Thursday, September 18, 2008

The Mother Of All Bailouts

The Dow is up huge at this hour. It was down 150, now up almost 400. Why?

The entire financial sector is about to get a bailout.
U.S. Treasury and Federal Reserve officials are considering a ``permanent'' plan to address the financial crisis, said Senator Charles Schumer, who proposed a new agency to pump capital into troubled financial companies.

``The Federal Reserve and the Treasury are realizing that we need a more comprehensive solution,'' Schumer, a Democrat who chairs the congressional Joint Economic Committee, told reporters in Washington today. ``I've been talking to them about it.''

Schumer proposed an agency to inject funds into financial companies in exchange for equity stakes and pledges to rewrite mortgages to make them more affordable. His remarks indicate momentum is building for some wider plan after the Fed and Treasury's takeovers of Fannie Mae, Freddie Mac and American International Group Inc. this month.

Discussions with the Treasury and Fed focus on ``trying to do something more permanent'' after the series of government interventions, the New York senator said. For the Fed, ``it's hard for them to do monetary policy, which is their primary task, and then run all these businesses,'' he said.

It's nothing short of the nationalization of the whole financial sector.

It will take trillions and trillions of dollars to do this. This is the endgame, folks. If this goes through we'll be on the hook for millions of dollars for every single American. It will wipe the country out.

This is downright terrifying...and it's being proposed by a Democrat.

[UPDATE] Bonddad takes this idea out back and shoots it.

Why is this a dumb idea? Let me count the ways.

1.) Where is the money for this going to come from? I've detailed the proposed spending plans we've seen so far. They total $900 billion. Now we're going to pump more money into the system from some as yet unknown source.

2.) Just what will the government do with these interests? They're going to wind up the majority shareholder in some of these institutions -- and a minor big holder in others. Who will decide the government's policy?

3.) What is the criteria for investing in a company? If ever there was going to be a highly politicized process this is it. I can see it now ... "Senator from big important district gets huge cash infusion not because it's a good investment but because the Senator is in a close reelection bid and needs votes.

4.) Will the government ever get out of these companies? Will there be a time limit?

5.) Will there be a time limit for this entity's duration? Will it go on forever?

6.) Will the government become intimately involved with the company's internal deliberations and policy? Will Congressmen sit on various boards?

I could go on, but you get the idea. This is a disaster waiting to happen.
Agreed wholeheartedly.

The problem is the Dems will jump on this and pass the thing. They now have to. There's a reason the stock market shot up 400 points. Wall Street is posititively giddy about the prospect of being able to unload trillions of debt onto the American taxpayer. You thought moral hazard and Too Big To Fail consolidation was bad before?

Republicans will be crowing. The party of "fiscal conservatism" and "small government" will immediately fall in line behind this program because now they can say the Democrats are preventing this vital solution from reaching Preznitman's desk, and they will lay every second that this Uberagency doesn't exist at the feet of Barack Obama, Nancy Pelosi, and Harry Reid. You'd better believe the marching orders are being put out right now, and that this is how the GOP plans to take control of the "it's the economy, stupid!" argument.

Absolutely bet on it. Wall Street has spoken. Everybody will want their piece of this multi-trillion dollar bailout, and they want it NOW. The lobbyists are already working the halls of power.

You will hear McSame call for this legislation to be passed as early as tomorrow. You will hear Obama call for this legislation to be passed as early as tomorrow. You will hear Preznitman call for this legislation to be passed as early as tonight.

More McSpain

The Washington Post has McSame's response to McSpain:
So, was McCain purposely trying to diss the Spanish leader? Questions about whether McCain forgot which country Zapatero leads, got confused about Spain's geographic relationship to Latin America, or confused Zapatero with the Zapatista rebels from Mexico have exploded on blogs since reports of the interview first surfaced.

McCain foreign policy adviser Randy Sheunemann said McCain's answer was intentional.

"The questioner asked several times about Senator McCain's willingness to meet Zapatero (and id'd him in the question so there is no doubt Senator McCain knew exactly to whom the question referred). Senator McCain refused to commit to a White House meeting with President Zapatero in this interview," he said in an e-mail.

Bullshit. Absolute bullshit. Spain is a NATO ally and one of the few countries that doesn't publicly hate us in a part of the world where we badly need help. You're telling me McSame won't commit to meeting with a NATO ally leader as President?

Doesn't that disqualify him from the job?

It's a lie to cover his growing senility. He's losing it. These are legitimate questions and they involve McSame being able to discharge his duties as President. If he can't, Sister Sarah is one heartbeat away from being leader of the free world.

Of course, there's the Obama option, America. Consider looking into it.

[UPDATE] Viva McSpain!

Muy bueno!

Who Could Have Possibly Predicted The Russia/Georgia Problem?

