U.S. Feds committed over 7.7 trillion to rescue financial system

According to a Bloomberg article here, by March 2009 the Feds had committed a mind boggling 7.77 trillion dollars to rescue the embattled financial system. This is a must read article based upon material that Bloomberg obtained.

The Feds and the banks fought tooth and nail to prevent the release of the information. After reading the article one can understand why. The article is quite long and detailed and an eye opener.

Among other revelations the documents show that secret loans helped banks to a net profit of 13 billion on the transactions. The loans were below market rates. The documents also show that while some banks were assuring investors that their investments were secure they were at the same time receiving emergency loans to keep themselves afloat.

James Galbraith on the Financial Crisis

This is an interesting alternative solution to the financial crisis by James Galbraith. Galbraith also notes the huge cuts in public spending at a time when there are huge needs for repairing infrastructure as state and local governments run out of funds and must cut budgets.

Washington PostSeptember 25, 2008A Bailout We Don't NeedBy James K. GalbraithNow that all five big investment banks -- Bear Stearns, Merrill Lynch, Lehman Brothers, Goldman Sachs and Morgan Stanley -- have disappeared or morphed into regular banks, a question arises.Is this bailout still necessary?The point of the bailout is to buy assets that are illiquid but not worthless. But regular banks hold assets like that all the time. They're called "loans."With banks, runs occur only when depositors panic, because they fear the loan book is bad. Deposit insurance takes care of that. So why not eliminate the pointless $100,000 cap on federal deposit insurance and go take inventory? If a bank is solvent, money market funds would flow in, eliminating the need to insure those separately. If it isn't, the FDIC has the bridge bank facility to take care of that.Next, put half a trillion dollars into the Federal Deposit Insurance Corp. fund -- a cosmetic gesture -- and as much money into that agency and the FBI as is needed for examiners, auditors and investigators. Keep $200 billion or more in reserve, so the Treasury can recapitalize banks by buying preferred shares if necessary -- as Warren Buffett did this week with Goldman Sachs. Review the situation in three months, when Congress comes back. Hedge funds should be left on their own. You can't save everyone, and those investors aren't poor.With this solution, the systemic financial threat should go away. Does that mean the economy would quickly recover? No. Sadly, it does not. Two vast economic problems will confront the next president immediately. First, the underlying housing crisis: There are too many houses out there, too many vacant or unsold, too many homeowners underwater. Credit will not start to flow, as some suggest, simply because the crisis is contained. There have to be borrowers, and there has to be collateral. There won't be enough.In Texas, recovery from the 1980s oil bust took seven years and the pull of strong national economic growth. The present slump is national, and it can't be cured that way. But it could be resolved in three years, rather than 10, by a new Home Owners Loan Corp., which would rewrite mortgages, manage rental conversions and decide when vacant, degraded properties should be demolished. Set it up like a draft board in each community, under federal guidelines, and get to work.The second great crisis is in state and local government. Just Tuesday, New York Mayor Michael Bloomberg announced $1.5 billion in public spending cuts. The scenario is playing out everywhere: Schools, fire departments, police stations, parks, libraries and water projects are getting the ax, while essential maintenance gets deferred and important capital projects don't get built. This is pernicious when unemployment is rising and when we have all the real resources we need to preserve services and expand public investment. It's also unnecessary.What to do? Reenact Richard Nixon's great idea: federal revenue sharing. States and localities should get the funds to plug their revenue gaps and maintain real public spending, per capita, for the next three to five years. Also, enact the National Infrastructure Bank, making bond revenue available in a revolving fund for capital improvements. There is work to do. There are people to do it. Bring them together. What could be easier or more sensible?Here's another problem: the wealth loss to near-retirees and the elderly from a declining stock market as things shake out. How about taking care of this, with rough justice, through a supplement to Social Security? If you need a revenue source, impose a turnover tax on stocks.Next, let's think about what the next upswing should try to achieve and how it should be powered. If the 1960s were about raising baby boomers and the '90s about technology, what should the '10s and '20s be about? It's obvious: energy and climate change. That's where the present great unmet needs are.So, let's use the next few years to plan, mapping out a program of energy conservation, reconstruction and renewable power. Let's get the public sector and the universities working on it. And let's prepare the private sector so that when the credit crunch finally ends, we'll have the firms, the labs, the standards and the talent in place, ready to go.Some will ask if we can afford it. To see the answer, don't look at budget projections. Just look at interest rates. Last week, in the panic, the federal government could fund itself, short term, for free. It could have raised money for 30 years and paid less than 4 percent. That's far less than it cost back in 2000.No country in this situation is broke, or insolvent, or even in much trouble. For once, Wall Street's own markets speak the truth. The financially challenged customer isn't Uncle Sam. He's up on Wall Street, where deregulation, greed and fraud ran wild.James K. Galbraith is the author of "The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too."<http://www.washingtonpost.com/wp-dyn/content/article/2008/09/24/AR2008092403033.html>

Krugman on the Financial Crisis and Lehman Bros.

