"End of Wall Street Boom" - Must-read history

[seemslikeadream]

http://www.businessweek.com/managing/co ... page_2.htm


Wall Street's Economic Crimes Against Humanity
By refusing to consider the consequences of their actions, those who created the financial crisis exemplify the banality of evil, writes Shoshana Zuboff
By Shoshana Zuboff

The financiers at AIG were awarded millions in bonuses because their contracts were based on the transactions they completed, not the consequences of those transactions. A 32-year-old mortgage broker told me: "I figured my job was to get the transaction done…Whatever came after the transaction—that was on him, not me." A long list of business executives have reaped sumptuous rewards even though they fractured the world's economy, destroyed trillions of dollars in value, and disfigured millions of lives.

Most experts now blame a lack of regulation and oversight for this madness. Or they point to misguided incentive programs associated with the push for shareholder value that tied executive rewards to a firm's share price. These factors are surely important, but they ignore the terrifying human breakdown at the heart of this crisis.

Each day's economic news leaves me haunted by Hannah Arendt's ruminations on Nazi war criminal Adolf Eichmann as she reported on his trial in Jerusalem for The New Yorker 45 years ago. Arendt pondered "the strange interdependence of thoughtlessness and evil" and sought to capture it with her famous formulation "the banality of evil." Arendt found Eichmann neither "perverted nor sadistic," but "terribly and terrifyingly normal."

Remoteness from Reality
He was a new type of criminal, a participant in "administrative massacre" who committed his crimes "under circumstances that make it well-nigh impossible for him to know or to feel that he is doing wrong." Eichmann had no motives other than what Arendt described as "an extraordinary diligence in looking out for his personal advancement…he never realized what he was doing.That such remoteness from reality and such thoughtlessness can wreak more havoc than all the evil instincts taken together," she concluded, "…was, in fact, the lesson one could learn in Jerusalem."

The economic crisis is not the Holocaust but, I would argue, it derives from a business model that routinely produced a similar kind of remoteness and thoughtlessness, compounded by a widespread abrogation of individual moral judgment. As we learn more about the behavior within our financial institutions, we see that just about everyone accepted a reckless system that rewards transactions but rejects responsibility for the consequences of those transactions. Bankers, brokers, and financial specialists were all willing participants in a self-centered business model that celebrates what's good for organization insiders while dehumanizing and distancing everyone else—the outsiders.

This institutionalized narcissism and contempt for the "other" found its ultimate expression in the subprime mortgage industry, and the investment business derived from those mortgages. In far too many cases, the obvious risks to borrowers and investors were simply regarded as externalities for which no one would be held accountable. If there was a family forced to relinquish its home or a retiree exposed to unfathomable risks in her pension, these human beings had not been imagined. Their suffering was invisible to those on the inside: it was so remote that for all practical purposes it did not exist.

No Feelings of Empathy
As in war, that emotional distance made it easier to operate in one's own narrow interests, without the usual feelings of empathy that alert us to the pain of others and define us as human. The narcissistic business model provided the modern day "circumstances" that enabled individuals to ignore the poisonous consequences of their choices. This paved the way for a full-scale administrative economic massacre.

Despite Arendt's deep understanding of the Nazi system to which Eichmann conformed, she insisted that the central moral issue—not only of the trial but of all time—came down to the nature and function of individual human judgment. "What we have demanded in these trials, where the defendants had committed 'legal' crimes, is that human beings be capable of telling right from wrong even when all they have to guide them is their own judgment, which, moreover, happens to be completely at odds with what they must regard as the unanimous opinion of all those around them."

Eichmann's trial sent a message to the world that individuals must be held accountable for their judgment, even when they have "thoughtlessly" conformed to toxic institutional circumstances. This message is not restricted to the unspeakable horrors of mass murder. It is relevant to the relationship between individual judgment and institutional processes in any situation. It's a message that says: you can't just blame the system for the bad things you've done. Yet to the world's dismay, thousands of men and women entrusted with our economic well being systematically failed to meet this minimum standard of civilized behavior. They did not capably discern right and wrong. They either did not judge, or they did not act on their judgment. This failure defines the raw heart of the public's outrage at each fresh disclosure of outlandish bonuses. It is less a thirst for revenge than it is a rebellion against this banal evil.

The public's indignation reflects a sense of morality that points deeper and truer than the laws devised to protect self serving business practices. The call now is to take back our community, to return to a place where people are capable of telling right from wrong because they recognize themselves in one another. The public demands—no, commands—that our leaders reassert their capacity, their duty, to judge what is right, even if that means standing up to lawsuits and angry bankers.

Vacuum of Moral Leadership
Edward Liddy, the Paulson-appointed chairman of AIG, initially recommended that the bonuses given to its employees go forward, though he found it "distasteful and difficult." Mr. Liddy missed what could have been the shining moment of his career by failing to insist from the start on what he thought to be right, despite "the unanimous opinion of all those around him." Neither Mr. Liddy nor anyone in the Obama Administration has demonstrated that kind of moral leadership, as they now scramble to respond to the public's demand that AIG employees return their bonuses.

By now the existential security of millions of people has been threatened or destroyed. No one is safe from the waves of value destruction set into motion by the banal evil of this self-centered business model and the unquestioning participants who failed to assert their own moral judgment. The urgent lesson for capitalism's heirs redounds through every headline: There is no "other"; there is only us. The damage that was supposed to be "theirs" is now shared misery on a global scale.

Since the days of Eichmann in Jerusalem, our understanding of human rights has evolved to include economic, social, and cultural rights. The Universal Declaration of Human Rights adopted by the U.N. includes "the promotion of social progress and better standards of life in larger freedom." The U.N. Commission on Human Rights has called the business community to account, stating that "transnational corporations and other business enterprises, as organs of society, are also responsible for promoting and securing the human rights set forth in the Universal Declaration of Human Rights."

The economic crisis has demonstrated that the banality of evil concealed within a widely accepted business model can put the entire world and its peoples at risk. Shouldn't those businesses be held accountable to agreed international standards of rights, obligations, and conduct? Shouldn't the individuals whose actions unleashed such devastating consequences be held accountable to these moral standards?

I believe the answer is yes. That in the crisis of 2009 the mounting evidence of fraud, conflicts of interest, indifference to suffering, repudiation of responsibility, and systemic absence of individual moral judgment produced an administrative economic massacre of such proportion that it constitutes an economic crime against humanity.

Shoshana Zuboff is the author of The Support Economy: Why Corporations Are Failing Individuals and the Next Episode of Capitalism. She was the Charles Edward Wilson Professor of Business Administration at Harvard Business School.



http://www.opednews.com/articles/Was-th ... 9-674.html

Was the Bailout Itself a Scam?

by Paul Craig Roberts


Professor Michael Hudson (CounterPunch, March 18) is correct that the orchestrated outrage over the $165 million AIG bonuses is a diversion from the thousand times greater theft from taxpayers of the approximately $200 billion “bailout” of AIG. Nevertheless, it is a diversion that serves an important purpose. It has taught an inattentive American public that the elites run the government in their own private interests.

