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

[MinM]

Frank Partnoy: Derivative Dangers : NPR

Fresh Air from WHYY, March 25, 2009 · Years before the current economic crisis, law professor and former Wall Street trader Frank Partnoy was warning about the dangers of risky financial practices.

In his 1997 book FIASCO: Blood in the Water on Wall Street, Partnoy detailed how derivatives — financial instruments whose value is determined by another security — were being used and abused by big financial firms. Partnoy used his experiences as a derivatives trader at Morgan Stanley to give the book an insider's perspective. In the preface to FIASCO, Partnoy wrote about the growing influence of derivatives:

"Derivatives have become the largest market in the world. The size of the derivatives market, estimated at $55 trillion in 1996, is double the value of all U.S. stocks and more than 10 times the entire U.S. national debt. Meanwhile, derivatives losses continue to multiply."

Partnoy is a professor at the University of San Diego law school. In addition to FIASCO, he's the author of Infectious Greed: How Deceit and Risk Corrupted the Financial Markets.

Partnoy joins Fresh Air to explain derivatives, credit default swaps and how they led to the current financial crisis.

The final months of 2008 marked the end of an unprecedented saga of excess. The mania, panic, and crash had many causes. But if you are looking for a single word to use in laying blame for the recent financial catastrophe, there is only one choice. Derivatives.

Without derivatives, leveraged bets on subprime mortgage loans could not have spread so far or so fast. Without derivatives, the complex risks that destroyed Bear Stearns, Lehman Brothers, and Merrill Lynch, and decimated dozens of banks and insurance companies, including AIG, could not have been hidden from view. Without derivatives, a handful of financial wizards could not have gunned down major mutual funds and pension funds, and then pulled the trigger on their own institutions. Derivatives were the key; they enabled Wall Street to maintain its destructive run until it was too late.

In what follows, I will connect the dots from the mid-1990s through the end of 2008. I will describe how investors and regulators ignored repeated warnings about the hidden dangers of derivatives. I will show you how derivatives were at the heart of the collapse...
http://www.npr.org/templates/story/stor ... =102325715

George Washington's Blog: What ARE the Toxic Assets Everyone Is Talking About?

George Washington's Blog: We Not Only Have a Shadow Banking System, But also a Shadow Government

Democracy Now! | AIG and the Big Takeover: Matt Taibbi on "How Wall Street Insiders Are Using the Bailout to Stage a Revolution"

[seemslikeadream]

Why Eliot Spitzer was assassinated

The predatory lending industry
had a partner in the White House


Mortaging America's future
for a quick buck

This video was originally posted in March of 2008

It's one of the most amazing displays of journalistic incompetence and malpractice in recent memory.

The US news media failed to draw the obvious connection between the bizarre federal law enforcement investigation and leak campaign about the private life of New York Governor Spitzer and Spitzer's all out attack on the Bush administration for its collusion with predatory lenders.

While the international credit system grinds to a halt because of a superabundance of bad mortgage loans made in the US, the news media failed to cover the details of Spitzer's public charges against the White House.

Yet when salacious details were leaked about alleged details of Spitzer's private life, they took that information and made it the front page news for days.

To the 9/11 fiasco, the Iraq War, the travesty of the federal response to Hurricane Katrina, and the shredding of the US Constitution, we can now add a deliberate and reckless undermining of the credit and banking system of the US to the list of Bush administration "accomplishments."

No external enemy, or group of external enemies, could have done as much harm to the nation as this group has in less than eight years.

Hey, do you think it's a coincidence that a Bush was involved the last time the US banking industry fell into a black whole because of White House-facilitated fraud?

There's actually a lot of money to be made blowing up banks. Here's how Bush Sr. and his friends in the Mafia and CIA profited from it the last time:

[MinM]

One sector of Wall Street that Frank Partnoy singled out for dropping the ball were the Credit Rating Agencies.

Maybe they got the message?

Pittsburgh Business Headlines: Moody's cuts Bank of America debt ratings
Mar 25, 6:34 PM EDT

NEW YORK (AP) -- Moody's Investors Service on Wednesday cut the debt ratings of Bank of America Corp., and sent its rating of the bank's preferred stock into junk territory, citing an increasing risk that government intervention may be needed to bolster the bank's capital position.

Also, Bank of America's chief executive said in a Los Angeles Times interview published Wednesday that the bank wants to begin repaying $45 billion in federal bailout funds next month.

Unlike Moody's junk-level downgrade of its rating on the bank's preferred stock, the cuts involving Bank of America's debt kept those ratings within investment-grade range.

Moody's lowered its senior debt rating on the Charlotte, N.C.-based bank down a notch to "A2" from "A1." Bank of America's senior subordinated debt rating was also cut one notch, to "A3" from "A2," and the junior subordinated debt rating fell four notches to "Baa3" from "A2."

The preferred stock rating fell to "B3" from "Baa1" - a drop of eight notches, to a level six steps below investment grade, and considered indicative of high credit risk.

Moody's also lowered the financial strength rating of Bank of America N.A., the parent company's primary bank subsidiary, to "D" from "B-".

The deposit and senior debt ratings of the parent company's U.S. banking subsidiaries were lowered to "Aa3" from "Aa2," and its subordinated debt rating to "A1" from "Aa3" - all within investment grade.

Moody's assigned a "negative" outlook for the preferred stock and junior subordinated debt, as well as the bank's financial strength rating, signaling the possibility of further downgrades should business conditions worsen.

Moody's said the negative outlooks reflect its belief that Bank of America "remains vulnerable to further declines in its tangible common equity due to rising credit losses."

Such declines "could lead the bank to seek additional capital support from the government," Moody's said.

Other possibilities, Moody's said, including a suspension of payouts on preferred dividends, or a "distressed" exchange" offer to preferred shareholders to boost the bank's common equity position.

David Fanger, a Moody's senior vice president, said the downgrade of the bank's financial strength rating was driven by capital challenges "which are made more acute because U.S. banks' access to the equity market is shut or very limited at best. This increases the likelihood of a capital initiative by the U.S. government to support" the bank.

A Bank of America spokesman declined to comment on the Moody's ratings.

Also Wednesday, a report in The Wall Street Journal said the bank was folding its Premier Banking unit into Merrill Lynch's Global Wealth Management unit, laying off several hundred workers. According to the report, client managers were among those notified of layoffs last week.

Earlier Wednesday, the Los Angeles Times published an interview with Bank of America Chief Executive Kenneth Lewis, who said the bank wanted to start repaying $45 billion in federal bailout funds next month. He said he's heard nothing to indicate his bank will not pass a government "stress test" of its strength to weather further economic troubles. Repayment of the bailout money could begin after that clearance, Lewis said.

"As soon as we think the markets normalize, we would very seriously like to pay it all back," Lewis told the Times.

Lewis said that could occur as soon as this year's fourth quarter.

Shares of Bank of America rose 48 cents, or nearly 6.7 percent, to close at $7.70.

