“Talk of Armageddon, however, is ridiculous scare-mongering. If financial institutions cannot make productive loans, a profit opportunity exists for someone else. This might not happen instantly, but it will happen.

Further, the current credit freeze is likely due to Wall Street’s hope of a bailout; bankers will not sell their lousy assets for 20 cents on the dollar if the government might pay 30, 50, or 80 cents…….If these assets are worth something, however, private parties should want to buy them, and they would do so if the owners would accept fair market value. Far more likely is that current owners have brushed under the rug how little their assets are worth.”

More here at CNN.

Marc Faber is more pessimistic – sounding the alarm for a long recession and advising, as he always does, to hold physical gold abroad. Easier said than done. How do you know the folks holding it for you aren’t stiffing you unless you’re physically able to go and check? Still – it’s the best advice around.

Comment

On the other hand, to Robert Kuttner of the American Prospect, Paulson’s diagnosis was right. It’s just that he’s not the right doctor with the right pill.

My take? I think the problem isn’t ultimately about economics or finance. It’s about ideology.

A big reason why AIG was down in the Caribbean tax havens cooking its books was to avoid taxes. Without high taxes and complex tax rules, you wouldn’t have those sorts of tax dodges. They wouldn’t be worth it for most companies. The more complex the rules, the less small businesses can survive. They can’t afford to hire $400 an hour lawyers to keep up with the latest dodges of their bigger and richer competitors. So bigger businesses take over…and grow bigger…since they also enjoy economies of scale as they grow. They start price-fixing. They bribe the government. The regulations change in their favor. They use their government contacts to help their cronies .

Finally, you get the monster with two faces we have today – the corporate-state. You get crony capitalism. The only real solution in this system is to bypass the state altogether or to actively limit it. For which you also have to actively limit the size of the corporations through anti-trust legislation.

In a corrupt society, socialism is attractive, because the ground rules don’t function any more and people can see that. You need more and more political machinery to make anything function at all. What Kuttner doesn’t see is that the new machinery inevitably becomes corrupted too….

Which is why Miron is fundamentally right. But what he wants to happen (bankruptcy without government bail outs) could happen only in a much more decentralized state (or a much smaller one) where people would feel their obligations to each other far more strongly. Today, there are just too many economic and political interests all at odds with each other. The pains of one are the gains of another. And when one has its hand in the state cookie jar, the others will want theirs in it too. Clashing interests are part of how our system works, but not when the state is as large as it is today and people are so far away are from the actual political horse-trading. In a state this big you have only one driving force, mass opinion, and one countervailing force,  propaganda. And when things cannot be pushed the way you want them to go,  then you get direct power play – the military. The state shows its fangs: it moves from fraud (propaganda) to force (war) – which is why both are central to criticism of the state.

Most voters will not be able to accept the fact that they are going to have to feel pain if we take the high road on this. They are going to want something “to be done.” And they are going to be very angry when they find that after a wild party, there’s usually a bar tab and lots of picking up. And they’re going to be even angrier when they find out that they have to do some of the picking up, even if they didn’t attend the party.

But the adjustment has begun. Seems Campbell’s Soup was the only stock that survived the slaughter yesterday. And read Will Grigg about how our triumvirate (Fed Chairman, Treasury Secy., and President) is preparing for trouble from the restive masses.

“The Trojan Horse in the bailout plan also solves the mystery of how loss-riddled, serially corrupt Citigroup, now run by the former head of a hedge fund, was allowed by the FDIC yesterday to buy $400 Billion in deposits from Wachovia, giving this crippled global tyrant 30 per cent of insured bank deposits in America.

For once, we can be proud of at least 228 members of our Congress. Yes, we do need swift, reasoned action to stave off a financial collapse. But a plan that allows one man to have unfettered access to $700 billion of taxpayer money, decide which firms survive, to potentially concentrate power in a few crony hands, while pushing off even a discussion of vital regulation until next year, is not a plan. It’s organized crime thinly disguised as legislation.. …”

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 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.