The Sacking of America
by Darryl Schoon | July 16, 2008
Communism was a public relations gift to the bankers. By diverting the dialogue to controlled versus free markets it obscured the bankers real intentto insert debt into every aspect of free markets. The bankers overwhelming success however would destroy both the bankers and the free markets on which they preyed.
Parasitoidism is the relationship between a host and parasite where the host is ultimately killed by the parasite. This is what is happening to the US. Once the most powerful and productive economy in the world, the US, indebted by bankers and government spending beyond its ability to repay, is headed towards sovereign bankruptcy.
The recent request by US Treasury Secretaryand more importantly former Chairman and CEO of investment bank Goldman Sachs Henry Paulson to bail out Fannie Mae and Freddy Mac with US taxpayer dollars is but another indication of this destructive and parasitic relationship between bankers, government and the economy.
That a private banker from a large Wall Street investment bank is also Secretary of the US Treasury is no coincidence. It is also no coincidence that once again, public monies from the US Treasury are being used to rescue private bankers and to indemnify their losses.
THE FOX IS IN THE HENHOUSE
GOLDMANS SACHING OF AMERICA
Receiving taxpayer dollars from the US Treasury for their private benefit is not new to Goldman Sachs. In 1990s, when the Mexican government defaulted on its bonds, investors at Goldman Sachs stood to lose billions of dollars. They didnt.
Buried deep in the subsequent $40 billion US bailout of Mexico was a $4 billion payment to Goldman Sachs, gratis of the US Treasury indemnifying Goldman Sachs against any losses on their investment in Mexican bonds.
The fact that current US Treasury Secretary and former Goldman Sachs CEO Henry Paulson also recently used US funds to underwrite JP Morgan Chases private buyout of investment bank Bear Stearns and is now proposing to do the same with Fannie Mae and Freddie Mac is to be expected. For investment bankers, using public money to privately profit is business as usual.
They're ruining what has been one of the greatest economies in the world, [Bernanke and Paulson] are bailing out their friends on Wall Street but there are 300 million Americans that are going to have to pay for this. Jim Rogers, Chairman of Rogers Holdings, July 14, 2008
THE TUMESCENCE OF CREDIT
THE DETUMESENCE OF DEBT
It often happens that only in retrospect does the truth become apparentat least to most. Seduced by the vain hope of eternal profits, investors blindly followed Alan Greenspans prognostications when he was appointed chairman of the Federal Reserve in 1987; in the beginning, it appeared that Greenspan was right. Now, two decades later Greenspans errors are apparent.
A former director at investment bank JP Morgan, Greenspan clearly understood the role of credit in todays economy. What he didnt understand were its limitations. Greenspans reputation as a maestro of the markets was built on his continual feeding of cheap credit into the US economy thereby bolstering asset prices and the profits of investors.
Greenspans reputation at the time was well deserved, much as BALCO the illegal steroid provider deserves credit for Barry Bonds astonishing achievements in baseball late in his career. Credit has the same affect on markets as does steroids on athletic performance. That is why both are so popular.
Greenspans continual feeding of credit into Americas economy fueled the greatest expansion of capital markets in history. This directly led to Americas fatal misperception of credit as the cause of its wealth. It is now beginning to dawn on America that credit, in actuality, is the cause of its problems.
Credit is but debt in disguise and the American economy is now collapsing under the weight of that debtthe bankers effluence, extraordinary and compounding levels of public, private and business debt that in only decades has completely drained America of its once immense productivity and wealth.
FANNIE MAE AND FREDDIE MAC
US mortgage giants Fannie Mae and Freddie Mac own or guarantee $5.2 trillion of US mortgages or nearly half of US mortgage debt. As of March 31st, however, the combined capital of the two insurers was only $81 billion, 1.6 % of the total owned or guaranteed.
With US housing prices continuing to fall, it was evident, contrary to government assurances, that Fannie Mae and Freddie Mac did not have the requisite capital needed to meet future obligations. The sudden decline in the value of their shares forced US authorities to come to their rescue; but, it will not be the last time the US will be forced to act in such a manner.
The systemic distress set in motion by last Augusts credit contraction is still continuing and the recent collapse of Bear Stearns and now Fannie Mae and Freddie Mac are witness to that fact. We are only one year into the contraction and although the liquidity provided by central banks has gone beyond all previous levels, financial institutions are continuing to falter and collapse.
It is possible that the FDIC, the insurer of Americas savings deposits, may be next. The capital of Fannie Mae and Freddie Mac equaled 1.6 % of the sums they guaranteed. Prior to last week, the FDIC had only 1.2 % of the funds necessary to cover the accounts they insure.
It is now estimated the bank failure of IndyMac last week cost the FDIC 10 % of its capital, leaving the FDIC with even less than its previous 1.2 % to cover additional bank defaults. As it is, $1 billion approximately 5 % of IndyMacs deposits were not covered by the FDIC and it is estimated 37 % or $7.07 trillion of US deposits are also similarly exposed to bank failures.
As financial institutions continue to fail, bank failures will increase. As usual, government regulators at the FDIC maintain there is no problem. Believe them and you might soon have problems of you own.
