares).

Not all these talks will presumably be concluded in time to avoid bankruptcies, events are accelerating too fast. There is no trust whatsoever left in the system. For every successful deal, three more problems will emerge. It has to wind down till all the funny money has gone.

I said yesterday that Morgan Stanley looked to be under siege. It’s down over 40% this morning. It has entered the emergency room. And when Goldman gets under attack (down 25%), the picture is complete: Wall Street as a whole is crumbling.

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Originally posted by brookmere:
Of course not. The guy is full of it.

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Are you calling my friend a liar? I happen to have good reason to vouch for his truthfulness.

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Originally posted by Fidel:
Canada doesn't even have a federal securities and exchange commission. Canadians have been ripped off by investment scandals and stock fraud to the tune of tens of millions of dollars over the last few years.

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Originally posted by M. Spector:
The U.S. has one, but it hasn't prevented the financial crisis, the housing bubble, the mortgage derivatives scam, and all the other financial horrors south of the border.

We need protection from investors, not protection for investors.

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Originally posted by M. Spector:
Why not throw in "bank accounts" into your list?

I'm talking about the people who derive their income from the investment of capital by appropriating the surplus value created by people who actually work for a living. You know - the capitalist class?

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Originally posted by M. Spector:
The U.S. has one, but it hasn't prevented the financial crisis, the housing bubble, the mortgage derivatives scam, and all the other financial horrors south of the border.

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And the Yanks have had nothing but the same two old line big money parties in power and running the show since always.

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Britain’s biggest savings bank will be rescued from the brink of collapse this morning in a deal intended to stave off financial catastrophe but likely to put tens of thousands out of work.

As Halifax Bank of Scotland finalised an emergency takeover by Lloyds TSB, two of Wall Street’s most powerful investment banks were scrambling to survive. Shares in Morgan Stanley and Goldman Sachs, once the stormtroopers of global capitalism, tumbled,prompting fears for their future.

One shell-shocked senior banker in London said that there was no future left for the traditional investment bank. “The world is on the brink. The market is puking all over us. There’s no capital left in the world,” he said.

On a day of undisguised market panic, the US Government was forced to nationalise AIG, America’s largest insurer; the price of gold soared as panicked investors rushed to find safe havens; others sought shelter by buying US government bonds at levels not seen since Pearl Harbor in 1941; and Gordon Brown personally intervened to enable the fire sale of HBOS to Lloyds to create Britain’s biggest bank. The deal could cost as many as 40,000 jobs across Lloyds and HBOS branches, call centres and head offices, according to one estimate. The new bank will be called Lloyds Halifax, raising concerns north of the Border that it will lose its Scottish identity.

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PARIS — The Federal Reserve, the European Central Bank, the Bank of Japan and other central banks significantly escalated the assistance offered to global money markets on Thursday, coordinating efforts to ease monetary constraints stemming from the turmoil emanating from Wall Street.

The Fed said in a statement that it had authorized a $180 billion expansion of its temporary reciprocal currency arrangements, known as swap lines, to allow banks to borrow more dollars in markets at a lower rates.

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The Fed also authorized increases in the existing swap lines with the European Central Bank, up to $110 billion from $55 billion, and the Swiss National Bank, up to $27 billion from $15 billion.

New swap facilities were established by the Fed with the Bank of Japan, for $60 billion; the Bank of England, for $40 billion; and the Bank of Canada for $10 billion.
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Central banks in Japan, Australia and India pumped a further $28 billion into money markets while China relaxed its monetary policy for the second time this week, Reuters reported.

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Panic is the word of the hour on Wall Street. Now even Morgan Stanley is fighting for survival. The commercial bank Wachovia and China's Bank Citic are being discussed as possible rescuers. The crisis has led President Bush to cancel a trip.
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By the end of Wednesday, no one here was in the mood for laughter. The bad news on Wall Street was coming thick and fast. All the US indexes were crashing again after Tuesday's brief and deceptive breather. In its wild, rollercoaster ride, the Dow Jones lost about 450 points, which was almost as much as it lost on Monday, the most catastrophic day on US markets since 2001.

Investors were turning their back to the market in droves and fleeing to safer pastures. The price of gold broke its record for the highest increase in a one-day period.

.................

Things got worse after the markets closed. Washington Mutual, America's fourth-largest bank, announced that it had started the process of putting itself up for sale. The Wall Street Journal reported that both Wells Fargo and the banking giant Citigroup were interested in taking over the battered American savings bank.

