CORRUPTION USA- HOW WALL STREET PAID FOR ITS OWN FUNERAL

CORRUPTION-US: How Wall Street Paid For Its Own Funeral
By Marina Litvinsky

WASHINGTON, Mar 4 (IPS) - A new report says that Wall Street has only itself to blame for the misguided deregulation that led to the current deepening financial crisis.

Issued Wednesday by Essential Information and the Consumer Education Foundation, the report documents billions of dollars spent by the financial sector on what would eventually be their own downfall.

The 231-page report, "Sold Out: How Wall Street and Washington Betrayed America," shows that the financial sector invested more than 5 billion dollars on purchasing political influence in Washington over the past decade, with as many as 3,000 lobbyists winning deregulation and other policy decisions that led directly to the current financial collapse.

"The report details, step-by-step, how Washington systematically sold out to Wall Street," said Harvey Rosenfield, president of the California-based non-profit organisation Consumer Education Foundation.

"Depression-era programmes that would have prevented the financial meltdown that began last year were dismantled, and the warnings of those who foresaw disaster were drowned in an ocean of political money," he said. "Americans were betrayed, and we are paying a high price - trillions of dollars - for that betrayal."

According to the report, government regulators, Congress and the executive branch have, on a bipartisan basis, spent the past three decades steadily eroding the regulatory system that restrained the financial sector from acting on its own worst tendencies.

From 1998-2008, Wall Street investment firms, commercial banks, hedge funds, real estate companies and insurance conglomerates made political contributions totalling 1.725 billion dollars and spent another 3.4 billion on lobbyists - a financial juggernaut aimed at undercutting federal regulation.

"Congress and the Executive Branch responded to the legal bribes from the financial sector, rolling back common-sense standards, barring honest regulators from issuing rules to address emerging problems and trashing enforcement efforts," said Robert Weissman of Essential Information and the lead author of the report.

"The progressive erosion of regulatory restraining walls led to a flood of bad loans, and a tsunami of bad bets based on those bad loans," he said. "Now, there is wreckage across the financial landscape."

The report documents a dozen distinct deregulatory moves that, in concert, led to the financial meltdown.

For example, the "rise of the culture of recklessness" was aided by the repeal of the Glass-Steagall Act. The Financial Services Modernisation Act of 1999 formally repealed the 1933 statute and related laws, which prohibited commercial banks from offering investment banking and insurance services. Erasing them from the books helped create the conditions in which banks invested monies from checking and savings accounts into creative financial instruments such as mortgage-backed securities and credit default swaps - investment gambles that rocked the financial markets in 2008.

The report also said that banking regulators retained authority to crack down on predatory lending abuses, which would have protected homeowners and lessened the current financial crisis if the regulators hadn’t "sat on their hands." The Federal Reserve took just three formal actions against subprime lenders from 2002 to 2007. The Office of Comptroller of the Currency, which has authority over almost 1,800 banks, took three consumer-protection enforcement actions from 2004 to 2006.

Another deregulatory federal law that benefited mortgage lenders at the expense of the public deals with assignee liability. It states that with limited exceptions, only the original mortgage lender is liable for any predatory and illegal features of a mortgage - even if the mortgage is transferred to another party.

The report points out that this arrangement effectively immunised acquirers of the mortgage ("assignees") for any problems with the initial loan, and relieved them of any duty to investigate the terms of the loan. Wall Street interests could purchase, bundle and securitise subprime loans, including many with pernicious, predatory terms, without fear of liability for illegal loan terms.

The arrangement left victimised borrowers with no cause of action against anyone but the original lender, and typically with no defences against being foreclosed upon.

Other misdeeds that led to the financial crisis include prohibitions on regulating financial derivatives; a voluntary regulation scheme for big investment banks; and the repeal of regulatory barriers between commercial banks and investment banks.

The report presents data on financial firms’ campaign contributions and disclosed lobbying investments, which supports its claim that "political decisions were influenced by political expenditures and extraordinary lobbying," as Weissman put it.

For example, securities firms invested more than 504 million dollars in campaign contributions, and an additional 576 million dollars in lobbying, while commercial banks spent more than 154 million dollars on campaign contributions and invested 383 million dollars in officially registered lobbying.

Individual firms spent tens of millions of dollars each. During the decade-long period Goldman Sachs spent more than 46 million dollars on political influence buying; Citigroup spent more than 108 million; and the now defunct Merrill Lynch spent more than 68 million dollars.

According to the report, the financial contributions were bipartisan: about 55 percent of the political donations went to Republicans and 45 percent to Democrats, primarily reflecting the balance of power over the decade. Democrats took just more than half of the Wall Street’s 2008 election cycle contributions.

The financial sector also bolstered its political strength by placing Wall Street expatriates in top regulatory positions, including the post of Treasury Secretary held by two former Goldman Sachs chairs, Robert Rubin and Henry Paulson.

Financial firms employed a legion of lobbyists - maintaining nearly 3,000 separate lobbyists in 2007 alone. Insurance companies had 1,219 lobbyists working for them; Real estate interests hired 1,142.

These firms drew heavily from former government officials in choosing their lobbyists. Surveying 20 leading financial firms, the report found that 142 of the lobbyists they employed from 1998-2008 were previously high-ranking officials or employees in the executive branch or Congress.

"It’s very important to identify the causes of the crisis if we are to fix it and prevent it from occurring again," Weissman told IPS, speaking to the report’s relevance.