PARASITE HOST COLLAPSE
When central banking was introduced in England in 1694 and in the US in 1913, it could not have been foreseen that the spread of credit based money would lead to such levels of indebtedness that systemic collapse would be a possibility, let alone occur.
Only time would make that fact apparent and it now appears that sufficient time has passed.
The economist Hyman Minsky described the three sequential steps of debt in capital markets in his Financial Instability Hypothesis.
Three distinct income-debt relations for economic units, which are labeled as hedge, speculative, and Ponzi finance, can be identified. Hedge financing units are those which can fulfill all of their contractual payment obligations by their cash flows: the greater the weight of equity financing in the liability structure, the greater the likelihood that the unit is a hedge financing unit. Speculative finance units are units that can meet their payment commitments on income account on their liabilities, even as they cannot repay the principal out of income cash flows. Such units need to roll over their liabilities issue new debt to meet commitments on maturing debt. For Ponzi units, the cash flows from operations are not sufficient to fill either the repayment of principal or the interest on outstanding debts by their cash flows from operations. Such units can sell assets or borrow. Borrowing to pay interest or selling assets to pay interest (and even dividends) on common stocks lowers the equity of a unit, even as it increases liabilities and the prior commitment of future incomes.
It can be shown that if hedge financing dominates, then the economy may well be an equilibrium-seeking and containing system. In contrast, the greater the weight of speculative and Ponzi finance, the greater the likelihood that the economy is a deviation-amplifying system. The first theorem of the financial instability hypothesis is that the economy has financing regimes under which it is stable, and financing regimes in which it is unstable. The second theorem of the financial instability hypothesis is that over periods of prolonged prosperity, the economy transits from financial relations that make for a stable system to financial relations that make for an unstable system.
In particular, over a protracted period of good times, capitalist economies tend to move to a financial structure in which there is a large weight to units engaged in speculative and Ponzi finance. Furthermore, if an economy is in an inflationary state, and the authorities attempt to exorcise inflation by monetary constraint, then speculative units will become Ponzi units and the net worth of previously Ponzi units will quickly evaporate. Consequently, units with cash flow shortfalls will be forced to try to make positions by selling out positions. This is likely to lead to a collapse of asset values.
As the US is now increasingly meeting its debt obligations by rolling over present debt and/or by borrowing, it is now according to Minskys model, clearly in the Ponzi finance mode which can precede a collapse of asset values.
According to Minsky, capital markets over time become increasingly unstable. Asset values in real estate are now collapsing, equities will be next, bonds will follow. Almost one hundred years after the Federal Reserve introduced debt-based money to America in 1913, both host and parasite are now approaching the same end, parcus nex, sic economic death.
Not only is the host, the US economy, in imminent danger, so too are the parasites, the banks. Bridgewater Associates, the giant US hedge fund, has warned its clients that current bank losses may reach $1.6 trillion, four times previous estimates.
The implications are discussed by financial journalist Ambrose Evans-Pritchard in The Telegraph.co.uk, July 8, 2008
Bank losses from credit crisis may run to $1,600bn, warns Bridgewater
By Ambrose Evans-Pritchard
Bridgewater Associates has issued an apocalyptic warning to clients that bank losses from the worldwide credit crisis may reach $1,600bn (£800bn), four times official estimates and enough to pose a grave risk to the financial system.
The giant US hedge fund said that it doubted whether lenders would be able to shoulder the full losses, disguised until now by "mark-to-model" methods of valuing structured credit.
"We are facing an avalanche of bad assets. We have big doubts as to whether financial institutions will be able to obtain enough new capital to cover their losses. The credit crisis is going to get worse," said the group in a confidential report, leaked to the Swiss newspaper SonntagsZeitung.
Bank losses on this scale would have far-reaching effects. Lenders would have to curtail loans by roughly 10-to-one to preserve their capital ratios. This would imply a further contraction of credit by up to $12,000bn worldwide unless banks could raise fresh capital.
It would be almost impossible to attract or even find such sums from investors. While sovereign wealth funds command roughly $3,000bn in funds, this money is mostly committed already. The funds have grown extremely wary of Western banks with sub-prime exposure after burning their fingers so many times already.
Bridgewater said true losses would mushroom if the banks were compelled to use "mark-to-market", which foretells a much crueler haircut for investors in the outstanding pool of structured debt from mortgages, credit cards, car loans and such like, together worth $26.6bn.
The International Monetary Fund has estimated bank losses of roughly $400bn. A chunk has already been covered by fresh infusions of capital, allowing the lenders to continue lubricating the global financial system without having to squeeze credit too hard.
The great unknown is whether this is the end of the debacle. A number of hedge funds believe the alleged losses - typically measured by the ABX index - may overstate the likely level of defaults. They are buying the spurned securities for as little as eight cents on the dollar.
If Bridgewater is anywhere near correct, governments alone have the wherewithal to rescue the system. This would mean the de facto nationalization of the banking systems in the US, Britain and Europe.
We are at the end of an era. Capitalism, itself, is a misnomer. It should instead be called creditism or referred to by its subsequent state, debtism, for capital de facto is credit, not money. This does not mean credit is not important. Credit is an integral part of functioning economies but its use should be constrained within gold and silver based monetary systems in order to prevent its abuse.
But in its present form where credit-based money (fiat money) completely replaced gold and silver based currencies (savings-based money), central bank originated credit has led to todays unsustainable levels of debt.