© 2009 The Associated Press. All rights reserved.
http://hosted.ap.org/dynamic/stories/B/BANK_OF_AMERICA_MOODYS_RATINGS

[seemslikeadream]

The Mafia, the CIA and Bush Sr.

http://www.youtube.com/watch?v=lUiAbeDs5Sk

http://www.youtube.com/watch?v=oDLyEOSZg5o

http://www.youtube.com/watch?v=JVQhhsET6UQ

[American Dream]

http://www.counterpunch.org/hallinan03252009.html

Europe in Crisis
By CONN HALLINAN

“Below the thunder of the upper deep;
Far far beneath in the abysmal sea…
The Kraken Sleepeth”

--Alfred Tennyson

In Nordic mythology, the Kraken was a huge beast that lay in wait for ships that braved the restless North Atlantic, rising from the “abysmal” depths to wrap its great arms around the unwary or the over bold, pulling them down to its lair. As economies from the Baltic to Spain and from Ireland to Austria self-destruct, the Kraken metaphor may be an apt one for a crisis whose first victim was Iceland.

The saga of Iceland’s fall, from what Reuters called “One of the richest countries in the world per capita” to flat broke, is a tale that begins in the 1980s when Ronald Reagan and Margaret Thatcher dismantled governmental and financial checks and balances, privatized everything that wasn’t nailed down, and turned the world’s economy into an enormous Ponzi scheme with promises of wealth that would make Las Vegas blush.

Tapping into the sea of high risk credit scams that floated the housing bubble, tiny Iceland—whose major export was cod—turned itself into a financial giant whose banks were worth 900 times more than the island nation’s gross domestic product. Icelanders bought townhouses in New York, imported expensive cars and lured back ex-patriots to cash in at the casino.

Such hubris stirred the Kraken.

Last month Icelanders were defaulting on car loans, unemployment was surging, and the country was in hock to the International Monetary Fund (IMF), whose standard formula for accepting its loans is the systematic savaging of education, health care, and social welfare programs. Iceland’s richest man, Asgeir Johannesson—who made out like a bandit over the past five years—runs a supermarket chain whose symbol is a cross-eyed pig, which suggests that while the northern gods may be vengeful, they have a sense of humor.

Iceland was just the first victim, an hors d’oeuvre for the beast. There are lots of others. The first to fall were smaller countries on the periphery—Latvia, Estonia, and Ireland—but the leviathans too soon felt the Kraken’s tentacles.

Germany’s export industry, the heart of its powerful economy, is off by 21 percent. France’s growth rate is projected to be minus 2 percent. Spain’s unemployment rate is 14 percent, and 22 percent in the country’s hard-hit south. Sweden’s industrial output in down 22.9 percent. Ukraine, an industrial giant with 46 million people, will see its economy shrink 6 percent. A $16.5 billion loan from the IMF is temporarily keeping the country solvent, but its foreign debts alone are $105 billion.

England—whose Thatcher and Tony Blair share the blame for waking the Kraken in the first place—is a basket case. Its economy is projected to shrink 3 percent, and over two million are out of work. And because the Tories and Labor alike cut social welfare programs over the past 25 years, the jobless only get about $85 a week. As a result, every seven minutes a person in Britain loses his or her home.

Virtually no country in Europe remains unscathed, although the worst hit are those like Hungry, Latvia, and Austria that bought into the myth that the economy was a never-ending cornucopia.

Austrian banks shoveled loans into Eastern Europe, up to 60 percent of them in foreign currency. When the crisis came, countries like Hungary and Latvia found themselves trying to pay back loans in expensive Euros, Swiss Francs, and dollars, while their own currencies were tanking. Austria now finds itself holding $371 billion in debts, almost equal to the country’s annual GDP. Unemployment has jumped 23.7 percent.

The newer members of the European Union (EU), including most of the countries that were formerly part of the Soviet bloc, soon found that, when the going got tough, it was every man for himself. When Hungary recently asked its fellow EU members for a bailout, it got heaved overboard. Indeed, the EU’s 27-member crew seems less concerned with fighting off the Kraken than with each saving itself, ready to turn on one another at the drop of a currency.

Madrid has launched a “buy Spanish” campaign, London is touting “British jobs for British workers,” and the French President is urging French carmakers to invest at home, not elsewhere in the EU. When the water reaches the quarterdeck, free markets go a glimmering.

The Obama Administration is pushing the Europeans to ante up a lot more cash for a bailout, but EU members are balking. “We don’t think we need to draw up new stimulus packages, and I’m supported on that by German Industry,” German Chancellor Angela Merkel told the Financial Times.

The Europeans, on the other hand, are demanding that the Americans accept global regulation of finance, because many in the EU blame the lack of such regulation for the current crisis. So far, however, Washington is resisting.

“The global economic crisis is relentlessly laying bare the EU’s flaws and limitations,” says former German Foreign Minister Joschka Fischer. “Without common economic and financial policies…the cohesion of [the] European monetary union and the EU—indeed, their very existence—will be in unprecedented danger.”

The combination of internal European squabbling—some of it fed by old fashioned panic—and differences with the Americans over regulation, means that besides pumping some money into the IMF, little is likely to come out of the upcoming Group of 20 meetings set for April 2 in London. The G20 is composed of developed and emerging countries.

As bad as things are in Europe, at least the region has some safety nets for its people, including mostly free medical care, low cost education, and social services that will blunt the worst aspects of the crisis. The same can’t be said for the United States.

The worst hit, of course, will be the world’s poor, the hundreds of millions of people in places like Africa and South Asia who currently eke out a marginal existence on a dollar or two a day, and who bear none of the blame for bringing on the world-wide economic crisis. The Kraken will make short work of them.

According to UNESCO’s Kevin Watkins, “With the slowdown in growth in 2009, we estimate that the average income of the 391 million Africans living on less than $1.25 a day will take a 20 percent hit. When you convert economic growth effect into human cost, the picture looks even grimmer. Best estimates point to an increasing infant mortality of somewhere between 200,000 and 400,000 yearly.”

Not that the poor or the recently-made-poor are going quietly. A demonstration in Iceland drew 7,000 people, the equivalent of seven million in the U.S. A march and rally in Ireland drew 120,000—a little over three percent of the population—and Waterford Crystal workers took over their plant. Similar demonstrations have taken place in Russia, Latvia, Ukraine, France, and Greece. As the crisis deepens, so has the anger of those who will bear most its weight.

In John Wyndham’s 1950’s science fiction book, “The Kraken Wakes,” aliens, using the sea as their refuge, paralyze the world. But governments, caught up in the Cold War, are more interested in fighting one another than resisting the invasion. The “Kraken” is finally destroyed when the poor residents of a fishing village overcome their terror and assault the creatures with crowbars and axes. Their example spreads and the invasion is finally defeated.

Demonstrators alone will not overcome the current crisis, but they can demand that governments act in the interests of their people, not those of Goldman Sachs and AIG. Yes, the banks have to be saved, but the most effective way to do that is to nationalize them, and in a way that the people with the crowbars and axes have a say over how their money is spent.

