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Stormfront
Article By: John Schettler, Sept. 2008
Note: Three years ago, to the day, I published “Bye, Bye Big Easy” on
the Hurricane Katrina Crisis. We had a strange echo this year with Hurricane Gustav and Ike. They say that history does not exactly repeat itself, but it echoes. It’s September again, and the storms are upon
us once more, yet the weather report isn’t the only stormfront in the headlines.
In my article concerning Hurricane Katrina titled Bye, Bye Big Easy, I wrote: “The crisis in New Orleans is a microcosm of America as a whole. We are a
society living below sea level in a rising tide of energy adversity. And the Big Easy, along with the easy American life style, may be gone forever.” If anyone thought I was exaggerating back then to make my
point, I doubt they think so now. What has changed since? The last three years under Bush and Cheney have seen the nation buffeted by a financial storm that I predicted years ago. Net writers who wrote about the
problems that we are now struggling with were thought of as fringe “doomers” and given little regard. The three years since Katrina have brought the leading edge of that Perfect Storm I was writing about in 2005, with the housing and financial markets bearing the brunt of the damage, leaving us in a far weaker position to cope with an emergency on the scale of Katrina, no matter how well organized FEMA is. But our weather is the least of our problems at the moment, the storm raging in the financial markets continues unabated.
The Fate of Lehman Brothers
hung in the balance on Sunday, Sept 14th as Treasury Secretary Paulson called an emergency meeting of key Wall Street Investment firms and major banks. They were looking for some way to possibly save Lehman, though Paulson made it clear that Uncle Sam was not coming to the rescue this time. Both Barclays and BofA were potential suitors for a purchase, though each pulled out of the deal by Sunday afternoon. A rare two our session allowing derivatives to be traded on Sunday was viewed as an escape hatch for firms likely to be hurt should Lehman file for bankruptcy. Then, 10 big players each chipped in $7 billion to announce a new $70 billion “loan fund” aimed at backstopping shaky financial institutions and quieting down trader anxiety. Futures were indicating a 300 point drop in the Dow on Monday, September 15th. and they were correct. Something had to be done to buttress the confidence in the system, but confidence is just the froth on the cappuccino in this cup. The problem is insolvency,
running right through the heart of the largest banks in the US.
By Monday Lehman had failed, and yet another pillar of Wall Street came tumbling down. Merrill Lynch was reportedly sold to BofA—amazing that the nation’s
largest bank had its choice of two major Wall Street firms on Sunday. Lehman, the wallflower, was forced to file the largest bankruptcy in US history on Monday, Sept 15. The firm listed assets of $613 billion on paper, but much of that was virtually worthless, or they would not have failed. Her creditors were lined up from here to Japan. Large bond traders like Pimco, Vanguard and others stand to lose some $86 billion or more. Analyst Nouriel Roubini summed up the carnage this way: "All of the independent broker dealers are going to disappear. In March it was Bear Stearns. Tonight it was Lehman and Merrill Lynch. Morgan Stanley and Goldman Sachs should go find a buyer tomorrow. The business model of broker dealers is fundamentally flawed. They cannot survive."
The New York times chimed in tune, as the markets crashed losing over 500 points on Sept, 15: “‘Investors just don’t know what these assets are
worth,’ said Ed Yardeni, president of Yardeni Research. ‘There’s no transparency. It’s totally up to management to decide what these assets are worth and tell their accountants.’ For
example, Lehman said last week that it had $20 billion in tangible equity— money that would theoretically be available to its shareholders if Lehman had to be liquidated. But those same shareholders valued
Lehman at only $2 billion as of Friday, proof that they do not have confidence in the way Lehman has calculated its assets.”
James Kunstler has it perfectly correct when he writes: “At least one thing ought to be clear: this has happened due to the negligence and malfeasance of the
regulating authorities, namely the Republican Party, and that now all the hoopla surrounding Sarah Palin can be swept away revealing that group to be what they actually are: the party that wrecked America.”
