September 17, 2008
The Real Tragedy
by Juan Moment
lifted from a comment
From fool's highly informative link in the Wild Ride thread :
In addition, The Fed has announced that it will take equities as collateral for loans. "Equities" is a fancy name for stocks.
That's right - for the first time in history, now banks can take stocks to the discount window. Maybe even their own stocks.
The Fed has gone from taking only the highest-quality securities -
"AAA" rated debt instruments - to taking everything up to and including
the most dangerous (common stock) all at once!
Now I may be blind but I've read The Federal Reserve Act multiple
times and nowhere do I see where equities can be taken to the window
(or anywhere else for that matter) for Fed Credit.
If they intend to actually do this, its quite clear they don't care
what the law says. They're going to do it anyway, and their precedent
is that you sat back and allowed them to take equity when they bailed
out Bear Stearns, and said nothing! They will do anything they want by
citing "exigent circumstances" and claim blanket authority.
What's worse, this effectively makes The Fed a margin lender on
the equity markets! You think they don't have a reason to interfere in
the market eh? Oh boy, now they have billions of reasons, all of them
sitting on their balance sheet! Fair and open markets? Bah!
Note carefully folks - this effectively makes The Fed LONG (that is, a "buyer") of STOCKS.
What's even better is that they don't eat their own losses if there are any - they're yours!
That's because The Federal Reserve Act says that the profits (or
losses) from The Fed flow through to the Treasury (after operating
expenses) which means that now, suddenly The Federal Government is
potentially directly exposed to losses in the stock market!
Now it has always been true that The Government "loses" when the
market goes to hell as it gets less in the way of tax receipts. But
that's different than suffering an actual capital loss - and that is
The implications of this tectonic shift
within the banking framework are as yet to be seen, but this lowering
of securities standards by the Feds is essentially the transfer of risk
for shonky investments in equities from the commercial money houses to
the US taxpayer, and with the risk the obligations to cover the losses.
In times when the S&P could easily fall another 20% by years end,
this will have grave consequences, possibly triggering a ruinous domino
effect throughout the US and entangled nations.
Although AIG has an alleged $1 trillion in assets, it can’t raise
$50 billion. Who would have this sort of money at this point in time
anyway? Certainly not people who can afford to loose it. So they wonder
how much the assets are really worth. How much risk have they insured
for loans which will or have already gone bad? When you hear
announcements of “imminent death if $75 billion aren’t raised within 48
hours”, then one doesn’t have to be a rocket scientist to predict the
future of this company in a downward spiraling economy. Too big to
fail they say. Hah, too big to succeed I say, the giant has already
stumbled and lost its balance, and no arm will be extended for fear of
being dragged down with the helpless giant. So instead the Fed roles
out the safety blanket to catch the falling juggernaut, taking on a 80%
stake in the insurance colossus, in effect becoming the insurer of many
commercial risks across the world. The costs of this venture could
potentially be catastrophic for the US treasury.
The US government coffers, already running on empty, hemorrhaging
from ridiculously expensive wars on foreign shores and tax cuts to the
high income earners, will have to cop further billions of dollars in
losses. The thrashing of equity values, the current implosion of global
stock markets will continue for quite some time, but from now on the
losses will be crystallizing in the US treasury’s P&L. Where
exactly is the treasury going to get the money from that will be needed
to cover the deficits?
Tax increases? Sell the Empire State to China? Reduce the public
service budget by 5% and start laying of employees? With an at best
stagnating economy, falling corporate earnings, the tax revenue will
decrease. A rise in unemployment figures means more social security
outlays. The foreign capital drip which keeps the patient alive for the
moment, apart from positioning the US in a dependency that could easily
translate into being controlled by foreign powers, is under current
global conditions slowly drying up and shouldn’t be taken for granted.
Who ever wins the next election will have to make some tough
decisions, but won’t. The mugs in congress, no matter which tentacle
they belong to, motivated by self-interest, have been sitting on their
hands forever. Stooges, most if not all of them, people who taught us
for decades that we best expect nothing so we won’t be disappointed.
And that all talk-no action squad, strikingly ignorant and lame for as
long as they’ve been in office, are representing us in the battle with
the conglomerates. Shudder.