He adds that one of the ways through which many deregulatory moves were justified was the claim that they facilitated "financial innovation - a buzz word on Wall Street and Washington."

"Our review suggests that while there may be some innovations that are socially beneficial, in general (financial innovation has served as) a code word for complexity," he explained. "It has been a means for Wall St. to confuse consumers and investors, extract money from them and the overall economy, and build up a house of cards that has now tumbled down to disastrous effects."

The report calls on Congress to adopt the view that Wall Street has no legitimate seat at the table. "This time, legislating must be to control Wall Street, not further Wall Street’s control," it says.

"The first substantive recommendation we make is to undue the deregulatory decisions that we have profiled," said Weissman.

Other recommendations include prohibiting some forms of financial instruments, as well as a financial transaction tax to slow down speculation and curb the turbulence in the markets.

(END/2009)

WHATEVERS GOOD FOR GOLDMAN SACHS...

Whatever is good for Goldman . . .

By John Gapper

Published: September 25 2008 03:00 | Last updated: September 25 2008 03:00

A lot of people used to think that Goldman Sachs ran the US economy. Now we know it does.

On Tuesday morning, Hank Paulson, the US Treasury secretary and former chairman and chief executive of Goldman, testified to Congress about his plan to buy $700bn of mortgage securities. He wants to scoop up these assets as rapidly, and with as little interference, as possible in a manner yet to be fixed.

On Tuesday evening, Goldman declared that Warren Buffett, the legendary investor, was handing it $5bn of new capital in the form of preference shares and the bank would follow up with a $5bn equity sale. For investment banking rivals that have fallen by the wayside, or had to hunt overseas for funds, it showed who is top of the heap.

Mr Paulson's stewardship of the crisis-hit economy - despite the role that investment banks have played in bringing it down - and Goldman's bravura capital-raising are typical. Goldman partners are not only smarter than the average Wall Street bear, but often turn up in "public service", running finance ministries and central banks.

They have been very adept at first making money for themselves and then trading the financier's life for that of the power broker. Even in a Wall Street-induced crisis, it feels safer to have Mr Paulson at the US Treasury than Paul O'Neill, or John Snow, his Main Street predecessors. His bald pate and manner are scary but he is no ingenue.

This Wall Street crash, however, has made the latent conflict of interest between Goldman's public and private faces uncomfortably real. Mr Paulson insists that, in his current job, he cares only about "the American taxpayer", yet Goldman has been one of the prime beneficiaries of recent interventions by the Treasury and the Federal Reserve. Even if you accept, as I do, that Mr Paulson is a man of principle who tries his best to put his country first, this is troubling.

It places him in a more awkward spot than Robert Rubin or Steve Friedman, who ran Goldman and went on to become Treasury secretary and director of the White House Economic Council respectively; or Jon Corzine, the former Goldman head who is New Jersey governor, or Mario Draghi, a former Goldman partner who runs the Bank of Italy.

It might not be so awkward if Goldman had suffered just a little more from the credit crisis. But it has instead emerged, along with Morgan Stanley, in the last pair of large investment banks standing. The Securities and Exchange Commission has protected them and other institutions from short-selling and the Fed has allowed them to become fully fledged banks.

Wall Street is widely reviled at the moment, but even Wall Street is bitter about Goldman. Former employees of Lehman Brothers, which was left to fail by the Fed, complain that Mr Paulson and Ben Bernanke, the chairman of the Fed, saved their $700bn (€474bn, £377bn) shot until last week. They pulled out the big gun when it looked as though Goldman and Morgan Stanley were in trouble.

Now, to compound matters, Goldman could make a bundle if Mr Paulson's $700bn fund clears Congress. Unlike rivals such as Lehman and Bear Stearns, Goldman marked down its exposures to subprime mortgages and real estate so aggressively that it has only $28bn of illiquid assets, of which a mere $1.7bn related to subprime mortgages, on a $1,000bn balance sheet.

It would be a bit rich for Goldman to turn round and make a profit by selling this stuff at a higher price to its old boss. But it need not be quite so blatant: even if Mr Paulson's fund buys comparable assets, Goldman will be able to mark up its own book. Furthermore, it is already thinking of using Mr Buffett's largesse to buy more distressed securities.

Goldman can hardly be blamed, of course, for navigating the Wall Street crisis better than others. It did not expose itself so disastrously to one highly leveraged play on the US mortgage market. It hedged against the credit turmoil and cut its losses swiftly rather than crossing its fingers that the market would turn.

Yet Goldman got a helping hand from the authorities and stands to get another one while Lehman was - rightly, in my view - allowed to fail and Bear Stearns' shareholders were nearly wiped out. Would the Treasury and the Fed ever have allowed Goldman to follow and its partners to lose their wealth? I doubt it.

The fact is that Goldman, having started out as a humble commercial paper house in 1869, has worked its way to the heart of the financial and political establishment. It has become the modern-day General Motors by convincing politicians and regulators that what is good for Goldman Sachs is good for the US economy.

It does not hurt that so many Goldman executives become public officials. They no doubt go to the capital with the best of intentions, but they bring with them Goldman's view of the world. Bear Stearns was "too inter-connected" with markets to be allowed to fail, but Goldman has embedded itself far more deeply in Wall Street and Washington.