Of course Lehman Bros is now in bankruptcy but Krugman provides a short succinct summary of the problems that gave rise to this continuing crisis. It seems that AIG is now teetering on the brink as well.


Financial Russian RouletteBy PAUL KRUGMAN15/09/08 "New York Times' -- - Will the U.S. financial system collapse today, or maybe over the next few days? I don’t think so — but I’m nowhere near certain. You see, Lehman Brothers, a major investment bank, is apparently about to go under. And nobody knows what will happen next.To understand the problem, you need to know that the old world of banking, in which institutions housed in big marble buildings accepted deposits and lent the money out to long-term clients, has largely vanished, replaced by what is widely called the “shadow banking system.” Depository banks, the guys in the marble buildings, now play only a minor role in channeling funds from savers to borrowers; most of the business of finance is carried out through complex deals arranged by “nondepository” institutions, institutions like the late lamented Bear Stearns — and Lehman.The new system was supposed to do a better job of spreading and reducing risk. But in the aftermath of the housing bust and the resulting mortgage crisis, it seems apparent that risk wasn’t so much reduced as hidden: all too many investors had no idea how exposed they were.And as the unknown unknowns have turned into known unknowns, the system has been experiencing postmodern bank runs. These don’t look like the old-fashioned version: with few exceptions, we’re not talking about mobs of distraught depositors pounding on closed bank doors. Instead, we’re talking about frantic phone calls and mouse clicks, as financial players pull credit lines and try to unwind counterparty risk. But the economic effects — a freezing up of credit, a downward spiral in asset values — are the same as those of the great bank runs of the 1930s.And here’s the thing: The defenses set up to prevent a return of those bank runs, mainly deposit insurance and access to credit lines with the Federal Reserve, only protect the guys in the marble buildings, who aren’t at the heart of the current crisis. That creates the real possibility that 2008 could be 1931 revisited.Now, policy makers are aware of the risks — before he was given responsibility for saving the world, Ben Bernanke was one of our leading experts on the economics of the Great Depression. So over the past year the Fed and the Treasury have orchestrated a series of ad hoc rescue plans. Special credit lines with unpronounceable acronyms were made available to nondepository institutions. The Fed and the Treasury brokered a deal that protected Bear’s counterparties — those on the other side of its deals — though not its stockholders. And just last week the Treasury seized control of Fannie Mae and Freddie Mac, the giant government-sponsored mortgage lenders.But the consequences of those rescues are making officials nervous. For one thing, they’re taking big risks with taxpayer money. For example, today much of the Fed’s portfolio is tied up in loans backed by dubious collateral. Also, officials are worried that their rescue efforts will encourage even more risky behavior in the future. After all, it’s starting to look as if the rule is heads you win, tails the taxpayers lose.Which brings us to Lehman, which has suffered large real-estate-related losses, and faces a crisis of confidence. Like many financial institutions, Lehman has a huge balance sheet — it owes vast sums, and is owed vast sums in return. Trying to liquidate that balance sheet quickly could lead to panic across the financial system. That’s why government officials and private bankers have spent the weekend huddled at the New York Fed, trying to put together a deal that would save Lehman, or at least let it fail more slowly.But Henry Paulson, the Treasury secretary, was adamant that he wouldn’t sweeten the deal by putting more public funds on the line. Many people thought he was bluffing. I was all ready to start today’s column, “When life hands you Lehman, make Lehman aid.” But there was no aid, and apparently no deal. Mr. Paulson seems to be betting that the financial system — bolstered, it must be said, by those special credit lines — can handle the shock of a Lehman failure. We’ll find out soon whether he was brave or foolish.The real answer to the current problem would, of course, have been to take preventive action before we reached this point. Even leaving aside the obvious need to regulate the shadow banking system — if institutions need to be rescued like banks, they should be regulated like banks — why were we so unprepared for this latest shock? When Bear went under, many people talked about the need for a mechanism for “orderly liquidation” of failing investment banks. Well, that was six months ago. Where’s the mechanism?And so here we are, with Mr. Paulson apparently feeling that playing Russian roulette with the U.S. financial system was his best option. Yikes.

