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Article By: John Schettler – February 2008 At this very moment, major US banks are, in point of fact, insolvent. They remain operating only because of accounting sleight of hand that allows them to hold the lion’s share of these bad debts off their balance sheets. Their actual assets, in terms of cash, are miniscule compared to the exposure they have with this debt. Like air oozing from holes in an overfilled balloon, billions of “writedowns” have been announced in the 3rd and 4th quarters of 2007 (over $120 billion so far)—but the losses announced are only a small fraction of the actual liability. The bankers know this. Deep down in their greed leveraged hearts they know that they are now walking on the edge of a knife. While they scrutinize the typical borrower, tracking how each person pays their bills and assigning a numerical FICO score to us all, their own FICO score would have to be factored in negative numbers. Stated simply, the banks are broke. They have taken all the money depositors have entrusted them with and lent it out. It’s gone. Their cash reserves can only cover a fraction of existing demand deposits, let alone savings deposits. They have trillions in leveraged debt hidden away that they can no longer “roll over” because the system has frozen, largely due to fear and suspicion. The government also knows how dire the situation actually is for major US banks. On January 14th the FDIC issued a two part “Notice of Proposed Rulemaking relating to the potential failure of an insured depository institution.” It contained procedures and rules to be applied in the event of a bank failure. The FDIC writes: “The second part of this proposed rule would require certain large depository institutions to place holds on deposits accounts in the event of failure. The amount held would vary depending on the account balance.” In short, the government is getting ready for rough water ahead, and planning to prevent massive cash withdrawals in bank runs. The companies that insure these shady securities, like Ambac and MBIA, are now realizing they do not have the capital to cover even a fraction of insured losses, and that they, too, are actually
insolvent. They put on the bravest possible face about this, with PR press releases claiming to have every confidence in their capital position, while the very next headline reveals they are now in the process of “seeking
additional strategic partnerships,” which is financial doublespeak meaning they are now desperately seeking additional dollars. Ambac lost its AAA rating on Jan 21st, and MBIA is out looking for emergency funding to
support their operation. The line must be getting very long outside the gilded palaces of Gulf State Sheiks and Chinese banks, as one Wall Street firm after another comes begging for money. When the insurance companies
start looking for insurance, the system is completely broken. Isn’t it ironic how the capitalist miracle on Wall Street now relies on rich autocrats and communists to have even the slightest chance of remaining
solvent? US stocks ended the second week of January with the worst start in decades. (The near term 10% correction the Nattering Nabob predicted has already happened.) Now the pain is rippling through the European markets as well. On Monday, January21st, the pan-European Dow Jones Stoxx 600 index ended down 5.4%; the French CAC-40 index was down 6.8%; the German DAX 30 index fell 7.2%; the U.K. FTSE 100 was down 5.5% erasing the equivalent of $120 billion from the traders books. DOW futures on the Martin Luther King holiday, (Jan 20th) were down 545 points, (5% off its last reported value). US stocks were at their lowest level since the year 2000, which means, in general, that you haven’t made a nickel in stocks for all the travail of the last seven years, and because the dollar has lost considerable value during that same period, the 12,000 point tally today is actually worth considerably less than seven years ago. The market has been a great place to lose money in recent years. It will continue to be such a place for years to come. US indices appeared to be at the edge of a precipice, so Tuesday morning, January 22nd, saw a full court press by the Treasury Department and the private Fed bankers. Treasury Secretary Paulson
came out for a cheerleading speech urging congress to swiftly enact a massive intervention “stimulus package,” which would take a full 1% of our gross domestic product and quickly return it to shell shocked US
consumers in the form of nice fat tax rebate checks. While he was taking questions at the podium, the Fed launched phase two of the PR plan with its first inter-meeting rate cut since 9/11. They trimmed 75 basis points to cut
the interest rate to 3.5%, an action that has not been taken since the recession of 1984. The pith helmets were strapped on tight and all the forces the government and Fed can bring to bear were manning the water buckets hoping
to put out the fire sale on stocks.