And then came the announcement that would dominate all of Thursday's market activities: Morgan Stanley -- the venerable Wall Street institution and one of the last two US investment banks left standing -- had lost massive amounts and was fighting for survival. Media reports were saying that it was even in talks about a possible bail-out or merger. Rumor had it that possible suitors might include Wachovia or China's Bank Citic.

China?

"Folks," economist Larry Kudlow, a host on the business channel CNBC begged his viewers that evening, "let's not let this magnificent country go down!"

End of an Era

In fact, it really does look as if the foundations of US capitalism have shattered. Since 1864, American banking has been split into commercial banks and investment banks. But now that's changing. Bear Stearns, Lehman Brothers, Merrill Lynch -- overnight, some of the biggest names on Wall Street have disappeared into thin air. Goldman Sachs and Morgan Stanley are the only giants left standing. Despite tolerable quarterly results, even they have been hurt by mysterious slumps in prices and -- at least in Morgan Stanley's case -- have prepared themselves for the end.

"Nothing will ever be like it was before," said James Allroy, a broker who was brooding over his chai latte at a Starbucks on Wall Street. "The world as we know it is going under."

.................
The only thing that is certain is that the era of the unbridled free-market economy in the US has passed -- at least for now. The near nationalization of AIG, America's largest insurance company, with an $85 billion cash infusion -- a bill footed by taxpayers -- was a staggering move. The sum is three times as high as the guarantee provided by the Federal Reserve when Bear Stearns was sold to JPMorgan Chase in March.

The most breathtaking aspect about this week's crisis, though, is that the life raft -- which Washington had only previously used to bail out the mortgage giants Fannie Mae and Freddie Mac -- is being handed out by a government whose party usually fights against any form of government intervention. The policy is anchored in its party platform.

"I fear the government has passed the point of no return," financial historian Ron Chernow told the New York Times. "We have the irony of a free-market administration doing things that the most liberal Democratic administration would never have been doing in its wildest dreams."

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Originally posted by ElizaQ:
The World as We Know it Is Going Under

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Originally posted by DrConway:
That last line in the quote should be a BIG ANVIL SIZED HINT to Obama-Biden that they had better start moving left some more if they want to get ahead of the new craze for interventionism on the scale of FDR's plans in the 1930s.

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Wall Street and Washington
How the Rules of the Game Have Changed
By Steve Fraser, TomGram

What is Washington to do as the financial system collapses? Clearly, stark differences in approach as well as in public policy have already emerged. Bail-out Bear Stearns and pump up the brokerage and investment business with new lines of credit. Nationalize Fannie Mae and Freddie Mac on the backs of the taxpayer -- but let Lehman drown. Tell the financial community to save itself, after which Bank of America salutes and buys Merrill Lynch. Then, the Fed gets cold feet and decides it can't let an institution the size of the insurance giant AIG go under as well. Washington is left staring into the abyss. The old rules no longer apply.

And that's the point. At moments of crisis since the mid-1980s, the relationship between Washington and Wall Street has changed fundamentally, at least when compared to anything that would have been recognizable in the previous century. As a result, the road ahead is dark and unknown. (...)

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King Louis XVI has been forced to call an assembly of the Estates General, to deal with debt incurred by numerous wars, the nation's astronomical debt, the inability to look after the social welfare of military vetrans, and what has come to be seen as an unfair tax regime.

I think the idea of government regulation is starting to circulate more generally, and I'm all in favour of that, but it seems to me that judicious and impartial applications of the criminal code in Canada and in the U.S. would have put a damper on this kind of activity.

But then, unlike tories, I am a big fan of law and order.

[ 18 September 2008: Message edited by: Tommy_Paine ]

By my reckoning that is $905.4 billion

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Originally posted by DrConway:
That last line in the quote should be a BIG ANVIL SIZED HINT to Obama-Biden that they had better start moving left some more if they want to get ahead of the new craze for interventionism on the scale of FDR's plans in the 1930s.

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Financial Warfare: The Powers of Deception

The weapons used on Wall Street are prior knowledge and inside information, the ability to manipulate with the capacity to predict results, the spreading of misleading or false information on economic occurrences and market trends. These various procedures are best described as the "powers of deception", which financial institutions routinely use to mislead investors.