Americans are angry that AIG executives are paying themselves millions of dollars in bonuses after having cost the taxpayers an exorbitant sum. Senator Charles Grassley put a proper face on the anger when he suggested that the AIG executives “follow the Japanese example and resign or go commit suicide.”

Yet, Obama’s White House economist, Larry Summers, on whose watch as Treasury Secretary in the Clinton administration financial deregulation got out of control, invoked the “sanctity of contracts” in defense of the AIG bonuses.

But the Obama administration does not regard other contracts as sacred. Specifically: labor unions had to agree to give-backs in order for the auto companies to obtain federal help; CNN reports that “Veterans Affairs Secretary Eric Shinseki confirmed Tuesday [March 10] that the Obama administration is considering a controversial plan to make veterans pay for treatment of service-related injuries with private insurance” [ click here ]; the Washington Post reports that the Obama team has set its sights on downsizing Social Security and Medicare.

According to the Post, Obama said that “it is impossible to separate the country’s financial ills from the long-term need to rein in health-care costs, stabilize Social Security and prevent the Medicare program from bankrupting the government.” [ click here ]

After Washington’s trillion dollar bank bailouts and trillion dollar gratuitous wars for the sake of the military industry’s profits and Israeli territorial expansion, there is no money for Social Security and Medicare.

The US government breaks its contracts with US citizens on a daily basis, but AIG’s bonus contracts are sacrosanct. The Social Security contract was broken when the government decided to tax 85% of the benefits. It was broken again when the Clinton administration rigged the inflation measure in order to beat retirees out of their cost-of-living adjustments. To have any real Medicare coverage, a person has to give up part of his Social Security check to pay Medicare Part B premium and then take out a private supplemental policy. The true cost of Medicare to beneficiaries is about $6,000 annually in premiums, plus deductibles and the Medicare tax if the person is still earning.

Treasury Secretary Geithner, the fox in charge of the hen house, has resolved the problem for us. He is going to withhold $165 million (the amount of the AIG bonuses) from the next taxpayer payment to AIG of $30,000 million. If someone handed you $30,000 dollars, would you mind if they held back $165?

PR flaks have rechristened the bonus payments “retention payments” necessary if AIG is to retain crucial employees. This lie was shot down by New York Attorney General Andrew Cuomo, who informed the House Committee on Financial Services that the payments went to members of AIG’s Financial Products subsidiary, “the unit of AIG that was principally responsible for the firm’s meltdown.” As for retention, Cuomo pointed out that ”numerous individuals who received large ‘retention’ bonuses are no longer at the firm” [click here ].

Eliot Spitzer, the former New York Governor who was set-up in a sex scandal to prevent him investigating Wall Street’s financial gangsterism, pointed out on March 17 that the real scandal is the billions of taxpayer dollars paid to the counter-parties of AIG’s financial deals. These payments, Spitzer writes, [ http://www.slate.com/id/2213942/ ] are “a way to hide an enormous second round of cash to the same group that had received TARP money already.”

Goldman Sachs, for example, had already received a taxpayer cash infusion of $25 billion and was sitting on more than $100 billion in cash when the Wall Street firm received another $13 billion via the AIG bailout.

Moreover, in my opinion, most of the billions of dollars in AIG counter-party payments were unnecessary. They represent gravy paid to firms that had made risk-free bets, the non-payment of which constituted no threat to financial solvency.

Spitzer identifies a conflict of interest that could possibly be criminal self-dealing. According to reports, the AIG bailout decision involved Bush Treasury Secretary Henry Paulson, formerly of Goldman Sachs, Goldman Sachs CEO Lloyd Blankfein, Fed Chairman Ben Bernanke, and Timothy Geithner, former New York Federal Reserve president and currently Secretary of the Treasury. No doubt the incestuous relationships are the reason the original bailout deal had no oversight or transparency.

The Bush/Obama bailouts require serious investigation. Were these bailouts necessary, or were they a scam, like “weapons of mass destruction,” used to advance a private agenda behind a wall of fear? Recently I heard Harvard Law professor Elizabeth Warren, a member of a congressional bailout oversight panel, say on NPR that the US has far too many banks. Out of the financial crisis, she said, should come consolidation with the financial sector consisting of a few mega-banks. Was the whole point of the bailout to supply taxpayer money for a program of financial concentration?

[brainpanhandler]

Spitzer interview on WNYC


The Real AIG Scandal

It's not the bonuses. It's that AIG's counterparties are getting paid back in full.
By Eliot Spitzer
Posted Tuesday, March 17, 2009, at 10:41 AM ET

Everybody is rushing to condemn AIG's bonuses, but this simple scandal is obscuring the real disgrace at the insurance giant: Why are AIG's counterparties getting paid back in full, to the tune of tens of billions of taxpayer dollars?


For the answer to this question, we need to go back to the very first decision to bail out AIG, made, we are told, by then-Treasury Secretary Henry Paulson, then-New York Fed official Timothy Geithner, Goldman Sachs CEO Lloyd Blankfein, and Fed Chairman Ben Bernanke last fall. Post-Lehman's collapse, they feared a systemic failure could be triggered by AIG's inability to pay the counterparties to all the sophisticated instruments AIG had sold. And who were AIG's trading partners? No shock here: Goldman, Bank of America, Merrill Lynch, UBS, JPMorgan Chase, Morgan Stanley, Deutsche Bank, Barclays, and on it goes. So now we know for sure what we already surmised: The AIG bailout has been a way to hide an enormous second round of cash to the same group that had received TARP money already.

It all appears, once again, to be the same insiders protecting themselves against sharing the pain and risk of their own bad adventure. The payments to AIG's counterparties are justified with an appeal to the sanctity of contract. If AIG's contracts turned out to be shaky, the theory goes, then the whole edifice of the financial system would collapse.


But wait a moment, aren't we in the midst of reopening contracts all over the place to share the burden of this crisis? From raising taxes—income taxes to sales taxes—to properly reopening labor contracts, we are all being asked to pitch in and carry our share of the burden. Workers around the country are being asked to take pay cuts and accept shorter work weeks so that colleagues won't be laid off. Why can't Wall Street royalty shoulder some of the burden? Why did Goldman have to get back 100 cents on the dollar? Didn't we already give Goldman a $25 billion capital infusion, and aren't they sitting on more than $100 billion in cash? Haven't we been told recently that they are beginning to come back to fiscal stability? If that is so, couldn't they have accepted a discount, and couldn't they have agreed to certain conditions before the AIG dollars—that is, our dollars—flowed?

The appearance that this was all an inside job is overwhelming. AIG was nothing more than a conduit for huge capital flows to the same old suspects, with no reason or explanation.

So here are several questions that should be answered, in public, under oath, to clear the air:

What was the precise conversation among Bernanke, Geithner, Paulson, and Blankfein that preceded the initial $80 billion grant?