According to the Asian Development Bank, the recession has cost the global economy $50 trillion. That is a figure straight out of the darkest nightmare one can imagine.

The G20—particularly the Germans and the Chinese—should bite the bullet and beef up the bailouts. They must also reinstate the checks and balances on credit, capital and banking that have been systematically dismantled over the years. And they must insure that the most vulnerable be protected.

If greed, selfishness, and timidity triumph, the Kraken waits.

[Gouda]

"Start of Next Wall Street/Global Boom" ... and accompanying Structural Adjustment Doom?

Jonathan Schwarz, yesterday: Let The Structural Adjustment Begin!

There's been a common phenomenon in the third world over the past three decades or so. A country's financial sector, in collaboration with the larger financial world, would create some type of gigantic economic fuck up. The IMF would then (in collaboration with the local financial elites) step in and provide loans in return for what was called "structural adjustment." Structural adjustment involved getting rid of any kind of social spending that made life bearable for everyone else.

In other words, the country's financial elites would use the catastrophes they'd created themselves in order to do what they'd always wanted to but couldn't get away with in normal times. They took the profit, and then imposed all the costs on everyone else.

I've long believed U.S. elites would attempt to do this for America as soon as they had the opportunity. Here's Treasury Secretary Timothy Geithner today at the Council on Foreign Relations having a jolly laugh with moderator and investment banker Roger Altman about the process now getting under way—all thanks to propaganda assistance from investment banking billionaire Pete Peterson.

For those without a decoder ring, "everyone" being a fiscal hawk means that due to the current financial disaster, they'll soon be coming after Social Security and Medicare:

GEITHNER: Of course, we are all fiscal hawks now because of Pete Peterson. (Laughter.) There are no doves left on the fiscal side. (Laughter.)

ALTMAN: And he deserves credit for that.

Yes, the coming massacre of American lives will be quite funny indeed. (Laughter.)

Jonathan Schwarz in 2005:

Yesterday was Cinco de Mayo. Or, as los gringos call it, May 5th.

Most people have no idea what Cinco de Mayo is about, except for the cheap beer part. And arguably the cheap beer part is most important. But the rest of it is also interesting, and (unfortunately) relevant.

Cinco de Mayo celebrates the victory of Mexican troops over an invading French army at the Battle of Puebla on May 5, 1862. While militarily it wasn't that important, it was a big watershed in Mexican national consciousness. Nothing brings people together like fighting others.

Anyway, here's the important part: France was invading Mexico essentially because Mexico owed France money.

Through history, countries have built up unsustainable debts to others all the time. In this case, Mexico had borrowed lots of money from Europe while establishing its independence and then fighting the US invasion in the 1840s.

In these situations, it's best for everyone--both debtors and creditors--to work out some kind of default. But the creditors usually don't see it that way. They want their sweet, sweet money.

In this case, France wanted its money so much it invaded Mexico. After the loss at Puebla they sent more troops and installed Archduke Maximilian of Austria to run things so they'd get paid back.

This was admirably honest. International relations are often like organized crime on a gigantic scale, but people pretend otherwise. Here there was no pretense: the loanshark's enforcers beat the crap out an entire country.

By contrast, creditors today have things like the IMF, which is essentially a creditors' cartel. The IMF is in charge of squeezing countries until they pay back their debts. This often involves lots of people dying... but in quiet ways, without armies involved.

The reason this is relevant to Americans today is now WE'RE in deeper and deeper hock to others. Will China invade us to get their money back? Probably not. We're more powerful than Mexico in 1862. What's more likely is we'll go through the same kind of "structural adjustment" we've imposed on others via the IMF. This means slower economic growth, cutbacks in Social Security and Medicare, and all the other things that benefit normal people.

Now, you might assume this will have to be forced on us, because all Americans would oppose it. BUT YOU WOULD BE WRONG--just as you'd be wrong if you were a regular Mexican and believed no Mexicans would support Archduke Maximilian.

The truth is most of the richer people in America will push for it to happen, because it's good for them. True, it will make America poorer and weaker as a whole--but it will make them more relatively powerful within America. And that's what the elites of most countries care about, just as Saddam Hussein cared about himself rather than the well being of Iraq.

For a glimpse of our future, I recommend the book Savages about Ecuador, a country with its own foreign debt problems. Ecuador as a whole would be better off defaulting on its debt, but that doesn't matter:

My family and I rented an apartment in the new section of Quito... Beyond the office towers, up along the valley walls, were lavish new condominiums and golf courses and tennis clubs. A good French dinner ran about fifteen dollars, a full-time, live-in house servant about twenty-five dollars a month.

I called them servants; one of my neighbors, Alex, called them slaves...

For someone like Alex--that is, for anyone, American or Ecuadorian, who works in the white-collar end of the petroleum business... Ecuador's ever-increasing poverty was a windfall. The price of slaves kept dropping. "The debt?" Alex said. "I love the debt."

Geithner's "conversation" at the CFR also read into by Doug Henwood @ Left Biz Observer:

Timmy meets the Establishment

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.

Yesterday's Post:

Leveraged speculators will save us!

And not just any band of leveraged speculators: handpicked members of the private equity elite operating with cheap government credit, and insured against losses!

(...)

But let’s leave all that aside for the moment. Much of the debate is about whether the Geithner plan will “work.” But this use of “work” isn’t defined. Does it mean “keep the financial system from imploding, so that time will heal the wound”? Does it mean “take the junk off the banks’ books so they can quickly start lending again”? Or what, exactly?

It looks like the intention of the Geithner scheme is to try to restore the status quo ante bustum, with private equity and hedge fund guys running around remaking the economic landscape with big gobs of borrowed money. Is the ultimate point of this plan to bring back the world of 1999 or 2005, when easy credit fueled speculative bubbles and overconsumption? That doesn’t seem like a live option.

There’s a more sinister possibility: the bailout will be funded by an austerity program.That is, all the trillions being borrowed to spend on bailouts and stimuli will save the financial elite, but at the costs of a fiscal crippling, and instead of raising taxes on the very rich to pay down the debt, there will be deep cuts in civilian spending. With the economy remaining weak, employment would stagnate and real wages fall—a prospect that would, by restricting consumption and therefore imports, bring the U.S. international accounts close to balance. Then we wouldn’t be dependent on Chinese capital inflows anymore—and the overprivileged wouldn’t have to give up lunching on $400 stone crabs. Is that the hidden agenda? It is coherent, if cruel.

U.S. workers are certainly used to long-term declines in real wages: the average hourly wage, adjusted for inflation, is almost 10% lower than it was 36 years ago. But the blow of that fall was significantly softened by the availability of easy credit, which allowed people to maintain the semblance of a middle-class standard of living. What would wage cuts without easy credit look like? What kind of retooling would be necessary for an economy now dependent on high levels of consumption, and a society dependent for legitimation on the same? Hard to say, but we should start talking about it.

It would be a nice Nixon-in-China turn, for a Democratic president elected on high “progressive” hopes, to preside over something like an IMF structural adjustment program applied to the U.S. It could be portrayed as a necessary sacrifice for the common good. In fact, we can already see the outlines of a liberal apologia for austerity on the Nation’s website.

