It was ten days that shook the world of finance to the core of its rotting foundation. Ten days where the ‘powers that be’ completely re-wrote the way business is conducted in this country, socializing massive private debt, altering the rules of stock trading to protect private financial institutions, saddling the US taxpayer with hundreds of billions in toxic mortgage backed ‘securities.’ Commissar Paulson and Obersturmfuhrer Bernanke visited congressional leaders Thursday, Sept 18 to spell out the real peril of what is now happening to the faltering system, reportedly stating that a collapse could be just days away. Those that spoke to the press afterwards said they emerged “stunned” by the scope of the problem. How clueless could they be? What have they been reading the last three years?

It was soon abundantly clear that this little “surprise” was well planned by the Bush administration. Roll Call reporter Kieth Staffler reported that in a statement to the press, “White House Deputy Press Secretary Tony Fratto insisted that the plan was not slapped together and had been drawn up as a contingency over previous months and weeks by administration officials. He acknowledged lawmakers were getting only days to peruse it, but he said this should be enough.” To make the point even more urgent, the FDIC seized WaMu, the nation’s 5th largest S&L on Thursday, Sept. 25th while the wrangling over the bailout plan was underway. “FDIC Friday” came in a day early.

Their plan? ...The greatest government bailout in history: TARP, the “Troubled Asset Relief Program.” Forget the paltry $200 billion earmarked to nationalize Fannie & Freddie, or the $84 billion to acquire AIG. The request this time will start at $700 billion. The only solution seems to be to dig another massive debt hole, shovel in all the fraudulent, speculative, shady bank securities, and cover it with a TARP. The waste will sit there until it either appreciates again one day in the future, or is slowly leeched away at taxpayer expense. Cleansed of the consequences of all their incompetence and greed, the banks will sit down and figure out how to regain solvency. But don’t expect them to pass on their future profits to the public. Those remain private—we just get their losses. Joshua Holland posted this little gem to describe it on Alternet: “We're splitting an oil well with the Big Boys on Wall Street: They get the oil, we get the shaft.”

All these foreclosures combined amounted to no more than $100. billion in loans. Now we suddenly need a down payment of $700 billion, which will grow to at least $1.5 trillion or more? It is clear that we are not simply bailing our the bad loans, but the massive, criminally leveraged bond markets that were built on top of them. In effect, the Wall Street magic show that has been going on the last 10 years, creating fraudulently valued securities, is now collapsing. A single home loan may have been used to “secure” other financial instruments that were packaged sold, and resold until their value exceeded the original loan by as much as 30 times! It’s a stunning and irresponsible act that will be regarded as the greatest wealth heist in history.

And the nation is stunned as well, as if awakening from a bad dream to an even darker reality. With Dick Cheney shuttling about the Caucasus, quietly trying to drum up support for Georgia and the Ukraine, with America sniping about a bespeckled Republican VP candidate, with both Republicans and Democrats in congress bumbling about, completely clueless and thinking of a recess, and Bush down in Galveston holding hands with the Mayor of that devastated town, America was effectively being run by Treasury Commissar Hank Paulson the last ten days. And it looks like he will continue to run the country, frightening senators and congressmen into submission as he goes. It will be another rush job for the new legislation, just like the Patriot Act was passed while congress cowered under Anthrax attack, legislation passed without even being read! By the same token, few in congress will really understand what they are voting on. They will simply do what they are told.

Laurisa Alexandrovna wrote for Huffington Post: “Welcome to the final stages of the coup...Yes, it does sound terribly conspiracy-theory-esque when explained just this way. But what else does one call a criminal conspiracy to destroy Congressional powers permanently, alter Judicial powers permanently, and steal public funds?”  Here’s what she means...

Among the Commissar’s new powers: Authorization to purchase mortgage backed securities from any US based financial institution, even a foreign bank based in the US. Power to: “enter into contracts...without regard to any other provision of law regarding public contracts.” (This is because if Paulson had to produce the contract, the original note on any of these mortgages, he could not do so. They’ve been sliced, diced, packaged and repackaged so many times that no one knows who actually owns much of this paper now. Solution--just ignore existing contract law.) The Commissar will also have power to: “designate financial institutions as financial agents of the Government.”  And the courts will be neutralized: “Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.” The national debt will Skyrocket: The US debt ceiling is raised to $11,315,000 ,000,000. ($11.3 trillion) by this act. Up from a ceiling of $8.9 trillion just a few months ago.