Trillions of dollars of that debt are now beginning to default and, as a consequence, credit is being withdrawn by banks, the intermediaries of credit in todays system. It will soon begin to appear that money is becoming scarce. But thats an illusion. The money was never there in the first place. It was only credit.
Real money, gold and silver currencies, were the first victims of central banking in the US. The latest victims are those who are about to be affected by the collapse of the US and global economy. Central banking and its spawn, credit and debt, are now everywhere and, unfortunately, so are the consequences.
| 2008/7/18 12:41||Profile|
With transparency and truth in short supply, caution is warranted
BY TONY ALLISON
Investor Jim Rogers minced few words, as usual, when asked about the U.S. Treasury Department's plan to shore up Fannie Mae and Freddie Mac.
It is an unmitigated disaster, said Rogers. Taxpayers will be saddled with debt if Congress approves (U.S. Treasury Secretary) Henry Paulson's request for the authority to buy unlimited stakes in and lend to Fannie Mae and Freddie Mac.
"These companies were going to go bankrupt if they hadn't stepped in to do something, and they should've gone bankrupt with all of the mistakes they've made,'' Rogers said. What's going to happen when you put some Band-Aids on it for another year or two or three? What's going to happen three years from now when the situation's much, much, much worse?''
"They're ruining what has been one of the greatest economies in the world,'' said Rogers. Bernanke and Paulson are bailing out their friends on Wall Street but there are 300 million Americans that are going to have to pay for this.''
Its a pity that Rogers doesnt speak frankly. The problem of course is that he is one of the few that will speak the truth as he sees it. He admits he is short the banks. But he has been short for years, and with good reason it turns out.
As we head toward the historically volatile fall season for the markets, and a presidential election in November, it seems a good time to take stock of the risks around us.
Free Money to save the day?
Its a presidential election year and the pandering and spinning are already picking up speed. Seeking self-preservation, politicians up for election must promise special favors for their special donors. Modern elections are rarely about the ills of the country. They are more directly about special interest groups with deep pockets, and the results are usually more of the same; earmark politics.
But a presidential race in a year when the economy is heading south is another story. Politicians must do something for the little guy. And the only thing politicians are skilled at is spending money in ever greater amounts. As a result, a stimulus package was created in record time, and $150+ billion promptly mailed out to taxpayers. No leadership, vision or tough calls required. Just send em a check. If that doesnt work, well, send another check.
Does it matter if much of the billions end up in China and the Middle East? No, what really matters is surviving another election cycle. This strategy works until the electorate is in sufficient distress to reject it and the politicians behind it. We are moving closer to that day.
By the way, did the federal government have $150 billion sitting around in surplus? No, it is merely added to our growing federal deficit and national debt (over $9 trillion). This stimulus package will likely stimulate something, and that is growing inflation. Inflation is the real threat to the struggling middle class, but calls for fiscal discipline and belt-tightening do not win elections. Free money has always worked like a charm.
Another time-honored tradition is the election year witch hunt. This years targets are the oil-trading speculators and the oil company executives. Who else but they could be responsible for $5 per gallon gasoline? Certainly not the politicians, who for decades have ignored enacting any meaningful energy policies.
Credit Crisis- write-offs continue
The credit crisis effectively broke into the public consciousness last August. At the time, the total losses were estimated at $200 billion. As bank write-offs continued into the fall and winter of 2007, the estimates were revised to $400 billion. During this period Wall Street pundits repeatedly stated that the worst was over and the financial stocks were a significant opportunity at these levels. Unfortunately, the banks have continued to write-off losses well into 2008. Recently the IMF (International Monetary Fund) and others have estimated that bank write-offs will reach $1.6 trillion. Given that roughly $400 billion has been written-off worldwide, there is still a ways to go.
One of the ongoing risks is a lack of transparency and understanding of the derivative crisis. One expert that has spoken out extensively is Satyajit Das. He is beginning to sound like a modern-day Paul Revere. The following quote appeared in a column by John Markman last September on TheStreet.com.
One of the worlds leading experts on credit derivatives (financial instruments that transfer credit risk from one party to another), Das is the author of a 4,200 page reference work on the subject, among a half-dozen other tomes. As a developer and marketer of the exotic instruments himself over the past 30 years, he seemed like the ideal industry insider to help us get to the bottom of the recent debt crunchand I expected him to defend and explain the practice.
I started by asking the Calcutta-born Australian whether the credit crisis was in what Americans would call the third inning. This was pretty amusing, it seemed, judging from the laughter. So I tried again. Second inning? More laughter. First? Still too optimistic.
Das, who knows as much about global money flows as anyone in the world, stopped chuckling long enough to suggest that were actually still in the middle of the national anthem before a game destined to go into extra innings. And it wont end well for the global economy.
One would hope this derivative mess is now in the middle innings, but that may prove a tad optimistic. The problem is that bankers, economists and particularly politicians do not understand how derivatives work, and what real dangers they might present. When a true derivatives expert says we should be very afraid, perhaps it would be wise to pay attention.