Meanwhile, things were no better on Main Street. The primary generator of personal wealth for so many Americans, their house, has suffered over 40% depreciation thus
far, and the bottom is nowhere in sight. This graph shows the fall to date in a real estate hot spot, Southern California. The predicted bottom will see prices fall back to where they were in 1999, (sometime in 2012 or so) and then rise no more than the annual inflation rate each year thereafter. In short, the massive equity storm surge that blew in on the winds of speculation by both buyers and banks, a surge that was really nothing more than a tsunami of debt,
will not return for perhaps 15 to 20 years. Think of all the Boomers out there roasting hotdogs this Labor Day holiday who will not have any secure retirement, and find themselves in a negative equity position with
their home. It’s scary.
All this depreciation created the waves of bad debt now swamping our banking system and many institutions are now on life support from the Fed and the Treasury
Department. Oil has more than doubled since Katrina, pushing a whole range of other prices higher in the process, including that ubiquitous charge tacked on to all your Internet purchases for “shipping and
handling.” The so called “free markets” have also been suspect. Investors, fleeing the the venerable financials, have driven up the price of commodities to also push the cost of food and other
materials higher. There has been talk of a depression scale crisis blowing on that stormy sky out there, and though it may not seem like it yet, in real terms the nation is so much weaker than it was in the 30s.
Back then we had a robust manufacturing base in place, millions of small private farms, an oil boom that would provide us will all the cheap energy we needed to recover, and a generation of people who had a lot of
practical skills and know how, not to mention the will to endure hard times. They weathered the depression, fought millions of enemy soldiers and won WWII in four short years, and built the foundation of our
modern nation.
Now look at the cards we are holding as we face this growing storm--the manufacturing base is gone, long since shipped to China for cheap labor, along with all those
jobs. All those farms, the perfect base for localized food growth, are gone as well. Now we rely on large growers, centralized warehousing and a food distribution system that requires a 2000 mile diesel-fueled trip
to bring the bacon to your breakfast table. Our workers have lost those practical handicraft skills, and instead handle service jobs or manage pixels in the digital world. There is no more cheap and abundant oil out
there to fuel our recovery. Our vaunted military has been unable to subdue or pacify Iraq and Afghanistan after five years.
The hard reality is that we are not ready for the major effort it will take to transform our oil based suburban consumer society into a green and sustainable culture
based on alternative energy systems. The knowledge is there--just look at this! But the will to invest and scale up remarkable discoveries like the Nocera invention seems sadly lacking. I’m afraid it will take much more pain before we truly start the process of change on the Manhattan Project scale required. And that pain is settling into the joints of the nation with a real arthritic ache these days.
The fact is this, New Orleans and Houston are not the only American cities under threat now. There are regions of the country where the housing bust alone has gutted
neighborhoods, destroyed equity, and forced evacuations as well, as the winds of foreclosure still chill down our slowly freezing economy. The banks are in no condition to finance a major recovery effort on the Gulf
Coast today. Many can barely keep their doors open. Like FEMA, the FDIC has been hiring on and expanding floor space in its main Dallas facility—ironically named “Energy Plaza.” They’ve added
another 125,000 square feet of office space with plans to hire another 300 employees. Why does that give me little comfort? When I think of FEMA bulking up for a national emergency, Blackwater hiring mercenaries,
and the FDIC expanding, I get a real uncomfortable rumble in my gut. Clearly the nation is headed for more trouble than the hurricane season is likely to bring. Who can say what the situation will be during
November’s election cycle... or will the grave state of the nation force a postponement, like the Republican convention? Thirteen banks have failed so far this year, along with another bakers dozen in credit
unions and conservatorships. How many more will be swamped as this financial storm continues to make landfall?
You know there’s something deeply wrong with your country when you worry that your hard earned money may no longer be safe in the bank. The American dream, once
thought to be a birthright for all US citizens can no longer be “taken to the bank.” It is a future that is fraught with peril and far from certain. FEMA will likely handle the situation in New
Orleans this week, but what if it had to take on simultaneous emergencies in ten, twenty or fifty more US cities? It would be as useless as a bucket brigade on 9/11. The same can be said of the vaunted FDIC.
The agency announced that the single bank failure of IndyMac was going to suck away $8.9 billion of their dwindling assets. The FDIC had about $48 billion to try and backstop all our banking institutions, which now
hold over $6 trillion in deposits. Talk about a finger in the dike! What would happen if a really large bank, like Washington Mutual, went under? With $317 billion in deposits, WaMu has an asset base six times
the size of the FDIC! (Note: As WaMu actually failed a few weeks later, the deal brokered with JP Morgan Chase, effectively acquiring the bank, took the pressure off the
FDIC on this one. Days later CitiGroup absorbed the failing Wachovia. The “Big three” BofA, Morgan-Chase and Citi, have now had full meals. BofA absorbed both Countrywide and Merril-Lynch. There is a
limit to what they can now do to help any other failing institution.)