The art of deception is also directed against their banking competitors, who are betting in the derivatives and futures markets, in stocks, currencies and commodities.

Those who have access to privileged information (political, intelligence, military, scientific, etc.) will invariably have the upper hand in the conduct of these highly leveraged speculative transactions, which are the source of tremendous financial gains. The CIA has its own financial institutions on Wall Street. . .

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But then Republicans are good at waving the flag while letting foreigners with fundamentally unfriendly intentions towards the US get away with murder, apparently sometimes literally.

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Originally posted by Uncle John:
Interesting first page on today's Globe Report on Business:
US Government bailouts:
(figures in billions US)
AIG Insurance $85
Federal Housing Administration $300
Housing grants $4.4
JP Morgan Chase $87
Term-Auction Facility $200
Bear Sterns $29
Fannie Mae and Freddie Mac $200

By my reckoning that is $905.4 billion

They say the total exposure could be as high as $3 trillion, so I guess we are about 30% there....

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I think it takes time to build these financial cases, and I think there will be charges, eventually. In the States.

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Originally posted by Tommy_Paine:
Well, John McCain promised yesterday to fire the outgoing head of the SEC....

I think it takes time to build these financial cases, and I think there will be charges, eventually. In the States.

But in Canada, our law enforcement couldn't even get a conviction in Bre-X, so it will be business as usual, as usual.

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[ 19 September 2008: Message edited by: Frustrated Mess ]

[ 19 September 2008: Message edited by: ElizaQ ]

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Originally posted by DrConway:
The USA should take comfort in knowing right-wing pushes for financial deregulation also lets foreign intelligence agencies make a killing on international speculative markets. It's been alleged that the KGB did this to good effect in the late 1970s and all through the 1980s while ordinary Soviets got paid in rubles that barely bought anything of value.

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If that's true about the KGB, then they didn't seem to have enough dollars for even the crooked privatizations of the 1990's. To make things appear legit, U.S. dollars were the agreed upon currency for the oil, gas, and vast mineral wealth buys by Russian, Euro, as well as American oligarchs now left hung out to dry for deals gone bad in Russia. Russian and other oligarchs didn't even pay world market values for the resources they stole from Russians, but the privatization decrees(written by oligarchs themselves) did require U.S. dollars of which the oligarchs needed outside partners for the appearance of legitimacy according to several sources. The ruble was wiped out with elimination of wage and price controls - Jeffrey Sachs referred to Russians life savings then as "pesky overhang" that prevented Russian workers from being totally reliant on the new market system. Russians needed this shock from their life of leisure and dependence on the state for employment and social supports. There were bonds issued to ordinary Russians for shared ownership in the common good distributed to workers, but Russians believed the papers to be worthless, sold them to street swindlers working for the oligarchs at criminally low prices. This, to my understanding, was the secret to Marxian primitive accumulation pushed through at breakneck speed in 1990's Russia.

In 1986, oil prices dropped as Saudis began dumping oil on world markets. The Soviets having no financial system decoupled from the physical economy relied mainly on oil and natural resource exports for earning hard currency. RAND Corp. said at the time that the Soviets were spending 50% and higher GNP on military and the occupation in Afghanistan. That was a big fib, but it at least inspired more Pentagon capitalism/upside-down socialism in the USSA. The Soviets were deficit spending and draining foreign capital reserves. Today the Saudis seem to be working to maintain higher oil prices to the Russians advantage.

[ 19 September 2008: Message edited by: Fidel ]

Leaders Stunned By Warnings - Meltdown

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As Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the Banking, Housing and Urban Affairs Committee, put it Friday morning on the ABC program “Good Morning America,” the congressional leaders were told “that we’re literally maybe days away from a complete meltdown of our financial system, with all the implications here at home and globally.”

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Originally posted by DrConway:
That last line in the quote should be a BIG ANVIL SIZED HINT to Obama-Biden that they had better start moving left some more if they want to get ahead of the new craze for interventionism on the scale of FDR's plans in the 1930s.

