[R-G] [BillTottenWeblog] Black Monday?

[Bill Totten]

House and Global Investors Vote "No" on Paulson Bailout

by Mike Whitney

Counterpunch (September 29 2008)

Today the US House rejected Treasury Secretary Paulson's $700 billion
Emergency Economic Stabilization Act of 2008. Paulson said he has the
votes, but Paulson was wrong. The House bucked the Paulson's claim that
buying up the illiquid mortgage-backed assets from the nation's banks
would be enough to save the financial system from an impending meltdown.
The jury remains out on that question, too. Professor Nouriel Roubini,
chairman of Roubini Global Economics, summed it up like this, "You're
not resolving the two fundamental issues: You still have to recapitalize
the banking system, and household debt is going to stay high". A large
number of economists believe Roubini is right. The bill would not solve
the underlying problems.

There is a crisis. The banking system is undercapitalized, the credit
markets are frozen, and foreign creditors are beginning to slow their
purchases of US debt. It's all bad. At the same time the number of
casualties among the financial giants - Bear Stearns, Indymac, AIG,
Lehman, Washington Mutual - continues to grow. Three more struggling
European banks were added to the list of financial institutions that
needed emergency government assistance this past weekend. It's no wonder
Congress feels like they have to do something to stop the bleeding.

Before the stock market opened on Monday, the futures markets had
slumped heavily into negative territory, while the TED spread, an
indicator of stress in interbank lending, had widened to 3.19, a level
that suggests another rocky week of trading ahead. Could this be another
Black Monday?

Paulson's bill was designed to avert a system-wide crash by clearing the
banks' balance sheets so they could resume extending credit to consumers
and businesses. The hope was that massive infusion of capital would
"turn back the clock" to the happy days of low interest speculation and
bubble economics. Paulson is a "one trick pony" who firmly adheres to
the belief that wealth creation depends on maximum leverage and an
ever-weakening currency. But that world view is no longer applicable
after reaching Peak Credit, where consumers are no longer able to make
the interest payments on their loans and businesses and financial
institutions are forced to curb their spending and dump their toxic
assets at firesale prices. The system is deleveraging and nothing can
stop it. Paulson has yet to accept the new reality.

Besides, there was no guarantee that the banks would use the money in
the way that Paulson imagines. As one Wall Street veteran explained to
me, "I don't see one penny of that $700 billion ending up helping the
broader economy. I see it being used to prop up share prices so the
insiders can salvage as much as possible when dumping their shares."

Indeed, the $700 billion is just part of a massive "pump and dump"
scheme engineered with the tacit approval of the US Treasury and the
Federal Reserve. Once the banksters have offloaded their fraudulent
securities and crappy paper on Uncle Sam, they will do whatever they
need to do pad the bottom line and drive their stocks up. That means
they will shovel capital into hard assets, foreign currencies, gold,
interest rate swaps, carry trade swindles, and Swiss bank accounts. The
notion that they will recapitalize so they can provide loans to US
consumers and businesses in a slumping economy is a pipedream.

The US is headed into its worst recession in sixty years. The housing
market is crashing, securitzation is kaput, and the broader economy is
drifting towards the reef. The banks are not going to waste their time
trying to revive a moribund US market where consumers and businesses are
already tapped out. No way; it's on to greener pastures. They'll move
their capital wherever they think they can maximize their profits. In
fact, a sizable portion of the $700 billion will likely be invested in
commodities, which means that we'll see another round of hyperbolic
speculation in food and energy futures pushing food and fuel prices into
the stratosphere. Ironically, the taxpayers' largesse will be used
against them, making a bad situation even worse.

Then again, if a rehabbed bill isn't passed, no one can predict with
certainty what will happen. Here's how Tim Shipman summed it up in
"Bailout Failure Will Cause US Crash", in the UK Telegraph:

"Officials close to Paulson are privately painting a far bleaker
portrait of the fragility of the global economy than that advanced by
President George W Bush in his televised address last week.

"One Republican said that the message from government officials is that
'the economy is dropping into the john'. He added: 'We could see falls
of 3,000 or 4,000 points on the Dow [the New York market that currently
trades at around 11,000]. That could happen in just a couple of days'.