They are starting to do exactly what I said they would two years ago--restrict spending for discretionary items as more and more of the budget goes to purchase necessities like food and fuel. After a weak holiday shopping season, January showed the slowest consumer spending on record for the last 40 years! Retailers hoped they would get a boost from gift cards, but Wal-Mart reported that its customers, typically low and middle class shoppers, are redeeming their gift money to buy food! The pain experienced by the average consumer will quickly translate into a declining retail market. Mike Shedlock (aka “Mish”) posted this list if store closures on his web blog recently: The pain is starting to ripple through the commercial retail sector of the economy, and job loss will be on the rise. Store Closings January was always a psychological turning point after the weight of the holiday season is finally set down. People want to start fresh, make new year’s resolutions, begin new projects in business--but this year has been decidedly different. People, and businesses, seem to be entrenching for harder times ahead, as well they should. Yet this is the very same psychology that actually produces an economic downturn. At the moment, the pundits still think consumers are simply choosing not to spend. I hold that they simply cannot spend at the rate that would be required to push the economy in to positive growth. It’s no longer a question of choice or psychology, but one of means. With credit tightening, balances due at an all time high, banks jacking up interest rates on credit cards while the Fed cuts and cuts and cuts, the cost of living rising, people finally realize they cannot buy whatever they want, with easy terms and quick finance. The result is obvious—they stop spending; they stop buying things they don’t really need with money they don’t really have (credit). “Necessities” are also being redefined in this climate. Case in point: the monthly mortgage payment, once the first bill to be paid each month, is now being viewed as disposable. In 2005, at the very height of the housing boom, I said people would be simply walking away from home loans where they owed more than the property was worth. They are now walking away, for these so called “homeowners” were really just renters in disguise. In effect, their liabilities now exceed their assets, and they are effectively bankrupt. They have few options, and default is looking more attractive than trying to maintain a payment that had nearly doubled in a home that is massively overpriced, losing more value each year. The Los Angeles Times writes: “A homeowner who can’t sell his house tells the L.A.Times, “Foreclose me. … I’ll live in the house for free for 12 months, and I’ll save my money and I’ll move on.” Banks and lenders fear this kind of thinking — that walking away from a house could be the smart economic move — appears to be on the rise. Wachovia, in a conference call yesterday, warned investors that increasing numbers of homeowners are walking away from their homes by choice: “… people that have otherwise had the capacity to pay, but have basically just decided not to because they feel like they’ve lost equity, value in their properties…” In true carpetbagger form, companies are already lining up to service this new market trend. Have a look at “youwalkaway.com,” a web site promising to teach stressed homeowners how to live in their home scot-free for up to 8 months and then walk away, not owing a penny. The slick web site features astounding images of typical American families cavorting with their kids over well kept lawns…as they walk away, and mom an daughter gleefully packing away their kids teddy bear in a shipping box as they get ready to move out, the dream of homeownership over. Have a look at their home page! They even offer a “Walk Away Protection Kit” as part of the deal. I guess you will always you find vultures ready to feed on a carcass and find a way to make money off of someone’s pain, but isn’t there something about this ad that just turns the stomach?
