Bull Worship

The Wall Street faithful genuflect before the alter of greed.

Financial Crisis 101 (and what the Left can do about it)

It's really been fascinating the last few days to watch the highly paid clowns on CNBC mumble and stutter as the obvious bankruptcy of capitalism is further exposed. Their clown prince, Jim Cramer of Mad Money, has been especially entertaining. Trillions in theoretical wealth has vanished into the dark void of nothingness from whence it came and no one in elite circles really knows what to do. Every "remedy" that US Treasury Secretary Hank Paulson and his counterparts in Europe have implemented so far have had but one goal: rescuing insolvent financial institutions. Meanwhile, the real economy of productive work in which tangible things of value and utility are created is being left to die on the vine. The rot on Wall Street has not yet fully infected the real economy or "Main Street" in popular parlance, but that may change quickly if the buffoons now calling the shots are not reined in--and soon. Even hardcore self-professed conservatives and true believers of capitalism such as investment professional Karl Denninger are utterly disgusted with the Paulson Gang.

What I'm not seeing anywhere on bubble-vision or reading in the Wall Street Journal is criticism which fundamentally questions the efficacy of capitalism itself as the best means of addressing a modern society's needs. This should hardly be surprising given that the mainstream corporate media's primary function is maintaining the status quo while preaching the gospel of consumerism. No, as always one must look to other sources.

Sj D'Arcy, a writer with whom I've only recently become aware, has laid out a compelling proposal for dealing with the crisis from a Left perspective and sees the current discrediting of capitalism at the systemic level as a unique opportunity for true progressives to leave the sidelines so to speak and get into the game. Infamous neo-liberal economist Milton Friedman once noted that during a crisis the ideas that are generally adopted to cope with it are the ones that "happen to be laying around". Naturally it helps if the ideas "laying around" were placed there by elites who are at or very near the levers of power. For the Right this has nearly always been the case over the past half century, however, the current crisis has the Right on the ropes, disoriented and reeling as opposed to the Left as is the usual pattern. Capitalism as a theory hasn't tumbled to these depths since 1930's--the last time the Left was resurgent in the US. This presents a unique opportunity for the Left to be relevant again in the US and shouldn't be squandered on sectarian squabbling (a Left staple).

D'Arcy's essay is a must read for those unfamiliar with the mechanics of this crisis and are unsure of how the Left fits in the present debate regarding a way forward.

[PS. The links that follow D'Arcy's essay are extremely valuable as well.]

"F" is for Failure

What follows is a recent TomDispatch post on the sorry Team Bush report card. They have so much with which to be proud:

On the brief occasions when the President now appears in the Rose Garden to "comfort" or "reassure" a shock-and-awed nation, you can almost hear those legions of ducks quacking lamely in the background. Once upon a time, George W. Bush, along with his top officials and advisors, hoped to preside over a global Pax Americana and a domestic Pax Republicana -- a legacy for the generations. More recently, their highest hope seems to have been to slip out of town in January before the you-know-what hits the fan. No such luck.
The rest...

The Crisis of Capitalism

Professor Richard D. Wolff of Amherst on Capitalism as it nears the cliff (courtesy of Lenin's Tomb).

The Meltdown Breakdown

I found this explication of the financial meltdown on Alternet and it may be the most layman-friendly I've found so far. Read it, then pass it on...

Running out of time, while good ideas languish

Stephen Lendman with a few cheerful words about the current crisis:

Since 9/11, the notion of an October surprise has been around. The idea going something like this. Another real or manufactured terror attack. The dominant media stokes fear. The public is again traumatized. The Bush administration pledges all effective measures to protect national security. Formerly seizes total power. Suspends the Constitution and declares martial law. Mass detentions follow. Beginning with dissenters and elements of the public considered "dangerous."
the rest...

Bankers Unchained

I recently stumbled upon the following essay by Rowan Wolf over at Cyrano’s Journal (Thomas Paine’s Corner) and, for the layman, it is by far the most assessable description I’ve found to date on the derivatives beast that threatens to swallow us whole. Of course this is all made possible by “our” elected representatives who would have us sit on the monster’s dinner plate in place of the Wall Street hustlers who nurtured and fed it.

[All credit to the great Elaine Meinel Supkis for this link]

The Anatomy of a Bubble

Until recently, most people had never even heard of derivatives; but in terms of money traded, these investments represent the biggest financial market in the world. Derivatives are financial instruments that have no intrinsic value but derive their value from something else. Basically, they are just bets. You can “hedge your bet” that something you own will go up by placing a side bet that it will go down. “Hedge funds” hedge bets in the derivatives market. Bets can be placed on anything, from the price of tea in China to the movements of specific markets.