The metaphor extends effortlessly. The FDIC is like the Army Corps of Engineers, building levees and hoping a storm doesn’t make a direct hit on one of these
wobbling banking institutions and cause catastrophic damage. When Katrina struck there was a lot of talk about the wisdom of living below sea level in hurricane alley. That’s a perfect description of the way
many Americans are living now. They are underwater in their homes, as falling prices have ravaged the market and drained their equity. They can no longer borrow, and the
credit cards are maxed out. The bills are piling up like a storm surge—and it’s happening all across this nation. Foreclosures and bankruptcy filings are at all time highs. There simply aren’t
enough FEMA trailers out there to handle the crisis that is now railing at our shores.
Bad Weather
Gustav played havoc with New Orleans again this year, Ike was right behind her, making a direct hit on Houston. There was a haunting echo of Katrina-Rita, but
this time the authorities were taking no chances, declaring a mandatory evacuation in the Big Easy. Without “Brownie” at the helm, FEMA seemed to be a better oiled machine. The thousands of busses that
sat idle in flooded parking lots three years ago were now put to good use, moving people out. Trains were running round the clock, with the last train scheduled to leave the city at 5pm Sunday, August 31st. Anyone
found on the streets after dusk that evening was subject to arrest.
And if local authorities drop the ball this time, not to worry. Blackwater, the paramilitary security company based in North Carolina, has reportedly been soliciting
to hire ex-police officers and military types who possess legal powers of arrest and are qualified and licensed to use automatic weapons. (A simple pistol license will not do). The email they broadcast circulated
the net a day before Gustav made landfall. The contract was for an indeterminate time in areas that may be ravaged by the storm. So, should Bush put any of his newly penned presidential directives into effect, or
end up declaring martial law in the storm region, the storm troopers will be ready to serve.
Evacuation centers have been well stocked, the FEMA trailers readied, and plenty of food and water supplies stockpiled, for Gustav was scheduled to make landfall just
as the Republican Convention was set to get underway in the Twin Cities. There was some talk of canceling the convention, with Republican strategists thinking it unseemly to put on a big shindig in a time of
national emergency. The first day was scaled back to just two hours, with speeches by Bush and Cheney canceled. (Hallelulia!) Ex Terminator Arnold Schwarzenegger and several other high ranking Republican
dignitaries bugged out, and McCain, getting out in front of the storm, moved to Mississippi with his ex-beauty queen VP pick to get in an early FEMA briefing. Rove must have been rubbing his hands with glee for, in
a bizarre way, the storm represented an incredible opportunity for McCain to seize the presidential high ground.
The storm surge piled right up the delta, a place littered with expensive oil infrastructure, including the important LOOP oil terminal, the only facility in the
region capable of unloading the very largest oil tankers. Oil analyst Matthew Simmons described the importance of the terminal this way: “LOOP is the only facility in the Gulf to unload VLCC tankers which
carry over 2 million barrels of crude. They can, in theory, be "litered" by unloading onto smaller tankers that can make it into the Gulf Coast ports, but this is very lengthy timing and the spare capacity
of these smaller tankers is slim. We get about 1.2 million b/d of crude imports through LOOP.” If that were not enough, the big oil majors were shutting down thousands of rigs and platforms ahead of the storm.
Analysts were projecting damage estimates, hoping repair times on several hundred rigs could be kept to weeks instead of months in the aftermath of the storm.
Perhaps we should feel fortunate that the price per barrel is not at the $145 mark as it was earlier this year. The SEC threats of investigation flushed speculators
out of the system in the last several months and oil closed a little over $115 on the Friday before Gustav’s predicted landfall. That $30 difference saw gasoline prices drop from a national average high of
$4.11 per gallon as the summer ramped up, to $3.66 by Labor Day weekend. It was $2.73 when Katrina hit three years ago, and jumped quickly to $3.05 just after the storm. In the damage zone it was over $5/gallon, if
gas could be found at all. What will it move to this time? The recent storm in the Republic of Georgia just shut down a major pipeline there, effectively “shutting in” a million barrels of Caspian oil
per day. If Gustav shuts down the LOOP, we lose another 1.2 million barrels per day, not to mention all those rigs now in the damage cone of the storm. These things start adding up.