The consolidation happening on Wall Street will leave even less
people in control over even more money. One has to wonder if this
wasn’t the name of the game in the first place. The incestuous
relationship between the oligarchs we have become used to, is lately
presenting its more ferocious side, showing that in their passionate
love they are not afraid of devouring each other. And this mounting
concentration of financial power is producing gorillas too large to
measure in pounds.
Even without a degree in business law or economics, people should be
starting to see the writing on the wall. Judging by the euphoria
generated by both parties’ presidential candidates, I doubt that this
awakening is taking place though. All this talk now by Obama &
McCain about how they will reform the financial sector, introduce
regulations and enforce them, is warm air, blown into the sails
of their respective election ships on the swelling oceans of public
fears and disillusionment. The crucial decisions in the landscape
gardening project on Wall Street will be made by the same tweed suits
who caused this mess in the first place, and the conditions imposed on
the banking orgs will have loopholes big enough to push in 4 years the
next election ship through.
As B pointed out, in terms of interest rates, the Fed has become
irrelevant. In the current climate banks will be hording cash and offer
interest rates way above the fed rate. Following a predestined path,
the flight from falling equities into securer cash assets means
interest rates will eventually come down again, allowing the businesses
that will survive the current squeeze, bruised but alive, to slowly
rebuild their balance sheets. Lower rates would also help to jump start
the mangled housing sector, however for that to happen, house prices
will have to drop further. Much further. Unrealistic expectations of
asset values will need to be adjusted, not just in board rooms but also
around kitchen tables.
A painful process, for sure. Financial stress causes marriages to
break up, children being yelled at, depression and despair. And so this
financial melt down will bring about social hardships for the many
caught up in this spider web of too closely related business interests.
The anger and frustration will not be helped by the realization that
their perceived worth didn’t just disappear into thin air, but that it
has been in scandalous fashion redistributed up the pyramid and the
perpetrators are buying up foreclosed villas.
The real tragedy though becomes apparent when one puts the figures
in context. While the Feds pours $80 billion into the bottomless pit
Wall Street has become, people all over the world are starving to
death, starvation that could be prevented by a fraction of that money:
NATIONS (AP) — The United Nations blamed the global food crisis
Wednesday for a $3.4 billion global shortfall in emergency humanitarian
aid for 34 nations.
U.N. officials said that higher food and fuel costs, along with natural
disasters and worsening conflicts, are making it more difficult to
raise funds from donor nations, mostly Western governments.
"The donors will need to dig deep into their pockets to try to find
that money," said John Holmes, the U.N.'s humanitarian chief.
So far this year, $2.9 billion has been raised, representing about 46%
of what's needed to respond to the world's most severe crises, Holmes
What a shame.
Posted by b on September 17, 2008 at 05:41 AM | Permalink
if history can be relied upon for an answer to this current quandary, then look no further: war.
Posted by: stumblewire | Sep 17, 2008 6:32:28 AM | 1
Interesting to see the slide into a financial fascist state. That is what I have always believed a state that whose sole purpose is to service the needs of big business and the elites who own those businesses to be. The AiG insurance bailout came immediately after the weak kneed knock back of a Lehmans bailout. As soon as the fed didn't bail out Lehmans, the parasites offered up something much bigger and much more damaging if it failed. AIG Insurance was put up to force the taxpayers to bail it out. Expect many more of these the assholes pulling this scam on taxpayers They will get the art sticking their snouts into the public trough every time they have a bad quarter down to a fine art.
The thing that amazes me about this is that in amerika there seems to be no expectation from anyone that the citizen should get anything for his investment.
After we went through the 80's 90's privatizations of the people's assets here a number went under due to bad stewardship by the old boys who got to buy them cheap and two of them (Air New Zealand and the railroad network) were judged too important to fail so muggins taxpayer bailed them out. The thing is at least we own our railways and airline once more.
I know that the feds (well shrubs old school chum Jim Lockhart) are sort of in charge of that freddie fannie thing but there seems to be an expectation that it will go back into some sort of private shareholding (look out for bush and lockhart family trusts on the register!) but there has been no serious talk about the people's new assets.