Most of the time, this intermingling is not pernicious. Goldman partners tend to be clever, hard-working people. I also share Goldman's views on the benefit of free markets and globalisation, and the belief that wealthy institutions and individuals should use their clout and money both for philanthropy and to improve standards of government.

But, at the moment, Wall Street is embroiled in a crisis of liquidity and credibility. Mr Paulson is due to step down by January as Goldman Sachs' latest Treasury secretary. The next president should recruit his successor from elsewhere.

john.gapper@ft.com

700 BILLION DOLLAR BAILOUT!!!! BIGGEST FASCIST SCHEME YET

As it turns out, all the foreign nations holding dollar-denominated foreign exchange surplus reserves in the form of treasury paper realized that we were going to inflate them into oblivion, what with all the bailouts and such, and it appears, well, that they all ran for the door at once, if you catch my drift. We wore out all the printing presses trying to cash in their bonds for them, and all we had left was a huge pile of treasury paper, which we decided to throw out of my helicopter instead of cash. They're in pretty big denominations, so the people should be quite impressed. In any case, we couldn't print any more Federal Reserve notes on account of the printing press issue, and besides, the notes wouldn't have been good for anything but heating fuel, "furnace fodder" if you will, so why go through all the expense to print more? We have to be fiscally responsible, you know. MM: Yeah, right. Gee, I know this may sound odd, but now that your helicopter's engines have shut down, I could swear that I hear -- could it be -- the sound of marching jackboots, doing a goose-step, in the background?

HP: Ahem, well, after Ben and I consulted with our Gestapo, oh, I mean our Department of Homeland Security, they decided to send in the foreign storm-troopers, er, our soldiers, as a follow-up to our helicopter drop. They were apparently concerned that there might be mass social upheaval, and possibly even a revolution, after the sheople, I mean our citizens, discovered that the treasury bills we just dropped were nothing but "worthless paper." Well, Ben, we better get going. We barely have time to pack and get ready to flee to our bunkers and safe-houses with the rest of our "comrades." Hey, see ya, wouldn't wanta be ya!!! Oh, and by the way: Sich Heil! MM: I have a bad feeling about this!

After over 40 years of financial reporting and analysis, we can say, without hesitation, that the 700 billion bailout plan proposed by Fed Chairman Buck-Busting Ben Bernanke and Treasury Secretary Hanky Panky Paulson, on behalf of the Caligula Administration, is the most abusive and piggish fascist scheme we have ever heard proposed. This is the living, freaking, end. We sit hear stunned and stupefied at the sheer arrogance of a corporatist, fascist plan, so saturated with moral hazard, that it can only be described, to use the words of Jean-Pierre Roth, president of the Swiss National Bank, in his description of the breakdown in American lending standards, as "unbelievable!"

First, note how the elitists have allowed the stock markets to crash over the past two days in order to put pressure on Congress to adopt their plan. They have withdrawn PPT support in an effort to stuff this plan down Congress's throat. And this pressure will continue until they get their way. This is what Congress gets for letting the Illuminati run our country. Now, they will have to face their constituents in a no-win situation. If they adopt the plan, they will be accused of bailing out the fraudsters, and of privatizing the profits from the sheople's hard work in evil elitist corporations, while socializing the losses from yet another bankers' Ponzi-scheme in the sheople as is their custom. If they don't adopt the plan, and as a result, the credit markets freeze up and the US economy goes down in flames, they will be blamed for that as well, even though that is our best solution at this point (i.e. purging the system of its excesses). The fact that our Congress has sat on their collective duffs and allowed this financial debacle to happen, when it was quite easily avoidable with even the slightest amount of regulation and oversight, gives you every reason to vote out every one of these reprobates and sociopaths ,which we like to refer to as "incumbent scum." The only exceptions to the coming ouster of incumbents, as far as we are concerned, are Ron Paul, and perhaps Senator Jim Bunning of Kentucky.

Congress appears to be balking, and rightly so, claiming that they need more time to deliberate over this situation, to ponder potential alternative plans, or at the very least to modify the current proposal to make it more palatable to voters, which is impossible, at least in our humble opinion. But is this just more posturing to make it look like they are not rolling over and playing dead for the elitists, or has Congress finally found their collective backbone? Only time will tell, but based on past experience, we aren't getting our hopes up.

These filthy Bosch Pigs want to give Paulson carte blanche to pay for toxic waste at its "hold-to-maturity" value with taxpayer funds, meaning you will pay par for crap that is worth pennies on the dollar. Then you, the taxpayer, will get paid back in hyper-inflated dollars on ever-deteriorating assets, with flagging real estate prices chipping away at their value without recovery for decades, meaning that your collateral on any of these no-down-payment, give-him-a-loan-if-he's-breathing mortgages will be impaired and next to useless in the event of default. And who is going to administer all these loans, and process the payments, and deal with defaults? And what types of toxic waste will be subject to the bailout? Will we be taking on defaulted credit default swaps, interest rate swaps, credit cards, corporate bonds, commercial paper and aircraft leases also? Will we solve the mortgage-backed securities problem only to be bitten in the butt by credit default and interest rate swaps, or other toxic paper that was equally steeped in fraud? Of course we will.

The most egregious part of the proposed bailout is that it allows Paulson to dole out the funds and deal with the toxic waste without any judicial oversight and with full immunity from any criminal prosecution. This means he can pay par with your hard-earned money, and then when it becomes clear that the cess-pool-paper is only worth a small fraction of par, he can pawn it off to his cronies at bargain basement prices, thus distributing any profits to the elitists as they see fit, and the American people can go spit in the wind.

