Thread: Bailouts May Never End By Joel Skousen Editor - World Affair

Bailouts May Never End
By Joel Skousen
Editor - World Affairs Brief
6-12-9

While the financial rescue package was sold to Congress and the public as a temporary measure it now appears that Treasury chief Timothy Geithner has no intention of ending the bailout program even as he gets ready to accept the return of TARP funds from 10 of the largest banks who want out from under the restrictions of that program. Apparently the money is never coming back to the taxpayer. I'll also cover many other short topics this week as the world moves ever more quickly toward the consequences of profligate spending and a reckless foreign policy with a world seething with resentment and distrust for our government.

There was an interesting exchange in the latter part of May between Senator Demint of the Senate Banking Committee and Treasury Secretary Geithner that indicates the federal government has no intention of ending the TARP program.

SEN. DEMINT: "If over the next six months $50 billion comes back, will $50 billion go into the general fund of the United States?

SEC. GEITHNER: "The way the TARP is designed -- and I didn't design this (but his collaborators in Congress did) -- but the way it's designed is every dollar that comes back goes into the general fund but that does still create additional head room under the $700 billion authority for us to make capital investments [meaning: we still get to keep using $700B on a permanent basis, in any way we see fit]. So we have the ability to still use the $700 billion if we think there's a strong case for doing that, but the way the program works is a dollar comes in and goes to the general fund but still creates additional room for us to make a new [investment in banks]

SEN. DEMINT: "So your understanding of what we did is that the Treasury now has $700 billion that it can use permanently, rotating in and out of the capital markets as you see fit?

SEC. GEITHNER: "Well, I'm not quite sure permanent, but you're right."

The problem with TARP is that it gave such general powers to the government that there is no way to rein it in without additional legislation. The reason Sen. Demint had to ask is there is nothing in the bill that covers this issue, so Geithner took advantage of the loophole to claim what he did.

Let's go back to the original issue that provoked this exchange. Why are some of the 10 largest banks so anxious to pay off their TARP bailout funds? It's not simply a matter of allowing them to go back to the old days of compensating executives with millions of dollars. That can't be done unless they generate huge income streams from derivatives as before. Thus, the big banks are anxious to get back into the derivatives and securitization game that provided all those excess profits--and they still want to do it in the shadows, which they can't do under TARP.

In reality, it is not a fear of the Treasury, which the big banks control, nor the Fed, which they own, but Congress which is under a lot of pressure from the public to audit the Fed and bring monetary control back under the authority of Congress. Bob Unruh of Worldnetdaily.com reports that "there now are 193 (actually 222 and rising) co-sponsors signed onto H.R. 1207, the Federal Reserve Transparency Act of 2009 that demands an audit of the organization. [Congressman Ron] Paul long has opposed the power held by the Federal Reserve and its ability to manipulate the nation's economy and over the years has launched multiple proposals to get rid of the quasi-governmental agency, without significant support [until now. As the bailouts are becoming more unpopular the public is realizing the money is only benefiting insider banks]. The bill calls for the comptroller general of the United States to audit the private Federal Reserve and report to Congress before the end of 2010 [This is a major flaw in Paul's proposal. The audit will surely be controlled and politicized like all federal investigations--but Paul really had no choice if he wanted to gain majority support. His next step will be to challenge the results if fraudulent. He will certain get traction against the Fed either way].

"When the bill has garnered the support of 218 members of the 435-member U.S. House, it technically has the support of the majority, even though the process of holding hearings and having committee review still provides for open doors for failure [if co-sponsors defect under pressure from the PTB].

"Paul's ultimate goals have not changed over the years he's been concerned by the impacts on the nation's economy. 'To understand how unwise it is to have the Federal Reserve, one must first understand the magnitude of the privileges they have,' he wrote in a recent Straight Talk commentary. 'They have been given the power to create money, by the trillions, and to give it to their friends, under any terms they wish, with little or no meaningful oversight or accountability.'

"Besides the support in the U.S. House, a companion bill [to audit the Fed], S. 604, also now has been introduced in the U.S. Senate by Sen. Bernard Sanders of Vermont [Ironically, a socialist]. It has been referred to the Senate Committee on Banking, Housing and Urban Affairs." What is the Fed's response to this growing backlash? --hire a lobbyist to set up a counter campaign!

Returning to the banker's motives, by getting out from under TARP, they effectively can go back to their ponzi schemes of old and run up new profits during the coming recovery--and do so in relative secrecy, as before. The speculative world has been watching as the US Treasury diverted billions into the hands of AIG and other insider investment banks like Citi, JP Morgan and Goldman Sachs, who were guaranteeing Credit Default Swap derivatives (insurance policies against default of everything from GM to securitized packages of subprime loans). There is still a huge market in this area as hundreds of outsider hedge funds and other financial institutions are still looking to switch their unsecured and at risk CDS derivatives to these favored 10 banks who still claim the clout to save them from default. That's what I believe is driving this move.