So where is the consequences? poor people especially poor unwhite people get horrible consequences if the endanger citizens material assets in amerika, yet Yalies and their ilk are immune. They get given more money. The queue outside the fed corporate dole office is gonna get very long, very quick. No one will want to wait too long in case they are too late and the larder is bare. Yeah so what? No one is even pretending any more - that's what.
When old people can't pay for their pharmaceuticals and there is no dough left in medicare or the kids in public schools don't have any equipment surely amerikans are gonna make the connection then,.
You know that whoever wins in November won't change a thing cause if it did Barack Obama would be confronting the administration about this gift of hundreds of billions to the rich now. He wouldn't wait until he's prez to do it.
Posted by: Debs is dead | Sep 17, 2008 7:16:10 AM | 2
For those who remember the fun Billmon used to have w/ Donald Luskin at the Whiskey Bar (when Luskin threatened to go legal on Atrios, Billmon joined in the web 'I am Spartacus' fightback), just to let you know that Luskikn is currently listed as part of McCain's economics team:
Third on the list, in fact (scroll down).
Great times ahead.
Posted by: Dismal Science | Sep 17, 2008 7:17:49 AM | 3
If you've ever wondered how bad was USSR economy in the early 80s, this is it.
Which also means that the US desperately needs a Gorby as next president, because the whole thing will turn to shit pretty soon. Pretty soon, it'll be either WW3 and nukes flying here and there, or back to 3rd world nation for years - with nationwide depression, mass abortions, no healthcare, deaths of elderly and infants, massive dropout in annual births, and the like.
The guy who coined the "New American Century" tagline had a wicked sense of humour.
Posted by: CluelessJoe | Sep 17, 2008 7:38:31 AM | 4
I don't know if this Libor anatomy lesson really belongs in this thread, but it may be of some interest, and is certainly very concrete and down-to-earth. Whether or not such matters will have major importance in the present financial turmoil is beyond my capacity to decide.
Posted by: Hannah K. O'Luthon | Sep 17, 2008 8:17:40 AM | 5
@ debs: The thing that amazes me about this is that in amerika there seems to be no expectation from anyone that the citizen should get anything for his investment.
A few years ago I got quite involved on the local planning and historic preservation committees. The town was trying to work out if and how to develop a large parcel of farmland on the fringe - it was in the town plan, and a developer came forward with a plan. Typical unsustainable, centreless neighbourhood full of cul-de-sacs to ensure you'd need to drive the half-mile to the local shops. One of the aldermen was extremely keen on organic development based on old-style villages and he thought it was a disasterous idea, as did I. We kept finding ourselves standing up in committees refusing to countenance the ridiculous plan on the grounds that it was expensive, anti-social and retrograde. The argument that ALWAYS came back was 'listen, the developers have a right to make money.' That trumped all other arguments. Even when the power company wanted to push a major new line right through the centre of town, the notion that the company had a right to its profits almost prevailed. It seems to be hard-wired into the American psyche that corporate profits constitute the American way, and that an individual's right to challenge that is scandalously destabilizing.
@ Clueless: right on cue, the US has cornered the market in a bottomless supply of cheap heroin...
Posted by: Tantalus | Sep 17, 2008 8:56:53 AM | 6
capitalism is dead. it just doesn't know it
Posted by: remembereringgiap | Sep 17, 2008 9:22:45 AM | 7
or perhaps, it does
Posted by: remembereringgiap | Sep 17, 2008 9:43:49 AM | 8
@ Clueless: right on cue, the US has cornered the market in a bottomless supply of cheap heroin...
And one can only guess as to how much drug money has been laundered through derivatives this past decade. AIG and financing of the drug trade would be a worthwhile analysis for a journalist who would like to eventually shoot themselves twice in the head with a shotgun.
As times get tough, the drugs get going. I expect illegal drug use to skyrocket in the years to come. Desperation and drug addiction go hand in hand. Too bad we can't invest in that business directly rather than having to go through the likes of Lehman and AIG, or their replacements.
Posted by: Gary | Sep 17, 2008 9:45:03 AM | 9
Thanks to Juan Moment for pointing out how much money now goes down the unproductive drain while much smaller sums could really make a difference.
And thanks to Hannah for the Libor link - good piece.
Posted by: b | Sep 17, 2008 10:12:17 AM | 10
Can anyone explain to me why this bid was not taken?