And the damage will not be limited to the $700 billion. Mike Shedlock notes: “Inquiring minds are also noting "The Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time." The idea behind the above statement is to allow for a continual dumping ground such that there will always be $700 billion in toxic garbage held under this program. As soon as any asset can be unloaded by the Treasury at cost, another toxic loan is eligible to be assumed on the books of the Treasury. This process can last for as long as two years.”

So the new Treasury Commissar has the authority to enter into contracts without any regard to existing contract law, without any judicial review of his decisions, and with a revolving US government credit line of a cool $700 billion, all credit extended by the US taxpayer, the citizens who are now paying for the rescue of a few thousand wealthy men and women in the finance industry. Capitalism is dead, over, done. The free market is gone. The last two investment brokerage titans left standing on Wall Street realize their business model is now fatal. As only “banks” will qualify for the bailout, they were quick to change their spots. They will both morph in to “holding companies” in the next 5 days, and emerge from that cocoon as “banks,” soon to have a prominent place in line at the public trough.

A Once in a Century Crisis
The architect of easy credit and shady derivatives trading, Alan Greenspan, felt compelled to let us all know this was a once in a century crisis. Thanks Al.  Remember when you denied there even was a housing bubble, calling all the phony securities deals nothing more then  a little “residual froth?”

The dramatic events of the last days could not have been better scripted by the very best in Hollywood. Houston was off-line, power down after a direct hit from Hurricane Ike, plunging over five million people in America’s 4th largest city into darkness. Galveston Island was inundated, with 5 feet of water filling the garages and lower floors of many neighborhoods. There was talk that 100,000 homes could be ruined by the storm. Over a million had fled the scene in the days prior to landfall, but most of Houston hunkered down, and was now watching the first columns of national guard convoys arrive to enforce a 9pm to 6am curfew on the oil metropolis. But these were only the outward signs of the damage being done to the nation that weekend.

Beyond this, other dark matter was being discussed. Treasury Commissar Paulson was huddling with bankers again, only days after nationalizing half the nation’s housing industry and watching the collapse of Lehman Brothers. Wall Street’s favorite Bull, Merrill Lynch, was gobbled up by Bank of America. The government was now ‘acquiring’ an 80% ownership stake in insurance giant AIG. Any one of those stories would have been a monumental event of the year on its own. Now the colossal breaking news slammed like a storm surge against the weary Wall Street traders desks. Like so many outrages we have endured under the Bush administration, bad news was followed by more bad news, and then more.

A run on other independent broker dealers Goldman Sachs and Morgan Stanley or even Citigroup was now a distinct possibility as the shadow banking system, the other dark energy supply driving the nation, was also effectively ‘shut in,’ like the oil in Houston’s idle refineries and pipelines. The financial system had relied on these shadowy derivatives trades to keep the wheels turning. Many investment houses were leveraged at impossible ratios, some as high as 35 to 1. As these positions became more and more untenable, the unwinding was ravaging the meager real capital base that supported their shadow trades.

The dark matter of derivatives comprising the shadow banking system amounted to over $620 trillion dollars, a sum exceeding the gross domestic product of the entire nation for the next 62 years. The energy flows had come to a near complete halt, with nervous investors unwilling to risk capital. Banks stopped lending to other banks. Loans became almost impossible to arrange. It was a freezing deflationary scenario, potentially much worse than the Great Depression, but no one really knew what the consequences would be. As Lehman was about to fall, the massive derivatives market opened in a rare Sunday session to allow investors to try and limit their exposure to damage. Good money was scrambling after bad money, in a desperate effort to stop the losses. The NY Post reported that the market was perhaps 500 trades from a major crash when the Fed announced a $105 billion “injection” of money. The printing presses were running round the clock.