Well, turns out of all people it was a friggin Republican Senator. Steve Clemons lays it out.
Of particular note in Chuck Hagel's letter relating vaguely to autonomous provinces in Georgia:
. . .Across the board, officials are clearly concerned about the consequences -- including unintended and uncontrollable consequences -- of a Kosovar declaration of independence. This includes a former senior Russian official known for his pro-Western views, who told me that, "there is no way that one cannot view a Kosovar declaration of independence as anything but a precedent" for other similar conflicts.

Hagel also writes:

At a time when our relations with Russia are badly frayed, our military is overly engaged, we're dealing with serious fissures in NATO over Afghanistan, and European willingness to respond militarily to an outbreak of violence in Kosovo and the Balkans is uncertain, I urge you to proceed with caution, weighing carefully the potential implications of a diplomatic event that could stretch well beyond the Balkans.

We need to weigh our current policy against our strategic interests -- in the Balkans, in Europe, with Russia, and in a shared, international understanding of national sovereignty under international law. It is not at all clear to me that a unilateral settlement of Kosovo can provide a lasting, stable solution for this region. We must think through all of the complexities ofthe Kosovo issue, the grave risk of violence against Serb minorities in Kosovo, and how to avoid isolating and alienating Serbia.

This letter warns the administration that its actions in the Balkans ran the risk of triggering blowback from Russia -- and yet there is no evidence that the administration worried that Russia would exploit the model of Kosovo in other ways -- particularly as we saw Russia assert the independence of South Ossetia and Abkhazia.

While many US Senators write to the President and other cabinet officers on requests for consideration of this project or that, Chuck Hagel was regularly provoking the administration with sensible, realistic assessments about America's geostrategic choices and their consequences.

Many of these letters -- if not all -- seem to have been ignored. I have not been able as of yet to find a letter from Rice back to Senator Hagel -- but Hagel's letter is enough to show that the administration had more than adequate warning from Senate Foreign Relations Committee members that a Russia storm could be on the way.

Once again, Preznitman listens to...nobody.

Bushenomics 101

Preznit Chucklepants took a break from fundraising to reassure the American people six days after the problem started.
Bush said recent actions by the government to take over the huge insurance company AIG on Tuesday as well as mortgage giants Fannie Mae and Freddie Mac were necessary to prevent a "severe disruption" in financial markets.

"These actions are necessary and important, and the markets are adjusting to them," Bush said.

Sure it is, pretzelboy. Even congressional Republicans are pissed.

Key Republicans on Capitol Hill blasted the Treasury Department and the Federal Reserve on Wednesday for orchestrating an $85 billion bailout of insurance giant American International Group, and the White House for not informing them of the plan.

Meanwhile, Democrats blamed the Bush administration for the financial crisis, while the White House pointed a finger at Congress.

The criticism came a day after lawmakers were surprised by the news that taxpayers would again be called on to shore up a member of the struggling financial sector.

"Once again the Fed has put the taxpayers on the hook for billions of dollars to bail out an institution that put greed ahead of responsibility and used their good name to take risky bets that did not pay off," said Sen. Jim Bunning, R-Kentucky, a member of the Senate Banking Committee.

A spokesman for Sen. Richard Shelby of Alabama, the top Republican on the committee, said the senator "profoundly disagrees with the decision to use taxpayer dollars to bail out a private company" and is upset the government has sent an inconsistent message to the markets by bailing out AIG after it just refused to save investment bank Lehman Brothers from bankruptcy.

"The American taxpayer should not be asked to unwillingly assume the inordinate risks that financial experts knowingly undertook, particularly when taxpayer exposure is increased by the ad hoc manner in which these bailouts have been engineered," said Shelby's aide, Jonathan Graffeo.
Silly GOP lawmakers. You don't matter to Bush. You never did. Asking Congress for permission to use money is so 19th Century.

Preznitman does what the hell he wants to. And so will McSame and Palin when they are in charge.

John McSpain

Seems the old man forgot where the hell Spain is. John Aravosis at AmericaBlog has the story.
As I reported last night, John McCain recently did an interview with a large newspaper from Spain, El Pais, and seemed to not know that Spain was in Europe. The interviewer kept asking specifically about "Spain," and McCain kept responding about Mexico and Latin America and "the hemisphere." McCain then refused to say whether he would be willing to meet with the President of Spain should McCain win the presidency, oddly setting down the precondition that the President of Spain would first have to embrace democracy and human rights before McCain would meet him (the president of Spain already does embrace both of those, and in fact, this past April McCain did another interview with El Pais in which he said he'd be happy to meet with the President of Spain). Huffington Post has more.

It's clear that McCain had no idea she was talking about Spain, or the president of Spain, even though the interviewer repeatedly told him she was asking about "Spain" and "the president of Spain." This isn't a case of McCain forgetting something. He quite literally didn't comprehend what this woman was saying. His mind was gone, he was on auto-pilot, giving pat answers because he seemingly didn't understand what Spain was.
Scared yet?
The idea of President Sarah Palin taking over becuase McSame is senile should terrify you even more.