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Video of Obama commenting on McCains Remarks -short

'Times That Try Men's Souls': Bush Must Telephone Medvedev

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A "New Bretton Woods" agreement in the spirit of the initiative of President Franklin Roosevelt, is the only precedent of relevance for the currently ongoing, general breakdown-crisis of the world's present monetary-financial system

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Next is the corrupted model of housing a trading desk for the firm inside the same company that is supposed to issue unbiased research to the public. For example, let’s say that XYZ Brokerage buys a big stake in ABC Company on its proprietary trading desk (the desk that trades for profits for the firm) on Wednesday afternoon. On Thursday afternoon, it could almost guarantee profits for itself by issuing a research report upgrading the stock. Conversely, it could short the stock on Wednesday and issue a negative report to drive down the price on Thursday, also guaranteeing itself a profit. Other than a fictional Chinese Wall, there is absolutely nothing to stop this type of public looting.

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All the "greedy" behaviour that led to the crisis can continue apace, secure in the knowledge that the government will always be there to bail the corporate welfare bums out of a tough situation.

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The real reason we have mega financial institutions is that mega financial institutions pay mega bucks to managers and make mega donations to the campaign coffers of politicians. They also get to put some of those mega-buck managers into key advisory positions in each administration, Republican and Democrat, to ensure that government polices allow them to get even bigger and even richer--and to ensure that when they screw it up, they get rescued at the taxpayers' expense.

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[ 20 September 2008: Message edited by: M. Spector ]

The real message we're getting is "as much as it takes".

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Originally posted by M. Spector:
I don't think anybody knows.

The real message we're getting is "as much as it takes".

And once they've sunk half a trillion into corporate welfare, there will be all the more "reason" to keep throwing more money after that.

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As much as it takes is just posturing.

What they might mean is "as much as we can".

There is an aspect here of feeling like I'm "dealing with the devil" - John manages money for rich people. The tone at their meetings is that it is OK to make fun of environmentalists, labor supporters, and 'community organizers' (like Obama)(not that Obama is perfect).

Anyway, it's one of the most succinct explanations I've scene of what's happening in US bankland (and everyone around the world who made the mistake of buying there products). But, it's still long. The way their website is, I can't find a way to link to it.

This whole thing reminds me a little of what it's like to be skin-diving & see a large gray shark. Simultaneously fascinating & terrifying.

"Let's jump back 18 months. I spent several letters going over how subprime mortgages were sold and then securitized. Let's quickly review. Huge Investment Bank (HIB) would encourage mortgage banks all over the country to make home loans, often providing the capital, and then HIB would purchase these loans and package them into large securities called Residential Mortgage Backed Securities or RMBS. They would take loans from different mortgage banks and different regions. They generally grouped the loans together as to their initial quality as in prime mortgages, ALT-A and the now infamous subprime mortgages. They also grouped together second lien loans, which were the loans generally made to get 100% financing or cash-out financing as home owners borrowed against the equity in their homes.

Typically, a RMBS would be sliced into anywhere from 5 to 15 different pieces called tranches. They would go to the ratings agencies, who would give them a series of ratings on the various tranches, and who actually had a hand in saying what the size of each tranche could be. The top or senior level tranche had the rights to get paid back first in the event there was a problem with some of the underlying loans. That tranche was typically rated AAA. Then the next tranche would be rated AA and so on down to junk level. The lowest level was called the equity level, and this lowest level would take the first losses. For that risk, they also got any residual funds if everyone paid. The lower levels paid very high yields for the risk they took.

Then, since it was hard to sell some of the lower levels of these securities, HIB would take a lot of the lower level tranches and put them into another security called a Collateralized Debt Obligation or CDO. And yes, they sliced them up into tranches and went to the rating agencies and got them rated. The highest tranche was typically again AAA. Through the alchemy of finance, HIB took subprime mortgages and turned 96% (give or take a few points depending on the CDO) of them into AAA bonds. At the time, I compared it with taking nuclear waste and turning it into gold. Clever trick when you can do it, and everyone, from mortgage broker to investment bankers was paid handsomely to dance at the party.

Will we ever forget Charlie Prince's line, the CEO of Citigroup, saying that "As long as they are playing music, you have to get up and dance?" just a few weeks before the market imploded? Apart from having his rhythm being proven totally horrendous and overseeing an implosion which cost Citigroup tens of billions, it was a great statement of the zeitgeist of the financial world at the time.

The key word here is model. The ratings agencies used data supplied by the investment banks on what the likely default rates would be. It was something like taking an open book test where you get to write the questions. And since home values had only gone up, default rates were low. And of course, the data was from an ear when bankers lent money actually expecting to get paid back.