Was it already known who the counterparties were and what the exposure was for each of the counterparties?

What did Goldman, and all the other counterparties, know about AIG's financial condition at the time they executed the swaps or other contracts? Had they done adequate due diligence to see whether they were buying real protection? And why shouldn't they bear a percentage of the risk of failure of their own counterparty?

What is the deeper relationship between Goldman and AIG? Didn't they almost merge a few years ago but did not because Goldman couldn't get its arms around the black box that is AIG? If that is true, why should Goldman get bailed out? After all, they should have known as well as anybody that a big part of AIG's business model was not to pay on insurance it had issued.

Why weren't the counterparties immediately and fully disclosed?

Failure to answer these questions will feed the populist rage that is metastasizing very quickly. And it will raise basic questions about the competence of those who are supposedly guiding this economic policy.

http://www.slate.com/id/2213942/

[Hugh Manatee Wins]

AIG = SPOOKS SINCE WWII.
(Thanks to Alex Constantine. He rocks.)

(FYI:
HMW sez - this SPOOK INSURANCE THEME is meme-reversed in the movie, 'The Truman Show,' which is mostly about nuclear fallout cover-up docs long suppressed but then exposed in 1999.
The movie's "Truman" is a clueless insurance agent.
Preston Truman heads the Downwinder group of people affected by nuclear fall-out.)


http://aconstantineblacklist.blogspot.c ... tions.html

Monday, March 16, 2009
Bailout of AIG, the CIA & Covert Operations
Posted by Matt Savinar
November 11, 2008
[Repost]

By now you no doubt have heard about the AIG bailout ... There is, however, something you almost certainly haven't heard about which is that the insurance business is heavily involved in covert operations. Some of you may be thinking "Huh? Insurance companies and covert operations?! Wow, this is some real nutballery, even for LATOC". Well if so then just consider the following excerpts from an article entitled "The Secret (Insurance) Agent Men" by Los Angeles Times staff writer Mark Fritz, originally published on September 22nd, 2000. Emphasis is mine:

COLLEGE PARK, Md. They knew which factories to burn, which bridges to blow up, which cargo ships could be sunk in good conscience. They had pothole counts for roads used for invasion and head counts for city blocks marked for incineration.

They weren't just secret agents. They were secret insurance agents. These undercover underwriters gave their World War II spymasters access to a global industry that both bankrolled and, ultimately, helped bring down Adolf Hitler's Third Reich.

Newly declassified U.S. intelligence files tell the remarkable story of the ultra-secret Insurance Intelligence Unit, a component of the Office of Strategic Services, a forerunner of the CIA, and its elite counterintelligence branch X-2.

. . . the unit mined standard insurance records for blueprints of bomb plants, timetables of tide changes and thousands of other details about targets, from a brewery in Bangkok to a candy company in Bergedorf. 'They used insurance information as a weapon of war,' said Greg Bradsher, a historian and National Archives expert on the declassified records.

The men behind the insurance unit were OSS head William "Wild Bill" Donovan and California-born insurance magnate Cornelius V. Starr. Starr had started out selling insurance to Chinese in Shanghai in 1919 and, over the next 50 years, would build what is now American International Group, one of the biggest insurance companies in the world.

Starr sent insurance agents into Asia and Europe even before the bombs stopped falling and built what eventually became AIG, which today has its world headquarters in the same downtown New York building where the tiny OSS unit toiled in the deepest secrecy.

Starr died in 1968, but his empire endures. AIG is the biggest foreign insurance company in Japan. More than a third of its $40 billion in revenue last year came from the Far East theater that Starr helped carpet bomb and liberate. Source

If the insurance business was heavily involved in OSS covert operations during World War II, it is most definitely NOT a leap of logic to suspect that the world's biggest insurer today (AIG) is also heavily involved in them. This is particularly the case when you consider that, as the L.A. Times article explained, the man who ran the OSS's insurance intel unit is the same man who established AIG.

What exactly the insurance related covert operations currently involve I (obviously) don't know. It stands to reason, however, that whatever they do involve, a bankruptcy of the world's biggest insurer would likely be very disruptive to them. In other words, the federal government was probably *extremely* motivated to save AIG for reasons that aren't going to be acknowledged in the mainstream or alternative press.

Hopefully this puts the bailout of AIG in a bit more perspective.

-Matt

http://circleof13.blogspot.com/2008/10/ ... avory.html
Posted by Alex Constantine at 1:05 PM

[barracuda]

Matt Taibbi in Rolling Stone (seven more pages at link):

The Big Takeover

The global economic crisis isn't about money - it's about power. How Wall Street insiders are using the bailout to stage a revolution

Posted Mar 19, 2009 12:49 PM

It's over — we're officially, royally fucked. no empire can survive being rendered a permanent laughingstock, which is what happened as of a few weeks ago, when the buffoons who have been running things in this country finally went one step too far. It happened when Treasury Secretary Timothy Geithner was forced to admit that he was once again going to have to stuff billions of taxpayer dollars into a dying insurance giant called AIG, itself a profound symbol of our national decline — a corporation that got rich insuring the concrete and steel of American industry in the country's heyday, only to destroy itself chasing phantom fortunes at the Wall Street card tables, like a dissolute nobleman gambling away the family estate in the waning days of the British Empire.

The latest bailout came as AIG admitted to having just posted the largest quarterly loss in American corporate history — some $61.7 billion. In the final three months of last year, the company lost more than $27 million every hour. That's $465,000 a minute, a yearly income for a median American household every six seconds, roughly $7,750 a second. And all this happened at the end of eight straight years that America devoted to frantically chasing the shadow of a terrorist threat to no avail, eight years spent stopping every citizen at every airport to search every purse, bag, crotch and briefcase for juice boxes and explosive tubes of toothpaste. Yet in the end, our government had no mechanism for searching the balance sheets of companies that held life-or-death power over our society and was unable to spot holes in the national economy the size of Libya (whose entire GDP last year was smaller than AIG's 2008 losses).

So it's time to admit it: We're fools, protagonists in a kind of gruesome comedy about the marriage of greed and stupidity. And the worst part about it is that we're still in denial — we still think this is some kind of unfortunate accident, not something that was created by the group of psychopaths on Wall Street whom we allowed to gang-rape the American Dream. When Geithner announced the new $30 billion bailout, the party line was that poor AIG was just a victim of a lot of shitty luck — bad year for business, you know, what with the financial crisis and all. Edward Liddy, the company's CEO, actually compared it to catching a cold: "The marketplace is a pretty crummy place to be right now," he said. "When the world catches pneumonia, we get it too." In a pathetic attempt at name-dropping, he even whined that AIG was being "consumed by the same issues that are driving house prices down and 401K statements down and Warren Buffet's investment portfolio down."