Das made a return visit in Markmans May 7th column. He doesnt see the light at tunnels end just yet. Given that the bank presidents have been consistently wrong about everything theyve said about their losses until now, why on earth would anyone believe them now? Das asked. He also mentioned the $1 trillion to $3 trillion that is in the process of moving onto the banks balance sheets from related entities where they were hidden. As to where we are in the credit crisis, Das dryly paraphrased Winston Churchill.
This is not the end, or even the beginning of the end, though it may be the end of the beginning.
While amusingly ironic, it does not give great comfort to a reeling global financial system. This may be one more reason to say cautious and buckled up.
End of Illusions- Fannie Mae and Freddie Mac
The Economist last week published End of Illusions, an article about Americas deeply flawed system of housing finance. The paragraphs below are excerpts from a more extensive article.
After a headlong plunge in the two firms share prices, Hank Paulson, the treasury secretary, felt obliged to make an emergency announcement on July 13th. He will seek Congresss approval for extending the Treasurys credit lines to the pair and even buying their shares if necessary. Separately, the Federal Reserve said Fannie and Freddie could get financing at its discount window, a privilege previously available only to banks.
The absurdity of this situation was highlighted by the way the discount window works. The Fed does not just accept any old assets as collateral; it wants assets that are safe. As well as Treasury bonds, it is willing to accept paper issued by government-sponsored enterprises (GSEs). But the two most prominent GSEs are Fannie Mae and Freddie Mac. In theory, therefore, the two companies could issue their own debt and exchange it for loans from the governmentthe equivalent of having access to the printing press.
With the credit crunch, Fannie and Freddie have become more important than ever, financing some 80% of mortgages in January. So they will need to keep lending. Nor is there scope to offload their portfolios of mortgage-backed securities, given that there are scarcely any buyers of such debt. And if the Fed has to worry about safeguarding Fannie and Freddie, can it afford to raise interest rates to combat inflation? American monetary policy may be constrained.
If the real estate market stabilizes soon, then Freddie and Fannie will greatly aid in the markets revival. If it doesnt, then the government (i.e. taxpayers) may have another large liability on its books. As mentioned in the article, if the Fed wants to stabilize the real estate market, Fannie and Freddie, dont look for an increase in interest rates anytime soon. This is not good news for the dollar or the prospects for lower inflation.
| 2008/7/22 10:47||Profile|
Another day another plan...
Fed extends emergency loan program for Wall Street
Wednesday July 30, 9:55 am ET
By Jeannine Aversa, AP Economics Writer
Fed extends emergency loan program for Wall Street, takes other steps to ease credit crisis
WASHINGTON (AP) -- The Federal Reserve said Wednesday it is extending its emergency borrowing program to Wall Street firms and is taking other steps to ease a severe credit crunch that has hobbled the national economy.
The Fed said the program, where investment houses can tap the central bank for a quick source of cash, will now be available through Jan 30. Originally the program, started on March 17, was supposed to last until mid-September.
Another program, where investment firms can temporarily swap more risky investments for super-safe Treasury securities also will continue through Jan. 30, the Fed said. And, it also will let commercial banks, in a separate program, bid on cash loans that last longer -- for 84 days, besides the 28-day loans now available.
The Fed said it was taking these steps "in light of continued fragile circumstances in financial markets." The Fed said that the emergency borrowing program for investment houses and the program that lets investment firms temporarily borrow Treasury securities would be withdrawn should the Fed determine that conditions in financial markets are "no longer unusual and exigent."
The smooth flow of credit is the economy's oxygen. It permits people to finance big-ticket purchases, such as homes and cars, and help businesses expand operations and hire workers. Fallout from a trio of crises -- housing, credit and financial -- have badly bruised the economy. Growth has slowed and companies have cut hundreds of thousands of jobs.
Investment houses were given similar, emergency loan privileges as commercial banks after a run on Bear Stearns pushed the nation's fifth-largest investment bank to the brink of bankruptcy. The situation raised fears that other Wall Street firms might be in jeopardy.
In the swap program, which began on March 27, investment firms bidding on the Treasury securities can put up as collateral more risky investments. These include certain mortgage-backed securities and bonds secured by federally guaranteed student loans.
The program is intended to make investment companies more inclined to lend to each other. A second goal is providing relief to the distressed market for mortgage-linked securities and for student loans.
The Fed also said it will let Wall Street firms place bids on an option to borrow the Treasury securities. Up to $50 billion would be made available for this. The Fed didn't say when the first auction of this type would be conducted. The notion here is to give firms -- unsure whether they might need the Treasury securities -- an insurance policy of sorts.
Starting on Aug. 11, the Fed will give banks the option of bidding on 84-day cash loans from the Fed, besides the 28-day loans now available. Specifically, the Fed will conduct biweekly auctions. They will alternate between making available $75 billion in 28-day loans and $25 billion in 84-day loans. The steps expand a program started in December aimed at helping banks overcome their credit problems so that they can keep lending to customers.
The European Central Bank and the Swiss National Bank have informed the Fed that they also will make available to their banks similar 84-day cash loans. To help on this front, the Fed also boosted its credit line with the ECB to $55 billion from $50 billion.
On the other side of the Atlantic, the ECB and the Swiss National Bank announced Wednesday they will make billions of U.S. dollars available to banks still starving for the currency.