Here’s what they add up to so far: (Source - Reuters)
SUMMARY (Gustav)
96.3 percent of U.S. Gulf of Mexico oil output shut
82.3 percent of Gulf of Mexico natgas output shut
27 percent of U.S. refining affected, 11 percent shut, 16 percent at reduced rates.
800,000 Entergy customers lose power
No damage assessments yet
US waives gasoline standards in parts of Texas and Louisiana,
ready to release emergency crude
CRUDE OIL, NATURAL GAS
96.3 percent of U.S. Gulf of Mexico's 1.3 million barrels per day crude output shut as of Sunday, according to U.S. government.
82.3 percent
of the Gulf's 7.4 billion cubic feet per day natural gas output shut as of Sunday.
REFINING
Ten refineries with capacity of 1.9 million bpd shut
Eight refineries with capacity of 2.8 million bpd at
reduced rates
REFINERIES NOT PRODUCING FUEL:
ExxonMobil 193,000 bpd Chalmette, Louisiana.
Murphy 120,000 bpd Meraux, Louisiana
ConocoPhillips 280,000 bpd Lake Charles and 195,000 bpd Alliance,
Louisiana, refineries
Motiva 236,000 bpd Norco, Louisiana; 235,000 bpd Convent, Louisiana refinery on standby.
Marathon 250,000 bpd Garyville, Louisiana.
Calcasieu shut its 80,000 bpd Lake Charles,
Louisiana
Alon 80,000 bpd Krotz Springs, Louisiana
Valero 250,000 bpd St. Charles, Louisiana
REFINERIES AT REDUCED RATES:
ExxonMobil 503,000 bpd Baton Rouge, Louisiana; 567,000 bpd Baytown, Texas;
349,000 bpd Beaumont, Texas
Citgo 430,000 bpd Lake Charles, Louisiana
Valero 325,000 bpd Port Arthur, Texas; 130,000 bpd Houston, Texas, 245,000 bpd Texas City, Texas
Motiva 285,000 bpd Port Arthur,
Texas
ELECTRIC POWER
Entergy says 433,600 of 1.9 million customers without power, 101,500 in evacuated areas, 332,600 in southeast
and southwest Louisiana.
Entergy's Waterford 3 nuclear plant shut Sunday night; River Bend nuclear plant powered down to 75 percent due to lower electricity demand.
SHIPPING AND PORTS
Louisiana
Offshore Oil Port stopped unloading ships Saturday and shut flows from storage Sunday
Houston Ship Channel closed to inbound traffic at midnight Sunday (0500 Monday GMT), all outbounders already
gone
Mississippi River traffic at New Orleans halted inbound at noon (1700 GMT) Saturday, outbound as of 6 p.m. CDT (2300 GMT).
Traffic at Lake Charles, Louisiana, halted Sunday
Traffic at Beaumont and Port
Arthur, Texas, halted Sunday
Gulf Intracoastal Waterway closed Mississippi to Florida
PIPELINES
Explorer Pipeline says entire 700,000 bpd products pipeline, Gulf Coast to Chicago, available Monday
night
El Paso's said its Tennessee and Southern Natural gas pipelines offshore throughput cuts total 2.5 Bcfd.
TEPPCO's 340,000 bpd products line from Texas to Northeast cuts run rates, Beaumont
distillate line down.
Henry Hub natural gas trading hub shut Sunday.
Enbridge (ENB.TO: Quote, Profile, Research, Stock Buzz) (EEP.N: Quote, Profile, Research, Stock Buzz) stopped taking natural gas production
Saturday on systems with 6.7 Bcfd capacity
Amazingly, the price of oil went down after these storms. Wall street was so busy unwinding commodities positions that it failed to move in tempo with the bad news for our energy outlook. It was a strange disconnect.
During the Katrina event three years ago I wrote: “But strangely, unlike the coverage of 9/11, the TV commercials were not knocked off the airwaves this time.