Liddy made AIG sound like an orphan begging in a soup line, hungry and sick from being left out in someone else's financial weather. He conveniently forgot to mention that AIG had spent more than a decade systematically scheming to evade U.S. and international regulators, or that one of the causes of its "pneumonia" was making colossal, world-sinking $500 billion bets with money it didn't have, in a toxic and completely unregulated derivatives market.

Nor did anyone mention that when AIG finally got up from its seat at the Wall Street casino, broke and busted in the afterdawn light, it owed money all over town — and that a huge chunk of your taxpayer dollars in this particular bailout scam will be going to pay off the other high rollers at its table. Or that this was a casino unique among all casinos, one where middle-class taxpayers cover the bets of billionaires.

People are pissed off about this financial crisis, and about this bailout, but they're not pissed off enough. The reality is that the worldwide economic meltdown and the bailout that followed were together a kind of revolution, a coup d'état. They cemented and formalized a political trend that has been snowballing for decades: the gradual takeover of the government by a small class of connected insiders, who used money to control elections, buy influence and systematically weaken financial regulations.

The crisis was the coup de grâce: Given virtually free rein over the economy, these same insiders first wrecked the financial world, then cunningly granted themselves nearly unlimited emergency powers to clean up their own mess. And so the gambling-addict leaders of companies like AIG end up not penniless and in jail, but with an Alien-style death grip on the Treasury and the Federal Reserve — "our partners in the government," as Liddy put it with a shockingly casual matter-of-factness after the most recent bailout.

The mistake most people make in looking at the financial crisis is thinking of it in terms of money, a habit that might lead you to look at the unfolding mess as a huge bonus-killing downer for the Wall Street class. But if you look at it in purely Machiavellian terms, what you see is a colossal power grab that threatens to turn the federal government into a kind of giant Enron — a huge, impenetrable black box filled with self-dealing insiders whose scheme is the securing of individual profits at the expense of an ocean of unwitting involuntary shareholders, previously known as taxpayers.

[seemslikeadream]

Company paid $218 million, not $165 million, Conn. attorney general says



NEW HAVEN, Connecticut - Connecticut's attorney general says documents turned over to his office by American International Group Inc. shows the company paid out $218 million in bonuses, higher than the $165 million previously disclosed.

Attorney General Richard Blumenthal's office received the documents late Friday after issuing a subpoena.

Blumenthal says the documents show that 73 people received at least $1 million apiece, and five of those got bonuses of more than $4 million. The financially ailing insurance giant has been under fire for giving bonuses after receiving more than $182.5 billion in federal bailout money.

AIG spokesman Mark Herr declined to comment Saturday.

http://www.msnbc.msn.com/id/29812224/

[chiggerbit]

I guess these were too small to be too big to fail.


Three banks, two corporate credit unions taken over by regulators in evening

http://www.marketwatch.com/News/Story/S ... E9B48AF%7D

[Trifecta]

http://market-ticker.denninger.net/arch ... es-GE.html

This is what is going to happen, as I noted in BlogTalkRadio yesterday afternoon, if "The Bezzle" is not removed from our system NOW.



Take a look at that folks. That's a snapshot of today's volume for June GE $2.50 PUTs.

That's over 52,000 contracts traded today, controlling 5.2 million shares.

They were purchased for about 30 cents, which means that the price has to be under $2.20 for them to go "in the money".

This is a bankruptcy bet on General Electric by the third week of June.

That's right - General Electric.

Folks, this is precisely what I was talking about last night on BlogTalkRadio. Go listen to my monologue on "The Bezzle", right at the front of the show, very carefully.

This is precisely what has happened with many financial institutions already and what happened to hundreds of companies during the 00-03 Tech Wreck.

General Electric is a stalwart of our financial and industrial system. A bankruptcy by GE would be catastrophic for our economy and capital markets. The follow-on damage with suppliers and customers would be even worse.

If "The Bezzle" is not brought under control right damn now this is what is going to to happen to company after company. We WILL see the S&P trade at one hundred if we start to see firms like GE go down the toilet.

Ladies and Gentlemen, Legislators and President Obama, your time is running out to change direction.

The number of people who have told me that I am wasting my time continues to grow.

You folks who are sending me those emails are missing the point of my activities in this regard.

It is my intention to guarantee that these actions and intentional and willful blindness is documented so that when these failures occur, which I have predicted and provided a path by which they can be prevented, occur due to the intentional and willful malfeasance of our lawmakers and policy "wonks", the people can correctly hold to account the people responsible for their unemployment, homelessness and hunger.

When firms like GE come under attack like this what I am talking about here is coming - imminently.

Either behavior changes RIGHT NOW or the outcome will become inevitable.

http://www.bloomberg.com/apps/quote?ticker=GE:US

[seemslikeadream]

$75 million in Madoff assets found in Gibraltar


Discovery brings total amount of money uncovered past $1 billion mark

NEW YORK - More than $1 billion in assets from Bernard Madoff’s businesses have been found, a lawyer for the trustee trying to recover money for jilted investors said Monday.

The lawyer, David Sheehan, said $75 million in an account in Gibraltar raises the amount of assets located past the $1 billion mark.

Sheehan spoke after a hearing in which government lawyers tried to block court-appointed trustee Irving Picard from gaining power of attorney over Madoff’s international operation.

Sheehan argued that power of attorney over Madoff’s accounts is an important tool, especially since actions may need to be taken quickly in foreign countries where things can happen to assets without warning.

http://www.msnbc.msn.com/id/29854351 /

[seemslikeadream]

http://www.washingtonpost.com/wp-dyn/co ... 30_pf.html

U.S. Seeks Expanded Power to Seize Firms
Goal Is to Limit Risk to Broader Economy

By Binyamin Appelbaum and David Cho
Washington Post Staff Writers
Tuesday, March 24, 2009; A01



The Obama administration is considering asking Congress to give the Treasury secretary unprecedented powers to initiate the seizure of non-bank financial companies, such as large insurers, investment firms and hedge funds, whose collapse would damage the broader economy, according to an administration document.

The government at present has the authority to seize only banks.

Giving the Treasury secretary authority over a broader range of companies would mark a significant shift from the existing model of financial regulation, which relies on independent agencies that are shielded from the political process. The Treasury secretary, a member of the president's Cabinet, would exercise the new powers in consultation with the White House, the Federal Reserve and other regulators, according to the document.

The administration plans to send legislation to Capitol Hill this week. Sources cautioned that the details, including the Treasury's role, are still in flux.

Treasury Secretary Timothy F. Geithner is set to argue for the new powers at a hearing today on Capitol Hill about the furor over bonuses paid to executives at American International Group, which the government has propped up with about $180 billion in federal aid. Administration officials have said that the proposed authority would have allowed them to seize AIG last fall and wind down its operations at less cost to taxpayers.

The administration's proposal contains two pieces. First, it would empower a government agency to take on the new role of systemic risk regulator with broad oversight of any and all financial firms whose failure could disrupt the broader economy. The Federal Reserve is widely considered to be the leading candidate for this assignment. But some critics warn that this could conflict with the Fed's other responsibilities, particularly its control over monetary policy.