When I wrote about all of this two years ago my words sounded like those of a crazed doomsayer. Now my small voice is drowned out by the cacophony of news headlines shouting the very same things I warned about. But there is only a glimmer of solace in seeing one’s predictions come true. Being a stormcrow is nothing more than taking a realistic look at the world and applying a little common sense in the face of the irrational exuberance of speculation and the simple depravity of human greed. Anyone could have seen that the housing boom had to go bust. They just chose not to see back in 2005 when it seemed the great game would never end. From banker to borrower, greed, deception, and self-delusion prevailed. The price is now a shattered housing market which will take years to recover. The repercussions from all this have only just begun to ripple through the economy as a whole. 60 minutes ran a segment called “House of Cards” that characterized the crisis, focusing on the distressed city of Stockton, CA, “Ground Zero, in the sub -prime crisis.” The mass media is finally writing the same kind of news copy that more insightful net bloggers have been cranking out for years. Yes, it takes that long for the main stream media to catch on. And if the pain in all of this could somehow be relegated to the “sub-prime” borrowers, they probably would still be blithely ignoring the reality of the economic crisis upon us. They pay attention now because the banks are feeling the pain--the banks are holding the bill, and the balance sheets are heavy with all that unpaid debt. They respond by tightening lending, meaning there is even less money circulating in the economy, and the consumer has fewer and fewer options beside default. Lather, rinse, repeat. It started with the poorest borrowers, and then began rippling up through alt A credit customers and into prime. Commercial and residential building has frozen as well. Credit card defaults are increasing dramatically. The crisis at hand could be much more severe than most people realize. When the Great Depression hit in the 1930s we had the massive economic stimulus of WWII, a huge manufacturing base, decades of cheap, abundant oil to help the recovery. Today we have a declining pool of ever more expensive oil to draw from, a decimated manufacturing base, and nothing but the a feeble government tax rebate check to try and feed the economy. The only thing that could save us would be a massive national recovery effort, but nobody is planning for this. They are still pointing fingers, from one hedge fund manager to the next, and wondering where the spinning wheel of debt will finally point. They have learned nothing from all this, but the lesson is really quite simple. World Controller Mustapha Mond explained it to John Savage in Huxley’s Brave New World in a few poignant words: “Happiness has to be paid for.” You cannot get something for nothing. You can’t force feed the American consumer credit and not think they will use it to spend 120% of their annual income each year and run up the greatest debt to income ratios the developed world has ever seen. You can’t bitch slap the American middle class consumer indefinitely with your 29% interest rates against a prime of 6.5%. You can’t slough off toxic mortgages designed to explode and double in payment while you gleefully wait for the checks to come in. The banks created the system. They make the rules of the game. They create the financial products that are so devious and do such harm to borrowers with the most fragile financial standing. But what happens when Mr. & Mrs. Everywhere just stop playing and just stop paying? You’ve been reading about it in all the bad financial headlines the last six months. The system freezes. The banks don’t want empty depreciating houses, and they don’t want your credit card bills either. When the backlash comes home to them in massive losses, they frantically talk about a crisis and look to the government for a bailout. But the crisis began when they first started their cavalier lending game. The crisis began somewhere in the darkness of the human heart, where self -serving greed became a standard business practice, adopted by the very best and brightest of our society. The Rich Dads thought they had a great scheme going. Today’s headlines are just the inevitable consequence of their negligence, and yes, downright fraud. Now the Fed is desperately trying to entice banks to begin lending yet again, so that consumers can start spending again, like another round of musical chairs. That’s all the Fed rate cut is about. White faced bankers have been staring at their balance sheets and realizing that they are, indeed, insolvent. Money velocity has slowed to a crawl as they scramble to rebuild lost capital, which is the great danger sign of a deflationary depression in the making. In the short run, however, the fears of the obvious US recession now underway have led to massive flight away from dollars by overseas investors. As dollar positions unwind, the strength of the Greenback wanes. This means all the things we import cost more, and we have an inflation problem that masks the deeper threat of deflation being caused by the bank lending freeze. Stagnation at home, with an odd cycle of inflation at the same time. Is this the old Stagflation rearing its ugly head again? Fire and Ice. The present dilemma is a crisis of confidence as much as