John Wayne is the Duke. Elvis is the King.

John Wayne's Holster: September 2008
John Wayne's Holster
Visit my main blog at Monkey Wrench Revival. Visit my birdwatching blog at The Birding Nerd.

Friday, September 19, 2008

Congress: Leadership When We Need It Most!

An Empty Congress...

The United States is in the midst of its worst economic crisis since the Great Depression. The fall-out from the sub-prime mortagage crisis is just starting to be felt. Ripples are beginning to move through the economy.

So far, one of the country's most successful investment firms (Bear Stearns) went belly-up, as did two of the biggest names on Wall Street (Merrill Lynch and Lehman Brothers). Then, the country's biggest mortgages lenders (Fannie Mae and Freddie Mac) were nationalized. A few days later, the country's largest insurace company (AIG) had to trade 79.9% of its shares for a punitive loan from the Fed that will keep it alive just long enough for all its organs to be harvested. And two days ago, the country's oldest money market fund (The Reserve Fund) "broke the buck".

What's next?

The auto industry is not doing so hot. The Big Three automakers (General Motors, Ford and Chrysler) are already sniffing around Washington for $50 million in low-interest federal loans. Then there is the airline industry? They have not completely recovered from 9/11 and more recently have been hit hard by rising fuel costs. I suppose we will end up bailing them out too.

Of course, with all these bail-outs, the taxpayers are going to end up footing the bill.

Surely our elected leaders will step forward to stand-up for the people they claim to represent. After all, it is in difficult times such as these where America shines brightest. Isn't it?

Who will step forward? Anyone? Anyone at all?

crickets chirping...

What exactly is Congress planning on doing to help solve the economic crisis were are in? As it turns out, the Congress says that it will likely adjourn next week. Yep, their packing they are bathing suits and heading to the beach.

Harry Reid's Message to Taxpayers

When asked about the Congress' plans, Senate Majority leader Harry Reid (D-NV) stepped forward like the true leader he is, and boldly stated stated, "No One Knows What to Do"..."The [Banking and Financial Services Committees] is where the action is anyway."

And what are the "committes" doing about the problem? They passed the buck too. They turned it over to Treasury Secretary Henry Paulson and Fed Chairman Ben S. Bernanke.

In other words, our elected "leaders" have turned over the responsibility for solving the biggest financial crisis since the Depression to a handful of unelected bankers whose primary loyalty lies with the Fed and its stock holders (i.e. - the guys that orchestrated the sub-prime mess in the first place).

And what do you know, Paulson and Bernanke already have a plan. Imagine that!

What is their plan, you ask? BOHICA!

Their plan is to "remove illiquid mortgage securities from companies' balance sheets." That's banker-speak for shifting the responsibility for all the bad loans to the taxpayer. That's right, we are picking up the tab yet again. And we are not talking about pocket change either. As Paulson himself said, "We're talking hundreds of billions [of dollars]". It will more likely be trillions, but then again, whose counting?

Personally, I don't know whether to laugh or cry. It's the same thing all over again. All the profits these now-defunct companies made along the way where pocketed by the banks and the CEO's. Now that they coffers are empty and they have debts coming out the wazoo, they have all fled the scene. Of course, they took their severence packages and their corporate bonuses with them.

And if I haven't mentioned it already, the taxpayer has to step in and pick-up the tab. Meanwhile, the bankers/CEO's are sipping champagne on the beach somewhere. And Conress it apparently getting ready to join them on vacation.

And who said there were no real leaders left in America?

Wednesday, September 17, 2008

Vultures Clean-up on Wall Street

Photo Credit: Safaris Pictures

Another day, another take-over by the Fed!

This time its AIG (American International Group) - the world's largest insurance company.

The Fed announced yesterday that it, "will provide a two-year loan, take 79.9 percent of the New York-based company's stock and replace its management..".

And like the script goes, the taxpayers will pick-up the tab for the loan.

The government is lending AIG the money at a rate of about 11.5 percent. According to Marco Annunziata, an analyst at UniCredit SpA, " the 'punitive' interest rate on the loan makes it extremely clear that this is not a subsidy extended to keep the company afloat but rather a stranglehold that makes AIG unviable while ensuring that its obligations will be met. This is to all extents and purposes a controlled bankruptcy"

A controlled bankruptcy? In other words, the loan will give the company just enough time to sell of its assets, most likely at fire sale prices.

Expect the regular players (Goldman Sachs, JP Morgan, Citibank, Barclay's, etc) to be involved. They will descent on AIG like vultures on a rotting carcass.

Monday, September 15, 2008

It's Harvest Time... on Wall Street

I stopped at the bank during my lunch break today. While waiting in line for a teller, I was watching the news on the flat screen TV mounted on the wall. I was hoping to catch-up on the latest develeopments in the on-going meltdown on Wall Street. To my suprise, that news was trumped by an (apparently) even BIGGER story.

O.J. is on trial!

Is this what we have come to in this country? On the heels on the largest bail-out in the history of the United States, two of Wall Streets most storied companies implode, and CNN decides to air gavel to gavel coverage of another O.J. trial. What the...

In case you missed it, one of the nations oldest investment banks - Lehman Brothers - filed for Chapter 11 bankruptcy protection Monday morning. It's the largers bankruptcy filing in US history. The firm crumpled under the weight of $60 billion in bad real estate deals.