As I watched the coverage of the Katrina disaster I was struck by the incongruous, almost jarring juxtaposition of advertisements from companies hawking home equity loans and rolling out those big oversized SUVs
with the exhortation that: “Now you can get the full sized SUV you really want”—and all this while gasoline prices skyrocketed to over $5 per gallon in Atlanta because 40% of our nation’s
refinery capacity was knocked off-line in the Gulf. On the one hand we see the complete destruction of a major American city, and beyond that, the Gulf Coast region as a whole, and on the other hand the TV ads just
keep humming along, exhorting us to continue borrowing against that house, and to upgrade to a heavier, less fuel efficient hulk of a vehicle that is supposed to represent our freedom in some way because it can go
off road. This strange disconnect, scenes of disaster offset by smiling yuppies in SUVs, seemed to proceed from the notion that the real world was still safe and sound, not a chaotic mess like New Orleans. But the
truth of the matter is that most of the rest of the real world is much more like that ravaged Gulf coastline. The crisis there, rippling out in high gas prices and shortages, is but a fore shock of the challenges
waiting just around the corner for America.”
How prophetic. Back then the nation as a whole was still humming along like a real estate agent leading a home tour in a Hummer. No one is running SUV spots this year. The hordes of
bankers crowding into our foyers to compete for a home equity loan are long gone as well. Now the rest of the country is deeply distressed, with many cities and communities just barely hanging
on as the recession takes hold and deepens. Our reaction to Katrina was to simply pump out the water and build the levees higher. We refused to get the point the storm made all too evident—that
the low lying swampy marshland and river delta was no place to build a new city. Now we are faced with the same potential nightmare yet again. FEMA is ready, the FDIC is ready, but in time we will
realize that neither institution, and the bankrupt government that spawned them, will be enough. The FDIC may be like a wind ravaged palm tree in a few years.
The warning I, and so many others, gave years ago about the convergence of debt and energy
scarcity has apparently not made the point yet either. The Fed and the FDIC are just building levees…and hoping. In effect, as one bank fails, flooded with bad debt, they just pump the water out
to another bank. The Fed itself has been taking on the water of bad debt like the Titanic of late. It has been trading its prime asset, treasury securities, for the flotsam and jetsam accumulating in our
storm ravaged financial institutions—SIVs, CDOs, worthless derivatives. Soon more than 50% of our
central bank’s asset base will be comprised of these “questionable” financial instruments. Slowly but surely, the Fed, and the FDIC will be sunk by the storm surge of debt that is destroying this
nation.
For all the travail of the last three years, have we really gotten the message yet? We can no longer
live a lifestyle based on the spending of borrowed money—other people’s money, now largely the big Asian bankrollers who have been propping up our national debt. And personally, Americans can
no longer live a lifestyle of consumption on credit, which is just a kind of deficit spending. Buying anything on credit is just an assumption that your future will be brighter than your present. Don’t bet
on that. The party is over, and if we don’t begin to make real productive change, we’ll remain stuck
in the New Orleans mentality—pumping out water and building levees--all half measures aimed at keeping the status quo in place as long as possible.
So, as you watch coverage of Gustav this week, think about the Big Easy lifestyle that has changed
so dramatically in the last three years. One last note from that article: “The Big Easy is over, done, finished. Not just for New Orleans, but for all of us. It took a hurricane like Katrina to expose the
injustice and inequity of our economic system, to expose that neglected 12.7% that are now floating in the infested flood waters, and to expose the fragile, oil dependent energy system that
underpins this economy. When will we change? What more will it take? Like those who could not heed the warning to evacuate, America itself will soon be up to its neck in a flood tide of adversity.”
The words have a haunting echo this year, don’t they? Now it is not just those impoverished 12.7%
who could not get out of the storm’s path and found themselves in the Superdome—now it’s the entire fate of Middle Class America about to face the eye wall. People are worse off, in so many
ways, than any generation since the depression. The thin veneer of normalcy that persists is only the effect of all that ephemeral “wealth” we generated with the housing boom, and it is slowly
melting away like the arctic sea ice. Soon this false “wealth effect” will be gone, and with it goes the
life style of sprawling suburban development, and all the house flipping yuppies in their SUVs. Three years ago I quoted a Saturday Nite Live comic fond of saying you can either “believe me now
or believe me later.” It’s later now…
Do you believe?
John Schettler: Sept. 1, 2008 - Updated Sept 15, 2008
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