anything else. Robert Reich wrote for Salon.com: “Nobody on Wall Street has any idea how many bad loans are out there. Therefore, nobody knows how big the losses are likely to be when the bottom is finally reached. And precisely because nobody knows, nobody wants to lend any more money.” The banks have lost faith in the securities they themselves created, and they can no longer refinance the massive debt they hold. In short, the people in the know have already stopped playing the game, and they’ve been taking their money off the table and heading for the door. Many were implicit in the many schemes that bilked billions from the artificially engineered housing boom. As Robert Samulson of the Washington Post put it: “Amid the mayhem on world financial markets, it is becoming clear that capitalism's most dangerous enemies are capitalists. No one can have watched the "subprime mortgage" debacle without noticing the absurd contrast between the magnitude of the failure and the lavish rewards heaped on those who presided over it. At Merrill Lynch and Citigroup, large losses on subprime securities cost chief executives their jobs -- and they left with multimillion-dollar pay packages. Stanley O'Neal, the ex-head of Merrill, received an estimated $161 million.” Nothing like a golden parachute to take the sting out of things when your game goes up in smoke. France’s
second largest bank had to announce a massive $7.1 billion loss on January 24 due to “Trader fraud.” Some enterprising young capitalist out there made off with a bit more than the golden parachute! He seems to have
taken the entire plane in that little scam. And sadly, the commentators on MSNBC almost cheered the lad on, with laudatory remarks on the audacity of this fellow, and banter that had the effect of a back slapping
congratulation. No shock. No shame. We are too jaded by the daily financial news trauma to be moved by something as paltry as the loss of a mere $7 billion. This is perhaps only one instance of fraud and profiteering
that characterized the boom years. How many more wait to be discovered? Bush would have served the nation much better had he unleashed the US Army on all these Wall Street fraudsters instead of Saddam’s Iraq.
Osama has done nothing to compare with the pain and suffering the financial houses have visited upon us. As WhatReallyHappened.com commented: “And in exchange for this $600 scrap from their table, the government expects that, in your gratitude, you will forget about all the lies used to take that money from you in the first place, all the lies used to trick us into a war, all the rigged elections, all the loss of our freedoms and civil rights.” But when it finally comes, you’ll spend it. It will vanish into the saw mill of bills and daily living expenses, and the country will be in the exact same stew a month later. The stimulus package will just not work, because it will be dwarfed by the other costs hitting the consumer now. Merrill Lynch estimated conservatively that the consumption will slow by at least $360 billion this year, and amount twice the size of the entire “stimulus package.” Instead of a bailout check from Uncle Sam, what we would like, dear banker, is this: a fair deal. Remember that all the money in your coffers is ours, not yours. We walked into your bank and handed it to you for safekeeping. We are kind to allow you to do anything at all with it. But now that we see what you have done, we are appalled. So when the Fed rate was 1% why did you serve up home loans at 9%? Why did our credit card rates still hover at 19% to 29%? Why are mortgage payments doubling on all those loans? You told us not to worry about that. We could always refinance, right? Why did you offer loans where interest is deferred and added to the principle, so it actually increases with each payment and never gets retired? Why did you sell loans off to a thousand investment vehicles in Germany? Japan? China? Who does the borrower talk to now when there’s a problem? Why are fees, points and interest the only things that define your business practices ? What happened to fairness, service and equity, let alone security and trust, words banks tack on to their DBA without a second thought. Read a poem like "Levy Silver" by Edgar Lee Masters to get my point: "Why did I sell you plated silver?” But
the poet goes on to ask: “The question is, why did you buy?” Both banker and borrower are to blame for the
crisis that is now at our doorstep, indeed, shouldering its way across the threshold into the living rooms of people all across this nation. It will not be confined to the big financial houses and trading pits of Wall Street.
This will be an old fashioned, sharp toothed recession, or worse. Masters’ answers his own question by concluding that most of us were simply brass under a film of gold. And that is a perfect description of the loan
packages concocted by the banks to feed the housing boom. They knew what they were doing, offering rigged home loans to people who could barely afford their groceries each month. Why did these folks buy? Because,
for the first time in their lives, and perhaps the only time, they had a chance to have their own home. It was the
first time in their lives they dared walk into the bank with any hope for loan approval. The system has shut them out for decades. They had been tagged with low FICO scores, branded as pariahs, sub-prime, sub everything.