Global No-Confidence Vote: Deal Or No Deal Pt 4

Another major Deal and a new pair of contestants this morning in the great game of Deal or No Deal.

First, the overnight deal...and it's a massive one. All the world's Bankers have combined forces for a massive "liquidity bomb" on the world markets.

The Fed, which is adding $50 billion into its own banking system today, will spray dollars around the world via swap lines with other central banks. They can then auction them in their own markets. The ECB, Bank of England and Swiss National Bank allotted a total of $64 billion for one day today.

``The timing, so early in the trading day, shows both the severity of the strains in the interbank market and as well the authorities' determination to resuscitate orderly functioning of the money markets,'' said Julian Callow, head of European economics at Barclays Capital in London.

Under the new arrangements, the ECB doubled the limit of dollars it can get from the Fed to $110 billion and Switzerland's central bank can offer $27 billion, an extra $15 billion. New swap facilities with the Bank of Japan, the Bank of England and the Bank of Canada amount to $60 billion, $40 billion and $10 billion, respectively. The arrangements are authorized until Jan. 30.

Up to $247 billion in liquidity is being injected into the world markets in order to try to free up the totally locked system.

The London Inter-Bank Overnight Rate (LIBOR) is what global banks charge for loaning each other cash on a daily basis. That LIBOR number went through the roof yesterday because global banks simply don't trust each other.

They don't trust each other because nobody wants to be the next Lehman Bros. disaster. Nobody wants to go under, and that mistrust was represented by a LIBOR of over five percent, which is the equivalent of highway robbery.

The injection of cash loosened up the LIBOR to under four percent, still brutally high but not as bad as yesterday. European shares have muddled through to a dead cat bounce stage.

But that brings us to today's contestants on Deal or No Deal, Washington Mutual and Morgan Stanley. Both are looking for a Deal. WaMu has lost 95% of its value and is on the brink, going from $40 a share to $2. It's auctioning itself off, but so far buyers don't seem to be terribly interested.

At the same time Morgan Stanley is looking to also get a Deal while the dealmaking is good, looking to hook up with a bank like Wachovia.

It wasn't too many years ago that some federal regulators fretted about the dangers of letting commercial banks merge with the big investment houses on Wall Street. But in the current financial crisis, those mergers might be the only thing that saves some of Wall Street's most storied firms, such as Morgan Stanley (MS) and a troubled lender like Washington Mutual (WM).

With Lehman Brothers (LEH) now history, panicked Wall Street investors sold off shares in both Morgan Stanley and Goldman Sachs (GS), despite the fact that both firms reported relatively strong earnings in recent days. Morgan Stanley's shares plunged 24% on Sept. 17, as investors worried the white-shoe firm would suffer the same liquidity crisis that felled Lehman and threatened Merrill Lynch (MER). Morgan Stanley executives rushed to condemn the short-sellers they said were driving the sell-off. In a memo to employees (, 9/17/08), Morgan CEO John Mack expressed his view that the firm was "in the midst of a market controlled by fear and rumors, and short-sellers are driving our stock down."

There's one huge problem however.

WaMu is the country's largest S&L. If it does go under without a deal, it'll be the largest consumer bank failure America has seen so far, and it will be the FDIC that has to cover deposits for WaMu the tune of billions.

Wachovia would have the same issue if they take over Morgan Stanley. They would then be on the hook for Morgan Stanley's losses...and that means the FDIC would be on the hook for Wachovia AND Morgan Stanley's losses as well. That's going to be a lot for anti-trust regulators to swallow.

Because again, the FDIC is almost broke.

BE very, very careful. There are reports the US Federal Deposits Insurance Commission is running out of money. Chairman Sheila Blair has been forced to issue a statement. "US banks are overwhelmingly safe and sound and the Government fund used to cover insured deposits will be adequate to absorb any losses, even high losses," she says.

But Brian Bethune, US economist at consulting company Global Insight, said: "Additional failures of large banks or savings and loans companies seem likely, and that could overwhelm the FDIC's insurance fund."

Christopher Whalen, senior vice-president and managing director of Institutional Risk Analytics, said: "We've got a ... retail bank run forming in this country."

On Monday, US Treasury Secretary Henry Paulson said the nation's commercial banking system "is safe and sound", and that "the American people can be very, very confident about their accounts in our banking system".

FDIC officials say 98% of US banks still meet regulators' standards for adequate capital.

Associated Press reported that the FDIC was down to $US45.2 billion ($A57 billion) - the lowest level since 2003.

Whalen then wrote that reports the FDIC was running out of cash had no basis.