However, there are still two of the largest insider banks that can't get out from the TARP net of control. Bank of America and Citigroup have received some $90 billion in bailout funds from the US Treasury. In their weakened financial condition, they cannot repay. Citibank, previously the world's largest bank, was so deep into the derivatives meltdown that it is still technically insolvent despite the bailout. Bank of America is still under water after absorbing the bankrupt Countrywide Financial mortgage unit--repudiating much of its debt in the process (stiffing the creditors and turning a potential pig of a deal into something sweet). But then on the heels of that deal, the PTB decided that BOA should buy the now defunct insider stock brokerage of Merrill Lynch. The latest revelations this week indicate that BOA executives refused knowing that the company was worthless and the price too high. Leaks from BOA claim the government forced it upon them.

The Washington Post revealed some of the pressure applied by the Fed. "Bank of America had agreed to the deal in September, then tried to back out in December when he found out that Sec. of Treasury Paulson and Fed Chairman Bernanke had grossly misrepresented Merrill's financial status to the bank when they requested BOA take over Merrill Lynch. Bank of America CEO Ken Lewis said that "Over a six-day period in late 2008, Merrill's expected losses jumped from $9 billion to $12 billion, with the possibility that they would reach as high as $15 billion."

"Fed Chairman Ben S. Bernanke wrote at the time that the company's reversal was 'a foolish move' and said 'regulators will not condone it [backing out].' [This was not true. Since the losses at Merrill were grossly understated to BOA, it constituted a "material and adverse change" in a deal that would certainly justify BOA backing out]. The e-mail [of Bernanke] was provided by the Fed in response to a subpoena from the House Committee on Oversight and Government Reform, and quoted in a memo circulated by the panel's Republican staff. Bernanke also told other Fed officials that he would warn Bank of America that senior management would be removed if the bank abandoned the deal and then needed more federal aid. Bank of America's Lewis said in a deposition that he yielded to the pressure." Then, under testimony to Congress the next day, Lewis reversed himself and claimed the threats of the government did NOT influence his decision. Somebody obviously got to Lewis, and at least two of his Congressional inquisitors expressed openly that they weren't buying his denials.

The larger questions that remain are: What kind of leverage did the government have on BOA that allowed them to twist its arm on the Merrill Lynch deal beyond threatening Lewis' job? And, what kind of special relationship did Bernanke and Paulson have with Merrill Lynch principals that made it so important to illegally pressure BOA to purchase them at a loss? These kinds of high level management types are people who have long played along with the PTB in order to rise to the top of financial institutions that are given special advantages in the markets.

Every insider bank that has these kinds of special relationship with government had been the beneficiary of special treatment, insider deals and/or other efforts to get regulators to look the other way on accounting issues that makes them vulnerable to this kind of blackmail. Large brokerage houses like Goldman Sachs, and Merrill Lynch are allowed to participate in government sponsored option movements as part of the Plunge Protection Team efforts to manipulate markets. Above all, the largest insider banks and brokerage houses were the ones allowed to develop, sell and profit from the huge markets created by the securitization of subprime mortgages and derivatives.

Mike Whitney of Global Research explains just how these securitization and derivatives ponzi schemes work. "Is it possible to make hundreds of billions of dollars in profits on securities that are backed by nothing more than cyber-entries into a loan book? It's not only possible; it's been done. And now the scoundrels who cashed in on the swindle have lined up outside the Federal Reserve building to trade their garbage paper for billions of dollars of taxpayer-funded loans. Where's the justice?

"Meanwhile, the credit bust has left the financial system in a shambles and driven the economy into the ground like a tent stake. The unemployment lines are growing longer and consumers are cutting back on everything from nights-on-the-town to trips to the grocery store. And it's all due to a Ponzi-finance scam that was concocted on Wall Street and spread through the global system like an aggressive strain of Bird Flu. This isn't a normal recession; the financial system was blown up by greedy bankers who used 'financial innovation' to game the system and inflate the biggest speculative bubble of all time. And they did it all legally, using a little-known process called securitization.

"Securitization--which is the conversion of pools of loans into securities that are sold in the secondary market--provides a means for massive debt-leveraging. The banks use off-balance sheet operations to create securities so they can avoid normal reserve requirements and bothersome regulatory oversight. Oddly enough, the quality of the loan makes no difference at all, since the banks make their money on loan originations and other related fees [But their ability to sell these packages depends upon the existence of derivatives which supposedly guaranteed them against loss. There was, however, absolutely no financial backing behind these CDS insurance guarantees].