The average person on the street knew little of the real danger. They had been dazzled by the summer Olympics, and now were distracted by the naming of an ex-beauty queen VP candidate to the Republican ticket in a pathetic effort to convince voters that the new Republican “mavericks” were out to change Washington. They had thrown everything they could think of at Barak Obama, leaning on his middle name, Hussein, touting his inexperience, associating him with a biased and wide mouthed preacher. Nothing worked. Obama’s message that the nation badly needed to divorce itself from the disastrous Bush presidency that had brought the nation to the edge of the abyss and assaulted the Middle Class while coddling the rich was too self-evident. People all across the nation could feel it in their bones, read it in their credit card statements, see it in the lonesome “for sale” signs sprouting like weeds all through their neighborhoods.

In desperation the Republicans simply decided to steal Obama’s thunder. The party that had declared “terrorism” to be our primary threat, then launched two wars, assaulting the constitution, and basically wrecking the economy in seven short years, was suddenly posturing as the party of change, out to shake up Washington and clean up the mess the Democrats had left there, according to McCain stump speech rhetoric. Carl Rove pulled the cupie doll VP Sarah Palin out of his basket of tricks and started rolling out the big lies. But the Republican legacy was to deepen this week, for now the very concept of free market capitalism itself was slowly collapsing under the weight of enormous greed, corruption and fraud—all this under their watch. The lapse of regulatory scrutiny is to be laid squarely on the shoulders of the men now begging congress to bail out their wealthy investor clients at taxpayer expense. In effect, these Republican proponents of ‘fiscal conservatism,’ less big government, reliance on the private sector, all stalwartly opposed to democratic sponsored programs pledging money to the people, now see nothing wrong with the complete dismemberment of free market capitalism—the socialization of America in the extreme. And shame on the Democrats as well, co-conspirators in the shotgun wedding of government and private markets. It’s ironic that a Republican administration had to push this on congress, however. Had any democratic administration come forward with such proposals the Republicans would have howled at the moon about free markets and the private sector. Now they, and the Democrats who side with them, will mastermind the virtual end of those markets, as the government takes on the failed trick mortgage backed securities, CDOs, SIVs, derivatives and other financial junk—all backed by the IRS.

And the crisis was not confined to American shores. Stocks plunged in China, Japan, and Russia shut down her market for three consecutive days after a 25% fall. All across the world central banks opened the pipelines in a desperate effort to move the frozen sludge of the shadow economy along. Lehman Brothers’ collapse made old scandals like Enron pale by comparison. The government “acquisition” of an 80% equity position in AIG was an even more massive socialization of the losses being sustained by greedy, incompetent and corrupt corporations. Still to come were large banks and thrifts like WaMu, Wachovia, Morgan Stanley, CitiGroup, not to mention the auto and airline industries, both in line holding begging cups at Uncle Sam’s door. WaMu failed on Sept 25th, and was acquired by JP Morgan after a quiet $16.9 billion was pulled from accounts between Sept 15 and Sept 25. A slow but steady run on the bank forced WaMu into Receivership, the largest bank failure in US history...for the moment.

Skittish investors also started pulling money out of CDs and Money Market Accounts, nearly $90 billion in one trading session alone. That was the development Paulson and Bernanke had feared the most, for these money market accounts were the very foundation of the system itself. The markets lost a thousand points in two sessions, gold jumped $70 in a single day. Analyst Nouriel Rabini described a slow motion run on the banks taking place, as frightened people slowly began to withdraw savings from overextended 401Ks and other accounts. In fact, the run on the Fed was far more serious, for the money being pledged to backstop Wall Street’s tottering institutions did not really exist. It had to be created by the Fed by exercising its unique power to simply print dollars by the billions and ‘inject’ them into the system.

It’s a bit like the effort the Saudis were making to try and keep the world’s largest oil fields pumping—injecting seawater into the wells to keep the pressure up. What they got back, of course, was a sludge of seawater and diluted crude that was becoming harder and harder to find in quantity, and growing ever more sour. The same thing was dooming the Fed’s efforts to shore up the financial levies and repressurize the credit flows of Western Capitalism.