The government also would assume the authority to seize such firms if they totter toward failure.

Besides seizing a company outright, the document states, the Treasury Secretary could use a range of tools to prevent its collapse, such as guaranteeing losses, buying assets or taking a partial ownership stake. Such authority also would allow the government to break contracts, such as the agreements to pay $165 million in bonuses to employees of AIG's most troubled unit.

The Treasury secretary could act only after consulting with the president and getting a recommendation from two-thirds of the Federal Reserve Board, according to the plan.

Geithner plans to lay out the administration's broader strategy for overhauling financial regulation at another hearing on Thursday.

The authority to seize non-bank financial firms has emerged as a priority for the administration after the failure of investment house Lehman Brothers, which was not a traditional bank, and the troubled rescue of AIG.

"We're very late in doing this, but we've got to move quickly to try and do this because, again, it's a necessary thing for any government to have a broader range of tools for dealing with these kinds of things, so you can protect the economy from the kind of risks posed by institutions that get to the point where they're systemic," Geithner said last night at a forum held by the Wall Street Journal.

The powers would parallel the government's existing authority over banks, which are exercised by banking regulatory agencies in conjunction with the Federal Deposit Insurance Corp. Geithner has cited that structure as the model for the government's plans.

[jingofever]

An article from 1999 about repealing Glass-Steagall:

November 5, 1999
CONGRESS PASSES WIDE-RANGING BILL EASING BANK LAWS
By STEPHEN LABATON

Congress approved landmark legislation today that opens the door for a new era on Wall Street in which commercial banks, securities houses and insurers will find it easier and cheaper to enter one another's businesses.

The measure, considered by many the most important banking legislation in 66 years, was approved in the Senate by a vote of 90 to 8 and in the House tonight by 362 to 57. The bill will now be sent to the president, who is expected to sign it, aides said. It would become one of the most significant achievements this year by the White House and the Republicans leading the 106th Congress.

''Today Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the 21st century,'' Treasury Secretary Lawrence H. Summers said. ''This historic legislation will better enable American companies to compete in the new economy.''

The decision to repeal the Glass-Steagall Act of 1933 provoked dire warnings from a handful of dissenters that the deregulation of Wall Street would someday wreak havoc on the nation's financial system. The original idea behind Glass-Steagall was that separation between bankers and brokers would reduce the potential conflicts of interest that were thought to have contributed to the speculative stock frenzy before the Depression.

Today's action followed a rich Congressional debate about the history of finance in America in this century, the causes of the banking crisis of the 1930's, the globalization of banking and the future of the nation's economy.

Administration officials and many Republicans and Democrats said the measure would save consumers billions of dollars and was necessary to keep up with trends in both domestic and international banking. Some institutions, like Citigroup, already have banking, insurance and securities arms but could have been forced to divest their insurance underwriting under existing law. Many foreign banks already enjoy the ability to enter the securities and insurance industries.

''The world changes, and we have to change with it,'' said Senator Phil Gramm of Texas, who wrote the law that will bear his name along with the two other main Republican sponsors, Representative Jim Leach of Iowa and Representative Thomas J. Bliley Jr. of Virginia. ''We have a new century coming, and we have an opportunity to dominate that century the same way we dominated this century. Glass-Steagall, in the midst of the Great Depression, came at a time when the thinking was that the government was the answer. In this era of economic prosperity, we have decided that freedom is the answer.''

In the House debate, Mr. Leach said, ''This is a historic day. The landscape for delivery of financial services will now surely shift.''

But consumer groups and civil rights advocates criticized the legislation for being a sop to the nation's biggest financial institutions. They say that it fails to protect the privacy interests of consumers and community lending standards for the disadvantaged and that it will create more problems than it solves.

The opponents of the measure gloomily predicted that by unshackling banks and enabling them to move more freely into new kinds of financial activities, the new law could lead to an economic crisis down the road when the marketplace is no longer growing briskly.

''I think we will look back in 10 years' time and say we should not have done this but we did because we forgot the lessons of the past, and that that which is true in the 1930's is true in 2010,'' said Senator Byron L. Dorgan, Democrat of North Dakota. ''I wasn't around during the 1930's or the debate over Glass-Steagall. But I was here in the early 1980's when it was decided to allow the expansion of savings and loans. We have now decided in the name of modernization to forget the lessons of the past, of safety and of soundness.''

Senator Paul Wellstone, Democrat of Minnesota, said that Congress had ''seemed determined to unlearn the lessons from our past mistakes.''

''Scores of banks failed in the Great Depression as a result of unsound banking practices, and their failure only deepened the crisis,'' Mr. Wellstone said. ''Glass-Steagall was intended to protect our financial system by insulating commercial banking from other forms of risk. It was one of several stabilizers designed to keep a similar tragedy from recurring. Now Congress is about to repeal that economic stabilizer without putting any comparable safeguard in its place.''

Supporters of the legislation rejected those arguments. They responded that historians and economists have concluded that the Glass-Steagall Act was not the correct response to the banking crisis because it was the failure of the Federal Reserve in carrying out monetary policy, not speculation in the stock market, that caused the collapse of 11,000 banks. If anything, the supporters said, the new law will give financial companies the ability to diversify and therefore reduce their risks. The new law, they said, will also give regulators new tools to supervise shaky institutions.

''The concerns that we will have a meltdown like 1929 are dramatically overblown,'' said Senator Bob Kerrey, Democrat of Nebraska.

Others said the legislation was essential for the future leadership of the American banking system.

''If we don't pass this bill, we could find London or Frankfurt or years down the road Shanghai becoming the financial capital of the world,'' said Senator Charles E. Schumer, Democrat of New York. ''There are many reasons for this bill, but first and foremost is to ensure that U.S. financial firms remain competitive.''

But other lawmakers criticized the provisions of the legislation aimed at discouraging community groups from pressing banks to make more loans to the disadvantaged. Representative Maxine Waters, Democrat of California, said during the House debate that the legislation was ''mean-spirited in the way it had tried to undermine the Community Reinvestment Act.'' And Representative Barney Frank, Democrat of Massachusetts, said it was ironic that while the legislation was deregulating financial services, it had begun a new system of onerous regulation on community advocates.

Many experts predict that, even though the legislation has been trailing market trends that have begun to see the cross-ownership of banks, securities firms and insurers, the new law is certain to lead to a wave of large financial mergers.

The White House has estimated the legislation could save consumers as much as $18 billion a year as new financial conglomerates gain economies of scale and cut costs.

Other experts have disputed those estimates as overly optimistic, and said that the bulk of any profits seen from the deregulation of financial services would be returned not to customers but to shareholders.

These are some of the key provisions of the legislation:

*Banks will be able to affiliate with insurance companies and securities concerns with far fewer restrictions than in the past.