"What matters is quantity, quantity, quantity; an industrial-scale assembly line of fetid loans dumped on unsuspecting investors to fatten the bottom line. And, boy, can Wall Street grind out the rotten paper when there's no cop on the beat and the Fed is cheering from the bleachers. In an analysis written by economist Gary Gorton for the Federal Reserve Bank of Atlanta's 2009 Financial Markets Conference, the author shows that mortgage-related securities ballooned from $492.6 billion in 1996 to $3,071.1 in 2003, while asset backed securities (ABS) jumped from $168.4 billion in 1996 to $1,253.1 in 2006. All told, more than $20 trillion in securitized debt was sold between 1997 and 2007 [and guaranteed by appropriate volumes of derivatives].

"Deregulation [especially the lack of reserve requirements for derivatives] opened Pandora's box, unleashing a weird mix of shady off-book operations (SPVs, SIVs) and dodgy, odd-sounding derivatives that were used to amplify leverage and stack debt on tinier and tinier scraps of capital. It's easy to make money, when one has no skin in the game. That's how hedge fund managers and private equity sharpies get rich. Securitization gave the banks the opportunity to take substandard loans from applicants who had no way of paying them back, and magically transform them into Triple A securities [in collusion with the 3 major debt ratings agencies].

The bottom line is that the economy is still on the brink. In an op-ed piece in the NY Times, Sandy Lewis and William Cohan, both former Wall Street insiders (Lewis was convicted of stock manipulation), tell why they still think things are rotten on Wall Street. "Mr. Obama thinks that the way to revive the economy is to restore confidence in it. If the mood is right, the capital will flow. But this belief is dangerously misguided. We are sympathetic to the extraordinary challenge the president faces, but if we've learned anything at all two years into the worst financial crisis of our lifetimes, it is that a capital-markets system this dependent on public confidence is a shockingly inadequate foundation upon which to rest our economy.

"We have both spent large chunks of our lives working on Wall Street, absorbing its [lack of] ethic and mores. We're concerned that nothing has really been fixed. We're doubly concerned that people appear to feel the worst of the storm is over -- and in this, they are aided and abetted by a hugely popular and charismatic president and by the fact that the Dow has increased by 35 percent or so since Mr. Obama started to lay out his economic plans in March. But wishing for improvement and managing by the Dow's swings are a fool's game.

The storm is not over, not by a long shot. Huge structural flaws remain in the architecture of our financial system, and many of the fixes that the Obama administration has proposed will do little to address them and may make them worse."

Michael Pento of Delta Global Advisors says the consequences of dollar debasement are already starting to show. "The consequences of adopting a weak dollar and inflationary monetary policy to bail out the economy have begun to manifest themselves, although the real effects of the government's $12.8 trillion dollar recovery plan have only just started to show up... To illustrate the point, the price of oil has increased 53% this year while gasoline has increased 26% in price since May 1st. That move alone should start to ring the alarm bells for everyone. But commodity prices have risen across the board sending the CRB Index up 14% in May alone. In addition, copper is up over 60% this year while cotton is up 18% in 2009 and the US dollar has also lost about 10% of its value since early March.

"The cause of steep rises in basic materials and energy is not so much a U.S. demand story. Asia seems to be faring better; (their economy expanded at a 6.1% annual rate in Q1, the slowest rate in 10 years) while our economy has shed over 6 million jobs since the recession began and GDP contracted at a 5.7% annual rate in the first quarter. But the real cause in the rise of commodities can be found in the weakness of the US dollar... The progenitor of this crisis was a collapse in real estate prices and it has shown only a few signs of stabilization in sales, but is still far from a marked recovery in prices. In fact, last month's report on existing home sales showed a drop of 15.4%. Both mortgage delinquencies and foreclosures reached record levels in Q1 2009 while the months' supply of existing homes actually climbed to 10.2 from 9.6. So while mortgage rates are on the rise, housing fundamentals continue to exhibit weakness. Those soaring bond yields and mortgage rates will wreak havoc on our debt-imbued economy. Already we saw a report by the Mortgage Bankers Association showing a drop of 16% in the Refinance and Purchase Index for the week ending May 29th. For an economy that has a total debt to GDP ratio of 370%, we can also expect dire repercussions in everything from credit card loans to municipal bonds.

"If Banana Ben steps up his manipulation of bond prices, the current fall in the dollar along with the rise in commodity prices and interest rates will seem inconsequential by comparison in the not too distant future. Our government risks morphing what would have been a severe deflationary recession into an inflationary recession/depression in the longer term. Their decision to choose the inflationary route is based on the fact that inflation bails out those in debt. Make no mistake, for a country with $11.4 trillion in debt [actually more like $50T counting all obligations and off-the books accounting] and a 2009 deficit equal to 13% of GDP, inflation is perceived as the only way out. However, inflation can never bail out anything or anyone, it only helps the very rich maintain their purchasing power while robbing it from the rest of the country."

World Affairs Brief, June 12, 2009 Commentary and Insights on a Troubled World.

Copyright Joel Skousen. Partial quotations with attribution permitted.

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Why would bailouts end? "Importing Poverty" is just now taking shape as a growth industry.