Treasury Commissar Paulson and Fed Obersturmfuhrer Bernanke continued their efforts to bail out the big financial institutions that created and profited immensely from the housing boom. The entire system was becoming a giant sink hole. Then the miracle of socialism was worked. Draconian new measures were announced: short sales of nearly 800 stocks were banned, including the big financial firms that had made billions using the trading tactic, and ruined numerous companies in the process. In addition, another $50 billion fund was set up to provide a government guarantee for money market accounts for up to one year. The money, of course, was pledged by the Treasury, the US Taxpayer.

Then the Fed announced it would buy up all the toxic mortgage backed ‘assets’ presently destroying bank balance sheets and dump them in a new financial landfill, something akin to the old Resolution Trust Corporation that cleaned up after the last big crisis involving S&Ls in the 1980s. It could amount to a $1.2 trillion dollar bailout for the banks, at US taxpayer expense, twice what we have spent in “the war on terror” to date.

The markets rebounded on the news, for the day of reckoning had again been postponed by the massive socialization of losses sustained by the banks. Corporate America could not be allowed to die the agonized death it so roundly deserved. The ‘free market,’ would be sacrificed in its stead. It has been the American way of handling a crisis for decades… they had to destroy it in order to save it.

The Economist wrote: “Financial houses set out to be monuments of stone and steel. In the widening gyre the greatest of them have splintered into matchwood. Ten short days saw the nationalization, failure or rescue of what was once the world’s biggest insurer, with assets of $1 trillion, two of the world’s biggest investment banks, with combined assets of another $1.5 trillion, and two giants of America’s mortgage markets, with assets of $1.8 trillion. The government of the world’s leading capitalist nation has been sucked deep into the maelstrom . . . And it looks overwhelmed. The bankruptcy of Lehman Brothers and Merrill Lynch’s rapid sale to Bank of America were shocking enough. But the government rescue of American International Group (AIG), through an $85 billion loan at punitive interest rates thrown together on the evening of September 16th, marked a new low in an already catastrophic year…It helps explain one of the mysteries of recent years: who was taking on the risk banks and investors were shedding? Now we know.”

Now the once proud US of A, the world’s sole superpower when Bush and Cheney took office in 2000, (and I mean took), the US has now been reduced to the world’s greatest debtor nation, with a wrecked economy, two unwon wars, and the World Bank and International Monetary Fund both looking down their noses and making assessments about the future viability of America.

This is the legacy of Bush, Cheney and the Republicans who so stolidly supported them. These are the men who trashed this nation, and the free market system that it was built on. Theirs was the failure of competence, management and prudent oversight. It was the wealthy men and women they supported with their votes that took the axe to America and made kindling of the greatest society the world has ever seen, and reaped enormous profits.

I long ago argued that while Bush and Cheney were playing the fear game with Osama bin Ladin finger puppets, the real danger to this country was your friendly banker. The banks made their billions in points, fees and interest during the boom, and passed on all the risk to the little guy. But now the Rich Dads don’t want the empty depreciating houses, and they don’t want your unpaid credit card bills and auto loans 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. How ironic that all these Rich Dads in nice pressed suits now turn to all the little Poor Dads out there, you and me,  when their game goes bust. But isn’t that how it has always been? Let the IRS collect for them now. (More on this theme here).

In my December 2007 article “Fed Up?” I quoted a few people who put a fine point on the game the banks had going: ‘Writer Stan Goff had this to say about this strange misallocation of national focus and concern, the financial dog and pony show that has caused so much harm in this country these last years: “While suburbia has had its eyes fixed on threatening images of Arabs and Persians and Latinos and deepest, darkest African America, the same establishment that makes war and builds prisons and gazes into our lives has picked suburban pockets with one hand and gripped the 'burbs as loan sharks with the other.” And never one to pull her punches, Netizen Carolyn Baker described the activity perfectly: “Some sleight of hand the ruling elite have accomplished since 9/11, namely, that while Americans were pondering the color of the government's daily terrorist threat assessments, that government and its corporate cronies was taking them to the cleaners, picking their pockets, swindling, cheating, extorting, defrauding, hustling, ripping-off, double-dealing, conning, hornswoggling, hoodwinking, fudging, gouging, bamboozling, scamming, screwing, shafting, and let's not forget bilking the American middle and working classes. Hey, look over there-see Osama hiding under your bed? And while you look, we'll steal you deaf, dumb, and blind!”