Global Finance, the Current Crisis and Challenges to the Dollar

This is an interesting analysis of the U.S. financial crisis by David McNally. McNally is a prof. at York University in Toronto Canada. McNally claims that the crisis is not a liquidity crisis but a bank solvency crisis. McNally certainly has a point but the fact that banks are facing financial problems does cause a liquidity crisis of sorts in that money stops flowing as loans to a considerable extent. The crisis is exacerbated by the increasing costs of energy and foodstuffs as speculative funds seek as safe haven. This drives up prices even further. At the same time these problems cause a slowing economy and distress for ordinary citizens. It is rather ironic that Bush a worshipper of the free market applies a band-aid of giving Americans a government check (aka handout) as means to stimulate the economy. If a leftist had suggested this it would have been panned as a unconscionable interference in the operations of the market as concocted by some idealistic free spending liberal who knew nothing about economics.


~~~~~~~~~~~~~~(((( T h e B u l l e t ))))~~~~~~~~~~~~~A Socialist Project e-bulletin .... No. 118 .... June 25, 2008________________________________________________
Global Finance, the Current Crisisand Challenges to the Dollar
David McNally
It is not often that we find ourselves living through financial turmoil so serious that the International Monetary Fund calls it "the largest financial crisis in the United States since the Great Depression." Yet that is where we are today. Already, commercial banks have collapsed in both Britain and Germany, as has the fifth-largest investment bank on Wall Street. A series of hedge funds have gone under or are teetering on the brink of ruin. And it is a near certainty that more financial institutions will fail before the crisis burns out.
It is clear that the Left needs serious analysis of just what is happening to world capitalism at the moment. Too often, however, our assessments are stuck in the past, revolving around debates as to whether or not this crisis represents a repeat of 1929 and the Great Depression.
Such debates detract from the hard work of analysis that is needed. On the one side are those who assume that history tends to repeat itself. On the other side are those critics who so exaggerate what has changed (particularly the ability of central banks to dampen tendencies to financial collapse) that they present a picture of a capitalism whose contradictions have been so muted that the system is no longer susceptible to severe economic slumps.
The real challenge for radical analysis, however, is to grasp both the changes and the enduring economic contradictions within capitalism in order to understand how capitalist transformation displaces and reorganizes crisis tendencies without eliminating them.
In the absence of such analysis, much of the radical commentary on offer tends to focus on the blatant deceit and corruption of financial players who have contributed to the market upheaval. This has its purposes. But it runs the risk of downplaying the structural features of late capitalism that breed financial meltdowns – and in so doing of suggesting that the Left focus on issues like financial regulation rather than class struggle against capital.
Trying to make sense of this crisis is one important step toward developing both an analysis of late capitalism and some of the tasks that confront the Left. To be sure, any assessment of unfolding events will necessarily be partial and incomplete. Nonetheless, it is possible to offer some crucial guidelines for making sense of this crisis.
A Banking Crisis, Not a Liquidity Crisis
It is critical to recognize at the outset that, contrary to the claims of central banks, this is not a liquidity crisis, i.e. financial turmoil caused by insufficient supplies of money flowing through the financial system. Instead, we are dealing with an insolvency crisis caused by the fact that many financial institutions are effectively broke. The result is a trauma in the banking sector.
This trauma persists because a myriad of lending institutions hold billions of dollars in massively depreciated paper that nobody is interested in buying from them. There is a host of exotic names for this paper, but essentially it is an array of debt obligations – titles to payment of interest and principal on a vast array of loans. Until the crisis broke, investors had been treating this paper as a pile of assets that they could always sell, i.e. as real wealth. Yet, the value of a debt rests in the first instance on the capacity of the borrower to pay. If the borrower can't pay, the alternative is for the creditor to seize the asset. But if the asset itself is losing value, then it may not cover the loan – and there might not be anyone out there who wants to buy it. In short, it may not be convertible to cash.
And that is precisely what is happening on a larger and more complex scale today. Economic reality is demonstrating that much of this paper – tied in the first instance to tens of millions of U.S. mortgages – is worth billions of dollars less than what was paid for it. So much of it is being written off or written down (revalued at amounts that involve enormous losses). It is as if you once had $1,000 in the bank, against which you'd borrowed many times that amount (say, ten times that amount or $10,000) and you have now learned that you only have $500. Once your creditors discover that, they'll scramble to collect in the knowledge that there's no way you will ever pay off all that you owe. But your $500 will be gone pretty fast. And since you owe $10,000, a lot of your creditors (including people who bought fancy paper called "Collateralized Debt Obligations" which includes some of your loans) won't be able to collect. And they won't be able to sell off your debts to anyone else either.
Precisely such dynamics are at work when an institutional "run on a bank" occurs, of the sort that rocked Bear Stearns in mid-March. In the course of 48 hours, Bear's holdings of cash and liquid assets plummeted from $17 billion to $2 billion as investors pulled their funds from the bank.
