House Defeats Bail-Out Bill (updated Sept.30)

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“WASHINGTON – The House on Monday defeated a $700 billion emergency rescue for the nation’s financial system, ignoring urgent warnings from President Bush and congressional leaders of both parties that the economy could nosedive into recession without it.

Stocks plummeted on Wall Street even before the 228-205 vote to reject the bill was announced on the House floor.”

More on this at MSN.

And here’s what happened in the stock market – biggest one day drop in the Dow since 9/11

With the prospect of more to come.

 

NOW HANK PAULSON SHOULD STEP DOWN

Comment:

Comment: (Sept. 30)

Regulation to ban short-selling or to expand home ownership have high moral reasons attached to them. But invariably, when you dig under the rhetoric, you find the economic or political self-interest pushing it: financial sectors want special protection from market forces….or banks want to sell mortgage loans.

It’s a conundrum called “Baptists and Bootleggers.”
Baptist preachers want liquor banned for moral reasons, but a ban only pushes liquor underground. Bootleggers begin to operate. The bootleggers are only too happy to support the preachers….. for altogether selfish, commercial reasons – the wider a ban on selling liquor, the less competition for them. Eventually, you end up with a monopoly. That’s why in the corporate-state we have more and more consolidation in every area – media conglomerates, publishing giants, giant agribusinesses – that have driven smaller operators out of the field. The big players are inevitably the supporters of “more regulation” and “more government” – because they know they can strengthen their hold on the marketplace even more. Confused voters blame big business (correctly) and politicians (correctly), identify the problem as the free market (wrongly), and demand more regulation (wrongly –  actually, let me modify that. I am all for anti-trust and strong criminal prosecutions of financial crimes; but that’s to keep the ground-rules fair. Regulation to achieve substantive ends I think is generally counterproductive or causes unintended harm that usually outweighs the intended good).

Mayor Bloomberg: US Has to Earn Its Credit Rating

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From an excellent post by Karl Denninger at Market-ticker:

“Michael Bloomberg, one of the few intelligent commentators out there (and a billionaire by his own hand) said exactly the same thing today:

“WASHINGTON (AP) — New York Mayor Michael Bloomberg is warning a ‘next wave’ of financial pain may come when foreign entities stop buying U.S. debt.

The billionaire mayor is speaking to an audience at Georgetown University, telling them it’s not clear who is going to continue buying U.S. debt as financial firms try to cope with a crisis of confidence on Wall Street.”

Mr. Bloomberg sees the same thing I do, but he’s a bit more polite than I am about it.

Then there was S&P which made this quite clear as well:

“The $85 billion bailout of AIG on Tuesday by the U.S. Federal Reserve “has weakened the fiscal profile of the United States,” S&P’s John Chambers told Reuters in an interview.

“Lack of a pro-active stance could have resulted in further financial stress and put pressure on the U.S. triple-A rating,” Chambers said. “There’s no God-given gift of a AAA rating, and the U.S. has to earn it like everyone else.”

Is that clear enough?

Congress MUST ACT RIGHT DAMN NOW.

Congress MUST stop The Fed and Treasury from printing any more money. The institutions that are insolvent must be forced into the open and put through bankruptcy.

We CANNOT wait until the next Congress and the election to stop this nonsense; that’s five months in the future. By then The United States could easily be quite literally broke and forced into a hyperinflationary spiral!

Debt that cannot be paid must be defaulted….”

The Fed, Bear, and JPMorgan – Maiden Lane LLC

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From the FDIC website here’s Federal Reserve Statistical Release H 4.1 that includes information on Maiden Lane LLC, the holding company that was the conduit for the acquisition of Bear Stearns by JP Morgan and for the management of its assets.

For Release at
4:30 P.M. Eastern time
July 3, 2008

The Board’s H.4.1 statistical release, “Factors Affecting Reserve Balances
of Depository Institutions and Condition Statement of Federal Reserve Banks,”
has been modified to include information related to Maiden Lane LLC, a
limited liability company formed to facilitate the arrangements associated
with JPMorgan Chase Co.’s acquisition of Bear Stearns Companies, Inc.

On June 26, 2008, the Federal Reserve Bank of New York (FRBNY) extended credit
to Maiden Lane LLC under the authority of section 13(3) of the Federal Reserve
Act. This limited liability company was formed to acquire certain assets of
Bear Stearns and to manage those assets through time to maximize repayment of
the credit extended and to minimize disruption to financial markets. Payments
by Maiden Lane LLC from the proceeds of the net portfolio holdings will be
made in the following order: operating expenses of the LLC, principal due to
the FRBNY, interest due to the FRBNY, principal due to JPMorgan Chase Co.,
and interest due to JPMorgan Chase Co. Any remaining funds will be paid to
the FRBNY….”