Glen Greenwald Agrees: Comparing the U.S. to Russia and Argentina

[seemslikeadream]

Tom Geoghegan on Democracy Now: How Unlimited Interest Rates Destroyed the Economy

http://www.youtube.com/watch?v=BLsK39xJus8

http://i1.democracynow.org/2009/3/24/th ... e_debt_how
AMY GOODMAN: The Obama administration has unveiled its plan to stabilize the banking industry. On Monday, Treasury Secretary Timothy Geithner announced the government plan to buy up as much as $1 trillion in troubled mortgages and other risky assets from banks. Wall Street was certainly happy with the plan with all the major stock indexes soaring as soon as the market opened. The Dow Jones Industrial Average ended the day up nearly 500 points. Investors saw the plan as a way to rescue the US financial system, clearing a path to recovery from what many have described as the worst economic crisis since the Great Depression.


The crisis has been largely blamed on deregulation of the financial industry and lax government oversight. But a new article in the latest issue of Harper’s Magazine argues otherwise. It reads, quote, “no amount of New Deal regulation or SEC-watching could have stopped what happened…The problem was not that we ‘deregulated the New Deal’ but that we deregulated a much older, even ancient, set of laws.” The article goes on to say, quote, “We dismantled the most ancient of human laws, the law against usury, which had existed in some form in every civilization from the time of the Babylonian Empire to the end of Jimmy Carter’s term.”


The article in Harper’s Magazine is written by Thomas Geoghegan, a Chicago-based labor lawyer, recent congressional candidate and author of many books. His most recent is See You in Court: How the Right Made America a Lawsuit Nation. His Harper’s article is called “Infinite Debt: How Unlimited Interest Rates Destroyed the Economy.” Thomas Geoghegan joins us from Chicago.


We welcome you to Democracy Now!


THOMAS GEOGHEGAN: Hi, Amy.


AMY GOODMAN: It’s good to have you with us. OK, how did we get here? Or how did they get us in this mess?


THOMAS GEOGHEGAN: In the article, I talk—that appeared in Harper’s, I’ve talked about the fact that we’ve not focused enough on the big deregulation that precedes all other deregulations, and that’s the ceiling that has existed on the financial sector since time immemorial on the amount of interest that banks can get from their clients, their customers, their depositors. Historically, and even up through movies like It’s a Wonderful Life with Frank Capra and Mr. Potter and George Bailey, the interest rates in this country were capped at eight percent, nine percent. In the 1970s, we began to deregulate this, and then we had a massive big bang with a Supreme Court case that effectively knocked out all the interest rate caps. And we have today, taken as common, that banks can charge 17, 18, 19, 30, 35 percent, not to mention payday lenders charging 200, 300, 400 percent in states like Illinois, California [inaudible]—


AMY GOODMAN: Tom Geoghegan, let’s go back to that 1978 case, Marquette National Bank v. First of Omaha Service Corp. Explain the significance of it. What was it?


THOMAS GEOGHEGAN: Sure, that’s the Brown versus Board of Deregulation for the financial sector. The case—Justice Brennan, of all people, opinion said that banks that operate—out-of-state banks that were subject to the National Banking Act of 1864, signed by President Lincoln in the middle of the Wilderness Campaign, effectively preempted any state regulation capping the interest rates of those banks when they sent their credit cards in from out of state. Now, back in 1864, banks in Delaware weren’t operating out in Nebraska or handing out credit cards across the country, and there was no such thing as Visa or MasterCard.


The effect of this was that the big national banks were not subject to any state usury law, because the Banking Act of 1864 had no interest rate cap on it, not contemplating the kind of situation that we’re in today. And in effect, this sealed what had been a trend throughout the country, which is lifting these interest rate caps for banks and giving consumers easy credit on the premise that they would just pay tons and tons of interest so that the banks were protected if the loan weren’t repaid. In fact, the banks had incentive to hand out credit cards and hope that the loans would not be repaid, because the interest rates on these credit cards were so high.


You know, if you are Mr. Potter in It’s a Wonderful Life and can only get six percent, seven percent on your loan, you want the loan to be repaid. Moral character is important. You want to scrutinize everybody very carefully. But if you’re able to charge 30 percent or, in a payday lender case, 200 or 300 percent, you don’t care so much if the loan—in fact, you actually want the loan not to be repaid. You want people to go into debt. You want to accumulate this interest. And this addicted the financial sector to very, very, very high rates of return compared to what investors were used to getting in the real economy, the manufacturing sector, General Motors, which would give piddling five, six, seven percent returns.


So the capital in this country began to shift in the financial sector. That’s why the financial sector began to bloat up. That’s why we ended up, by 2006, having a third of all profits going into the banks and the financial firms and not into the real economy.


AMY GOODMAN: Thomas Geoghegan is our guest. His piece in the latest issue of Harper’s Magazine, “Infinite Debt: How Unlimited Interest Rates Destroyed the Economy." We’ll be back with him in a minute.


[break]


AMY GOODMAN: Our guest is Thomas Geoghegan. He has a very interesting piece in the latest issue of Harper’s Magazine. It’s called “Infinite Debt: How Unlimited Interest Rates Destroyed the Economy.”


Tom Geoghegan, you talk about how, with no law capping interest, the evil is not only that banks prey on the poor—they’ve always done so—but that capital gushes out of manufacturing into banking. When banks get 25 percent to 30 percent on credit cards and 500 or more percent on payday loans, capital flees from honest pursuits like auto manufacturing. Now, I’ve just come back from Grand Rapids this weekend, and going through Detroit, they’re in a dire situation—


THOMAS GEOGHEGAN: Yes.


AMY GOODMAN: —talking about money fleeing from the auto industry.


THOMAS GEOGHEGAN: Sure. I feel one of the reasons I am in favor of the bailout of the auto industry is, aside from all the other reasons, a sense of guilt that we set up all the returns in this economy in favor of financial firms and really disinvested from industry. And even worse, we began to turn industry into a banking itself. General Motors, General Electric began to operate banks, because that’s where they made the big profit, in the loans to consumers, uncapped interest. It’s a very destructive situation.


And this isn’t some left-wing progressive critique circa 2009. Adam Smith, in The Wealth of Nations, warned how important it is to have interest rate caps on the financial sector, or all the money will gush into there and out of productive uses. Keynes, in The General Theory of Employment, Interest, and Money, the great classic, 1936, has a little chapter at the end saying, “Yes, we have deficit spending. I’ve got this way of getting out of the Depression. By the way, we’ve got to keep the interest rate caps on the banks.”


Well, we took that stuff off, the thing that was kind of an instinct in human and legal civilization, from the time of the Code of Hammurabi up to the present, and we created all these incentives for money to go into speculation, derivatives, because we addicted the economy to very, very high rates of return by squeezing money out of people. And the way in which we disinvested from the economy was, in my view, not so much globalization or trade as the fact that we had preteens in shopping malls who were running up, you know, debts where they were paying 25, 30 percent interest, when investors could only get five, four, three percent from our globally competitive industry.