"'What's being put around behind the scenes is that we're looking at
1930s stuff. We're looking at catastrophe, huge, amazing catastrophe.
Everybody is extraordinarily scared. It's going to be really, really
nasty.'"


The fear on Capital Hill is palpable, especially among the Democrats who
have led the effort to pass Paulson's boondoggle ASAP. Speaker of the
House, Nancy Pelosi, and fellow Democratic Party leaders, Chris Dodd,
Harry Reid and the blabbering blowhard from Massachusetts, Barney Frank,
did everything in their power to sandbag dissenters, quash resistance,
and rush the bill to a vote without the usual deliberation and debate.
Representative Marcy Kaptur (D-Ohio) was one of many angry members of
congress who lashed out at Pelosi's highhandedness. It's all caught on a
one minute video:

Representative Marcy Kaptur: "The normal legislative process that should
accompany a monumental proposal to bail out Wall Street has been
shelved. Yes, shelved! Only a few insiders are doing the dealing. These
criminals have so much power they can shut down the normal legislative
process of the highest lawmaking body in this land. All the committees
that should be scanning every word that is being negotiated have been
benched. And that means the American people have been benched. We are
constitutionally sworn to protect this country against all enemies
foreign and domestic, and yes, my friends, there are enemies ... The
people who are pushing this bill are the very same one's who are
responsible for the implosion on Wall Street. They were fraudulent then;
and they are fraudulent now. We should say No to this deal." {1}


Republicans were equally furious at the way the Pelosi Politburo kept
the rank and file out of loop as much as possible. Representative
Michael Burgess (R-Texas) summarized the feelings of a great many
congressmen who felt they were being railroaded by Pelosi and Company:
"We have seen no bill. We have been here debating talking points ...
House Republicans have been cut out of the process and derided by the
leaders of the House Democrats as "unpatriotic" for not participating in
supporting the bill. Mr Speaker, I have been thrown out of more meetings
in the last 24 hours than I ever thought possible as an elected official
of 800,000 citizens of North Texas ... Since we didn't have hearings,
since we didn't have markup, let's at least put this legislation up on
the Internet for 24 hours and let the American people see what we have
done in the dark of night. After all, I have never gotten more mail on a
single issue than on this bill that is before us tonight."

Representative Dennis Kucinich (D-Ohio) gave the best speech of the day
railing against the financial industry and defending the interests of
working class Americans.

Representative Dennis Kucinich: "The $700 bailout bill is being driven
by fear not fact. This is too much money, in too short of time, going to
too few people, while too many questions remain unanswered. Why aren't
we having hearings ... Why aren't we considering any other alternatives
other than giving $700 billion to Wall Street? Why aren't we passing new
laws to stop the speculation which triggered this? Why aren't we putting
up new regulatory structures to protect the investors? Why aren't we
directly helping homeowners with their debt burdens? Why aren't we
helping American families faced with bankruptcy? Isn't time for
fundamental change to our debt-based monetary system so we can free
ourselves from the manipulation of the Federal Reserve and the banks? Is
this the US Congress or the Board of Directors of Goldman Sachs?"

There was greater opposition to the Paulson bill than any legislation in
the last half century. The groundswell of public outrage has been
unprecedented, and yet, Congress, completely insulated from the demands
of their constituents, continues to blunder ahead following the same
pro-industry script as their ideological twins in the White House.
There's not a dime's worth of difference between the two parties. Not
surprisingly, neither Pelosi nor any of the Democratic leadership has
even met with any of the more than 200 leading economists who have
stated unequivocally that the bailout will not address the central
problems that are wreaking havoc on the financial system. Instead, they
have caved in to Bush's demagoguery and the spurious claims of
Goldman-Sax bagman Henry Paulson, a man who has misled the public on
every issue related to the subprime/financial fiasco so far.