More here.

The Hussman Solution to Wall Street’s Crisis

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September 22, 2008 An Open Letter to the U.S. Congress Regarding the Current Financial Crisis

John P. Hussman, Ph.D.
This article may be reprinted and distributed without further permission

Summary Of Principles

1) Public funds must function to increase the capital of distressed financial companies, not simply to take bad assets off of the balance sheet at market value……

2) In return for these funds, the government should NOT take equity (which is a subordinate claim and also creates potential conflicts of interest), but instead should take a SENIOR claim that precedes not only the stockholders but also the senior bondholders in the event the company defaults anyway…….

3) Ideally, the rate of interest on such funds should be relatively high (which will encourage these firms to substitute private financing as soon as possible), but actual payment should be made once the firms are again profitable so that the payment burden does not weaken them during the present recession.

4) The bill should allow for expedited bankruptcy resolution for these institutions, so that in the event of failure, the “good” bank (all assets and customer liabilities, but excluding debt to bondholders) can be cut away and liquidated to an acquirer as a “whole bank” sale.

5) To assist homeowners, the bill should allow for a reduction of mortgage principal during foreclosure, but the mortgage lender should also receive a Property Appreciation Right (PAR) that gives the original lender a claim on future property appreciation up to that original mortgage amount.…..

More here.

Wa-Mu Implodes In Biggest US Bank Failure

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“The Federal Deposit Insurance Corp. seized WaMu on Thursday, and then sold the thrift’s banking assets to JPMorgan Chase & Co. for $1.9 billion.

Seattle-based WaMu, which was founded in 1889, is the largest bank to fail by far in the country’s history. Its $307 billion in assets eclipse the $40 billion of Continental Illinois National Bank, which failed in 1984, and the $32 billion of IndyMac, which the government seized in July.

One positive is that the sale of WaMu’s assets to JPMorgan Chase prevents the thrift’s collapse from depleting the FDIC’s insurance fund. But that detail is likely to give only marginal solace to Americans facing tighter lending and watching their stock portfolios plunge in the wake of the nation’s most momentous financial crisis since the Great Depression….”

More at AP.

And from the Miami Herald:

“Federal regulators had been trying to broker a deal for Washington Mutual because a takeover by the Federal Deposit Insurance Corp. would have dealt a crushing blow to the federal government’s deposit insurance fund.

The fund, which stood at $45.2 billion at the end of June, has been severely depleted from the sudden collapse of IndyMac Bank. Analysts say that a failure of Washington Mutual would cost the fund upwards of $20 or $30 billion.”

And from the CS Monitor :

“JPMorgan plans to mark down WaMu’s loan portfolio by about $31 billion – a sign of the costs the US Treasury may face if Congress gives the go-ahead for the government to buy troubled assets from banks.”

A good round up of some of the statistics on this from Mish Shedlock, dated July 2008:

“There is roughly $6.84 Trillion in bank deposits. $2.60 Trillion of that is uninsured. There is only $53 billion in FDIC insurance to cover $6.84 Trillion in bank deposits. Indymac will eat up roughly $8 billion of that.

25. Of the $6.84 Trillion in bank deposits, the total cash on hand at banks is a mere $273.7 Billion. Where is the rest of the loot? The answer is in off balance sheet SIVs, imploding commercial real estate deals, Alt-A liar loans, Fannie Mae and Freddie Mac bonds, toggle bonds where debt is amazingly paid back with more debt, and all sorts of other silly (and arguably fraudulent) financial wizardry schemes that have bank and brokerage firms leveraged at 30-1 or more. Those loans cannot be paid back.”

Comment

OK. I’d been hearing that another big one was about to go and this is the one – last night. Interesting that, again, it’s JPMorgan that’s picking up the pieces.

I don’t understand this though. Buying $307 billion in assets for 1.9 b. is a steal for JPMorgan. Yet, it’s the FDIC that takes the hit because it has to guarantee the deposits to the tune of $20-30, when it’s already hurting from IndyMac, which cost it around $8b. Worst case scenario – the FDIC is almost wiped out and needs to be replenished. So why doesn’t the government get the assets on the cheap but JPMorgan does?

How is this a rescue?