AMY GOODMAN: In your history of usury, basically, from ancient times to today, you’re also giving a labor history, a labor history of this country.


THOMAS GEOGHEGAN: Sure.


AMY GOODMAN: Explain.


THOMAS GEOGHEGAN: Well, history—historians like Niall Ferguson, conservative historians and progressive historians, many economic historians, see history as nothing but a turf war between three groups: the manufacturers, workers and the bondholders, or the financial sector.


So where does labor fit in in all of this? People lost the ability to get wage increases and got the ability, an incredible ability, really unknown in previous times, to get credit cards with which they had high rates of interest. So, unable to get wage increases, people—or unable to get union cards, really, people got credit cards and began running up these great debts, which addicted the country to high rates of return in the financial sector, so that people were kind of spending their way out of the real economy, pushing more and more money, by the fact that they were going into debt, into this virtual financial sector economy. So, really, the inability of people to raise their own wages and the incredible ease with which they could get credit instead helped create this flow of capital out of manufacturing and into finance. You know, we, the little people in this country, helped finance the bloating up of this financial sector and really the downsizing of our own jobs in the real economy. We sent the signals, you know, to investors to put money into the financial sector and not into the manufacturing sector.


AMY GOODMAN: You say US workers increased their productivity over the past thirty-five years, but real wages actually decreased.


THOMAS GEOGHEGAN: Yes. Well, certainly if you look at the amount of money that went into actual wage, as opposed to non-wage labor costs. You know, one of the tragedies of working people in this country is that we don’t have single payer. So, what some of the additional increment—


AMY GOODMAN: Explain what you mean by that.


THOMAS GEOGHEGAN: If private employers were not paying healthcare costs to the private sector, the private insurance industry, a lot of that money could go for wage increases. It also could make the country much more globally competitive. You know, in this congressional campaign that I just finished, I argued for an increase in Social Security, single payer, basically for the government taking over non-wage labor costs so that the globally competitive parts of the economy could lower their labor costs, hire more employees, people could actually get pay raises, and the government would be assuming these non-wage labor costs, which are so, so important to making the country globally competitive. It’s what many of our high-wage rivals are able to do. And they run trade surpluses; we run trade deficits.


AMY GOODMAN: You were running for Rahm Emanuel’s open seat. So why didn’t this idea fly?


THOMAS GEOGHEGAN: Well, I only had two months to argue it, and it took me about one month to raise enough money to get the message out to voters. And also, Amy, it’s very hard to go door to door and explain things to people, which is the key, when it’s 30 below wind chill. But next time I’m going to start in the summer and—if I attempt any run for any office again.


AMY GOODMAN: Well, as the economy grew and Wall Street was just blooming, individual workers were—


THOMAS GEOGHEGAN: Yes.


AMY GOODMAN: —as you write it, individual people were actually becoming worse off.


THOMAS GEOGHEGAN: Sure. Well, they went from being creditors to debtors. That’s what is so insidious about this whole process. Not only were people being denied wage increases, but they were losing their, quote, “savings,” at least in the sense losing the kind of security that they used to have. I saw that as a labor lawyer in Chapter 11 reorganizations, seeing all these companies, now taken over by financiers and squeezed for as much profit as they can, go belly up after outsourcing occurred. And then, people would be brought into court as creditors, not named as parties, but because they had claims to retiree health insurance and so forth, and would just be stripped of these rights.


So, you know, in addition to people not having the wage increases that they needed, because of lack of unionization, because of really the fact that the healthcare system was devouring up the money that would have been there to pay for them, they were also losing their savings and, worse than that, losing the sense that if they entered contracts with their employers, the money would be there at the end of the day. So you had this destruction of future-oriented thinking just at the time that the credit cards were being handed out to them, and it was kind of “live for the moment.” We really—


AMY GOODMAN: Explain this issue of people who are getting their healthcare from the company, a pension, retirement, and today we hear, on the issue bonuses, you can’t break contracts. But what happens to all of this, for example, when a company decides to, well, just declare bankruptcy?


THOMAS GEOGHEGAN: Well, they aren’t really bankrupt. That’s the first thing. It’s just that these firms set up subsidiary corporations that go into Chapter 11 and get, quote, “reorganized.” It’s very easy to shed unsecured obligations. And virtually all uninsured, non-insured PBGC pension obligations and all healthcare obligations and other supplemental benefits that people earn over a lifetime are completely unsecured and are the first thing to go in a reorganization.


So, over the 1980s, 1990s and, if any were left, by the early twenty-first century, the early twenty-first century, the ’01s, people would be dragged into court as creditors and emerge as debtors. And the debtors—that is, the big companies—would walk away with enormous savings. And these companies were really just subsidiaries often of firms that were really quite well off. But they used the device of subsidiary and corporation, they used the ease of going in and then out of Chapter 11, or just liquidating these subsidiary corporations and starting over with a different framework, to shed all these obligations. Or they just went out of business altogether and put the money into speculative financial sector type things, which were supposedly going to bring huge returns.


AMY GOODMAN: When, Thomas Geoghegan—


THOMAS GEOGHEGAN: The kind of returns they were used to.


AMY GOODMAN: When did usury become legal?


THOMAS GEOGHEGAN: I would say that it happened slowly through the late 1960s and early 1970s. You know, there were, at first, very limited deregulations with lots of bells and whistles to make sure it wouldn’t go too far. So if you look at the first state laws that deregulated usury, they usually say, “We are only going”—like in Illinois, for example, which I’m most familiar with, but which is typical—“We’re only going to let you do this if you pass a test of having good moral character. We’re going to investigate your reputation in the community. We’re going—we at the Department of Financial Regulation will make findings that your reputation for honesty and fairness is such that we can let you get out of these interest rate caps to lend money more freely to consumers.”


But then that all went by the by, and then it was anything goes. And soon you had the most predatory behavior going on without any kind of check into moral character or otherwise, which was the fig leaf to allow this deregulation to occur at the state level. And then came Marquette Bank, where it became pointless to try to regulate it at all, because all the states were effectively preempted when they’re dealing with the big Chase and Citibanks and out-of-state credit card issuers. So that’s how it happened.


AMY GOODMAN: So, what is your recommendation? You make four major points, what you think has to happen now.


THOMAS GEOGHEGAN: Well, my major points change from month to month, and that was some time ago, but I still stick with those that are in the article.


First of all, we ought to have an interest rate cap in this country. Senator Durbin proposed 35 percent, but it should be much lower than that, especially for the banks that we’re bailing out. I’d slash it at least by half.


Second, I think that there should be something in the country like what Europeans, the Germans, in particular, have, the Sparkasse—and I’m probably mispronouncing the German word. Somebody taught me the correct pronunciation of it, but I’ve bungled it. These are state-run banks that make low-interest rate loans to consumers and are a wonderful alternative to the payday lending system that is being put up in most states, soon will be in New York, too, I assure you, but are certainly in California and Illinois.