The ECB -- the central bank for the 15 countries that use the euro -- said it will increase the amount of dollars offered to $50 billion in the latest series of operations. The bank will make 84-day loans available starting on Aug. 8 and said operations will continue as long as "needed in view of the prevailing market conditions." Similarly, the Swiss National Bank said it would start making 84-day loans available on Aug. 12.
| 2008/7/30 10:23||Profile|
Washington's ultimate solution
How to solve the financial crisis? Play for time, pray for markets to turn.
By Alan Sloan, senior editor at large
Last Updated: August 18, 2008: 7:55 AM EDT
(Fortune Magazine) -- These are the dog days of summer, the height of our national vacation season. But instead of hitting the beach, people in Washington and on Wall Street are spending their days all atwitter with ideas of what new regulations and rules and controls we need to deal with our financial market meltdowns, the worst since the Great Depression almost 80 years ago.
But let me tell you a little secret, folks. Even though they're scurrying around like everyone else in this game, I think the crisis managers at the Federal Reserve Board and the Treasury have quietly adopted a technique that has helped us deal with previous financial crises - what I call the "play and pray" approach.
They don't teach it in Economics 101, and none of the players dealing with the current meltdown will talk about it on the record. But it's a time-tested strategy - think of the mortgage crisis of the late 1970s and early 1980s, the bank problems in the early 1990s, and the Asian contagion of the late 1990s. The idea: You play for time by keeping things afloat long enough for your prayers to be answered by the markets' turning in the right direction.
The theory is that if you give stricken financial institutions like Fannie Mae (FNM, Fortune 500) enough time, profits from their basic operations can help them dig out of the capital pit into which they've fallen. A few years of nice profits will help offset the big losses from past blunders, provided the company stays alive long enough.
In fact, Fannie Mae's underlying business - using borrowed money to buy mortgages - is showing increasing profitability. That's because while the Fed has cut the short-term Federal funds rate that it controls to 2% from 5.25% since September, rates on long-term mortgages have risen. HSH Associates says fixed-rate 30-year mortgages cost 6.70% in early August, up from 6.47% when the Fed first cut rates. The reason: There are far fewer sources of long-term mortgage money than before the market meltdown started last year, because falling house prices and fear of inflation have spooked lenders. Another factor is the dollar's decline, which has unnerved the foreigners who had been major mortgage investors.
I suspect that playing for time and praying for a break is also how crisis managers hope to keep financial insurers like MBIA (MBI) and Ambac (ABK) alive, to forestall what they fear could be catastrophic failures. The idea: The firms' basic business of insuring municipal securities that rarely default will over time help cover their losses from insuring collateralized debt obligations and mortgage-backed securities that they didn't understand.
Play-and-pray isn't a particularly fair policy - among other things, it means giant institutions aren't allowed to fail, while smaller ones are left to the tender mercies of the market. But given time and regulatory leeway and some good luck, this policy has a chance of working out if we can get past the hair-raising losses many big financial institutions are currently reporting.
The idea of regulating hitherto-unregulated institutions like investment banks in return for having Uncle Sam stand behind them is a good idea. So is giving regulators more power over Fannie and its sibling, Freddie Mac (FRE, Fortune 500). Those are long-term objectives. For now, though, goal No. 1 is to get through this mess. But once things have stabilized a bit, let's cram through tough regulations before memory fades. We didn't do so after the last mortgage crisis abated, and we're paying for that mistake now.
Prayers are occasionally answered. Oil prices have been falling, and if that continues, it will be enormously helpful. However, mortgage defaults among nonjunk borrowers are rising, and house prices are still falling. Air-conditioning bills in places where electricity is generated with natural gas are horrendous, and home heating bills promise to be horrendous too.
But for now, if you'll excuse me, I'm heading for the beach. If you can, I suggest you do the same. The world may not feel better when you get back - but at least you will.
| 2008/8/18 8:26||Profile|
Large U.S. bank collapse seen ahead
Tuesday August 19, 1:07 am ET
By Jan Dahinten
SINGAPORE (Reuters) - The worst of the global financial crisis is yet to come and a large U.S. bank will fail in the next few months as the world's biggest economy hits further troubles, former IMF chief economist Kenneth Rogoff said on Tuesday.
"The U.S. is not out of the woods. I think the financial crisis is at the halfway point, perhaps. I would even go further to say 'the worst is to come'," he told a financial conference.
"We're not just going to see mid-sized banks go under in the next few months, we're going to see a whopper, we're going to see a big one, one of the big investment banks or big banks," said Rogoff, who is an economics professor at Harvard University and was the International Monetary Fund's chief economist from 2001 to 2004.
"We have to see more consolidation in the financial sector before this is over," he said, when asked for early signs of an end to the crisis.
"Probably Fannie Mae and Freddie Mac -- despite what U.S. Treasury Secretary Hank Paulson said -- these giant mortgage guarantee agencies are not going to exist in their present form in a few years."
Rogoff's comments come as investors dumped shares of the largest U.S. home funding companies Fannie Mae and Freddie Mac on Monday after a newspaper report said government officials may have no choice but to effectively nationalize the U.S. housing finance titans.
A government move to recapitalize the two companies by injecting funds could wipe out existing common stock holders, the weekend Barron's story said. Preferred shareholders and even holders of the two government-sponsored entities' $19 billion of subordinated debt would also suffer losses.