Allianz, Flowers Said to Have Bid for AIG Before Fed Takeover
Allianz SE, Europe's largest insurer, made an offer to invest in American International Group Inc. that was rejected by the U.S. insurer two days before it accepted a government takeover, said two people with knowledge of the bid.
Did the Fed or Treasury veto that one? Why?
Posted by: b | Sep 17, 2008 10:16:32 AM | 11
why should they sell out and lose control when they can be bailed out and maintain control?
Posted by: ralphieboy | Sep 17, 2008 10:47:08 AM | 12
interesting take on chris floyd's site
Creative Destruction: The Solid Core Behind the Financial Crisis
quoting arthur silbur
What you have seen over the last six months and more, and what you will see in the coming months and years, is the same phenomenon in the realm of economic policy. All of the solons who led us into this abyss of mounting debt, worthless securities, failing financial institutions, economic contraction and collapse, rising taxation, and all the rest, will now instruct us as to how we should "solve" the crisis that they have created. The crisis may be ameliorated to a degree, and the worst of the consequences may be postponed for a while. But whatever "solutions" are implemented, whatever reorganization and reregulation is imposed, it will all be done in accordance with the ruling class's desires and goals. It will all be to protect their own wealth and power to whatever extent is possible, and to expand their wealth and power still more....
The ruling class is the state. The state exists to serve the interests of the ruling class, and only the interests of the ruling class. They may promise you greater unemployment benefits, better health care, and a host of other government benefits -- all benefits also paid for by you, please note (the ruling class does have a sense of humor, after all; vampires are often crudely funny creatures) -- and those promises will cause most Americans to fall for the con still one more time.
Whatcha gonna do? Not a goddamned thing. Vote for McCain! Vote for Obama! It doesn't matter. The ruling class wins either way. The ruling class always wins. That's how the system was designed, and that's how it works. For the ruling class, it works very admirably.
That last observation by Silber is perhaps the most telling, and frightening of all: despite all the disasters raging around us -- the wars, the atrocities, the tyranny, the economic collapse -- the system is working. It's doing exactly what it's supposed to do: serve the rich and powerful, guard and protect them, entrench them in their rule. Just like John McCain says, the system is fundamentally sound.
- - -
inner city press: AIG Bail Out Shows Fed's Favoritism, Patrikis, Willumstad and Revolving Doors
On AIG, it's worth noting for example that former Federal Reserve Bank of New York chief counsel Ernest Patrikis went through the revolving door directly to a similar position at AIG, where he showed himself quite willing to call regulators, former colleagues, to get them to side with AIG on consumer protection and other issues.
When AIG was applying for approvals to buy American General, along with its already controversial subprime lending business, Patrikis and AIG convinced regulators to ignore applicable law about granting public hearings. Patrikis even called New York regulators and assured them AIG would meet with its critics, including Fair Finance Watch -- and in full disclosure Inner City Press -- after the deal was consummated. But AIG quickly returned to pure hardball, threatening to file complaints against its critics if they continued to oppose it.
Another AIG connection is Robert Willumstad, formerly Citigroup's number two official. Citigroup from its beginnings has always been a Fed favorite. The merger of Travelers Insurance and Citicorp, then illegal under the Glass Steagall Act, was secretly pre-approved by the Fed. The Fed's meetings about the deal, belatedly disclosed in a series of letters referring almost comically to the merger of "Red" and "Blue," arrived at a two year grace period during which Citigroup could lobby to repeal applicable law. The AIG bail out also puts off the reckoning for two years. Much further lobbying can be done in that time.
Posted by: b real | Sep 17, 2008 11:14:44 AM | 13
Cheers B, appreciated. The numbers being transferred into this banking void are indeed staggering. The people responsible for this debacle, the http://www.washingtonpost.com/wp-dyn/content/article/2008/09/16/AR2008091602877.html”>pervert view that mammoth amounts of taxpayer money are better spend on rescuing greedy commercial banks and their hangers-on shareholders than showing the comparatively little generosity needed to provide food to a billion desperate human beings, must be atheists, or else they should be shitting bricks.