The NY Times put its finger on the fading pulse of the other side of the crisis—Main Street. “The latest outgrowth of the housing crisis, the breakdown on Wall Street, threatens to gradually corrode economic activity on Main Street, mainly by disabling the credit on which so many everyday transactions depend — but also by frightening people. Lenders of all types had already been raising the bar for borrowers, turning away all but the best customers. This week, they became even less willing to part with their money, further crimping budgets and family spending.  An economy propelled by easy credit for more than a decade is fraying as credit disappears.”

Home equity loans are a thing of the past, Credit card lines are being reduced, even by American Express, car loans becoming very hard to get, housing loans near impossible. The average “consumer” is now realizing that spending 125% of your annual income, (with that last 25% on the plastic) is no way to run a family budget. And so, no matter what Treasury Commissar Paulson does to save the banks, the pain will continue to be very real for Average Joe. This downturn is still in its early stages. The unemployment comes next, and most must people now realize that a lost job in this economy is damn near akin to a death sentence.

That is the sad reality of this bailout—it will help the bankers, and those wealthy enough to be holding thousands of dollars in bonds, CDs, 401ks, money market accounts. It will possibly keep credit lines open to thise with FICO scores of 750 or higher. But it will do nothing whatsoever to help the Average Joe out there, who has no 401k, no stocks or bonds, no IRA, no savings, no health insurance, and a FICO of 680 or less. (That’s 65% of all American citizens.) That person, now branded with the stain of being ‘sub-prime’ increasingly makes up the heart of this nation. Do you think things will be better for them any time soon? The man on the street knows that no one is going to call him offering to salvage his shattered budget, save his home, or help pay off his credit card debt. The $300 government ‘stimulus’ check he received earlier this year was worth two weeks groceries, and long since spent. I guess you just have to be rich to get free government money in any quantity that really makes a difference. The trillion plus dollars the government now wants to spend to bail out the wealthy amounts to $5000 for every American taxpayer. They gave us $300, then sent us back a bill for $5000. And while they were at it, they destroyed what little was left of free market capitalism in this country. Now’ we’re the USSA.

Good luck Comrades! See you in the work camps! If it’s any consolation to you, the Government want’s you to feel “safe.” The Army Times reported that the 1st Brigade, 3rd Infantry Division, now returning from a long counterinsurgency role in Iraq, will be assigned as the first brigade to NORTHCOM, here in the US-- “Beginning Oct. 1 for 12 months, the 1st BCT will be under the day-to-day control of U.S. Army North, the Army service component of Northern Command, as an on-call federal response force for natural or manmade emergencies and disasters, including terrorist attacks.” According to the army, the brigade will actively train: “to help with civil unrest and crowd control or to deal with potentially horrific scenarios such as massive poisoning and chaos in response to a chemical, biological, radiological, nuclear or high-yield explosive, or CBRNE, attack.” The brigade will also train to use spike strips and roadblocks to control traffic, and utilize “non-lethal” weapons that have been tested in Iraq, including shields & batons, beanbag guns, and tazers--all this ostensibly to fulfill the mission of “taking care of our citizens at home.” The unit is training at Ft. Stewart as I write this now.

Well, boys, you’re welcome to truck in water, food, supplies and medical support to the folks in Galveston. Please leave the assault rifles, shields, batons, tazers and other stuff in the depot.

I am left thinking on Thomas Jefferson’s fear and opposition to standing armies on US soil at the beck and call of the government: “There are rights which it is useless to surrender to the government and which governments have yet always been found to invade. These are the rights of thinking and publishing our thoughts by speaking or writing; the right of free commerce; the right of personal freedom. ...There are instruments so dangerous to the rights of the nation and which place them so totally at the mercy of their governors that those governors, whether legislative or executive, should be restrained from keeping such instruments on foot ... Such an instrument is a standing army.” And Jefferson also had it right when he said: “Banking establishments are more dangerous than standing armies.”

Article by: John Schettler Sept 20, 2008
 

Contact Us Here