[A-List] U.S. Banks Brace for Storm Surge as Dollar and Credit System Reel
tal1 at cogeco.ca
Tue Sep 18 13:22:12 MDT 2007
> September 18, 2007
> U.S. Banks Brace for Storm Surge as Dollar and Credit System Reel
> By MIKE WHITNEY
> By now, you've probably seen the photos of the angry
> customers queued up outside of Northern Rock Bank waiting to
> withdraw their money. This is the first big run on a British
> bank in over a century. It's lost an eighth of its deposits
> in three days. The pictures are headline news in the U.K.
> but have been stuck on the back pages of U.S. newspapers.
> The reason for this is obvious. The same Force 5
> economic-hurricane that just touched ground in Great Britain
> is headed for America and gaining strength on the way.
> On Monday night, desperately trying to stave off a wider
> panic, the British government issued an emergency pledge to
> Northern Rock savers that their money was safe. The
> government is trying to find a buyer for Northern Rock.
> This is what a good old fashioned bank run looks like. And,
> as in 1929, the bank owners and the government are
> frantically trying to calm down their customers by
> reassuring them that their money is safe. But human nature
> being what it is, people are not so easily pacified when
> they think their savings are at risk. The bottom line is
> this: The people want their money, not excuses.
> But Northern Rock doesn't have their money and,
> surprisingly, it is not because the bank was dabbling in
> risky subprime loans. Rather, NR had unwisely adopted the
> model of "borrowing short to go long" in financing their
> mortgages just like many of the major banks in the U.S. In
> other words, they depended on wholesale financing of their
> mortgages from eager investors in the market, instead of the
> traditional method of maintaining sufficient capital to back
> up the loans on their books.
> It seemed like a nifty idea at the time and most of the big
> banks in the US were doing the same thing. It was a great
> way to avoid bothersome reserve requirements and the loan
> origination fees were profitable as well. Northern Rock's
> business soared. Now they carry a mortgage book totaling
> $200 billion dollars.
> $200 billion! So why can't they pay out a paltry $4 or $5
> billion to their customers without a government bailout?
> It's because they don't have the reserves and because the
> bank's business model is hopelessly flawed and no longer
> viable. Their assets are illiquid and (presumably) "marked
> to model", which means they have no discernible market
> value. They might as well have been "marked to fantasy",it
> amounts to the same thing. Investors don't want them. So
> Northern Rock is stuck with a $200 billion albatross that's
> dragging them under.
> A more powerful tsunami is about to descend on the United
> States where many of the banks have been engaged in the same
> practices and are using the same business model as Northern
> Rock. Investors are no longer buying CDOs, MBSs, or anything
> else related to real estate. No one wants them, whether
> they're subprime or not. That means that US banks will soon
> undergo the same type of economic gale that is battering the
> U.K right now. The only difference is that the U.S. economy
> is already listing from the downturn in housing and an
> increasingly jittery stock market. That's why Treasury
> Secretary Henry Paulson rushed off to England yesterday to
> see if he could figure out a way to keep the contagion from
> Good luck, Hank.
> It would interesting to know if Paulson still believes that
> "This is far and away the strongest global economy I've seen
> in my business lifetime", or if he has adjusted his thinking
> as troubles in subprime, commercial paper, private equity,
> and credit continue to mount?
> For weeks we've been saying that the banks are in trouble
> and do not have the reserves to cover their losses. This
> notion was originally pooh-poohed by nearly everyone. But
> it's becoming more and more apparent that it is true. We
> expect to see many bank failures in the months to come.
> Prepare yourself. The banking system is mired in fraud and
> chicanery. Now the schemes and swindles are unwinding and
> the bodies will soon be floating to the surface.
> "Structured finance" is touted as the "new architecture of
> financial markets". It is designed to distribute capital
> more efficiently by allowing other market participants to
> fill a role which used to be left exclusively to the banks.
> In practice, however, structured finance is a hoax; and
> undoubtedly the most expensive hoax of all time. The
> transformation of liabilities (dodgy mortgage loans) into
> assets (securities) through the magic of securitization is
> the biggest boondoggle of all time. It is the moral
> equivalent of mortgage laundering. The system relies on the
> variable support of investors to provide the funding for
> pools of mortgage loans that are chopped-up into tranches
> and duct-taped together as CDOs (collateralized debt
> obligations). It's madness; but no one seemed to realize how
> crazy it was until Bear Stearns blew up and they couldn't
> find bidders for their remaining CDOs. It's been downhill
> ever since. The problems with structured finance are not
> simply the result of shabby lending and low interest rates.