Visitors in other threads have recently argued that with our society’s inherent apathy, there will be little to nil chance of Jack and Diane’s piggy bank getting a break from being raided, not to mention the one ninth of one tenth of change in the abhorrent living conditions the third and fourth world is experiencing. I tend to agree. There is something fundamentally wrong with our society’s order of values. Hypocrisy is being played out all around http://www.oldielyrics.com/lyrics/lou_reed/last_great_american_whale.html”>us.
And animal life is low on the totem pole
with human life not worth more than infected yeast
From reading here at the Moon, I get the impression that most of the regulars here are in some way or another trying to “change” the world as we know it, be that by writing letters to decision makers, joining protest marches, ethical shopping, right down to gently trying to encourage colleagues, friends and family to loose their political blinkers. However much or little it is, it is more than the fluffy nothing hundreds of millions of apathetic citizens chip in. Every little bit of activism is much needed and appreciated. So in no way do I want to come across as underestimating or belittling individual people’s contributions to the push into a saner direction. Especially not since I myself am not the most active of activists out there on the streets, instigating the revolution that is needed. But I am under no illusion that to alter today’s political landscape, more than words and letters mixed with scattered and easily brutalised rallies are needed. I am not sure about blood, but no doubt plenty of sweat and worn out shoes.
For a starter, we need a workable solution. I find myself fascinated by the rapid degradation of our world as we know it, all the while chasing the carrot being tangled in front of me. And although I sponsor two children in Bolivia, to at least help my conscience and maybe a far away community a little bit, I can't say I'm contributing a great deal to the small pockets of positive progress that do exist.
Too much time is spent on describing the unfolding misery, not enough if any on initiating the events we are all hanging around for. Just as it is true that shit doesn’t just happen, a..holes produce it, so is it true that change doesn’t just not happen, people, including myself, miss to create it. Maybe what is needed is a thread on “How to bring about change”, where rather than recounting how bad things are, the aim is to discuss angles and ideas which could lead to real improvements. Eventually a select few proposals will stand out, and whoever wants to could then be directing efforts towards possibly realising one or two of them. To give up, or hope that someone else will fix it, is being defeatist. I have a nine year old daughter and for her and her fellow children's sake, I'm hoping we find ways and means to rearrange our political systems to be more responsive to our global community's cries for help, to be less corrupt and inbred. A government for the millions, not the millionaires.
Anyhow, to now not come across as an optimist :) here a link to http://www.kommersant.com/p-13234/Federal_funds_Sberbank_VTB_Gazprombank/”>Kommersant describing the near eclipse of our financial sun.
Finance Minister Offers Money to Sberbank, VTB, Gazprombank
Russia’s Finance Ministry will propose to the RF Sberbank, VTB Bank and Gazprombank to raise federal budget’s funds to the deposits with the term of above three months.
Finance Ministry said the ceiling for keeping funds with those banks was widened to 1,126.6 billion ruble. Of this amount, Sberbank will cover 754.2 billion ruble, VTB will get 268.5 billion ruble and Gazprombank will have 103.9 billion ruble.
Finance Ministry announced earlier the increase in the bank deposit limit for federal money from 625 billion ruble to 1,232 billion ruble. With the growth in limit taken into account, the amount to be deposited with Sberbank, VTB and Gazprombank steps up to 1,514.2 trillion ruble.
Those three banks, the Finance Ministry explained, are the backbone able to ensure liquidity in the banking system…
Goes to show that no matter how you look at it or think of it, the world wide financial system is one gigantic Siamese twin looking in the mirror.
Posted by: Juan Moment | Sep 17, 2008 12:15:47 PM | 14
michael hudson & nomi prinz were on democracy now this morning
AMY GOODMAN: Michael Hudson, we’re talking government bailout, which means taxpayers stuck with the bill. Do you think this is the right move?
MICHAEL HUDSON: No, it’s the worst possible move, and it puts the class war back in business with a vengeance. Wall Street has been preparing for this for years, because every financial analyst knows that the debts can’t be paid. And the question that Wall Street has, if you’re going to take a gamble on bad debts that can’t be paid, how are you going to come out a winner? And there’s only one way of coming out a winner, and that’s to make the government bail you out. This has been known for years, because it’s inherent almost in the mathematics of compound interest. Every banker I know knew that the loans they were making were going to go bad. They were trying to sell them to somebody else, ultimately expecting them to end up with some sovereign wealth fund.