Now they had a chance to make something of their own, and the banks gave them a mortgage designed to explode like an IED instead of something they could actually live with, pocketing enormous profits by herding
these borrowers through the system and then selling off their loans to whomever they could sucker. Some chance. The pain from defaults and foreclosures has only just begun. Article By: John Schettler – February 2008 |
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In the meantime the cheery talk of the US economy, described as “resilient” by Paulson, and “robust” was a
thinner veil than the wan smile he tried to present with his speech. There has been a hard lesson taught to the fat cats in the money castles these last several months, and it is simply this: when you swindle the little guy for
your profit and gain, there will eventually be a price to pay. Because there are millions of little guys out there, ten thousand Poor Dads for every Rich Dad, and their collective pain will be your undoing. The whole
gist of what the Fed and Paulson are trying to accomplish is to get you, my dear friend, out of your house, into
your car, and off to a shopping mall. “consumer spending” is the heart of the American economy, not the
stocks and bonds traded in the casino like atmosphere of the financial markets. America’s wealth is not held by Morgan Stanley, Bear Sterns, and Lehman Brothers, but in the checking and savings balances of the
American middle class, and in the rapidly diminishing value of the homes they live in.
The American consumer has been taken for a ride in recent years with
the artificially engineered “Housing Bubble.” They were all given toxic “gotcha” mortgages and urged to refinance into option ARMs and go out
and spend. Now they owe for the things they bought: wide screen TVs, granite counter tops, new Washer/Dryer combos, cars, clothes and everything else. They have eaten the sumptuous meal made possible by
the housing boom and now the waiter, (your friendly banker) has presented the bill with that nice little fine print line at the bottom advising you that a 20% gratuity has been added to your tally. They stare at the
tab, realizing that they just cannot pay. There isn’t enough room left on the Visa card to pay. The debt created
and served up by bankers has finally hit home to the typical American, and household after household is feeling the heavy burden of increasing mortgage payment resets, spiking credit card interest rates, food costs up over
22% in one year, medical costs through the roof. They simply cannot service this debt any longer, and so, predictably, they stop paying.
All this could have been avoided if
the banks had simply written a proper loan, one the borrower could manage. But then again, bankers would not have reaped the enormous windfall of points, fees and interest that they have been feeding on these last seven years.
So, in the end, the crisis we have is a sad combination of banker greed and manipulation, with buyer hope and illusion. The cocktail has turned out to be lethal for the economy as a whole, not just because of the
losses to banks and finance houses, but because the speculation the housing bubble created drove up a whole host of other daily costs, which almost never come down again. When is the last time your
landlord sent you a friendly letter telling you your rent was being lowered?
I’ll close with the last painful moment of the month, the final State
of the Union speech delivered by George Bush. Like the others, it was full of platitudes about democracy, our ideals, freedom, tributes to “our
boys” and all the other typical Republican heartstring pulls. But it was sickening to hear this appointed president reference the founding fathers, the sanctity of the constitution, and talk about solving problems like
immigration “in a manner that will uphold the law while remaining true to our highest ideals.” This from the man who has consistently flouted the law and trashed our highest ideals. This from the president who
introduced a whole new lexicon of doublespeak into our public vocabulary with terms like the decider, rendition, persons of interest, enemy combatants of the state, shock and awe. This
from the man who brought us hundreds of presidential signing statements to bypass the will of congress; from
the president who gave us the endless “war on terror,” domestic surveillance, NSA harvesting of our phone
records, the Orwellian Department of Homeland Security, the “Patriot Act,” the herding of dissent into “Free
Speech Zones,” preemptive war, the obsession with non-existent weapons of mass destruction, the indecency of Abu Ghuraib, the blight of Guantanamo, the demise of the Geneva Conventions, the death of Habeas Corpus,
the building of hundreds of detention facilities on US soil, and the astounding statement that “we do not torture.” 