*The legislation preserves the regulatory structure in Washington and gives the Federal Reserve and the Office of Comptroller of the Currency roles in regulating new financial conglomerates. The Securities and Exchange Commission will oversee securities operations at any bank, and the states will continue to regulate insurance.

*It will be more difficult for industrial companies to control a bank. The measure closes a loophole that had permitted a number of commercial enterprises to open savings associations known as unitary thrifts.

One Republican Senator, Richard C. Shelby of Alabama, voted against the legislation. He was joined by seven Democrats: Barbara Boxer of California, Richard H. Bryan of Nevada, Russell D. Feingold of Wisconsin, Tom Harkin of Iowa, Barbara A. Mikulski of Maryland, Mr. Dorgan and Mr. Wellstone.

In the House, 155 Democrats and 207 Republicans voted for the measure, while 51 Democrats, 5 Republicans and 1 independent opposed it. Fifteen members did not vote.

Tucked away in the legislation is a provision that some experts today warned could cost insurance policyholders as much as $50 billion. The provision would allow mutual insurance companies to move to other states to avoid payments they would otherwise owe policyholders as they reorganize their corporate structure. Many states, including New York and New Jersey, do not allow such relocations without the consent of the insurer's domicile state. But the legislation before Congress would pre-empt the states.

Both the Metropolitan Life Insurance Company and the Prudential Life Insurance Company are in the midst of reorganizing into stock-based corporations that are requiring them to pay billions of dollars to policyholders from years of accumulated surplus. In exchange, the policyholders give up their ownership in the mutual insurance company.

The legislation would permit any mutual insurance company to avoid making surplus payments to policyholders by simply moving to states with more permissive laws and setting up a hybrid corporate structure known as a mutual holding company.

The provision was inserted by Representative Bliley at the urging of a trade association. It attracted little opposition because it was attached to a provision that forbids insurers from discriminating against domestic-violence victims.

In a letter sent to Congress this week, Mr. Summers said that the provision ''could allow insurance companies to avoid state law protecting policyholders, enriching insiders at the expense of consumers.''

[antiaristo]

.

The Obama team are by now regular practitioners of the Big Lie Technique.

AIG was regulated.
By the OTS - which is part of the Treasury!

Here is the relevant excerpt from the Rolling Stone article currently roiling the net:

In the biggest joke of all, Cassano's wheeling and dealing was regulated by the Office of Thrift Supervision, an agency that would prove to be defiantly uninterested in keeping watch over his operations. How a behemoth like AIG came to be regulated by the little-known and relatively small OTS is yet another triumph of the deregulatory instinct. Under another law passed in 1999, certain kinds of holding companies could choose the OTS as their regulator, provided they owned one or more thrifts (better known as savings-and-loans). Because the OTS was viewed as more compliant than the Fed or the Securities and Exchange Commission, companies rushed to reclassify themselves as thrifts. In 1999, AIG purchased a thrift in Delaware and managed to get approval for OTS regulation of its entire operation.

Making matters even more hilarious, AIGFP — a London-based subsidiary of an American insurance company — ought to have been regulated by one of Europe's more stringent regulators, like Britain's Financial Services Authority. But the OTS managed to convince the Europeans that it had the muscle to regulate these giant companies. By 2007, the EU had conferred legitimacy to OTS supervision of three mammoth firms — GE, AIG and Ameriprise.

That same year, as the subprime crisis was exploding, the Government Accountability Office criticized the OTS, noting a "disparity between the size of the agency and the diverse firms it oversees." Among other things, the GAO report noted that the entire OTS had only one insurance specialist on staff — and this despite the fact that it was the primary regulator for the world's largest insurer!

"There's this notion that the regulators couldn't do anything to stop AIG," says a government official who was present during the bailout. "That's bullshit. What you have to understand is that these regulators have ultimate power. They can send you a letter and say, 'You don't exist anymore,' and that's basically that. They don't even really need due process. The OTS could have said, 'We're going to pull your charter; we're going to pull your license; we're going to sue you.' And getting sued by your primary regulator is the kiss of death."

When AIG finally blew up, the OTS regulator ostensibly in charge of overseeing the insurance giant — a guy named C.K. Lee — basically admitted that he had blown it. His mistake, Lee said, was that he believed all those credit swaps in Cassano's portfolio were "fairly benign products." Why? Because the company told him so. "The judgment the company was making was that there was no big credit risk," he explained. (Lee now works as Midwest region director of the OTS; the agency declined to make him available for an interview.)

[StarmanSkye]

WoW -- Thanks for posting that dated-but-extremely-relevant article, Jingofever; That ought to make a handy reprint to pass around showing folks the level of malfeaance and duplicity by our legislators, caving to the unmitigated greed and influence-peddling of the financial industry's lobbyists. It's also a great 'answer' to those who argue the repeal of Glass-Steagal did NOT contribute to or cause the present crisis.

The unofficial model for American 'sucess' is now and has been, "Unindicted crime pays -- Very Well, thankyou, all the way to the bank, for everyone but suckers!!!!"

We're well along on the downhill slide to rock bottom, sold-out and cheated by professional insider cons disguised as 'honorable patriots' embodying American virtues. The whole PR hypocritical ediface of human rights and social justice, freedom and courage and honesty is a monumental scam. I don't feel any better for having seen through the fraud starting 20+ years ago. Which can probably be accurately dated to the 1948 creation of the National Security State.

-S

-S

[barracuda]

Okay, so here are the carrying values of various securitiy types as marked to complete fantasy by the large financial institutions that are about to sell these assets, presumably at the highest price they can get, to the U.S. taxpayer under Geithner's new Public-Private Investment Program (PPIP):

http://zerohedge.blogspot.com/2009/03/ridiculous-marks-of-toxic-assets.html

The Ridiculous Marks Of Toxic Assets

Posted by Tyler Durden at 1:27 PM
The Treasury's arbitrary transaction price of 84 for the "pool of residential mortgages" seems to not have been all that arbitrary after all. In fact, as it may turn out, it was gloriously optimistic. A report by Goldman today on the PPIP caught my eye, with one chart in particular, indicating that bank are still marking the bulk of their "assets" at 90-95! Of particular note is Citi's delirious optimism on marks in its assorted asset classes, especially commercial mortgages.

A PPIP transaction at 70 is one thing, one at 95 is very much different, especially when the FMV is in the 30-40s, as the potential equity upside is very limited, while the downside is... well... much less so. Have not had much time to dig into this but present it for consideration and commentary. If banks have expectations for bid levels north of 90 on the bulk of TALF-mediated transactions, this could really end up being a lot of hot air, despite PIMROCK's enthusiastic endorsement of the proposal.

And, the percentage of the companies assets which fall into these classes:

http://zerohedge.blogspot.com/2009/03/ridiculous-marks-of-toxic-assets-part-2.html

The Ridiculous Marks of Toxic Assets (part 2)

Posted by Cornelius at 4:19 PM
Following up on Tyler's earlier post, it's important to put the potential PPIP assets in perspective to the overall holdings of the banks.