And third, I think that as long as we’re in the process of bailing out the banks, we’ve got to restructure them. That’s one of several grievances I have against the administration plan. And in particular, at the very least, let’s put aside the issue of nationalization. I think that there should at least be these public guardians on the board of directors who will, from inside the bank—from inside the bank, there has to be a restructuring of these banks to ensure that these banks are much more in the nature of fiduciaries and guardians and do what banks ought to be doing in this country: pushing money into the globally competitive parts of the economy, accepting lower rates of return, not squeezing money from consumers. It’s not enough to have external outside regulation. You have to change the internal corporate structure of the banks. And I think some kind of codetermination with the public at the board level is the way to go.


And finally, I think that we have to inject equity not only into the banks, but to the people who the banks are lending to. We’ve got to make people—we not just have to force the banks to extend credit, we have to make people more creditworthy. And one of the ways of doing that and encouraging future-oriented thinking is, I believe, for the President and the administration right now to make a big point about promising people that if they work for a living in this country, they will get a decent public pension to live on when they retire. So, instead of cutting back on entitlements—and all the veiled sounds coming out of Washington are to that extent—I would increase the replacement rate of Social Security from our very low level now, which is something like 40 percent on average, to the amount that other developed countries pay on average, according to the OECD, which is closer to two-thirds of working income.


AMY GOODMAN: And where do you see the labor movement today under an Obama administration and the Employee Free Choice Act, which I think the large corporations this week, Starbucks and Costco and Wal-Mart, are joining together to launch a massive advertising campaign against?


THOMAS GEOGHEGAN: Yes. Well, EFCA, or the Employee Free Choice Act, or whatever you want to call it, is crucial for labor. Some sort of labor law reform is important. But I would urge people in labor and all friends of labor throughout this country that if we’re really serious about bringing back the labor movement through changes in laws, which are absolutely crucial—not just Employee Free Choice, but bankruptcy laws, all sorts of laws that allow us to hold corporations liable for their wage obligations—we have to do something about the filibuster in the Senate. It has to be removed. It has to be taken away. It’s destroyed the labor movement over and over. Labor laws have gone down the drain because of the filibuster. As long as that’s in place, we’re going to have a country that is on warp speed—


AMY GOODMAN: Explain.


THOMAS GEOGHEGAN: Well, under Carter, we could have had labor law reform, but for the filibuster. You know, it passed the House, got majority in the Senate, went down the drain because of the filibuster. Under Clinton, we could have had labor law reform, but for the filibuster—passed the House, got a majority in the Senate, went down the drain because of the filibuster.


The stimulus plan that Barack Obama just proposed could have been great. It went down the drain because of the filibuster. We had to negotiate—it got through, but it got negotiated away. The same is going to happen with the Employee Free Choice Act.


Until you move to a Senate that is more majoritarian, you know, the reality is that you’re going to be in a situation where you have a very unequal, unfair, often unethical and oppressive economy, because you can’t get the changes that you need, you can’t get the New Deal reenacted with the kind of filibuster that is in place today. FDR couldn’t have had the New Deal if he had had the filibuster that we have now, you know, where any senator can just raise his hand and say, “Well, I would like to filibuster this. I don’t actually have to get up there and argue. I would just like to do it and require two-thirds—sixty votes of the Senate to get measures through.” The New Deal wouldn’t have happened.


AMY GOODMAN: Well, I want to thank you very much for being with us, Thomas Geoghegan, Chicago-based lawyer. His piece is called “Infinite Debt” in the latest issue of Harper’s. And when I talked about the Employee Free Choice Act, the groups that are joining together in a joint advertising campaign are Costco, Whole Foods and Starbucks, though Wal-Mart is also opposed to EFCA.

[jingofever]

Via Clusterstock, "a letter purporting to be from en employee at AIG's Financial Products business." I won't bother quoting it because it would require too much editing to make it fit well. But if you read it, note this part (or just note this part I quote):

First of all, what happened at AIG? AIG has been destroyed by a systemic failure of management that started when Hank Greenberg was booted out. I have facts that prove that had Greenberg not been removed, AIG would be in fine form today, but he does need to accept the blame for the weak overall structure of the place.

Deep Capture guy says Greenberg was unfairly chased out of AIG by Spitzer. I wonder if there is something there. Of course now Spitzer is going after AIG.

Has the Gaming of the Public-Private Partnership Begun?:

It certainly looks as if Citigroup and Bank of America are using TARP funds, not to lend, which was one of the primary goals of the program, but to scoop up secondary market dreck assets to game the public private investment partnership.

And it fleeces the taxpayer a second way: the public has spent enough money on both banks so that in an economic sense, they ought to have been nationalized. Yet for reasons that are largely ideological and cosmetic (the banks' debt would need to be consolidated were they owned 100% by Uncle Sam), they remain private. So not only are they seeking to extract far more than was intended even with the already generous subsidies embodied in this program, but this activity is also speculating with taxpayer money.

This sort of thing was predicted here and elsewhere. Welcome to yet more looting.

From the New York Post (hat tip reader Hendririx):

As Treasury Secretary Tim Geithner orchestrated a plan to help the nation's largest banks purge themselves of toxic mortgage assets, Citigroup and Bank of America have been aggressively scooping up those same securities in the secondary market, sources told The Post...

But the banks' purchase of so-called AAA-rated mortgage-backed securities, including some that use alt-A and option ARM as collateral, is raising eyebrows among even the most seasoned traders. Alt-A and option ARM loans have widely been seen as the next mortgage type to see increases in defaults.

One Wall Street trader told The Post that what's been most puzzling about the purchases is how aggressive both banks have been in their buying, sometimes paying higher prices than competing bidders are willing to pay.

Recently, securities rated AAA have changed hands for roughly 30 cents on the dollar, and most of the buyers have been hedge funds acting opportunistically on a bet that prices will rise over time. However, sources said Citi and BofA have trumped those bids.

The secondary market represents a key cog in the mortgage market, and serves as a platform where mortgage originators can offload mortgages in bulk that have been converted into bonds.

Yields on such securities can be as high as 22 percent, one trader noted.

BofA said its purchases of secondary-mortgage paper are part of its plans to breathe life back into the moribund securitization market....

While some observers concur that the buying helps revive a frozen market, others argue the banks are gambling away taxpayer funds instead of lending.

Moreover, the MBS market has been so volatile during the economic crisis that a number of investors who already bet a bottom had been reached have gotten whacked as things continued to slide.

Around this same time last year some of the same distressed mortgage paper that Citi and BofA are currently snapping up was trading around 50 cents on the dollar, only to plummet to their current levels.

One source said that the banks' purchases have helped to keep prices of these troubled securities higher than they would be otherwise.

Both banks have launched numerous measures to help stem mortgage foreclosures, and months ago outlined to the government their intention to invest in the secondary market to expand the flow of credit.