From better days at WaMu, this notice about its activities in 2002:

” In 2002 Washington Mutual funded $275 billion in home loans and made homeownership possible for 1 out of 8 homeowners in America…..As a leader in the mortgage industry, we offer unmatched home financing solutions designed for flexibility and innovativeness. “One of America’s Most Admired Companies in Mortgage Finance” for 2002 as recognized by Fortune Magazine and ranked No. 116 in the 2002 Fortune 500. We currently fund loans in over three quarters of the United States.”

As a curious aside, I see that Goldman Sachs was hired to do the auction. Goldmans Sachs analysts (only on September 15) changed their rating on WaMu from sell to neutral while lowering its price target from $5 to $4

And another ominous sign for the dollar: Barclay’s reports that McDonald CDS are now trading inside US Government debt at 29bp (30bp for US debt). Uncle Sam is a worse risk than a whopper, says Boris Schlossberg at GFT Forex.

Update:

Looks like it was bank runs that did WaMu in, although its exposure to subprime is high and that probably made its assets much less than they were on paper. But it still looks like the FDIC basically went in and handed WaMu over to JPMorgan. Rescue? Or cannibalism? I’d like to look at the FDIC structure a bit more..

*Bush made changes to deposit insurance in 2005 on the recommendation of Alan Greenspan that consolidated the two government insurance funds.

*Paulson was pushing a federal insurance regime this March.

*Three IB’s that are rivals of Goldman Sachs go under (Lehman, Bear, Merrill)

*The remaining IB’s (Goldman and Morgan Stanley) as well as a commercial bank (JP Morgan) profit.

*GS changes into a commercial bank along with the second surviving IB, Morgan Stanley.

Looks like interbank predation combined with implosion. Is this all scare-mongering to allow a huge round of financial consolidation favoring 2-3 big players and complete a highly centralized structure for whoever is the next president?

Update:

Looks like the deposits in excess of $100,000 get taken over by JP Morgan, so there wasn’t a problem for them either. Check this post on Seeking Alpha on outflows from large deposit banks. It seems that WaMu wasn’t insolvent – which is good news – but just suffered liquidity problems, when large deposit holders moved money out. In that case, an even sweeter deal for JPMorgan Chase.

Update:

On FDIC funds, this disturbing caution:

“BE very, very careful. There are reports the US Federal Deposits Insurance Commission is running out of money. Chairman Sheila Blair has been forced to issue a statement. “US banks are overwhelmingly safe and sound and the Government fund used to cover insured deposits will be adequate to absorb any losses, even high losses,” she says.

But Brian Bethune, US economist at consulting company Global Insight, said: “Additional failures of large banks or savings and loans companies seem likely, and that could overwhelm the FDIC’s insurance fund.”

Christopher Whalen, senior vice-president and managing director of Institutional Risk Analytics, said: “We’ve got a … retail bank run forming in this country More at The Age.com.

JPMorgan Chase Gives Lehman Mouth-to-Mouth

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This could be kosher but a correspondent who sent this to me suggests otherwise:

JPMorgan Gave Lehman $138 Billion After Bankruptcy (Update3)
By Tiffany Kary and Chris Scinta

Sept. 16 (Bloomberg) — JPMorgan Chase & Co. gave $138 billion this week in Federal Reserve-backed advances to the broker dealer unit of Lehman Brothers Holdings Inc. to settle Lehman trades and keep financial markets stable amid the biggest bankruptcy in history, according to a court filing.

One advance of $87 billion was made on Sept. 15 after the pre-dawn bankruptcy filing, and another of $51 billion was made today, Lehman said in court documents. Both advances were made to settle securities transactions with customers of Lehman and its clearance parties, according to the filing.

The advances were necessary “to avoid a disruption of the financial markets,” Lehman said in the filing.

The first advance was repaid by the Federal Reserve Bank of New York on the night of Sept. 15, Lehman said. JPMorgan said in a statement that the $51 billion advance was also repaid and the process will zero out the advances at the end of each day.

U.S. Bankruptcy Judge James Peck in Manhattan approved an order confirming that advances JPMorgan is providing are covered by existing collateral agreements with Lehman and its affiliates. JPMorgan holds about $17 billion in collateral to secure the money it advances to clear the trades, Lehman attorney Richard Krasnow said.

`Comfort Order’

“I believe the comfort order for the benefit of JPMorgan Chase under these clearance agreements, while unusual in my experience, is entirely appropriate,” Peck said. There were no objections to the request.”

More here. 

The Paulson Put(sch): Questions for Hank Paulson

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The Paulson Put(sch)

Questions for the new CEO of US Government Inc.

[Last Wednesday, Hank Paulson was installed as CEO of US Government Incorporated, replacing the now defunct United States of America].