And how is this elitist bailout bonanza going to benefit the taxpayers, or our economy? It isn't! In fact, it is going to exacerbate an already volatile situation. Thanks to free trade and globalization, the global economy has become a tripwire economy. One wrong move, and the claymores go off, taking out the entire global financial system in a blaze of shrapnel and glory. The whole house of fraudster cards, rife with trade and investment imbalances, then collapses and gets sucked into a gargantuan financial black hole. All it will take is one nation whose citizens are fed up with rampant inflation. They will have to break the dollar pegs, cash in their US treasury bonds, and absorb the excess amounts of their domestic currencies by purchasing them with the dollars received as proceeds from the sale of the treasury bonds. This strengthens their currency, thus moderating their inflationary problems, but then their exports suffer. Meanwhile, the dollar starts to decline, and everyone else is afraid that this decline will continue and threaten the value of their reserves. The mad dash for the front door begins, and not everyone can fit through at the same time. The dollar gets destroyed, along with the US economy, as the cash from dumped treasuries finds its way back to the US through purchases of US assets by the foreign nations that are looking desperately to dump their cash, thus creating hyperinflation on a Weimar scale. That is why the FTC is no longer publishing statistics regarding foreign investment in the US, to hide this problem from the public as the dollars start pouring in. Adding to global woes, the exporting nations, whose goods are now no longer competitively priced, go down with the USS Titanic.

The United States operates at a deficit, spending more money than we gained from our own production, and we need foreigners to finance our profligacy. In order to help us finance this deficit, these foreigners buy our treasury paper with the excess dollars they obtain from their trade with the US. They do this by having their central banks print more of their domestic currency to absorb the dollar forex which is flooding their economies due to trade imbalances with the US. Their central banks simply print more of their own currency, which is then used in currency exchanges to soak up that dollar forex. This process inflates their economies by dumping their own currency on their domestic markets while bidding up dollars which are then used to purchase treasuries. While those dollars are parked in treasuries, they do little harm to US citizens via inflation, although we do have to pay interest on them. The foreign nations then enjoy a competitive price on their exports to the US because of their artificially weakened currency, but at the expense of domestic inflation. This system perpetuates the trade imbalances, and the inflation in the foreign nations. Obviously, this cannot go on forever.

And now, all these wild, lunatic bailouts will threaten the entire world economy. Why? Because we are dumping more dollars into the world economy, devaluing our currency, and therefore the value of all these foreign-owned US treasury bonds. Imagine what will happen when 700 billion dollars, in cash, is dumped into the fraudster system. If the fraudsters start lending again, that means the fractional banking multiplier, which usually runs at 7 to 8 times reserves, will then generate five to six trillion dollars of new money and credit, an amount that would swamp the US and global financial systems even if the Fed shut off its money and credit spigot completely. And who would they lend all this money to? The overextended, totally broke, unemployed, underemployed sheople who are being hyper-inflated into oblivion? Of course not. It will be used for more wild speculation, and to produce more leverage, and more fraud, and more toxic waste, which will add yet more money and credit to our already waterlogged, or should we say dollar-logged, system.

And just because there are losses does not mean that this 700 billion will be absorbed by those losses. The money that was used to produce the assets which suffered those losses is still in the system, but not where the elitists wanted it to be parked. They are trying to get that money back, at your expense, through this bailout plan. Where is that money now? It is following a path from wherever the last seller of the toxic waste, before it went bad, spent or invested the proceeds from the sale of that toxic waste. Remember, these derivatives added nothing to the system. They are just a re-bundling of existing debt-type assets, with the proceeds being used to create more debt for more re-bundling, in what is truly a Ponzi-scheme, using the same money over and over again to create more debt. The only new money produced were the fees and commissions paid to do the re-bundling. What about the money that the current owner of the toxic waste has lost on principal and interest on defaulted loans? That money is in the future earnings of the defaulted borrowers, who instead of spending it on principal and interest to cover mortgage payments, will now spend it on rent and other necessities. And what of the lost leverage? That is being replaced by the dollars coming back into the system through de-leveraging, and which will be available for re-leveraging when it comes into stronger hands, as it must, eventually.

Further, our national debt is going to grow by leaps and bounds on account of these bailouts, and this affects our ability to repay, thus weakening the dollar further and exacerbating inflationary pressures. We are like a person who earns twenty thousand dollars a year and has two hundred thousand dollars worth of credit card balances. We have news for you. Those balances are not going to be repaid. The foreign holders of dollar-denominated assets are not stupid, and the dollar suffers in foreign exchange markets every time the debt ceiling gets raised. Our debts are accelerating. They are not leveling off. And these bailouts will put that acceleration into hyper-drive. Once the exit from treasuries begins, there will be no stopping it. The elitists want to jump-start the system so they can run the markets up again to complete The Big Sting Two, but this is a futile effort because everything else is imploding. Few can qualify for loans anymore, because the credit standards are being tightened and they are broke and overextended, and the ones who do qualify do not need it. What will businesses do with loan money when they have no customers left to buy their products? As the economy and the real estate markets continue to tank, the toxic waste will become ever less valuable, and now they want to plant that future misery in the taxpayer gardens. These bailouts must be stopped at all costs, or we are going to get vaporized later.