“The point everyone misses,” wrote economist Robert Chapman a decade ago, “is that buying derivatives is not investing. It is gambling, insurance and high stakes bookmaking. Derivatives create nothing.” 1. They not only create nothing, but they serve to enrich non-producers at the expense of the people who do create real goods and services. In congressional hearings in the early 1990s, derivatives trading was challenged as being an illegal form of gambling. But the practice was legitimized by Fed Chairman Alan Greenspan, who not only lent legal and regulatory support to the trade but actively promoted derivatives as a way to improve “risk management.” Partly, this was to boost the flagging profits of the banks; and at the larger banks and dealers, it worked. But the cost was an increase in risk to the financial system as a whole.

2. 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...

The rest is worth reading in full.

Dean Baker on the Giveaway

Triumph of the Beasts

As predicted in many quarters the Wall Street cretins and their sycophants in Congress have succeeded in laying the ground work for the looting of our children's future. The Giveaway Plan sailed through the House after the Senate slathered honey & cream on Paulson's turd. Where will things go from here you wonder? Well London Banker paints a scenario that is frighteningly plausible [note: this was written before the House vote]:

Financial Eugenics: The Paulson Plan for Survivor Bias

By “London Banker”

As I write this I don’t know the outcome of the attempt to ram through legislation for looting the US Treasury of $700 billion before the end of the Bush administration.  I suspect that Congress will force the passage of the bill in some form because the media and political narrative on the necessity of the measure is unremitting and so horribly biased.

No alternatives will be considered.

No constraints on the unilateral executive authority of Hank Paulson will be considered.

No assurances that funds will be used to unlock credit markets or promote lending to the real economy (as opposed to the financial robber barons) will be considered.

Instead, the bill will get laden with an additional 300 pages of pork to sway the dissenters, adding to the tab imposed on the American taxpayer.

Having listened to all 42 minutes of the late night Treasury briefing of investment banks on Sunday, there is no doubt in my mind that this legislation represents the sort of federal largesse for Goldman Sachs, Morgan Stanley, Citibank and JPMorgan Chase that the Iraq war provided for Halliburton and Blackwater.

The most cynical moment in the call is when the Treasury official confirms, ”our preference would be to help the healthy banks become even healthier” rather than helping troubled banks or illiquid banks.

America is now a centrally planned economy where the Treasury will determine which firms survive and prosper through allocation of scarce capital to an undercapitalised financial sector.

Clearly what is going on here has nothing to do with kick starting the credit markets or stabilising the equity markets or restoring depositor confidence in banks.  (Treasury official:  “No provision in the legislation that mandates re-lending.”)  What is going on here is a blatant attempt to provide government funds to a select cadre of firms (not all banks) which are chosen to be the survivors feasting off the carcasses of their less fortunate and less well-connected brethren as the downturn intensifies in the years to come.

The crash in equities will still happen.  The debt deflation of the economy leading to mass commercial and consumer credit defaults will still happen.  The collapse of many national, regional and local financial institutions will still happen.  The bankruptcy of many municipalities and shortfalls in state budgets will still happen.

This bill is about engineering survivor bias to friends of the Bush administration so that they profit disproportionately from the collapse of these markets using the funds provided by the taxpayer via the unreviewable and unconditional authority of the Secretary of the Treasury.

The basic plan is to set up a federal money laundering operation.  Bad assets come in, get laundered by the Treasury and put in a new AAA “wrapper” (as it’s termed on the call), and good assets go out, issued as Treasury guaranteed securities.  Whether the final value of the legislation this week is $700 billion or $150 billion is irrelevant as long as the laundering operation can accommodate the throughput, as that number is only a cap on total extensions at any one time.

The SEC will support the plan and survivor bias by relaxing FASB 157 on mark to market accounting.  If there is no agreement on what an asset is worth, it is worth whatever the firm holding it says in its Level 3 accounts or the Treasury Secretary accepts in buying it.

The Federal Reserve will support the plan by relaxing the definition of “control stake” in US banks and bank holding companies to allow secretive cabals to hold through private equity and offshore hedge funds.  No one knows the beneficial owners of these ill-transparent private equity investors, and so it is the ideal way to reward loyal and helpful insiders, legislators and officials – as well as cede further ownership of American assets to foreign stakeholders who would be politically unacceptable if publicly acknowledged.  Many foreign creditors are irate at the losses their funds, banks and pensioners have sustained from investments in the United States, and this plan provides a secret way to buy them off and keep them lending and investing as their own economies are roiled by the deflation to come.