..by bailing them out—Wall Street was coming to terms with the bad debts. When Bear Stearns went under and when Lehman Brothers went under, this began to wipe away the bad debts. And when the debts exceed the ability to pay, there’s only one thing any economy can do, and that’s wipe them out. Instead, the government is trying to keep the fiction alive. And what Paulson did yesterday, in bailing out AIG, was to try to lock in whoever is the next president not only to further bailouts of Wall Street, ostensibly to protect the public money, but to make it impossible to write down the debts of the four million homeowners that are expected to default this year, impossible to write down the debts of companies that have issued junk bonds, impossible for the country to get rid of this excess of debts that can’t be repaid. And you’re having really a war now of creditors against debtors. And this is what Wall Street has been preparing for. It needed an emergency to do it. It’s really not an emergency at all. This has been building up for many years. Everybody expected it. And breathlessly now, the Secretary of Treasury has done it.
Posted by: b real | Sep 17, 2008 12:20:26 PM | 15
#15, nice and simple for the simpletons (like me)
And what Paulson did yesterday, in bailing out AIG, was to try to lock in whoever is the next president not only to further bailouts of Wall Street, ostensibly to protect the public money, but to make it impossible to write down the debts of the four million homeowners that are expected to default this year, impossible to write down the debts of companies that have issued junk bonds, impossible for the country to get rid of this excess of debts that can’t be repaid. And you’re having really a war now of creditors against debtors. And this is what Wall Street has been preparing for.
Posted by: annie | Sep 17, 2008 1:50:21 PM | 16
Hillary Clinton once said that it takes a village to raise a child. Bailout Ben is now saying that it takes a village to keep Wall Street afloat!
Posted by: Cynthia | Sep 17, 2008 5:55:58 PM | 17
I realize that the main reason why AIG went belly up is because it lost big time backing mortgage-linked derivatives. But I can't help but think that the folks from the private sector didn't want to rescue this giant insurer simply because they didn't want to be saddled with a mountain of insurance claims from a plethora of natural disasters looming on the horizon. After all, it's no secret that natural disasters across the globe, whether they are caused by climate change or not, are only gonna get worse!
Posted by: Cynthia | Sep 17, 2008 6:04:12 PM | 18
@ 18, Cynthia, #18 -- that insurance itself could be a contributing factor I had not thought of, but yes, of course, it's common knowledge that a, umn, "hard rain is a gonna fall".
Here in the Happy Little Kingdom the insurers are jacking up rates for certain areas which, even now, experience has shown they are fated for ever more recurring floods -- this is simply because the rain patterns have changed here in Denmark, instead of days of drizzle we have blue skies and a week's rain in 12 hours or less.
Correct me if I have misunderstood, but AIG is, among other things, a re-insurerer, that is, they insure the insurance companies. That is to say, that insurance is also a pyramid game -- a single insurance company cannot cover all possible claims when the shit really hits the fan, so, to keep premiums competitive, they must insure themselves with the likes of AIG and other re-insurerers.
That is my understanding as a layman ignorant of economics as a science.
Posted by: Chuck Cliff | Sep 18, 2008 4:23:24 AM | 19
14, Juan Moment....
"what is needed is a thread on “How to bring about change”, where rather than recounting how bad things are, the aim is to discuss angles and ideas which could lead to real improvements. Eventually a select few proposals will stand out, and whoever wants to could then be directing efforts towards possibly realising one or two of them. To give up, or hope that someone else will fix it, is being defeatist. .... A government for the millions, not the millionaires."
FANTASTIC idea, Juan Moment. Let's do it!! Pleeeeze, b?
Posted by: Jake | Sep 18, 2008 9:33:50 AM | 20
@chuck cliff - that's pretty much it. insurance is theoretically all about managing risk. the concept of reinsurance allows that insurance companies are able to take on greater amounts of risk -- issue larger policies -- than they themselves can possibly cover -- not only allowing them to be competitive, but also allowing them to reap the benefits of more & larger premiums -- by transferring part of that risk onto other insurers, reinsurers, who then, in the case of large policies, typically retain part of that risk themselves and go on to cede the remaining risk to other reinsurers
Posted by: b real | Sep 18, 2008 10:58:19 AM | 21