The system must be purged, and the dollar rescued, although we believe it is probably too late for the latter. But it is sure worth giving it a try, because having the world's reserve currency is very advantageous.

All this craziness reminds us of an old Genesis song, called "Land of Confusion." We note that our generation unknowingly, or ignorantly, helped bring the Illuminati into power, and now the Baby Boomers, who have tasted of their venomous temptations, are going to have to take them out. We know you can do it. You are our largest generation, and you have the most to lose, so you cannot, and must not, fail. All we can do now is teach you where things went wrong. It will be up to you to set things right, if not for yourselves, then for your children and your grandchildren.

IT’S THE DERIVATIVES, STUPID!
WHY FANNIE, FREDDIE AND AIG ALL HAD TO BE BAILED OUT

Ellen Brown, September 18, 2008
www.webofdebt.com/articles/its_the_derivatives.php

“I can calculate the movement of the stars, but not the madness of men.”
– Sir Isaac Newton, after losing a fortune in the South Sea bubble

Something extraordinary is going on with these government bailouts. In March 2008, the Federal Reserve extended a $55 billion loan to JPMorgan to “rescue” investment bank Bear Stearns from bankruptcy, a highly controversial move that tested the limits of the Federal Reserve Act. On September 7, 2008, the U.S. government seized private mortgage giants Fannie Mae and Freddie Mac and imposed a conservatorship, a form of bankruptcy; but rather than let the bankruptcy court sort out the assets among the claimants, the Treasury extended an unlimited credit line to the insolvent corporations and said it would exercise its authority to buy their stock, effectively nationalizing them. Now the Federal Reserve has announced that it is giving an $85 billion loan to American International Group (AIG), the world’s largest insurance company, in exchange for a nearly 80% stake in the insurer . . . .

The Fed is buying an insurance company? Where exactly is that covered in the Federal Reserve Act? The Associated Press calls it a “government takeover,” but this is not your ordinary “nationalization” like the purchase of Fannie/Freddie stock by the U.S. Treasury. The Federal Reserve has the power to print the national money supply, but it is not actually a part of the U.S. government. It is a private banking corporation owned by a consortium of private banks. The banking industry just bought the world’s largest insurance company, and they used federal money to do it. Yahoo Finance reported on September 17:

“The Treasury is setting up a temporary financing program at the Fed’s request. The program will auction Treasury bills to raise cash for the Fed’s use. The initiative aims to help the Fed manage its balance sheet following its efforts to enhance its liquidity facilities over the previous few quarters.”

Treasury bills are the I.O.U.s of the federal government. We the taxpayers are on the hook for the Fed’s “enhanced liquidity facilities,” meaning the loans it has been making to everyone in sight, bank or non-bank, exercising obscure provisions in the Federal Reserve Act that may or may not say they can do it. What’s going on here? Why not let the free market work? Bankruptcy courts know how to sort out assets and reorganize companies so they can operate again. Why the extraordinary measures for Fannie, Freddie and AIG?

The answer may have less to do with saving the insurance business, the housing market, or the Chinese investors clamoring for a bailout than with the greatest Ponzi scheme in history, one that is holding up the entire private global banking system. What had to be saved at all costs was not housing or the dollar but the financial derivatives industry; and the precipice from which it had to be saved was an “event of default” that could have collapsed a quadrillion dollar derivatives bubble, a collapse that could take the entire global banking system down with it.

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.

Credit default swaps (CDS) are the most widely traded form of credit derivative. CDS are bets between two parties on whether or not a company will default on its bonds. In a typical default swap, the “protection buyer” gets a large payoff from the “protection seller” if the company defaults within a certain period of time, while the “protection seller” collects periodic payments from the “protection buyer” for assuming the risk of default. CDS thus resemble insurance policies, but there is no requirement to actually hold any asset or suffer any loss, so CDS are widely used just to increase profits by gambling on market changes. In one blogger’s example, a hedge fund could sit back and collect $320,000 a year in premiums just for selling “protection” on a risky BBB junk bond. The premiums are “free” money – free until the bond actually goes into default, when the hedge fund could be on the hook for $100 million in claims.

And there’s the catch: what if the hedge fund doesn’t have the $100 million? The fund’s corporate shell or limited partnership is put into bankruptcy; but both parties are claiming the derivative as an asset on their books, which they now have to write down. Players who have “hedged their bets” by betting both ways cannot collect on their winning bets; and that means they cannot afford to pay their losing bets, causing other players to also default on their bets.

The dominos go down in a cascade of cross-defaults that infects the whole banking industry and jeopardizes the global pyramid scheme. The potential for this sort of nuclear reaction was what prompted billionaire investor Warren Buffett to call derivatives “weapons of financial mass destruction.” It is also why the banking system cannot let a major derivatives player go down, and it is the banking system that calls the shots. The Federal Reserve is literally owned by a conglomerate of banks; and Hank Paulson, who heads the U.S. Treasury, entered that position through the revolving door of investment bank Goldman Sachs, where he was formerly CEO.