Charles Krauthammer wrapped up an astounding week in American history with a hosanna to Ben Bernanke and Hank Paulson. The best possible team to have on your side in a financial crisis bigger than any since the 1930s, says he. Bernanke, because he is an economic historian specializing in the Great Depression. And Paulson because he knows everyone in the banking industry and is the perfect person for arm-twisting and deal-making. Financiers aren’t all bad, sniffs Krauthammer. There were all those greedy realtors and home-owners too.

Yes, Charles, we do see that greed is a many-splendored thing, visiting the poor and rich alike. But on a mundane level, the yearning of the cleaning lady who gets herself in over her head with a home loan she can’t pay is not the same sort of public hazard as the cosmic larceny of financiers who’ve skipped out with hundreds of millions from companies they’ve skinned like pole cats…

Read the rest of my latest piece on Paulson’s power grab at Lew Rockwell. You can find other articles of mine on the old archive of Dissident Voice. I will (eventually) get my pieces onto this site in a more approachable way, but being bloggitudinally challenged, that may take a while.

 

Dollar Dilemma: Is the Euro any better?

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“I do not share the widespread view that the dollar will collapse. This has prompted a volley of hostile comment, as if I was somehow turning traitor to the cause of bears, or had become an optimist overnight.

The reason why it will not collapse — at least for now — is that the euro is facing an even deeper and more intractable crisis, Britain is mangled, Sweden frozen, most of Eastern Europe is facing a swing from property boom to bust, Brazil is about to slow dramatically, Japan is in full recession, and China’s banking system is buckling, as Fitch warned today.

What I envisage as this credit crisis goes turns into a full-fledged global economic slump is that half the world resorts to currency devaluation in a beggar-thy-neighbour scramble to stave off recession and cling to market share.

This will be very good for gold, though only once the EMU smash-up becomes more evident, perhaps with the onset of street protests in Spain. You won’t have to wait very long…”

Ambrose Evans-Pritchard in the Telegraph. 

Comment:

Hmmm…I do agree with this fundamentally. The dollar looks weak short-term but mid to long term I don’t see how it can be that much weaker than the euro or other currencies, when currency debasement is practiced by most countries. Gold is the place to be. But when you buy is also important. A global slow down could keep the price down, aside from manipulation of the price. In the long run, though, it’s clear everything is bullish for gold.

Taxpayers to Paulson: We Don’t Need No Stinkin’ Lemons….

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From Fall Street:

“This is not expenditure.” Paulson
“This is not expenditure.” Bernanke

The initial Paulson/Bernanke bailout plan was all of three pages long and was franticly cooked-up as the markets were collapsing. It reads like it was put together by a bunch of tyrannical toddlers playing with crayons. Are we really to believe given the circumstances that this plan represents an opportunity and not an expenditure for U.S. taxpayers?

“This is not an expenditure of $700 billion. This is a purchase of assets, and if auctions are done properly, evaluations are done properly, the American taxpayer will get a good value for his or her money.” Bernanke

Good value? Well Mr. Bernanke, if buying the garbage stinking up the American financial system is such an opportunity why don’t you partake in this adventure with some of your own capital? (I am quite sure the public would not mind if a few Chinese walls were broken down to allow Hank and Ben to invest some of their own funds in this scheme). Why not call the new plan ‘Opportunity USA’, get the best minds in the industry to run the entity, and entice Greenspan, Bush, Gross, and other proponents of the plan to invest funds. After all, under such a scenario it is not inconceivable that taxpayers dollars would start voluntarily rolling in to also invest.

But alas, the chain of events to create ‘Opportunity USA’ is exactly how the free market works, and the free market has already spoken and told us that the crap to be so graciously purchased by the U.S. taxpayer is indeed crap.

More here.

Bring the Recession On…

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Now here”s the spirit of self reliance:

“Which brings me back to the collapsing markets, the product of fart-in-the-wind economics.

I can foresee on 5th Avenue in Park Slope a beautiful resurgence of shuttered shops, rotted storefronts, the end of money’s welcome in its hypocrite hug, the end of surfeit, a return to normalcy. No more strawberries in January at the store on the corner – the strawberries were never meant to be eaten in winter anyway. Perhaps we might even see a return to the city of people who manufacture something other than air. I will be driven out first – because this screed is all air! So be it!”

Christopher Ketcham at Counterpunch. 

Comment: 

Only problem I have with this essay is the confusion between casino capitalism and the free market..and the reflexive assumptions about what growth is (assumptions our corporatist masters also hold, oddly enough)