And Glenn Greenwald has a good post up, [url=http://www.salon.com/opinion/greenwald/2009/03/26/comparisions/index.html]
Comparing the U.S. to Russia and Argentina[/url]. He points to [url=http://www.dailykos.com/storyonly/2009/3/26/713129/-Bernie-Sanders-Temporarily-Blocks-Obama-Nominee-as-Goldman-Sachs-Deregulator-(with-poll)]Bernie Sanders holding up Gary Gensler's nomination[/url] to head the Commodity Futures Trading Commission. Gensler is another Rubin and Summers man. The Kos story points out that the CFTC was previously headed by Brooksley Born who wanted to regulate derivatives but was stopped by Rubin, Summers and Greenspan. Genser's role in deregulation:

Gensler advocated the passage of the Commodity Futures Modernization Act of 2000, which exempted credit default swaps and other derivatives from regulation.

This New York Times article has more info about the Born saga.

[jingofever]

The Banks Were Profitable In January And February Thanks To... AIG:

Zero Hedge is rarely speechless, but after receiving this email from a correlation desk trader, we simply had to hold a moment of silence for the phenomenal scam that continues unabated in the financial markets, and now has the full oversight and blessing of the U.S. government, which in turns keeps on duping U.S. taxpayers into believing everything is good.

I present the insider perspective of trader Lou (who wishes to remain anonymous) in its entirety:

"AIG-FP accumulated thousands of trades over the years, all essentially consisted of selling default protection. This was done via a number of structures with really only one criteria - rated at least AA- (if it fit these criteria all OK - as far as I could tell credit assessment was completely outsourced to the rating agencies).

Main products they took on were always levered credit risk, credit-linked notes (collateral and CDS both had to be at least AA-, no joint probability stuff) and AAA or super senior portfolio swaps. Portfolio swaps were either corporate synthetic CDO or asset backed, effectively sub-prime wraps (as per news stories regarding GS and DB).

Credit linked notes are done through single-name CDS desks and a cash desk (for the note collateral) and the portfolio swaps are done through the correlation desk. These trades were done is almost every jurisdiction - wherever AIG had an office they had IB salespeople covering them.

Correlation desks just back their risk out via the single names desks - the correlation desk manages the delta/gamma according to their correlation model. So correlation desks carry model risk but very little market risk.

I was mostly involved in the corporate synthetic CDO side.

During Jan/Feb AIG would call up and just ask for complete unwind prices from the credit desk in the relevant jurisdiction. These were not single deal unwinds as are typically more price transparent - these were whole portfolio unwinds. The size of these unwinds were enormous, the quotes I have heard were "we have never done as big or as profitable trades - ever".

As these trades are unwound, the correlation desk needs to unwind the single name risk through the single name desks - effectively the AIG-FP unwinds caused massive single name protection buying. This caused single name credit to massively underperform equities - run a chart from say last September to current of say S&P 500 and Itraxx - credit has underperformed massively. This is largely due to AIG-FP unwinds.

I can only guess/extrapolate what sort of PnL this put into the major global banks (both correlation and single names desks) during this period. Allowing for significant reserve release and trade PnL, I think for the big correlation players this could have easily been US$1-2bn per bank in this period."

For those to whom this is merely a lot of mumbo-jumbo, let me explain in layman's terms:
AIG, knowing it would need to ask for much more capital from the Treasury imminently, decided to throw in the towel, and gifted major bank counter-parties with trades which were egregiously profitable to the banks, and even more egregiously money losing to the U.S. taxpayers, who had to dump more and more cash into AIG, without having the U.S. Treasury Secretary Tim Geithner disclose the real extent of this, for lack of a better word, fraudulent scam.

In simple terms think of it as an auto dealer, which knows that U.S. taxpayers will provide for an infinite amount of money to fund its ongoing sales of horrendous vehicles (think Pontiac Azteks): the company decides to sell all the cars currently in contract, to lessors at far below the amortized market value, thereby generating huge profits for these lessors, as these turn around and sell the cars at a major profit, funded exclusively by U.S. taxpayers (readers should feel free to provide more gripping allegories).

What this all means is that the statements by major banks, i.e. JPM, Citi, and BofA, regarding abnormal profitability in January and February were true, however these profits were 1) one-time in nature due to wholesale unwinds of AIG portfolios, 2) entirely at the expense of AIG, and thus taxpayers, 3) executed with Tim Geithner's (and thus the administration's) full knowledge and intent, 4) were basically a transfer of money from taxpayers to banks (in yet another form) using AIG as an intermediary.

For banks to proclaim their profitability in January and February is about as close to criminal hypocrisy as is possible. And again, the taxpayers fund this "one time profit", which causes a market rally, thus allowing the banks to promptly turn around and start selling more expensive equity (soon coming to a prospectus near you), also funded by taxpayers' money flows into the market. If the administration is truly aware of all these events (and if Zero Hedge knows about it, it is safe to say Tim Geithner also got the memo), then the potential fallout would be staggering once this information makes the light of day.

[smiths]

The Quiet Coup

The crash has laid bare many unpleasant truths about the United States.
One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises.
If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform.
And if we are to prevent a true depression, we’re running out of time.

by Simon Johnson

...

http://www.theatlantic.com/doc/200905/imf-advice


there is a lot i dont agree with in this but is still worth a read

[Gouda]

Obama holds “very pleasant” meeting with top US bankers

Bank CEO's emerge satisfied that Obama understands his mission; give the meeting 4 1/2 stars:

While no transcript of the discussions has been released (nor will there be), the bankers emerged very pleased. Their post-meeting comments included:

* Ken Lewis, CEO of Bank of America: "We're just in this together. There's still some hard work to do, but a pleasant meeting." On executive bonuses, Lewis added, "I got the impression, both from [Obama] and from some of the things that are going on behind the scenes that cooler heads will prevail and nothing will be done that is that punitive."

* Vikram Pandit of Citigroup: "We all have a common goal for building momentum for a recovery. It was good constructive meeting with a lot of open dialogue."

* Jamie Dimon of JPMorgan: On the question of AIG bonuses, Obama "is very clear that he is not against wealth.... I think he would like to see an awful lot of self-restraint," as opposed to government regulation.

* Robert Kelly of New York Mellon Corp, on the toxic asset program detailed by Treasury Secretary Tim Geithner earlier this week: "We don't know all the details...but we think it's a really encouraging first step to get the plan out there.... I think there's going to be a lot of interest in it.... I think that we are very much aligned with the administration."

* John Koskinen of Freddie Mac: "No one in that room gave any indication at all that they were anything other than enthusiastic about supporting the president and this program."

* John Mack of Morgan Stanley: "There was no tension. It was all about cooperation...It was all about getting the economy going and the banks taking a crucial role in making sure that happens...It was all about working together and was very encouraging."

* Lloyd Blankfein of Goldman Sachs: "Everybody was on the same page, one of cooperation. What we really wanted the president to understand, which of course he does understand, was that we recognize our interests are aligned, that we only do well if the economy does well."

For his part, White House spokesman Robert Gibbs said that Obama was "very pleased" with the outcome and that he hoped to keep the lines of communication open with the bankers.