His statement said: "It is essential that people realise the US Treasury will advance whatever cash is needed by FDIC to address bank failures and make good the deposit insurance guarantee. There is no issue regarding the bank insurance fund, but unfortunately most of the public do not understand this. The FDIC needs to make this clear in all of its public statements."

IRA has been constantly in contact with the FDIC and other regulators and knows more about this situation, I would suggest, than the US Government.

The situation may not have been helped by a report from American Banker concerning the deal by Bank of America, the FDIC's biggest customer, with 10% of the nation's deposits, to take over Merrill Lynch saying "it is unclear how much that acquisition would increase B of A's risk profile"

If the FDIC goes, then bank runs will send us into a depression, period. It wasn't the 1929 stock market crash that caused the Great Depression, but the bank runs that resulted from the bank failures in 1930-1931.

If the FDIC has to make good on billions, confidence in banks will plummet and lead to massive withdrawals, further crippling the system. It won't take much in the environment we're in currently. Cash on hand reserves for most banks are well below 1% of assets. The rest is tied up in risky investments.

If even 1% of depositors take out their cash money on the same day, the bank has to turn people away. This causes a bank run, and people will panic.

IndyMac bank went under because people started making withdrawals. It didn't need much. Imagine that multiplied by hundreds, if not thousands of banks...and imagine the billions if not trillions it would take to cover those deposits.

Now remember the FDIC is down to $45 billion or so. AIG took more than that to save...for one company.

What happens when the Full Faith And Credit Of The United States Of America backing up your bank deposits aren't worth the paper it's printed on?

What happens when Deal or No Deal runs out of money to play? Everything the Fed has done up until now has failed. If the FDIC is challenged and even 1% of America withdraws their funds, the bank runs will collapse the economy overnight. Period.

Phil Gramm was partially right: This is a "mental recession". Only America being blithely unaware of how precarious the financials really are is saving the country from a massive bank run.

Be prepared.

Cross-posted at the Frog Pond.

The Even Larger Bailout

Yesterday I pointed out the US financial crisis has gone global. Overnight the response has been a joint counter-attack from the world's central the tune of nearly one-quarter of a trillion dollars.
The Federal Reserve almost quadrupled the amount of dollars central banks can auction around the world to $247 billion in a coordinated bid to ease the worst crisis facing financial markets since the 1920s.

The Fed increased the amount of dollars that the European Central Bank, the Bank of Japan and other counterparts can offer from $67 billion ``to address the continued elevated pressures in U.S. dollar short-term funding markets.'' The Bank of England, the Bank of Canada and the Swiss National Bank also participated.

Policy makers have struggled to revive confidence in markets this week as investors stockpiled money on concern more financial institutions would fail after the bankruptcy of Lehman Brothers Holdings Inc. and the U.S. government bailout of American International Group Inc. The cost to hedge against losses on U.S. government debt climbed to a record yesterday.

``There's a complete lack of faith in the markets,'' said Jim O'Neill, chief economist at Goldman Sachs Group Inc. in London. ``There's a lot of cash hoarding and people losing trust in banks, so the central banks are acting to relieve that. This might not be the last time they have to act.''

Markets welcomed the announcement, which was made in statements from each central bank at 9 a.m. Frankfurt time at the start of European trading. The cost of borrowing dollars overnight slid to 3.84 percent from 5.03 percent yesterday. It was 2.15 percent last week and reached the highest since 2001 on Sept. 15.

That's right, the world's central banks with the Fed leading the way are throwing almost $250 billion at the problem. As I said, the last card the Fed has to play is hyper-inflation, creating massive amounts of money to keep the global economic engine from seizing up. They are doing this now, as are many central banks. They have nothing else they can do now.

So far Asian markets are mixed, European ones are up modestly, and US markets are set to open a bit higher. But keep in mind it took an unprecedented amount of global fiat money this week -- almost four hundred billion dollars -- to stanch the bleeding today.

And nothing has been done to deal with the underlying problems. We're still deep in a housing depression. Plenty of banks are facing toxic balance sheets, now even more toxic after the last three days. Washington Mutual and Morgan Stanley are on the blocks now looking for buyers, and they certainly won't be the last financials to go.

Once again the Bush Administration will try to declare the crisis over and everything is now fine, the "fundamentals of our economy are strong."

They are not strong. We're living in a house of cards built on sand...sand owned by China and Saudi Arabia. Our capitalist society has become socialist overnight. Everything the Fed has done up until now has failed to stop the problem long term.

Every single action the Fed and Treasury has taken over the last two years HAS ULTIMATELY FAILED. Remember that. Each Fed response has only bought time until the next breaking point where even more Fed action is necessary.

This action will fail as well. The only thing that will change is the magnitude of the next phase of the crisis and the magnitude of the response to it, and the magnitude of the disaster when the Fed ultimately runs out of responses. That time is almost upon us.

They are down to their last option right now.


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