The Best Game in Town

In an article on FinancialSense.com on September 9, Daniel Amerman maintains that the government’s takeover of Fannie Mae and Freddie Mac was not actually a bailout of the mortgage giants. It was a bailout of the financial derivatives industry, which was faced with a $1.4 trillion “event of default” that could have bankrupted Wall Street and much of the rest of the financial world. To explain the enormous risk involved, Amerman posits a scenario in which the mortgage giants are not bailed out by the government. When they default on the $5 trillion in bonds and mortgage-backed securities they own or guarantee, settlements are immediately triggered on $1.4 trillion in credit default swaps entered into by major financial firms, which have promised to make good on Fannie/Freddie defaulted bonds in return for very lucrative fee income and multi-million dollar bonuses. The value of the vulnerable bonds plummets by 70%, causing $1 trillion (70% of $1.4 trillion) to be due to the “protection buyers.” This is more money, however, than the already-strapped financial institutions have to spare. The CDS sellers are highly leveraged themselves, which means they depend on huge day-to-day lines of credit just to stay afloat. When their creditors see the trillion dollar hit coming, they pull their financing, leaving the strapped institutions with massive portfolios of illiquid assets. The dreaded cascade of cross-defaults begins, until nearly every major investment bank and commercial bank is unable to meet its obligations. This triggers another massive round of CDS events, going to $10 trillion, then $20 trillion. The financial centers become insolvent, the markets have to be shut down, and when they open months later, the stock market has been crushed. The federal government and the financiers pulling its strings naturally feel compelled to step in to prevent such a disaster, even though this rewards the profligate speculators at the expense of the Fannie/Freddie shareholders who will get wiped out. Amerman concludes:

“[I]t’s the best game in town. Take a huge amount of risk, be paid exceedingly well for it and if you screw up -- you have absolute proof that the government will come in and bail you out at the expense of the rest of the population (who did not share in your profits in the first place).”⁴

Desperate Measures for Desperate Times

It was the best game in town until September 14, when Treasury Secretary Paulson, Fed Chairman Ben Bernanke, and New York Fed Head Tim Geithner closed the bailout window to Lehman Brothers, a 158-year-old Wall Street investment firm and major derivatives player. Why? “There is no political will for a federal bailout,” said Geithner. Bailing out Fannie and Freddie had created a furor of protest, and the taxpayers could not afford to underwrite the whole quadrillion dollar derivatives bubble. The line had to be drawn somewhere, and this was apparently it.

Or was the Fed just saving its ammunition for AIG? Recent downgrades in AIG’s ratings meant that the counterparties to its massive derivatives contracts could force it to come up with $10.5 billion in additional capital reserves immediately or file for bankruptcy. Treasury Secretary Paulson resisted advancing taxpayer money; but on Monday, September 15, stock trading was ugly, with the S & P 500 registering the largest one-day percent drop since September 11, 2001. Alan Kohler wrote in the Australian Business Spectator:

“[I]t’s unlikely to be a slow-motion train wreck this time. With Lehman in liquidation, and Washington Mutual and AIG on the brink, the credit market would likely shut down entirely and interbank lending would cease.”⁵

Kohler quoted the September 14 newsletter of Professor Nouriel Roubini, who has a popular website called Global EconoMonitor. Roubini warned:

“What we are facing now is the beginning of the unravelling and collapse of the entire shadow financial system, a system of institutions (broker dealers, hedge funds, private equity funds, SIVs, conduits, etc.) that look like banks (as they borrow short, are highly leveraged and lend and invest long and in illiquid ways) and thus are highly vulnerable to bank-like runs; but unlike banks they are not properly regulated and supervised, they don’t have access to deposit insurance and don’t have access to the lender of last resort support of the central bank.”

The risk posed to the system was evidently too great. On September 16, while Barclay’s Bank was offering to buy the banking divisions of Lehman Brothers, the Federal Reserve agreed to bail out AIG in return for 80% of its stock. Why the Federal Reserve instead of the U.S. Treasury? Perhaps because the Treasury would take too much heat for putting yet more taxpayer money on the line. The Federal Reserve could do it quietly through its “Open Market Operations,” the ruse by which it “monetizes” government debt, turning Treasury bills (government I.O.U.s) into dollars. The taxpayers would still have to pick up the tab, but the Federal Reserve would not have to get approval from Congress first.

Time for a 21^st Century New Deal?

Another hole has been plugged in a very leaky boat, keeping it afloat another day; but how long can these stopgap measures be sustained? Professor Roubini maintains:

“The step by step, ad hoc and non-holistic approach of Fed and Treasury to crisis management has been a failure. . . . [P]lugging and filling one hole at [a] time is useless when the entire system of levies is collapsing in the perfect financial storm of the century. A much more radical, holistic and systemic approach to crisis management is now necessary.”⁶

We may soon hear that “the credit market is frozen” – that there is no money to keep homeowners in their homes, workers gainfully employed, or infrastructure maintained. But this is not true. The underlying source of all money is government credit – our own public credit. We don’t need to borrow it from the Chinese or the Saudis or private banks. The government can issue its own credit – the “full faith and credit of the United States.” That was the model followed by the Pennsylvania colonists in the eighteenth century, and it worked brilliantly well. Before the provincial government came up with this plan, the Pennsylvania economy was languishing. There was little gold to conduct trade, and the British bankers were charging 8% interest to borrow what was available. The government solved the credit problem by issuing and lending its own paper scrip. A publicly-owned bank lent the money to farmers at 5% interest. The money was returned to the government, preventing inflation; and the interest paid the government’s expenses, replacing taxes. During the period the system was in place, the economy flourished, prices remained stable, and the Pennsylvania colonists paid no taxes at all. (For more on this, see E. Brown, “Sustainable Energy Development: How Costs Can Be Cut in Half,” webofdebt.com/articles, November 5, 2007.)