For the past year the survivor bias has been orchestrated from the Federal Reserve, with its extension of innovative credit facilities and selectively engineered rescues or forced mergers.  That has been very useful, but that well is now dry.  The Fed has no more good assets to trade for the bad assets the banks can offer.  And the supply of bad assets just keeps growing as market illiquidity spreads further from the core of the mortgage backed securities market.  Instability is now leading to a realistic threat that the Fed and Treasury could lose control of the deflationary process.

Part of the reason the Paulson Plan is so attractive is that it recapitalises the Fed by promoting the unwinding of repos and lending facilities which left the Fed holding toxic assets.  As the repos and credit facilities gradually unwind, these toxic assets can now be taken back by the banks and exchanged for good cash.  The Fed gets its balance sheet Treasuries and cash back to restore its flexibility to intervene anew.

Favoured private equity and insiders who swap US dollars for equity in the banking system will presumably be aware of the survivor bias being engineered on their behalf.  Sovereign wealth funds, investment funds and private equity investors ripped off in the first round of recapitalisation may be willing to come back in once it is clear to them that the next round will benefit from official favouritism.  Warren Buffett’s timely stake in Goldman Sachs is clearly linked to his confidence the Paulson Plan will benefit them disproportionately.

A factor which is probably critical but has received little discussion is that literally thousands of Bush administration apparatchiks will need jobs come January, and a fair selection of GOP House and Senate legislators and their aides too.  What better way to enahance their CVs in their final months in power than to distribute $700 billion or so in pre-Christmas largesse to the most remunerative employers in the world?  And what better way to ensure the corporate largesse is returned to the GOP to win back the White House and Congress in 2012 as the recession fuels public anger?
And then there is a huge arbitrage opportunity as well so that everyone makes money.  According to the conference call, the pricing on offer from the Treasury will be a bit below Level 3 pricing.  The toxic assets will be repackaged and resold with a new AAA wrapper, possibly priced well below what the Treasury paid, assuring a huge profit on both immediate liquidation by the banks and ultimate maturity by investors.  The Fed gets its cash and Treasuries back; the banks make huge profits; the foreigners and off-shore tax avoiders get disguised ownership of the American financial system; the taxpayer gets ripped off.  What’s not to love?

Think back to Fisher’s Theory of Debt Deflation in Great Depressions.  Dollars become “bigger” as deflation takes hold because each dollar can buy more assets as assets deflate.  That means that as these clowns crash the markets, their $700 billion of liquid cash funnelled to their friends and recycled through the Treasury laundrymat can progressively buy up the rest of the pieces on the gameboard at low discount prices.  Game over with those who caused the crash and robbed the bank winning.

Deflation is going to happen – globally.  Either we can use the course of deflation to shape healthy economies that will provide growth and employment and productive returns on investment in future, or we can allow deflation to further enrich those miscreants whose irresponsible policies led to the violent financial collapse we are about to experience.

There is a fundamentally healthy economy in America – somewhere underneath all the financial excess and chicanery and all the financial/oil/military/healthcare/developer corruption of local, state and federal politics.  It will be a painful and slow process to kill off the metastasising cancerous growths on the economy, but if Americans achieved that, they could embrace a healthier and more productive and more prosperous future.

I would like to believe Americans expressed the courage to change over last weekend when they 25 to 1 rejected an unconstrained and unconditional bailout of Wall Street in favour of cold turkey deleveraging of the economy.  I wish I could believe that it mattered in the political calculus, but the result of the House vote on the bill will tell us that.

Fight the survivor bias.  It’s not your survival they’re engineering.

More Common Sense

The following is another interesting take on Paulson's shenanigans from a thread over at Common Dreams:

Paulson’s Great Depression:

It is difficult to believe that Paulson is not intentionally destroying the world economy, since his company, Goldman Sachs has been so intimately involved in setting the stage for this fiasco.