Inside a RMBS
Let's look at a RMBS. As Berg points out, when you are buying a mortgage backed security, there are really only three questions you need to know the answers to:

How many mortgages will default?
How much will I get back on a defaulted loan?
How much credit enhancement is there in the security?
Let's set the table by looking at a few terms and definitions. Using his example, let's take a mortgage where the home was originally appraised for $400,000 and there is a $300,000 mortgage on the home. Let's assume a default and the bank takes back the home. If they sell the home and recover $240,000 that means they lose $60,000. This is called a 20% severity. If they sold and recovered $150,000 it would be said to have a 50% severity.

Next, let's look at how the rating agencies come up with the AAA rating. First they model the expected losses, with emphasis on the word model. If they figure that worst case that 8% of the loans default at a severity of 50%, then the security would lose 4% of its value. To get an AAA rating you have to have at least two times the coverage of the "modeled" loss. In this illustration, that means that 92% of the loans would be put into the AAA tranche. An A rating assumes a coverage of more than 1 times but less than 2. B means you expect to get your money back and if they model that you will get below 100% back then the rating would be at junk levels.

Now, this next fact is important. All ratings assume a par value of 100. The rating of these bonds has nothing to do with price. After the presentation, Rich sat down with me and pulled up an actual mortgage backed security that was being offered that day on his screen. It was once a AAA rated Alt-A security. If I remember correctly it was a 2006 vintage security.

As of the latest reporting, a little over 5% of the mortgages were over 60 days past due or in foreclosure. In this security, there are no toxic option ARMS. The numbers of mortgages in this security that are in trouble are rising. S&P has downgraded that AAA tranche to BBB, which of course means its value is going down.

And sure enough, the offered price of the security is 70 cents on the dollar, or 70% of the original par value. Now remember, this particular AAA bond will only start to lose money after the lower tranches take up the first 8% of losses. Thus, this bond can be said to have an 8% credit enhancement.

Pricing in Financial Armageddon
Now, let's stress test that loan. For the AAA portion of the loan to lose money, that would mean that 16% of the loans would have to default with a severity of 50% losses. Could that happen? Sure.

But let's look at what buying that loan at 70 cents on the dollar does for the new owner. First, you are getting a much higher yield (interest rate) because you are buying the security at a lower valuation. But something else even more interesting happens.

Even though the security sold at 70 cents, it still gets all of the first of the proceeds of the home owners who pay their mortgages, up to 92% of the original value in the security. How many loans would have to default in order to make the buyer at 70 cents lose money? Remember, we already had credit enhancement of 8%. But at 70 cents, we just "bought" or priced in another 30%. Let's think Armageddon and that 50% of the mortgages default and they only recover 50% of the loans. That would only be a total loss of 25% to the entire collateral of the deal, but it would mean that the new investor still get all of my 70 cents plus another 13% back! The proud new owner could get up to 92% of the monies paid. Even in a pretty bad scenario, you get more than you paid for the security.

Let's walk through the math. Let's say the original security was $100 million (which would be a very small RMBS). The AAA tranche would have cost $92 billion. If you have it at 70 cents on the dollar you paid approximately $64 billion. In my Armageddon scenario above, the security loses 25% or $250 million. The lower rated tranches are completely wiped out losing $8 billion. Your tranche loses the remaining $17 billion which means you get $75 billion and you only paid $64 billion.

So, how bad would things have to get to lose money on this security? If I am doing the math right, 72% of the loans would have to default with a severity of 50% before your investment of $64 billion was impaired by even so much as 1 dollar. If that happened, it would be Armageddon.

So, why is it rated BBB? Because the rating is over the entire tranche and it is made at a par price of 100. The rating is not affected by the current price. As of today, assuming that even double the number of mortgages currently delinquent default with a 50% severity, your returns over the life of the security would be well over 12%. You would get back $92 million for your $64 billion dollar investment along with interest payments.

The reason this presentation was being made to banks and institutions? Because if you are a bank, you can generally only get prime plus 2% on a loan you make. But if you buy this security with your capital, you can make prime plus 6%. That is a large difference to a bank. Performance Trust has sold billions of this type of paper to banks and institutions.

If this is such a good deal, then why isn't everyone hitting the bid? Because these securities are very difficult to analyze. It is time consuming. You need to analyze every loan and develop your own valuations. You simply can't trust the ratings, as they are measuring something completely different.