Rogoff said multi-billion dollar investments by sovereign wealth funds from Asia and the Middle East in western financial firms may not necessarily result in large profits because they had not taken into account the broader market conditions that the industry faces.
"There was this view early on in the crisis that sovereign wealth funds could save everybody. Investment banks did something stupid, they lost money in the sub-prime, they're great buys, sovereign wealth funds come in and make a lot of money by buying them.
"That view neglects the point that the financial system has become very bloated in size and needed to shrink," Rogoff told the conference in Singapore, whose wealth funds GIC and Temasek have invested billions in Merrill Lynch and Citigroup
In response to the sharp U.S. housing retrenchment and turmoil in credit markets, the U.S. Federal Reserve has reduced interest rates by a cumulative 3.25 percentage points to 2 percent since mid-September.
Rogoff said the U.S. Federal Reserve was wrong to cut interest rates as "dramatically" as it did.
"Cutting interest rates is going to lead to a lot of inflation in the next few years in the United States."
| 2008/8/19 8:15||Profile|
U.S. Must Buy Assets to Prevent `Tsunami,' Gross Says (Update1)
By Jody Shenn
Sept. 4 (Bloomberg) -- The U.S. government needs to start buying assets to stem a burgeoning ``financial tsunami,'' according to Bill Gross, manager of the world's biggest bond fund.
A process of delevering, where banks are shrinking and cutting off lending, is sapping demand for bonds, real estate, stocks and commodities, driving down assets of even ``impeccable quality,'' Gross said.
``Unchecked, it can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami,'' Gross of Newport Beach, California-based Pacific Investment Management Co. said in commentary posted on the firm's Web site today. ``If we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the U.S. Treasury.''
The government needs to replace private investors who either don't have the money to buy new assets or have been burned by losses, Gross said. Pimco, sovereign wealth funds and central banks are now reluctant to fund financial firms after losing money on more than $400 billion in capital raisings, Gross said. Banks and brokerages are retreating after more than $500 billion in writedowns and credit losses since the credit seizure began last year.
Treasury should support not only mortgage finance providers Fannie Mae and Freddie Mac, but also ``Mom and Pop on Main Street U.S.A.,'' through subsidized home loans guaranteed by the Federal Housing Administration and other government institutions, Gross said. A new version of the Resolution Trust Corp., which bought assets from failing institutions during the savings-and-loan crisis of the 1980s, may also work, he said.
`New Balance Sheets'
As Fannie and Freddie, banks, securities firms and hedge funds shrink, yields on all debt assets will rise compared with benchmark rates and volatility will increase, Gross said. Delevering ends once sellers have depleted their assets and sufficient capital has been raised, Gross said. Unless ``new balance sheets'' emerge, prices of almost all assets will drop, he said.
``There is an increasing reluctance on the part of the private market to risk any more of its own capital,'' Gross said. ``Liquidity is drying up; risk appetites are anorexic; asset prices, despite a temporarily resurgent stock market, are mainly going down; now even oil and commodity prices are drowning.''
Home prices have fallen 10 percent year over year, a decline not seen since the Great Depression, Gross said. That drop translates to an even bigger decline in overall wealth as margin calls lead to distressed sales, he said.
Fannie and Freddie 30-year fixed-rate mortgage bond yields, which influence the rates on most new home loans, have probably risen 75 basis points because of the waning demand, Gross said. A basis point is 0.01 percentage point.
About 61 percent of the holdings of Gross's Pimco Total Return Fund were mortgage-backed securities as of June 30, mostly debt guaranteed by Fannie, Freddie or U.S. agency Ginnie Mae, according to data on Pimco's Web site.
The fund returned 9.8 percent in the past 12 months, beating 97 percent of its peers in the government and corporate bond fund category as of Sept. 3, according to Bloomberg data. The returns are 5.76 percent annually over five years. Pimco, a unit of Munich-based Allianz SE, has $830 billion of assets under management.
``In a global financial marketplace in the process of delevering, assets that go up in price are rare diamonds as opposed to grains of sand,'' Gross said.
| 2008/9/4 10:21||Profile|
Officials announce takeover of mortgage giants
Sunday September 7, 12:34 pm ET
By Alan Zibel and Martin Crutsinger, AP Business Writers
Government assumes control over mortgage giants Fannie Mae and Freddie Mac
WASHINGTON (AP) -- The Bush administration, acting to avert the potential for major financial turmoil, announced Sunday that the federal government was taking control of mortgage giants Fannie Mae and Freddie Mac.
Officials announced that the executives and board of directors of both institutions had been replaced. Herb Allison, a former vice chairman of Merrill Lynch, was selected to head Fannie Mae, and David Moffett, a former vice chairman of US Bancorp, was picked to head Freddie Mac.
Treasury Secretary Henry Paulson says the historic actions were being taken because "Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe."
The huge potential liabilities facing each company, as a result of soaring mortgage defaults, could cost taxpayers tens of billions of dollars, but Paulson stressed that the financial impacts if the two companies had been allowed to fail would be far more serious.
"A failure would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance," Paulson said.
Both companies were placed into a government conservatorship that will be run by the Federal Housing Finance Agency, the new agency created by Congress this summer to regulate Fannie and Freddie.