Today’s credit crisis is very similar to that facing Herbert Hoover and Franklin Roosevelt in the 1930s. In 1932, President Hoover set up the Reconstruction Finance Corporation (RFC) as a federally-owned bank that would bail out commercial banks by extending loans to them, much as the privately-owned Federal Reserve is doing today. But like today, Hoover’s ploy failed. The banks did not need more loans; they were already drowning in debt. They needed customers with money to spend and invest. President Roosevelt used Hoover’s new government-owned lending facility to extend loans where they were needed most – for housing, agriculture and industry. Many new federal agencies were set up and funded by the RFC, including the HOLC (Home Owners Loan Corporation) and Fannie Mae (the Federal National Mortgage Association, which was then a government-owned agency). In the 1940s, the RFC went into overdrive funding the infrastructure necessary for the U.S. to participate in World War II, setting the country up with the infrastructure it needed to become the world’s industrial leader after the war.

The RFC was a government-owned bank that sidestepped the privately-owned Federal Reserve; but unlike the Pennsylvania provincial government, which originated the money it lent, the RFC had to borrow the money first. The RFC was funded by issuing government bonds and relending the proceeds. Then as now, new money entered the money supply chiefly in the form of private bank loans. In a “fractional reserve” banking system, banks are allowed to lend their “reserves” many times over, effectively multiplying the amount of money in circulation. Today a system of public banks might be set up on the model of the RFC to fund productive endeavors – industry, agriculture, housing, energy -- but we could go a step further than the RFC and give the new public banks the power to create credit themselves, just as the Pennsylvania government did and as private banks do now. At the rate banks are going into FDIC receivership, the federal government will soon own a string of banks, which it might as well put to productive use. Establishing a new RFC might be an easier move politically than trying to nationalize the Federal Reserve, but that is what should properly, logically be done. If we the taxpayers are putting up the money for the Fed to own the world’s largest insurance company, we should own the Fed.

Proposals for reforming the banking system are not even on the radar screen of Prime Time politics today; but the current system is collapsing at train-wreck speed, and the “change” called for in Washington may soon be taking a direction undreamt of a few years ago. We need to stop funding the culprits who brought us this debacle at our expense. We need a public banking system that makes a cost-effective credit mechanism available for homeowners, manufacturing, renewable energy, and infrastructure; and the first step to making it cost-effective is to strip out the swarms of gamblers, fraudsters and profiteers now gaming the system.