And the real truth is that many of the various RMBS securities will in fact be totally wiped out or lose a great deal. Many are seeing default rates of 30% or more. You have to be very careful when you walk through this minefield. And in a time of crisis, it is not clear what the new rules will be. What if the government forces lenders to re-set mortgages at some loss level? What if the housing crisis gets worse? On the other hand, what if the government comes in and buys up all the bad mortgages in an attempt to stop the erosion in the home markets. The level of uncertainty in these times makes people a lot more cautious.

There are Alt-A RMBS like the one mentioned above that are probably not worth even 70 cents on the dollar. These things are marked to a market that is frozen. Everything gets lumped into the same basket and it all has to be marked to market by the new accounting rules called FASB 157. The institution selling the above mentioned security is being forced to do so, either because they are in financial trouble or they are not allowed to hold BBB securities in their portfolios and by law are required to sell. And in times of crisis, the selling price is not that of normal times.

Ratings to Collateral to Ratings: A Vicious Cycle
What's a recipe for a perfect financial storm? Let's make a massive amount of bad loans and get them on the books of most of the major financial institutions because they are rated investment grade. Then let's have the loans start to go bad. Throw in some general panic as everyone tries to sell the loans. No one is buying.

Let's make a new rule that you have to mark your illiquid securities to the last price paid by someone desperate to sell. That means that many institutions now have to mark their capital down and that means those pesky rating agencies must by their own rules mark down the ratings of the institutions which of course means that it costs them more to raise capital at a time when they can't get it which means they get lower ratings and so on. It becomes a vicious cycle.

In the early 80's, every major US bank was bankrupt because they had loaned Latin American countries far more than their capital they had on their books. The Latin American countries defaulted. If the US banks had been forced to mark to market, they would have all gone down taking the US economy along with them. So, the Fed simply allowed them to carry the loans at book value, offering liquidity and allowing the banks to buy time to make enough money to eventually write off the loans.

The current mark to market rule, while nice in theory, works in normal times. But it has the unintended consequence of making things worse in crisis times. Why should an institution have to write down a security which over time is going to pay back the lion's share or more of its value just because a severely stressed institution was forced to sell that security at a very low price in a time of crisis?

Yes, there needs to be transparency and we as investors need to know what is on the books of the companies that we invest in. But it is somewhat like my bank asking me to mark to market my home and pricing my loan daily based on that new price. If my neighbor loses his job and sells his home at auction, does that mean my home is now worth less two years from now. Maybe an even better analogy, if I am renting that home to a very good tenant, does my neighbor's price impair my income?

I was, and am, a fan of mark to market pricing. But we need to think through what a market price is. Not all things can be easily marked to market. This is doubly true when "market price" is a nebulous index of mortgage securities which may or not have a fundamental relationship with an illiquid security on the books of an institution which has no intention of selling, especially in a time of credit crisis.

It is one thing to require that you mark your stocks or bonds to market values. It is another thing entirely to require all mortgage backed securities, which are extremely complex things, can be very different one from another and which require a lot of time and effort to value, to be priced as though they are all the same.

FASB 157 needs to be amended this week. If Congress can create a new Resolution Trust Corp in a week, the surely the accounting board, with the suggestion of Treasury, can figure out a better way to price illiquid securities.

This Too Shall Pass
I know that you probably are reeling from all that has happened the past few months and especially the past two weeks. Lehman and Mother Merrill gone? We the people own AIG? Fannie and Freddie? A new housing bailout which will cost hundreds of billions? The Fed creating whole new programs to provide liquidity? Did you notice they loaned some $250 billion this last week to banks all over the world? Stopping short selling?

Want to see in graph form how bad it got and what spooked Paulson, Bernanke and company to act so quickly? Look at these graphs from my friends at Casey Research (http://www.caseyresearch.com/crpmkt/crpSolo.php?id=119&ppref=JMD119ED0908A). 30 day commercial paper went to 5% from 3% a week ago. The market was literally freezing. And the amount of paper issued is in free fall. Commercial paper is the life blood of the financial and business world. Without it commerce will soon grind to a halt.

{graphs & charts}

It simply takes your breathe away. As President Bush said today, it does not help to find who is at fault today, we have to figure out how to get out of this mess. It is going to cost the taxpayers a lot of money. While I think the losses on AIG will be rather minor in the grand scheme of things, if you add up Fannie and Freddie and a new RTC, coupled with the stimulus package, you can easily get to $500 billion, and that is probably a low number.