Citi is clearly the most interested party in this whole thing, with a whopping 44% of its total assets tied up in legacy assets. As Citi is valuing these things at such a ridiculously high level, Citi stockholders are going to be closely watching the PPIP proceedings and how the players approach their bidding strategy. The benefit of the PPIP-leverage is it is likely to boost valuations higher than they would be without the PPIP leverage/backstops - it remains to be seen if that benefit will be substantial enough to stem the bloodloss at Citi.

Another interesting tidbit is that the weighted average ex-Citi is still at a pretty high 9%. If the valuations for these legacy assets drop from the 90-100 range to roughly half that (which doesn't seem wholly unreasonable) that's an instant 5% drop in assets across the entire financial industry.

The takeaway from this whole thing is that the PPIP program is wrought with conflicting interests, and every movement in valuations for deals is going to have a huge impact beyond the specific parties of that particular deal. Stay tuned...

Update: Institutional Risk points out the gap between Geithner/Bernanke's pricing of these legacy assets at around 80 cents/dollar and the market's pricing at between 20-40 cents/dollar. Further, it highlights the possibility of these following to 15 cents/dollar by Q3 - implying a 37.4% net asset markdown for Citi and a 7.65% net asset markdown across the entire financial industry.

[barracuda]

Sometimes I really like Jim Kunstler's Clusterfuck Nation:

March 23, 2009
Full Commanding Denial

      If central casting called for a poised, straight-talking, and capable-seeming president, it would be hard to come up with someone better than the Barack Obama who walked and talked around the White House grounds with Steve Croft on "60-Minutes" Sunday night. He may perfectly represent the majority who elected him, though, because he also appears to be in full commanding denial of the realities overtaking our American experience.

      Those realities include the fact that we can't possibly return to the easy credit and no money down "consumer" economy no matter how many nominal dollars get shoveled into the fiery furnaces of banks too-big-to-fail. As Treasury Secretary Geithner's underling, Stephanie Cutter, said last week, "Our singular focus is on increasing lending to support economic recovery. Everything we do to stabilize the financial system is done with that goal in mind."

      Lending on the scale that became normal over the last decade is for sure the one thing that we will not recover. We turn around in 2009 to find ourselves a much poorer nation than we thought we were a year ago, especially among that broad range of formerly middle-class wage-earners who lived so luxuriously until yesterday. The public can't process this reality and the president, for all his relaxed charm, is either not ready to articulate it, or can't process it himself.

     Everything that we're doing right now is engineered to avoid reality, to sustain the unsustainable, to recover the unrecoverable, when the mandate of reality compels us to face our losses in order to move on to the next chapter of a collective American life. The next chapter would be a society that runs on a much more local and modest scale, centered on essential activities like growing food, requiring harder physical work, and focused attention -- in other words, the opposite of a society lost in abstractions, long-range daisy chains of off-loaded responsibility, and incessant pleasure-seeking.

     In retreat from this reality, we've set in motion two forces that are pretty certain to bring us to grief. The first proceeds from the fateful FMOC decision last week at the Federal Reserve Bank to begin buying massive amounts of our own treasury bonds and bills. This is predicated on the idea that the mechanisms of wealth production -- even of illusory wealth, such as the fortunes created by trading securitized unpayable debt -- can keep chugging along, spinning off limitless additional suburban villas, chain stores, car trips, and deep-fried snacks. It would be sententious to explain how this destroys currencies, but wherever "monetizing debt" has been tried before in history, that is the outcome. The result would be ruinous at every level and would lead straight to the second terrible force: social upheaval brought on by the conversion of economic problems into political turbulence.

     Those two forces are underway right now, in fact, since the overt monetizing of last week was preceded by the shoveling of bail-outs, which tacitly guaranteed a collapse of credibility in US debt instruments. I'm not in favor of violence and anarchy, but after the AIG bonus affair, it's hard to imagine that we are not one more corporate misdeed away from a rocket-propelled-grenade, or something like that, being fired into a glass office tower somewhere -- and then the "first-broken-window" rule of social disintegration comes into play. Meanwhile, I stick to my time-table of six-to-eighteen months before the reckless creation of new money-for-nothing filters through the system, overcomes even compressive mass bankruptcy, and starts expressing itself in the sinking value of dollars and the revved up velocity of their circulation in pursuit of tangible commodities.

     We're already seeing the first twinges of that in the up-creep of oil prices, busting through the $50-a-barrel barrier last week. Since scarcity tends to express itself in gross volatility, it's easy to imagine oil prices rising swiftly beyond the $147-per-barrel record level of last year. As that occurs, the most basic premises of everyday life in the USA will be called into question. If you think car sales have been bad lately, with oil in the $35-a-barrel range most of the winter, just wait. The newly-minted unemployed will be marooned in their subdivisions. They will not be buying GMC Yukons on 48-month installment contracts, let alone X-boxes on their Visa cards. They might be very very hungry, though. All bets are off as to how these social classes may organize themselves to alleviate their hunger (and express their anger about it).

    Given all this, it's kind of hard to believe that the savvy, thoughtful Mr. Obama is going along with such a disastrous program as the one his "team" is rolling out. Perhaps his ease and confidence masks a tragically conventional world-view, an incapacity to imagine "change" outside a very narrow range of possibility. I must say I doubt this is the case. I think, he is going along, for the moment, with a consensus of wishes to prop up life as we know it at all costs. This consensus emanates from the top down and the bottom up. The millions of "Joe-the-Plumber(s)" out there don't want to rethink the terms of existence anymore than the lords of Goldman Sachs. I also think that circumstances will force Mr. Obama's hand before long -- specifically that a moment will arrive when he goes on TV and tells the American public that things have changed way beyond the scope of what they even imagined when they pulled the levers last fall and voted for an uncharted future.

      Capable observers are calling, meanwhile, for a robust bear market rally moving through Spring, on technical grounds that have little to do with the greater forces roistering in the background. Reality is a cruel mistress. If the stock market rally rolls out as predicted, it will surely fake-out the mainstream media. They'll conclude wishfully and foolishly that something like "recovery" is underway. They may even interpret rising oil prices as a "positive sign" that the great groaning enterprise of the something-for-nothing economy is back "on track."

     They'll be shocked sometime after Memorial Day when it all comes off the rails again. We have a lot to sort out and very little time to get on with job. Notice, I haven't even mentioned the potential for mischief and instability coming out of the rest of the world -- enough black swans to blot out the sun. Want some concrete advice? For those of you sitting on US Treasury bonds and bills, now would be a good time to get out.

[SonicG]

I have tried to get some economic edumacation from Doug Henwood but it hasn't sunk in much. Anyhow, I know there is at least one other Henwood fan around, so check out his comments and let me know how you think it jibes.
Timmy Meets the Establishment

Treasury Secretary Tim Geithner appeared this morning at the Council on Foreign Relations. The main meeting room, named after private equity kingpin and entitlement scourge Pete Peterson, was jam-packed with members, so we media hacks had to watch the proceedings on a video screen set up in the David Rockefeller Room.