Merrill Lynch also got caught-up in the sub-prime mortgage mess, and was bought out by Bank of America for pennies on the dollar. reports that Merrill Lynch suffered "$52.2 billion in losses and writedowns from subprime- mortgage-contaminated securities". As a result, their stock value has dropped more than 80% since January, 2007.

As if this news were not bad enough, there is more sub-prime-related trouble on Wall Street. AIG, the nations largest insurer, is scrounging for about $40 billion in capital to meet its day-to-day operating costs. CNN-Money reports that AIG has lost "nearly $18.5 billion in the past three quarters - primarily due to a plunge in the value of credit default swaps tied to subprime mortgages". Now Goldman Sachs and JP Morgan appear to be stepping forward to lend AIG money to keep them afloat.

All three of these companies are ranked by Fortune 500. In addition, AIG is a Dow Jones company. It's losses can only serve to drive the Dow further down into bear-market territory. Surely, these are reasons for investors to be worried.

However, not everyone is worried. The banks tied-in with the Fed (BofA, JPMorgan, GoldmanSachs) are dancing in the streets. For them, it's harvest time!

Not to be a conspiracy nut, but it seems odd to me that the big banks tied to the Fed have not suffered much during the sub-prime mess. It's begging to look like the unfolding of a grand scheme. Back in 2001, the Fed lowered its funding rate to 1%. The goal being to increase the money supply and encourage lending. Lending, in turn, encourages spending. This was all supposed to spark a post-9/11 boost which the country sorely needed.

With so much money now available to lend, bankers were not too picky on who they actually lent the it to - thus the sub-prime loans. The Fed-linked banks knew these loans were risky, due to the higher probability of default. They then packaged the risky loans with a few good loans and sold them off as asset-backed securities (ABS) - transferring the risk in the process. These loans were also repackaged and sold to Wall Street, who in turn sold them to investors. It was a trickled-down scheme that would have made Jack Kemp do a double-take.

As we all know by know, the bottom dropped out of the sub-prime lending scheme when the original borrower began defaulting in mass. The losses retraced their way back up the lending chain, leaving bankruptcies in its wake. Of course, the banks linked to the Fed were off the hook. They already took their money and ran. The losses suffered by other lenders, such and Freddie & Fannies, were transferred to the public in the form of tax-funded bail-outs and devaluation of the dollar. Those companies that haven't quite breathed their last, but are having trouble meeting operating costs are being bought-out at fire sale prices.

After all, it's harvest time!

Wednesday, September 10, 2008

The United States of America: the Land of Privatized Profits & Socialized Losses

Bankers Take the Money & Run

As I am sure you all heard over the weekend, the government announced the take-over of Fannie Mae and Freddie Mac (hereafter, F&F). While the ultimate cost is not yet known, financial analysts estimate that is could be somewhere in the neighborhood of $100 to $500 billion.

It’s the biggest bail-out in the history of the US!

We all knew it was coming! The audacity of the move is shocking nonetheless.

You can read all about Treasury Secretary Paulson saying the move protects the taxpayer , or that it puts them first.

Sounds great! Now I can sleep at night knowing the government has come to the rescue. On second thought, maybe I should sleep with one eye open...

Here’s how the government's bail-out works. When reading this, please keep two things in mind. When they say the “government” bailed-out F&F, they don’t really mean the government. It was really the you and me - the taxpayers. And when they say the Federal Reserve Bank, be wary. If they are referring to the taking of profits, then they do actually mean the Fed; however, if they are talking about covering losses or picking-up the tab, once again they mean you and me - the taxpayers. Got it?

The Fed pumped about $100 million in capital into each company to keep them solvent. In return, they received $ 1 billion in senior preferred stock. In the process, common and preferred stock holders were essentially wiped-out.

What does all this mean? For starters, the Fed didn’t have the money to cover all the bad loans. However, that is not a problem when you hold the purse strings of the treasury and have control of the printing press. The required money was simply printed, effectively transferring the cost to the taxpayer. I guess that’s what Paulson meant when he said the deal put the taxpayer “first”.

The deal also means big profits for the Fed and its member banks, such as Citibank, Chase Manhatten, Morgan Guaranty Trust, Chemical Bank, Manufacturers Hanover Trust, Bankers Trust Company, National Bank of North America, and the Bank of New York.

How do they profit? That’s where the senior preferred stock comes into play. One needs to keep in mind that not all the loans F&F made were bad ones. In fact, most were good loans, with borrowers who continue to pay on time. Holding senior preferred stock means that the bankers can continue to collect the interest on these loans.

That’s right, the bankers will continue to collect the interest on the good loans! The taxpayers cover the losses for the bad loans.

When you boil it all down, the bail-out is nothing more than a socialist scheme where earnings are privatized and losses are socialized. It’s the modus operandi of the Federal Reserve System. It’s the same thing that happened in the Penn Central Railroad bail-out, the Chrysler bail-out, the Continental Illinois Bank bail-out , the Lockheed Aircraft bail-out and the New York City bail-out, just to name a few. In all these cases, the taxpayer was forced to foot the bill for the irresponsible businesses practices of corporate America.

Does that sound like free-market capitalism or democracy to you?