For such a price, we had better get a new regulatory scheme which requires reduced leverage. Want to get really mad? Up until 2003, all investment banks were allowed only 12 to 1 leverage. Then in 2004, the SEC basically gave five banks (and only five banks) the ability to lever up 30 or even 40 to 1. Bet you can guess the five banks. Bear, Lehman, Merrill, Morgan and Goldman. Three down.

As Barry Ritholtz wrote: "So while the SEC runs around reinstating short selling rules, and clueless pension fund managers mindlessly point to the wrong issue, we learn that it was the SEC who was in large part responsible for the reckless leverage that led to the current crisis." (Don't get me started on blaming the short sellers. Let's not blame the people who leveraged up their companies 40 to 1 with bad investments.)

We absolutely must move credit default swaps to a regulated exchange, no matter how much investment banks and hedge funds scream. Must be done. Do it now. Real rules about writing mortgages, although now that losses are in the hundreds of billions, underwriting rules are already becoming quite restrictive.

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Since then, derivative trades have grown exponentially, until now they are larger than the entire global economy. The Bank for International Settlements recently reported that total derivatives trades exceeded one quadrillion dollars – that’s 1,000 trillion dollars.3 How is that figure even possible? The gross domestic product of all the countries in the world is only about 60 trillion dollars. The answer is that gamblers can bet as much as they want. They can bet money they don’t have, and that is where the huge increase in risk comes in.

Credit default swaps (CDS) are the most widely traded form of credit derivative. CDS are bets between two parties on whether or not a company will default on its bonds. In a typical default swap, the "protection buyer" gets a large payoff from the "protection seller" if the company defaults within a certain period of time, while the "protection seller" collects periodic payments from the "protection buyer" for assuming the risk of default. CDS thus resemble insurance policies, but there is no requirement to actually hold any asset or suffer any loss, so CDS are widely used just to increase profits by gambling on market changes. In one blogger’s example, a hedge fund could sit back and collect $320,000 a year in premiums just for selling "protection" on a risky BBB junk bond. The premiums are "free" money – free until the bond actually goes into default, when the hedge fund could be on the hook for $100 million in claims.

And there’s the catch: what if the hedge fund doesn’t have the $100 million? The fund’s corporate shell or limited partnership is put into bankruptcy; but both parties are claiming the derivative as an asset on their books, which they now have to write down. Players who have "hedged their bets" by betting both ways cannot collect on their winning bets; and that means they cannot afford to pay their losing bets, causing other players to also default on their bets.

The dominos go down in a cascade of cross-defaults that infects the whole banking industry and jeopardizes the global pyramid scheme. The potential for this sort of nuclear reaction was what prompted billionaire investor Warren Buffett to call derivatives "weapons of financial mass destruction." It is also why the banking system cannot let a major derivatives player go down, and it is the banking system that calls the shots. The Federal Reserve is literally owned by a conglomerate of banks; and Hank Paulson, who heads the U.S. Treasury, entered that position through the revolving door of investment bank Goldman Sachs, where he was formerly CEO.

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If the economy is on the edge of collapse we need to act. But we can't just give away $700 billion of taxpayer money to the banks.
For years, as a member of the House Banking Committee and now as a member of the Senate Budget Committee, I have heard the Bush Administration tell us how "robust" our economy was and how strong the "fundamentals" were. That was until a few days ago. Now, we are being told that if Congress does not act immediately and approve the $700 billion Wall Street bailout proposal these "free marketers" have just written up, there will be an unprecedented economic meltdown in the United States and an unraveling of the global economy.

This proposal as presented is an unacceptable attempt to force middle income families (and our children) to pick up the cost of fixing the horrendous economic mess that is the product of the Bush Administration's deregulatory fever and Wall Street's insatiable greed. If the potential danger to our economy was not so dire, this blatant effort to essentially transfer $700 billion up the income ladder to those at the top would be laughable.

Let us be clear. If the economy is on the edge of collapse we need to act. But rescuing the economy does not mean we have to just give away $700 billion of taxpayer money to the banks. (In truth, it could be much more than $700 billion. The bill only says the government is limited to having $700 billion outstanding at any time. By selling the mortgage-backed assets it acquires -- even at staggering losses -- the government will be able to buy even more, resulting is a virtually limitless financial exposure on the part of taxpayers.) Any proposal must protect middle income and working families from bearing the burden of this bailout.(...)

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