There are parts of Paulson's Emergency Economic Stabilization Act of
2008 that every US taxpayer should understand, even though the media is
keeping those facts obscured. In sections 128 and 132; the proposed bill
would have suspend "mark to market" accounting. This means that the
banks would no longer be required to assess the worth of their assets
according to what similar assets fetched on the open market. For
example, Merrill Lynch just sold $31 billion of mortgage-backed
securities for $6 billion, which means that similar bonds should be
similarly priced. Simple; right? The banks need to adjust the value of
those assets on their balance sheet accordingly. This gives investors
and depositors the ability to know whether their bank is in bad shape or
not. But Paulson's bill lifted this requirement and allowed the banks to
assign their own arbitrary value to these assets, which is the same old
Enron-style accounting scam.

Paulson's bill also proposed the "Elimination of FASB 157 and 0%
reserves". This is just as sketchy as it sounds. FASB or Financial
Services Regulatory Relief Act reads:

"Federal Reserve Banks are authorized to pay banks interest on reserves
under Section 201 of the Act. In addition, Section 202 permits the FRB
to change the ratio of reserves a bank must maintain relative to its
transaction accounts, allowing a zero reserve ratio if appropriate. Due
to federal budgetary requirements, Section 203 provides that these
legislative changes will not take effect until October 1 2011."

It's all legal mumbo jumbo to conceal the fact that the banks can
continue to operate with insufficient capital, which is why the system
is currently blowing up. It all get's down to this: The reason the
system is exploding is because the various financial institutions have
been allowed - via deregulation - to act as banks and create as much
credit as they choose without a sufficient capital base. When one reads
about massive deleveraging, this relates directly to the fact that
under-capitalized businesses were operating with too much debt in
relationship to their capital. That's it in a nutshell; forget about the
CDOs, the MBSs, the CDS and the whole alphabet soup of derivatives
garbage. They were all inserted into the system so Wall Street
landsharks could expand credit without supervision and balance trillions
of dollars of debt on the back of a one dollar bill. This is why Paulson
wants to suspend the rules which would bring credibility and trust back
to the system. After all, that might impinge on Wall Street's ability to
enrich itself at the public's expense.

Nouriel Roubini sites a study by Barry Eichengreen, "And Now the Great
Depression", which points out why Paulson's $700 billion plan is likely
to fail:

"Whenever there is a systemic banking crisis there is a need to
recapitalize the banking/financial system to avoid an excessive and
destructive credit contraction. But purchasing toxic/illiquid assets of
the financial system is NOT the most effective and efficient way to
recapitalize the banking system ...

"A recent IMF study of 42 systemic banking crises across the world
provides evidence of how different crises were resolved.

"First of all only in 32 of the 42 cases there was government financial
intervention of any sort; in ten cases systemic banking crises were
resolved without any government financial intervention. Of the 32 cases
where the government recapitalized the banking system only seven
included a program of purchase of bad assets/loans (like the one
proposed by the US Treasury). In 25 other cases there was no government
purchase of such toxic assets. In six cases the government purchased
preferred shares; in four cases the government purchased common shares;
in eleven cases the government purchased subordinated debt; in twelve
cases the government injected cash in the banks; in two cases credit was
extended to the banks; and in three cases the government assumed bank
liabilities. Even in cases where bad assets were purchased - as in Chile
- dividends were suspended and all profits and recoveries had to be used
to repurchase the bad assets. Of course in most cases multiple forms of
government recapitalization of banks were used." (Nouriel Roubini's
Global EonoMonitor.)

In short, it wouldn't work. Nor was it designed to work. The bill was
just Paulson's way of carving a silver canoe for he and his
brandy-drooling investor buddies so they can paddle away to some
offshore haven while the rest of us drown in a bottomless ocean of debt.

_____

Mike Whitney lives in Washington state. He can be reached at
fergiewghitney at msn.com

Note {1}  Representative Marcy Kaptur (D-Ohio) on floor of the House on
the subject of the Wall Street bailout: "Wall Street's Greed Game" by
Jeffrey St Clair (September 25th, 2008)
http://redstaterebels.org/2008/09/wall-streets-greed-game/

http://www.counterpunch.com/whitney09292008.html


TO POST A COMMENT, OR TO READ COMMENTS POSTED BY OTHERS, please click
on the word "comment" highlighted at the end of the version of this
essay posted at http://billtotten.blogspot.com/