> The model itself is defective.
> John R. Ing provides a great synopsis of structured finance
> in his article, "Gold: The Collapse of the Vanities":
> "The origin of the debt crisis lies with the evolution of
> America's financial markets using financial engineering and
> leverage to finance the credit expansionâ¦. Financial
> institutions created a Frankenstein with the change from
> simply lending money and taking fees to securitizing and
> selling trillions of loans in every market from Iowa to
> Germany. Credit risk was replaced by the "slicing and
> dicing" of risk, enabling the banks to act as principals,
> spreading that risk among various financial
> institutionsâ¦.. Securitization allowed a vast array of
> long term liabilities once parked away with collateral to be
> resold along side more traditional forms of short term
> assets. Wall Street created an illusion that risk was
> somehow disseminated among the masses. Private equity too
> used piles of this debt to launch ever bigger buyouts. And,
> awash in liquidity and very sophisticated algorithms,
> investment bankers found willing hedge funds around the
> world seeking higher yielding assets. Risk was piled upon
> risk. We believe that the subprime crisis is not a one off
> event but the beginning of a significant sea change in the
> modern-day financial markets."
> The investment sharks who conjured up "structured finance"
> knew exactly what they were doing. They were in bed with the
> ratings agencies----off-loading trillions of dollars of
> garbage-bonds to pension funds, hedge funds, insurance
> companies and foreign financial giants. It's a swindle of
> epic proportions and it never would have taken place in a
> sufficiently regulated market.
> When crowds of angry people are huddled outside the banks to
> get their money, the system is in real peril. Credibility
> must be restored quickly. This is no time for Bush's "free
> market" nostrums or Paulson's soothing bromides (he thinks
> the problem is "contained") or Bernanke's feeble rate cuts.
> This requires real leadership.
> The first thing to do is take charge, alert the public to
> what is going on and get Congress to work on substantive
> changes to the system. Concrete steps must be taken to build
> public confidence in the markets. And there must be a
> presidential announcement that all bank deposits will be
> fully covered by government insurance.
> The lights should be blinking red at all the related
> government agencies including the Fed, the SEC, and the
> Treasury Dept. They need to get ahead of the curve and stop
> thinking they can minimize a potential catastrophe with
> their usual public relations mumbo jumbo.
> Last week, an article appeared in the Wall Street Journal,
> "Banks Flock to Discount Window". (9-14-07) The article
> chronicled the sudden up-tick in borrowing by the struggling
> banks via the Fed's emergency bailout program, the "Discount
> "Discount borrowing under the Fed's primary credit program
> for banks surged to more than $7.1 billion outstanding as of
> Wednesday, up from $1 billion a week before."
> Again we see the same pattern developing; the banks
> borrowing money from the Fed because they cannot meet their
> minimum reserve requirements. WSJ: "The Fed in its weekly
> release said average daily borrowing through Wednesday rose
> to $2.93 billion." $3 billion.
> Traditionally, the "Discount Window" has only been used by
> banks in distress, but the Fed is trying to convince people
> that it's really not a sign of distress at all. It's "a sign
> of strength". Baloney. Banks don't borrow $3 billio unless
> they need it. They don't have the reserves. Period.
> The real condition of the banks will be revealed sometime in
> the next few weeks when they report earnings and account for
> their massive losses in "down-graded" CDOs and MBSs.
> Market analyst Jon Markman offered these words of advice to
> the financial giants
> "Before they (the financial industry) take down the entire
> market this fall by shocking Wall Street with unexpected
> losses, I suggest that they brush aside their attorneys and
> media handlers and come clean. They need to tell the world
> about the reality of their home lending and loan
> securitization teams' failures of the past four years -- and
> the truth about the toxic paper that they've flushed into
> the world economic system, or stuffed into Enron-like
> off-balance sheet entities -- before the markets make them
> walk the plank."â¦." Since government regulators and
> Congress have flinched from their responsibility to
> administer "tough love" with rules forcing financial
> institutions to detail the creation, securitization and
> disposition of every ill-conceived subprime loan,
> off-balance sheet "structured investment vehicle," secretive
> money-market "conduit" and commercial-paper-financing
> vehicle, the market will do it with a vengeance."