THE FINAL DESTRUCTION OF THE MIDDLE CLASS-THE GREAT 2008 TRANSFER OF WEALTH

By Joan Veon
9-18-8

Americans are confronted with what appears to be the worse economic situation since the Great Depression. What will history say about the U.S. credit crisis turned global financial crisis? At every turn investors are faced with new problems, new crises, and less than desirable solutions which include debt, deflation and a transfer of wealth. With regard to debt, the American taxpayer has been made the lender of last resort for international bank Bear Stearns and now the two Government-sponsored Enterprises-GSEs, Fannie Mae and Freddie Mac. On top of the $29B for Bear Stearns, Fannie and Freddie's debt of $5.4T has been effectively transferred to the balance sheet of the USA. This is equal to the entire publicly traded debt of the U.S. which is also the same as the total of America's mortgage-related assets. In addition to personal debt, every American now has a financial responsibility for Bear Stearns and Fannie and Freddie. We, the people, have saved the foreign investors such as China which owns $376B, Japan which owns $228B, South Korea which owns $65B, Taiwan which owns $55B, and Australia which owns $33B, from losing faith in America. It is the stockholders, both common and preferred, that have been given the raw end of the deal. While large financial institutions such as JP Morgan, which owns $1.2B of Freddie and Fannie stock, said a complete loss would only erase one or two months of profits, contrast this to smaller banks such as the Central Virginia Bank in Richmond which has $20M in shares of Freddie and Fannie. That type of loss will put them in the same kind of trouble as Lehman Brothers, not enough capitalization. There are 15 other banks that hold 10% or more of their capital in shares of Freddie and Fannie. The Federal Accounting Standards Board is requiring more stringent standards for banks and savings and loans to maintain a certain amount of capital to protect against insolvency. Those rules are in the process of being changed to conform to international rules issued by the Bank for International Settlements in Basel, Switzerland which Congress has voted on. These rules which were only to pertain to international banks are now being applied to national banks. Furthermore those in retirement who thought their money was safe-invested in the highest ranked bonds in the country are going to lose their dividends. Depending on the price they invested, they could have principal losses of up to 80 or 90% of their investment. Ouch. The credit crunch began a year ago when the various investment banks both here and abroad stopped buying each others paper, a very uncommon practice between them. As a result of no liquidity for mortgage paper caused by their decision, we have the most serious slowdown in real estate in decades. The decision to not buy mortgage paper includes the sub-prime loans made to home buyers that had no down payment. To relate, I recently met a young Latino who is worried about her home. Five years ago she bought a $370,000 townhouse with $14,000 down. Her interest rate varies causing her monthly payment to jump from $2700 per month to $3500. She cleans houses for a living. Freddie and Fannie decided they could make more money by buying subprime mortgage paper. Today there is an eleven month inventory of unsold homes. Higher interest rates as a result of the hidden clauses on floating interest rates have put many people in jeopardy of foreclosure. All of these problems have given the Federal Reserve the opportunity to seize total control of powers they did not oversee in order to protect our economy. Perhaps we should ask where the desire to put poor people into homes came from? It was part of the Bush Administration's policy to conform to the United Nations' Millennium Development Goals unveiled in the year 2000. Exacerbating the credit crunch have been the historically high oil prices which have caused pain at the gas pumps and a weak dollar which has made imports more expensive. To counter high oil prices, Americans have drastically reduced how many miles they drive and a number of buying habits. In light of a tight job market and job losses in housing and the automotive industries, we are confronted with higher energy costs to heat and cool our homes, increased costs for food, and the inability to refinance mortgages. Basically the economy is now in deflation. When people stop spending, it moves from deflation to stagflation-no matter how cheap an item becomes, people can't afford to buy. All this without knowing what the real fall out will be from the bailout of Freddie and Fannie. The situation we are confronted with did not happen in the last few years, but began in 1913 when a group of cunningly deceitful legislators passed the Federal Reserve Act on December 24 at 11:45 p.m., after those who were opposed went home for Christmas. The entire financial system of the U.S. was transferred from Congress to a private corporation that is NOT accountable to Congress. They create and destroy the business cycle by various means: raising and lowering interest rates. The government of the United States is in bondage to a group of individuals who own the Federal Reserve. The reason why the American people cannot forgive themselves the interest on our debt is because we do not owe it to ourselves we owe it to the Federal Reserve! Every single time since then that the Federal Reserve Act was amended, over 195 times, the Federal Reserve gathered more power over various aspects of our economy. However, they are in the final throes of stripping America of any remaining vestiges of sovereignty as has been laid out in the Treasury "Blueprint for a Modernized Financial Regulatory System." The Blueprint was written under the watchful eye of one of America's most successful international bankers, former Goldman Sachs CEO Hank Paulson, who is now our illustrious Treasury Secretary. Is this not a case of the fox in the chicken coup? Long time investment sage Marty Whitman commented on his actions, "Paulson thinks he is in Russia and is not giving any value to stockholders. It is outrageous that the Treasury Secretary is not giving any consideration to the shareholders." The Blueprint calls for key components of our financial system, not currently under Federal Reserve control, to be transferred to them. In order to do this, a number of changes will be necessary which Congress will have to approve. First, it recommends changing the banking charter to include all financial institutions, thus effectively transferring control over "national banks, federal savings associations, and federal [and state] credit union charters." For your information, Washington Mutual is a savings and loan while Lehman Brothers is and Bear Stearns was an international bank. The Fed is to be given authority over the U.S. Payment and Settlement System thereby controlling the settlement process for securities. It will be given the role of Market Stability Regulator and it will have total control over the market. The Blueprint provides for the entire mortgage system of the U.S. to be federalized and to be under the control of the Mortgage Origination Commission. The Federal Reserve will be part of the Commission. Additionally the Federal Reserve will be given a say in the insurance industry which will be federalized and a new Office of Insurance Oversight will oversee its activities. The Federal Reserve will have a place on the Insurance Oversight commission. By the time Congress votes on the Blueprint, there will be so many reasons for them to transfer the last vestiges of our financial sovereignty to the Federal Reserve that they will not even have to read the prepared legislation. So far, we have the bailout of Freddie and Fannie by giving Treasury a blank check to act; the Federal Reserve worked all weekend to find a buyer to Lehman, another international bank, their next project might be to rescue Washington Mutual, a savings and loan, and the Fed has been given initial powers to act as the Market Stability Regulator. The only component that is missing is the demise of an insurance company, AIG anyone? For the record, at the heart of the Blueprint is changing our financial/banking and securities regulatory system from a national system to an international system to bring America into the world governmental system that functions above the nation-states. I have maintained that in order to get Congress to go along, we would have to have a huge problem which would allow Congress to be convinced that they need to act, however, the truth of the matter is they no longer have the power they once had because the majority has been transferred to the Federal Reserve. History will determine how the final stage was set but I believe it started in 2000 with the Crash of the Nasdaq. Who would have ever thought that a stock would drop 90% in value? About $7T vanished from the balance sheets of investors. But we did not have to worry, as a result of 9/11, the Federal Reserve started to reduce interest rates to 45 year lows to get Americans to support the economy by buying the dream home. We bit the bait. It was the Roaring 20s all over again. At one point in the housing boom, one out of four jobs was created by the housing industry. No one asked if they could afford the debt, they only asked if they could afford the payment: a big difference. They did not ask the right questions about their mortgage because the mortgage industry was not required to disclose to them, when it should have. At one time the mortgage industry was run on honesty and integrity, but that changed too and people have been caught in a terrible snare. The Bailout of Freddie and Fannie provide us with the latest excitement in the diabolical saga of the raping, robbing, and pillaging of America. Interestingly enough it took place 13 months after the beginning of the credit crunch. Lastly, I have maintained since the beginning of the credit crunch last August that it was planned and managed destruction in order to accomplish the final transfer of America's financial sovereignty. All of the above only confirms my original suspicion. Sadly, only the strong will survive, only those who did not use their house as a checking account will survive, only those who turn to the Creator of the Universe, the Lord God who created heaven and earth, and His Son, Jesus, will survive in the midst of the Great 2008 Transfer of Wealth. © 2008 Joan Veon - All Rights Reserved