The Federal Reserve and other federal banking regulators said in a joint statement Sunday that "a limited number of smaller institutions" have significant holdings of common or preferred stock shares in Fannie and Freddie, and that regulators were "prepared to work with these institutions to develop capital-restoration plans."
The two companies had nearly $36 billion in preferred shares outstanding as of June 30, according to filings with the Securities and Exchange Commission.
Paulson said that it would be up to Congress and the next president to figure out the two companies' ultimate structure.
"There is a consensus today ... that they cannot continue in their current form," he said.
Paulson and James Lockhart, director of the Federal Housing Finance Agency, stressed that their actions were designed to strengthen the role of the two mortgage giants in supporting the nation's housing market. Both companies do that by buying mortgage loans from banks and packaging those loans into securities that they either hold or sell to U.S. and foreign investors.
The companies own or guarantee about $5 trillion in home loans, about half the nation's total.
Lockhart said that both Fannie and Freddie would be allowed to increase the size of their holdings of mortgage-backed securities to bolster the housing industry as it undergoes its worst downturn in decades.
Lockhart said in order to conserve about $2 billion in capital the dividend payments on both common and preferred stock would be eliminated. He said that all lobbying activities of both companies would stop immediately. Both companies over the years made extensive efforts to lobby members of Congress in an effort to keep the benefits they enjoyed as government-sponsored enterprises.
Both Paulson and Lockhart were careful not to blame Daniel Mudd, the CEO of Fannie Mae, or Freddie Mac CEO Richard Syron for the companies' current problems. While both men are being removed as the top executives, they have been asked to remain for an unspecified period to help with the transition.
......end of article......
As a side note, Secretary of the Treasury Paulson will be leaving this office shortly, not finishing his full term in this office...
It will be interesting to see where his next place of employment will be...
| 2008/9/7 13:20||Profile|
Since the taxpayer is going to be bailing out the banks...we might as well bail out the car industry as well....
Auto industry to press Congress for $50B in loans
Sunday September 7, 10:03 am ET
By Ken Thomas, Associated Press Writer
Auto industry seeking up to $50 billion in government loans to modernize plants
WASHINGTON (AP) -- Auto industry allies hope to secure up to $50 billion in government loans this month that would pay to modernize plants and help struggling car makers build more fuel-efficient vehicles.
With Congress returning this coming week from its summer break, the industry plans an aggressive lobbying campaign for the low-interest loans. The situation is growing dire after months of tumbling sales, high gasoline prices and consumers' abandoning profitable trucks and sport utility vehicles.
Lawmakers authorized $25 billion in loans in last year's energy bill to help the companies build fuel-efficient vehicles such as hybrids and electric vehicles. With credit tight, automakers and suppliers now want lawmakers to come up with the money for the program -- and expand the pool of money available to $50 billion over three years.
Industry leaders have argued that the loan guarantees are not a government bailout because it would hasten production of fuel-efficient vehicles and reduce dependence on imported oil.
"This is not about benefiting Wall Street," said Ford Motor Co.'s President of the Americas Mark Fields, referencing recent federal support for the investment firm Bear Stearns and troubled mortgage companies Fannie Mae and Freddie Mac. "This is benefiting Main Street, the working men and women. The auto industry is part of the backbone of the U.S. economy."
The low-interest loans, at rates of about 4 percent to 5 percent, would pay for up to 30 percent of the cost of retooling plants to build hybrids, plug-in hybrids, electric cars and other alternatives.
Ford and General Motors Corp.'s credit ratings have fallen below investment grade, making it difficult for the companies to borrow money at affordable rates. Chrysler, which has been heavily dependent upon truck sales, has been privately held since last year and faces similar problems accessing capital.
"This industry could fall down, literally, or be absorbed if they don't get something in place very soon. I think it's that severe," said Rep. Joe Knollenberg, R-Mich. "Something has to happen pretty quickly because they can't compete paying 15 to 20 percent (interest)."
Industry lobbyists pressed the issue at the recent presidential conventions in Denver and St. Paul, Minn., and members of Michigan's congressional delegation have talked to legislative leaders and the Bush administration about the program. Discussions surround a three-year plan that would make $25 billion in loans available in the first year, followed by $15 billion the second year and $10 billion in the third.
To provide $50 billion in loans, Congress would need to set aside about $7.5 billion to guard against a loan default.
Automakers want to secure the money for the loans before November's election because a new president and Congress could delay the companies' ability to access the loans.
The White House said last week it was talking to members of Congress and the industry about the financing. The issue, meanwhile, has gained a foothold in the presidential campaign in states with many auto workers such as Michigan and Ohio.
Democrat Barack Obama has criticized Republican rival John McCain for not supporting the full $50 billion loan program. McCain said last week he supported fully covering the $25 billion loan program in the energy law.
Congressional leaders have said they are open to an expanded program. But the industry will face a compressed schedule in an election year when many lawmakers will push to leave Washington so they can campaign for re-election this fall.
"We're hopeful that we're making an effective case to get this done between now and the end of this session," said John Bozzella, Chrysler's vice president of external affairs and public policy.
The loans would be available to foreign automakers, but the companies are not expected to seek the money because they are in a better financial situation and priority would be given to companies with plants 20 years or older.
| 2008/9/7 13:23||Profile|
A new week another problem....