> Good advice. We'll have to wait and see if anyone is
> listening. The investment banks may be waiting until Tuesday
> hoping that Fed-chief Ken Bernanke announces a cut to the
> Fed's fund rate that could send the stock market roaring
> back into positive territory.
> But interest rate cuts do not address the underlying
> problems of insolvency among homeowners, mortgage lenders,
> hedge funds and (potentially) banks. As market-analyst
> John R. Ing said, "A cut in rates will not solve the
> problem. This crisis was caused by excess liquidity and a
> deterioration of credit standardsâ¦.A cut in the Fed Fund
> rate is simply heroin for credit junkies."
> The cuts merely add more cheap credit to a market that that
> is already over-inflated from the ocean of liquidity
> produced by former-Fed chief Alan Greenspan. The housing
> bubble and the credit bubble are largely the result of
> Greenspan's misguided monetary policies. (For which he now
> blames Bush!) The Fed's job is to ensure price stability and
> the smooth operation of the markets, not to reflate equity
> bubbles and reward over-exposed market participants.
> It's better to let cash-strapped borrowers default than
> slash interest rates and trigger a global run on the dollar.
> Financial analyst Richard Bove says that lower interest
> rates will do nothing to bring money back into the markets.
> Instead, lower interest rates will send the dollar into a
> tailspin and wreak havoc on the job market.
> "There is no liquidity problem, but a serious crisis of
> confidence," Bove said:
> "In a financial system where there is ample liquidity and a
> desire for higher rates to compensate for risk, the solution
> is not to create more liquidity and lower the rates that are
> available to compensate for risk. ... (The Fed) cannot
> reduce fear by stimulating inflationâ¦
> "It is illogical to assume that holders of cash will have a
> strong desire to lend money at low rates in a currency that
> is declining in value when they can take these same funds
> and lend them at high rates in a currency that is gaining in
> value. By lowering interest rates the Federal Reserve will
> not stimulate economic growth or create jobs. It will crash
> the currency, stimulate inflation, and weaken the economy
> and the job markets".
> Bove is right. The people and businesses that cannot repay
> their debts should be allowed to fail. Further weakening the
> dollar only adds to our collective risk by feeding inflation
> and increasing the likelihood of capital flight from
> American markets. If that happens; we're toast.
> Consider this: In 2000, when Bush took office, gold was $273
> per ounce, oil was $22 per barrel and the euro was worth
> $.87 per dollar. Currently, gold is over $700 per ounce, oil
> is over $80 per barrel, and the euro is nearly $1.40 per
> dollar. If Bernanke cuts rates, we're likely to see oil at
> $125 per barrel by next spring.
> Inflation is soaring. The government statistics are
> thoroughly bogus. Gold, oil and the euro don't lie.
> According to economist Martin Feldstein, "The falling dollar
> and rising food prices caused market-based consumer prices
> to rise by 4.6 per cent in the most recent quarter." (WSJ)
> That's 18.4 per cent a year, and yet Bernanke is still
> considering cutting interest rates and further fueling
> What about the American worker whose wages have stagnated
> for the last six years? Inflation is the same as a pay-cut
> for him. And how about the pensioner on a fixed income? Same
> thing. Inflation is just a hidden tax progressively eroding
> his standard of living. .
> Bernanke's rate cut may be boon to the "cheap credit"
> addicts on Wall Street, but it's the death-knell for the
> average worker who is already struggling just to make ends
> No bailouts. No rate cuts. Let the banks and hedge funds
> sink or swim like everyone else. The message to Bernanke is
> simple: "It's time to take away the punch bowl".
> The inflation in the stock market is just as evident as it
> is in the price of gold, oil or real estate. Economist and
> author Henry Liu demonstrates this in his article "Liquidity
> Boom and the Looming Crisis":
> "The conventional value paradigm is unable to explain why
> the market capitalization of all US stocks grew from $5.3
> trillion at the end of 1994 to $17.7 trillion at the end of
> 1999 to $35 trillion at the end of 2006, generating a
> geometric increase in price earnings ratios and the like.
> Liquidity analysis provides a ready answer".(Asia Times)
> Market capitalization zoomed from $5.3 trillion to $35
> trillion in 12 years? Why? Was it due to growth in
> market-share, business expansion or productivity? No. It
> was because there were more dollars chasing the same number
> of securities; hence, inflation.
> If that is the case, then we can expect the stock market to
> fall sharply before it reaches a sustainable level. As Liu
> says, "It is not possible to preserve the abnormal market
> prices of assets driven up by a liquidity boom if normal
> liquidity is to be restored." Eventually, stock prices will
> return to a normal range.