Geithner’s remarks (as prepared, here; as delivered, here) mostly achieved the anodyne level customary to the genre. He’s glib in a way, but doesn’t give the impression of having a powerful or capacious mind. Though he’s 47, he still gives the impression of being a kid playing at being a grownup—or so it seemed on the closed-circuit TV.

A couple of highlights stand out amidst the boilerplate.
Pete the austere

There was much joshing about Pete Peterson and his eponymous room. Geithner: “Nice to see Pete Peterson. I hope he’s being sufficiently generous to the Council. You know, this room looks a little crowded, Pete. I think you might want to build up, maybe.” Later, Roger Altman, the former Clinton Treasury official and now head of his own private equity firm, continued teasing Peterson about the Council’s need for his money—which Geithner seconded, by recalling his own experience as president of the New York Fed when Peterson was its chair: “brutal on…basic things. A real challenge.”

But, things took a more serious turn re: Peterson when Geithner said “Of course, we are all fiscal hawks now because of Pete Peterson. There are no doves left on the fiscal side.” There are two ways to read this remark. One would be to see it as a distracting pledge of fealty to fiscal orthodoxy as Geithner’s government was about to embark on the biggest deficit spending program since the end of World War II: that is, “we’re doing this because we have to, not because we want to, so keep buying our bonds.” The other would be as a confirmation of the argument I made in yesterday’s post: that once this bout of spending is done, Obama et al will impose a serious structural adjustment program on the U.S., cutting social spending to the bone.
Textual departures

There were some intriguing departures from Geithner’s prepared text. Towards the beginning, he improvised this: “President Zedillo [of Mexico] had this great line in his country’s moment of financial peril [during its 1994 crisis], when he said, you know, markets overreact, so policy has to overreact.” He later underscored that point, saying that the lesson of other countries is that you have to “keep at it long enough that you’re really firmly on the other side,” and “[not] to put the brakes on too early…. [W]e’re not going to do that.” Leaving aside whether one can really tell in the heat of the moment that you are “on the other side,” it sounds like Geithner is telling the markets and the public that all this tsurris could go on a lot longer than anyone expects.

The other interesting departure from the script was the omission of a discussion of AIG, which contained the passage: “[A]top its insurance companies is an almost entirely unregulated business unit that took extraordinary risks to generate extraordinary profits.” Perhaps Geithner deemed that too friendly to the day before yesterday’s dark mood of angry populism, beyond which we have now moved into the bright land of the forward-looking and constructive.
Flies in the ointment

Some analysts have wondered whether banks will be reluctant to sell their toxic assets to the outside speculators funded by Geithner’s bailout scheme. If the prices that the markets “discover” are below the value the banks are currently carrying them at on their books, that would lead to fresh writedowns and a desperate need for fresh capital—meaning from the Treasury. And with Treasury capital comes political attention and, gasp, possible compensation limits.

Altman asked Geithner about this, and Geithner wasn’t worried. He seems to think that the major problem is uncertainty, not brokeness. So the banks are actually being forced to hold more capital than they’d like, and once the program is underway, the “uncertainty premium” will disappear. Let’s hope so. Because if it really is a matter of brokeness, we’re talking some major additional capital infusions—from the Treasury, of course. (Try getting that through Congress!) Once the uncertainty premium is gone, then banks will have no problem raising fresh capital from private sources.

Geithner didn’t explain why the banks would need to raise fresh capital if they’re now holding excess capital, except maybe because of the possibility of a “deeper recession.” But if we’re in for one of those, then how much more capital will they need? Geithner didn’t explain that either.
Dollar indiscretions

Finally, there were some questions about the dollar, and Geithner’s answers reinforced the impression that he’s in over his head.

A few days ago, Zhou Xiaochuan, governor of the Chinese central bank, declared that it was time for the world to move on from using the dollar as its reserve currency. Zhou’s concerns are obvious: the U.S. financial system is a mess, its international accounts are also a mess, and it’s early in a major federal borrowing binge. (Of course he didn’t put it that harshly in his statement.) Such a country isn’t the obvious candidate to be the issuer of the world’s central currency.

Yet the U.S. derives enormous advantage from that role—most relevant to the present moment, a freedom to borrow with (so far) no practical limit, since countries keep most of their reserves in dollar-denominated assets. Zhao suggested that some synthetic unit, like the IMF’s special drawing rights (SDRs), which are comprised of a basket of the world’s major currencies (the dollar, the euro, the yen, and the pound), replace the dollar in this privileged role. Such a move would reduce, materially and symbolically, U.S. imperial power (though of course you can’t put it that way in polite company), so no U.S. official would embrace it—though it makes good sense for China to put the idea forward.

Asked by an audience member what he thought of Zhou’s idea (at these events, the press doesn’t ask questions—only members of the CFR do), Geithner’s first response was that he hadn’t read the governor’s proposal, though he quickly laid on the praise for Zhou as “a very thoughtful, very careful, distinguished central banker.” Then, Geithner added that the U.S. is “open to [the] suggestion” of expanding the SDR’s role. Currency traders immediately interpreted that as a weak defense of the dollar’s role, and sold the currency.

Geither should have anticipated that. But he also should have read Zhou’s proposal, since it came from a top official in a country that holds about a trillion dollars worth of the paper that Geithner is responsible for. (It’s only 1,513 words, including title and byline—and comprehensible, according to Microsoft Word, to anyone reading at the 12th grade level or better.) Maybe that was a conscious dis rather than a careless confession of indefensible ignorance—but in either case, Geithner really needs to find a new line of work.

Altman, obviously dissatisfied with Geithner’s first attempt at an answer, closed the meeting by asking “one final question…on behalf of the market…. Do you see any change…in the basic role of the dollar as the world’s key reserve currency…?” With the question so bluntly prepared for him, Geithner finally came up with the right answer: “I do not.” The dollar promptly rallied, at least for the moment.

Maybe Geithner would like to see a decline in the dollar. It would make our exports cheaper and imports more expensive, which would help balance the trade accounts. If we just print the money, it would make it a lot easier to service the debts we owe the outside world, currently approaching $6 trillion, or 42% of GDP. (It was 15% of GDP at the end of 1999, almost two-thirds below the present level.) But it’s playing with fire for a country that needs to borrow as massively as this one to signal that it wouldn’t mind a little devaluation. A little devaluation could turn into a big one pretty quickly, and with that would come capital flight and a spike in interest rates. Coming on the same day that a British government bond auction failed—there weren’t enough buyers willing to take up the offering, which was for just £1.75 billion. That’s considerably less than the amount that the U.S. needs to borrow every day to fund its projected deficits over the coming year.

No worries, though. Altman concluded the proceedings by thanking Geithner, and assuring the audience that “we’re in good hands.” He didn’t disclose who “we” are, though.

[/quote]