Goldman Sachs was involved in many sub-prime securitizations, and then was instrumental in setting up the ABX index, which Goldman then shorted to death after selling the index to its clients. By shorting the ABX index, Goldman not only made huge profits, but also eliminated all financing for real estate securities by spreading the notion that they had no resale value, because the value “indicated” by the ABX index was so low. The notion of “toxic securities” was sold to the world by Goldman and their confederates. Once new real estate lending was substantially restricted, a broad decline in real estate prices was a certainty, and recently adopted “mark-to-market” accounting rules forced lenders to report balance sheet losses even for loans that were current.
Goldman also helped develop and sell complex securities, that have magnified the extent of the damage done. Collateralized debt obligations and credit default swaps can magnify any actual loss, since there are many more credit default swaps sold than actual loans made. A $1 actual loan loss can become $10 or more of losses to one side of the swap transaction, and $10 or more of gain to the other side of the transaction.
Paulson has made the financial crisis much worse by his publicly stated intention to “punish” some companies. While Bear Stearns was “bailed out”, Lehman was allowed to fail. Fannie and Freddie were “rescued” in a way that arbitrarily removed $10 to $15 billion of capital from banks that had invested in the preferred stock, which then reduced those banks’ lending capacity by $100 billion, making the “credit crisis” much more severe than it was before the “rescue”. Instead of stopping a run on Washington Mutual by providing cash loans, Washington Mutual was unnecessarily liquidated, to demonstrate the urgency to authorize $700 billion to Paulson’s Treasury.

Of course because of credit default swaps sold around the world, financial institutions’ losses on the Washington Mutual liquidation are vastly larger than the cost of keeping Washington Mutual open as an independent entity.

Now we come to the $700 billion. If this is used SOLELY to purchase whole loans, then the institutions now holding those loans do not experience losses that get magnified by credit default securities, and the government is in a position to rework the loans with affordable payment terms, so that people keep their homes, and the government recovers its entire investment. If this money is used to purchase “downstream securities”, such as securitization interests, CDOs, and credit default swaps, then vastly more money is required, and homeowners still lose their homes.

Why would Paulson seek the authority to buy “downstream securities”? Could it be that Goldman and its confederates hold these securities, and make vastly more money at taxpayer expense by selling these securities than by allowing people to remain in their homes, eliminating the defaults that make these credit default swaps so valuable to one side of the contract, and so costly to the other side of the contract, the US taxpayer, if Paulson gets his way.


Let's work to kill this damn bill.

In a nutshell...

The following comments are courtesy of a poster over at the New Republic blog and it is perhaps the clearest and most accessible synopsis yet of the Wall Street debacle and what's at stake:

(September 30, 2008 9:07 AM)

Very few people in or out of government understand what this crisis is about.  The simple  answer is that highly levered financial companies that participate in the credit/money supply have lost their equity due to the market decline in their mortgage-backed assets and related derivative contracts.  That freezes the flow of credit/money supply.  So, something needs to be done if the economy is not going to tip into sharp recession because credit/money are essential lubricants for transactions.

However, there is a correct and visceral negative reaction to the notion that the best or only way to stabilize the credit system is for the public to eat the losses generated by rapacious finance types by buying up their bad paper at above market values -- which is what the Paulson plan is about.  Dress it up how you will, it is nothing more than a giant handout to the very people who are to blame for the problem at the expense of everyone else.

It is simply unnecessary to do this in order to stabilize the system.  The right way to do it is a variation on what has occurred at AIG and WaMu, which is that the investors, both debt for money borrowed and equity, get wiped out in the course of the recapitalization of the operating assets.  It isn't even necessary to wipe out the debt and equity.  They can be left in a position to realize the full value, and more, of what they own today.  How can this be done?

It can be accomplished with a law that, by fiat, removes from the books of the operating companies their bad assets, their indebtedness for borrowed-money, and their derivative contracts (which combine both an asset and a liability) and spins them off to a parent or trust that is free to realize them as a pass-through tax entity (meaning there is no taxation at that level, only at the level of the ultimate owners).  The trade/operating liabilities (deposits, customer accounts, and such) are left undisturbed.  The owners and investors have exactly the same pool of assets and liabilities that they did before this maneuver, but now there is an unlevered operating subsidiary that is free to do business, borrow money, and raise capital without the burden of past mistakes.  In those cases where the operating entity is still under-capitalized (too many liabilities for its good assets), THEN the Treasury can be authorized to inject capital by purchasing a combination of preferred stock and warrants (the same deal Warren Buffet got at Goldman).

In this manner, the investors are left free to realize the pool of assets, liabilities, and fresh equity that they hold, but without invading the capital of the new subsidiary to do it.  They are no worse off in financial terms, other than the fact they they cannot liquidate the operating company, and are likely better off as the market as a whole returns to equilibrium.  They can hold instruments to maturity for their cash flow, sell them in the market, sell the equity of the subsidiary, whatever they want, without clogging up the flow of credit.  It reorganizes the situation so that it is the shareholders and investors who bear the losses, not the operating entity, as if, for example, the shareholders of Lehman had gone bankrupt, not Lehman itself.  Best of all, this "recapitalization on the fly" does not redistribute losses from those who produced them to anyone else.