> Bernanke should not even be contemplating a rate cut. The
> market needs more discipline not less. And workers need a
> stable dollar. Besides, another rate cut would further
> jeopardize the greenback's increasingly shaky position as
> the world's "reserve currency". That could destabilize the
> global economy by rapidly unwinding the U.S. massive current
> account deficit.
> The International Herald Tribune summed up the dollar's
> problems in a recent article, "Dollar's Retreat Raises Fear
> of Collapse."
> "Finance ministers and central bankers have long fretted
> that at some point, the rest of the world would lose its
> willingness to finance the United States' proclivity to
> consume far more than it produces - and that a potentially
> disastrous free-fall in the dollar's value would result.
> "The latest turmoil in mortgage markets has, in a single
> stroke, shaken faith in the resilience of American finance
> to a greater degree than even the bursting of the technology
> bubble in 2000 or the terror attacks of Sept. 11, 2001,
> analysts said. It has also raised prospect of a recession in
> the wider economy.
> "This is all pointing to a greatly increased risk of a fast
> unwinding of the U.S. current account deficit and a serious
> decline of the dollar".
> Other experts and currency traders have expressed similar
> sentiments. The dollar is at historic lows in relation to
> the basket of currencies against which it is weighted.
> Bernanke can't take a chance that his effort to rescue the
> markets will cause a sudden sell-off of the dollar.
> The Fed chief's hands are tied. Bernanke simply doesn't have
> the tools to fix the problems before him. Insolvency cannot
> be fixed with liquidity injections nor can the deeply-rooted
> "systemic" problems in "structured finance" be corrected by
> slashing interest rates. These require fiscal solutions,
> congressional involvement, and fundamental economic policy
> Rate cuts won't help to rekindle the spending spree in the
> housing market either. That charade is over. The banks have
> already tightened lending standards and inventory is larger
> than anytime since they began keeping records. The slowdown
> in housing is irreversible as is the steady decline in real
> estate prices. Trillions in market capitalization will be
> wiped out. Home equity is already shrinking as is consumer
> spending connected to home-equity withdrawals.
> The bubble has popped regardless of what Bernanke does. The
> same is true in the clogged Commercial Paper market where
> hundreds of billions of dollars in short-term debt is due to
> expire in the next few weeks. The banks and corporate
> borrowers are expected to struggle to refinance their debts
> but, of course, much of the debt will not roll over. There
> will be substantial losses and, very likely, more defaults.
> Bernanke can either be a statesman---and tell the country
> the truth about our dysfunctional financial system which is
> breaking down from years of corruption, deregulation and
> manipulation---or he can take the cowards-route and buy some
> time by flooding the system with liquidity, stimulating more
> destructive consumerism, and condemning the nation to an
> avoidable cycle of double-digit inflation.
> We'll know his decision soon enough.
> Mike Whitney lives in Washington state. He can be reached at:
> fergiewhitney at msn.com
> This email has been sent as a service by Roland Sheppard
> Visit my web site at: http://web.mac.com/rolandgarret
> Access LABOR-L archives and manage your subscription
> at https://listserv.yorku.ca/archives/labor-l.html
> - ----- End forwarded message -----
> - --
> *** FULL-SPECTRUM DOMINANCE! ***************************************
> * BOYCOTTS: Organized; Ad Hoc; Anticipated; Hoped-For: *
> **** Critical endorsement only *** Most sites need donations ****
> * http://www.cokewatch.org Cokewatch *
> * http://www.killercoke.org Killer Coke *
> * http://www.indiaresource.org India Resource Center: Coke Justice *
> * http://www.haitisupport.gn.apc.org Haiti Support Group *
> * http://wakeupwalmart.com Wake-Up Wal-Mart: Always High Costs *
> * http://www.ciw-online.org [Suspended. For now..!] Taco Bell *
> * http://www.mcspotlight.org/beyond/companies/shell.html Shell Oil *
> * http://www.shellfacts.com/ Shell Oil *
> *** Military Technology: The Ultimate Prostitution of Science ***
> GPG fingerprint = 2E7F 2D69 4B0B C8D5 07E3 09C3 5E8D C4B4 461B B771
> -----BEGIN PGP SIGNATURE-----
> Version: GnuPG v1.4.1 (GNU/Linux)
> -----END PGP SIGNATURE-----
More information about the A-List