Top Obama adviser Valerie Jarrett, who participated in the meeting with the bankers, said Thursday, "We're reliant upon them to help rebuild our economy. It would be very unnatural if we didn't engage them and have a direct opportunity to pick their brains and look to the future."

[seemslikeadream]

Federal Agency That Insures Pensions Shifted Funds To Risky Stocks Just Before Market Crash


Just months before the start of last year's stock market collapse, the federal agency that insures the retirement funds of 44 million Americans departed from its conservative investment strategy and decided to put much of its $64 billion insurance fund into stocks.

Switching from a heavy reliance on bonds, the Pension Benefit Guaranty Corporation decided to pour billions of dollars into speculative investments such as stocks in emerging foreign markets, real estate, and private equity funds. ...

Nonetheless, analysts expressed concern that large portions of the trust fund might have been lost at a time when many private pension plans are suffering major losses. The guarantee fund would be the only way to cover the plans if their companies go into bankruptcy.

The kicker, though, comes from the Bush-era official who oversaw the switchover:

Charles E.F. Millard, the former agency director who implemented the strategy until the Bush administration departed on Jan. 20, dismissed such concerns. Millard, a former managing director of Lehman Brothers, said flatly that "the new investment policy is not riskier than the old one." ...

A finance professor who had previously advised the agency not to make the switch away from bonds compared the move to an insurance company writing policies to cover hurricane damage and then investing the premiums in beachfront property.

Talkingpointsmemo.com

http://www.boston.com/news/nation/washi ... ?page=full

[seemslikeadream]

America the Tarnished - Krugman


Ten years ago the cover of Time magazine featured Robert Rubin, then Treasury secretary, Alan Greenspan, then chairman of the Federal Reserve, and Lawrence Summers, then deputy Treasury secretary. Time dubbed the three “the committee to save the world,” crediting them with leading the global financial system through a crisis that seemed terrifying at the time, although it was a small blip compared with what we’re going through now.

All the men on that cover were Americans, but nobody considered that odd. After all, in 1999 the United States was the unquestioned leader of the global crisis response. That leadership role was only partly based on American wealth; it also, to an important degree, reflected America’s stature as a role model. The United States, everyone thought, was the country that knew how to do finance right.

How times have changed.

Never mind the fact that two members of the committee have since succumbed to the magazine cover curse, the plunge in reputation that so often follows lionization in the media. (Mr. Summers, now the head of the National Economic Council, is still going strong.) Far more important is the extent to which our claims of financial soundness — claims often invoked as we lectured other countries on the need to change their ways — have proved hollow.

Indeed, these days America is looking like the Bernie Madoff of economies: for many years it was held in respect, even awe, but it turns out to have been a fraud all along.

http://www.nytimes.com/2009/03/30/opini ... ?th&emc=th

[seemslikeadream]

http://www.talkingpointsmemo.com/archiv ... uble_2.php

The more I look at these investment decisions of Pension Benefit Guaranty Corporation and former Lehman exec Charles Millard the more my suspicion grows that some very bad happened here. There's no question that something happened very bad for the pensioners who were relying on this fund. But is there any conceivable good reason why you'd take most of the assets of the fund designed to insure pension benefits out of safe investments like bonds and put them into highly speculative investments -- hedge fund, equities, etc. -- just before the stock market collapsed.

Incompetence doesn't cut it as an explanation.

First, some topline numbers: The PBGC decided to put most of its $64 billion of reserves into stocks. And already by September 2008, i.e., before the bottom really fell out on Wall Street, the stock portfolio had already lost 23%. That percentage must be much higher today.

One of the big drives behind Social Security privatization was the desire to find more money -- in the case of Social Security, a lot more money -- to keep the fires burning on Wall Street. Not just more fees for the people handling the money, but more money to keep pushing asset values higher. This looks like the same thing just using slightly different means.

[jingofever]

White House to let Chrysler fail. Some snippets:

At least that's the message from the White House, whose newly released plan for the automakers includes financing for just 30 days, after which point the Administration will leave the firm in the hands of the banks and an Italian company that's proposed a partnership.

The Administration appears to have dispatched a slew of anonymous sources to spread the message: on Monday, Politico played host to a handful of aides who variously bashed the automaker's plan for its own resurrection, questioned their "too big to fail" importance and derided their cars.

Compared to General Motors, which employs more than 200,000, Chrysler employs 58,000.

“They are, of course, much smaller,” a senior administration official was quoted as saying.

In a conference call with reporters, the official also dismissed the quality of Chrysler's cars, saying he "could think of no industry recognition for Chrysler vehicles."

"Chrysler has no cars that are recommended by Consumer Reports," the official said.

Chrysler could receive a cash infusion from Fiat, an Italian carmaker that's seeking entry into the US market. Fiat has tentatively agreed to give Chrysler access to technology and research worth $10 billion in exchange for a 35% ownership stake. But that deal isn't final, and its unclear if Fiat would come through with cash.

If the deal was consummated, however, the Administration says they'd be willing to pony up as much as $6 billion in more bailout funds...

I've been waiting for one of these auto companies to fall because of this article about synthetic CDOs. A snippet:

...Ambac, MBIA, PMI, General Motors, Ford and a lot of US home builders are teetering.

If the list of defaults – full and partial – gets to nine, then a mass transfer of money will take place from unsuspecting investors around the world into the banking system. How much? Nobody knows, but it’s many trillions.

It will be the most colossal rights issue in the history of the world, all at once and non-renounceable. Actually, make that mandatory.

The distress among those who lose their money will be immense. It will be a real loss, not a theoretical paper loss. Cash will be transferred from their own bank accounts into the issuing bank, via these Cayman Islands special purpose vehicles.

The repercussions on the losers and the economies in which they live, will be unpredictable but definitely huge. Councils will have to put up rates to continue operating. Charities will go to the wall and be unable to continue helping those in need. Individual investors will lose everything.

There will also be a tsunami of litigation, as dumbfounded investors try to get their money back, claiming to have been deceived by the sales people who sold them the products. In Australia, some councils are already suing the now-defunct Lehman Brothers, and litigation funder, IMF Australia, has been studying synthetic CDOs for nine months preparing for the storm.

But for the banks, it’s happy days. Suddenly, when the ninth reference entity tips over, they will be flooded with capital. It’s possible they will have so much new capital, they won’t know what to do with it.

He mentions Ford and GM but not Chrysler. But if Chrysler is on that list, consider this last bit of the Raw Story article:

Moreover, Chrysler has made "little progress" getting its lenders to waive debts. The company has offered to give its creditors ownership stakes in exchange for debt forgiveness. But as of yesterday, Chrysler hasn't had "any negotiations" with JP Morgan Chase, Citigroup, Goldman Sachs and Morgan Stanley, which holds the firm's debt.

Barring debt forgiveness or aid from Fiat, Chrysler's days appear numbered. While the firm could go into "structured bankruptcy," which would give it some level of shielding from creditors, a bankrupt automaker would likely find its cars hard to sell because consumers wouldn't have faith in the vehicles.

And cross reference that with the article in this thread.