Now, you tell me why the Bush administration prefers just to hand out money to the very people who caused the problem -- the dying gasp of the Bush kleptocracy.  People may not understand the intricacies, but their visceral negative reaction to the Bush/Paulson plan is spot on.  It is a pity that the Dems seem to have no one who can figure out what is wrong with the Bush plan and how to fix it.
-roidubouloi

Cut it, paste it and pass it along.

The Plot Thickens

It would appear that in one last dying grasp the Banksters are attempting to blackmail Congress and the rest of the country into signing off on the Paulson/Wall Street Heist of the century. The so-called "liquidity crisis" is in fact a shabbily disguised insolvency issue in which the reckless are demanding that the taxpayer pay the price. As always on Wall Street, their profits are their profits but their losses are our losses. Mike Whitney explains further...

Change We Can Believe In

Only fools blinded by irrational fear of change and progress make the claim that there's no fundamental difference between Obama and McCain on the issues.

Finally!

Visible backbone sighting in Washington.

Heads Up! Falling Bankers!

Lehman Brothers survived the Panic of 1857, The Civil War, the Panics of 1873, 1893, 1907, and the Great Depression. But it couldn't survive the Bush presidency.
— Robert Hammer, Pittsboro, NC
Oh the horror!

Random Notes on Georgia

Chomsky with the straight dope as usual...

Dems in Danger

Oh no! The presumptive crown appears to slip ever so slightly from St. Obama's blessed head. Beads of sweat now grace his brow and frankly the faithful are worried. They should be. The Barockstar can't shake McCrazy and Sarah "The Diplomat" Palin no matter how much he panders to the right wing crowd which the polls seem to now confirm.

We've all seen this movie before of course. The Democratic wing of the Business Party would rather wither and die than inspire a class revolution, but then you knew that of course. Unsurprisingly the GOP knows how to play this game, how to tap into America's inner crazy and they're off to a fine start. The problem is largely twofold really. First, the Democratic Party is collaborationist in every sense not an agent of fundamental change and, secondly as IOZ points out, huge swaths of the American population ain't ready for no chang'in.

Welcome to the USSRA

Economist Nouriel Roubini works up a righteous anger over the recent nationalization of Freddie/Fannie. Well it's about time.

Surge Fables

I would be remiss if I didn't share some notes from Professor Juan Cole on the "surge" that has been so prominently featured in the calculations of both challengers in the race for Chief Imperial Manager. Though this essay is from way back in July of this year, every word of it is still highly relevant today. In fact, It would behoove you to refer to it whenever you next encounter some hack blathering on about the success of the surge. The comments section of this piece contains some very good analysis as well. Read on...

The Irresistible Centrifugal Force of Power

Yes, there can be little doubt that Obama and the powerful elite sector which supports and funds his campaign are feeling good about their chances this November. Why shouldn't they? Hasn't McCain foolishly staked his run on the thoroughly discredited Team Bush agenda of aggressive militarism abroad and rapacious, winner-take-all, the devil gets the hindmost, "free-market" capitalism at home that has embarrassingly revealed itself in our cratering financial sector and imploding housing market? Of course Team Barack Obama (hereafter, Team B.O.) has no serious fundamental or moral objection to this agenda per se, however, they do raise tactical objections about its execution by the outgoing team. It is here where Team B.O. has sought to distinguish itself from the Bushistas. So, you'll hear nothing from Obama's camp that seriously addresses the desire of perhaps 90% of Iraqis that US occupying forces and accompanying mercenaries leave their decimated lands. Team B.O. has every intention of maintaining the 14 massive mega-bases and the Vatican City-sized "embassy" that garrison this illegally occupied country. Furthermore, Obama has been explicit in his determination to expand the war in Afghanistan and Pakistan. Is there anyone who seriously thinks that Team B.O., filled to the brim with free-market true believers, will work to rescind NAFTA and the other investor rights agreements that have decimated the labor movement (and the worker protections and living wages that went with it) both here and abroad? Let's grow up people.

Even knowing all of this It's still gratifying when one is surreptitiously given a peek inside the citadel of power by an insider. What follows is an important essay by a contributer to Joe Bageant's wonderful blog. This political insider wisely chooses to remain anonymous (and thus employable):

By an anonymous political consultant

Over the last many weeks we have all been subjected to endless news stories about Senator Obama's campaign "Move to the Center". Leaving aside the political illiteracy which underlines this phrase, the use of it reveals important clues about the rhetoric of electoral campaigns, whom they target and what they are trying to communicate.
Put simply, what "Moving to the Center," means is: moving towards power and money...

The rest