Lehman racing to find buyer for beleaguered firm
Friday September 12, 7:19 am ET
By Joe Bel Bruno, AP Business Writer
Lehman Brothers seeks buyers as shares signal steep drop, confidence wanes
NEW YORK (AP) -- With Lehman Brothers' shares signaling another steep drop on Friday, top executives are racing to put a sale of the beleaguered investment bank in place before it loses further market value and confident.
Confidence has waned that Lehman Brothers Holdings Inc. will emerge from the financial crisis as an independent franchise, and the No. 4 U.S. investment bank is scouring Wall Street for a financial lifeline. Executives worked feverishly in the past 24 hours to find someone willing to buy all or part of the company, bankers and industry executives close to the situation said.
And the scrutiny is expected to grow more intense Friday, with investors placing bets that Lehman's stock will again nosedive. Shares fell 41 cents, or 9.7 percent, to $3.81 in after-hours trading; the stock skidded 41.8 percent to $4.22 during the regular session in New York, and is down more than 94 percent for the year.
That only puts more pressure on Lehman Chief Executive Richard Fuld, who joined the company in 1961 as a college student and now serves as Wall Street's longest-serving CEO. He has tenaciously resisted putting the company up for sale, but finally relented after a free-fall in its stock price and growing doubts about its survival, according to bankers and industry executives. They asked not to be named because they are not authorized to comment publicly.
Bank of America Corp., Japan's Nomura Securities, France's BNP Paribas, Deutsche Bank AG and Britain's Barclay's Plc have been mentioned this week as potential buyers. Goldman Sachs Group Inc., which also was being talked about as a potential buyer, is not interested, according to an industry official who ask not to be named.
Lehman is also in close contact with both the Treasury Department and Federal Reserve about how to proceed.
Government officials, who asked for anonymity because of the sensitivity of the ongoing discussions, said that a number of options were being explored and that no decisions had been reached on how any deal involving Lehman would be structured.
The Fed and the Treasury Department have been working to help resolve Lehman's situation. Fed officials are having conversations with relevant parties and getting updates. It's premature to say what form any final resolution would take.
Any resolution of the Lehman troubles is not expected to involve the use of government money which would set it apart from the billions of dollars that the government put at risk to facilitate the sale of Bear Stearns in March and to rescue mortgage giants Fannie Mae and Freddie Mac this week.
Randy Whitestone, a spokesman for Lehman, declined to comment.
Lehman's losses soared to almost $7 billion in the last two quarters alone, primarily because of wrong-way bets on mortgage securities and other risky investments.
It's not alone. Global banks have lost more than $300 billion since the subprime mortgage crisis spread to the credit markets one year ago. And the International Monetary Fund has suggested total losses globally could hit $1 trillion.
Lehman Brothers hunted for months for a deep-pocketed investor to pump fresh capital into the firm, a move that would help restore confidence and replenish its broken balance sheet. Some analysts said Lehman was asking too high a price, others guessed that potential investors found too much risk on its books in the current environment.
Fuld tried to assuage nervous investors on Wednesday by announcing a plan to sell a 55 percent stake in its prized investment management business and spin off its commercial real estate holdings into a publicly traded company.
He cast a wide net for potential investors, bankers and executives said, including stepping up talks with private equity firms such as Kohlberg Kravis Roberts & Co. and Bain Capital.
But analysts increased their criticism of Fuld on Thursday for not naming a potential buyer of its investment management unit, which includes Neuberger Berman, and because they said Lehman would need to finance the real estate spinoff itself.
"We believe some type of capital raise or transaction must be consummated quickly to improve confidence in Lehman," said Standard & Poor's financials analyst Matthew Albrecht.
| 2008/9/12 8:08||Profile|
Well the kings of this world are scrambling to stem the blood on Wall Street....
Wall Street awakes to 2 storied firms falling
Monday September 15, 7:01 am ET
NEW YORK (AP) -- When Wall Street woke up Monday morning, two more of its storied firms had fallen.
Lehman Brothers, burdened by $60 billion in soured real-estate holdings, filed a Chapter 11 bankruptcy petition in U.S. Bankruptcy Court after attempts to rescue the 158-year-old firm failed. Bank of America Corp. said it is snapping up Merrill Lynch & Co. Inc. in a $50 billion all-stock transaction.
The demise of the independent Wall Street institutions came as shock waves from the 14-month-old credit crisis roiled the U.S. financial system six months after the collapse of Bear Stearns.
The world's largest insurance company, American International Group Inc., also was forced into a restructuring.
And a global consortium of banks, working with government officials in New York, announced a $70 billion pool of funds to lend to troubled financial companies.
The aim, according to participants who spoke to The Associated Press, was to prevent a worldwide panic on stock and other financial exchanges.
Ten banks -- Bank of America, Barclays, Citibank, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan, Merrill Lynch, Morgan Stanley and UBS -- each agreed to provide $7 billion "to help enhance liquidity and mitigate the unprecedented volatility and other challenges affecting global equity and debt markets."
The Federal Reserve also chipped in with more largesse in its emergency lending program for investment banks. The central bank announced late Sunday that it was broadening the types of collateral that financial institutions can use to obtain loans from the Fed....
| 2008/9/15 8:08||Profile|