So the root problem is not a lack of liquidity in the system. It's that there are all kinds of institutions out there that nobody wants to lend to and whose ostensible "assets" nobody wants to buy. Worse, none of the players in the system are entirely certain as to who is holding increasingly worthless paper, or how much of it they have. As a result, the flow of funds between banks, and between banks and other lenders (like mortgage companies), keeps seizing up.
This is the reason that injecting cash into the system doesn't restore confidence. In fact, despite deep cuts to interest rates by central banks, particularly the U.S. Federal Reserve (designed to encourage borrowing) and massive injections of money into the banking system, American banks have continued to tighten lending to consumers, corporations and other banks (Financial Times, May 6, 2008).
When investors lost confidence in Bear Stearns, they did so for a fundamental economic reason, not a simply psychological one: Bear's actual assets, particularly those tied to real estate loans, had been losing massive amounts of value for months. In fact, in June of last year, two of the bank's hedge funds, which were deeply invested in sub-prime mortgages, effectively collapsed.
Continue reading: www.socialistproject.ca/bullet/bullet118.html#continue

A Very Negative Take on the U.S. economic crisis

In stock market terms this article is exceedingly bearish. Nevertheless the article clearly points out some of the underlying problems causing the present problems. However, it remains to be seen whether the situation is nearly as dire as Kunstler makes out but at least along with his rhetoric he gives relevant arguments why the downturn could be much worse than the mainstream press portrays it.


Burning Down the House

by Jim Kunstler
Comment on current events by the author of The Long Emergency
(Atlantic Monthly Press, 2005)
www.kunstler.com (February 11 2008)
Behind all the blather and bullshit about the Federal Reserve's rescue
gambits and the machinations of the ratings agencies, and the wiles of
foreign sovereign wealth, and the incomprehensible mysteries of
markets, and the various weather forecasts of a gathering "recession"
is the simple fact that the USA is a way poorer nation than we
imagined ourselves to be six months ago. The American economy has been
running on the fumes of "creatively engineered" finance (that is, new
and improved swindling) for years, and now these swindles are
unraveling. In their aftermath, they leave empty wallets, drained bank
accounts, plundered retirements funds, boiled away capital reserves,
worthless stocks, bankrupt companies, vandalized housing tracts,
ruined families, and Wall Street executives who are still pulling down
multimillion-dollar pay packages despite running their companies into
the ground.
We're burning down the house and kidding ourselves that there is a
remedy for it. All the rate cuts and loans to big banks and bank-like
corporate organisms, and "monoline" bond insurers, and mortgage mills
amount to little more than a final desperate shell game to conceal the
radioactive pea of aggregate loss. The losses are everywhere, and when
you add up seven billion here and eleven billion there they probably
amount to something like a trillion dollars in sheer capital
evaporation - not counting the abstract "positions" that the capital
was leveraged onto by the playerz and boyz who mistook algorithms for
productive activity.
The shell game may run a few more weeks but personally I believe the
timbers are burning. The losses are no longer "contained" or
concealable. A consensus has now formed that we're in for a
"recession". The idea is that, yes, this seems to be the low arc of
the business cycle. Fewer Hamptons villas will be redecorated in the
interim. We'll gird our loins and get through the bad weather and when
the sun shines again, we'll be ready with new algorithms for new sport
with capital.
Uh-uh. Think again. This is not so much financial bad weather as
financial climate change. Something is happenin' Mr Jones, and you
don't know what it is, do ya? There has been too much misbehavior and
it can no longer be mitigated. We're not heading into a recession but
a major depression, worse than the fabled trauma of the 1930s. That
one occurred against the background of a society that had plenty of
everything except money. Back then, we had plenty of mineral
resources, lots of trained-and-regimented manpower, millions of
productive family farms, factories that were practically new, and more
than ninety percent left of the greatest petroleum reserve anywhere in
the world. It took a world war to get all that stuff humming
cooperatively again, and once it did, we devoted its productive
capacity to building an empire of happy motoring leisure. (Tragic
choice there.)
This new depression, which I call The Long Emergency, will play out
against the background of a society that has pissed away its oil
endowment, bulldozed its factories, arbitraged its productive labor,
destroyed both family farms and the commercial infrastructure of main
street, and trained its population to become overfed diabetic TV
zombie "consumers" of other peoples' productivity, paid for by "money"
they haven't earned.
There is a theory (see Nouriel Roubini's blog) that a reform process
will now ensue in the financial realm, new regulation and oversight of
the same old familiar activities {1}. This too, I'm afraid, will prove
to be wishful thinking. The financial system will not be reformed
until it lies in smoking wreckage, and when that "re-form" happens the
armature of the re-organizing society will barely resemble the one
that the previous burnt-down-house was designed to dwell in. Among
other things, it will not support capital enterprise at anything like
the scale that we became accustomed to lately. Globalism will be over.
The great nations of the world will be scrambling desperately for the
world's remaining oil supplies. It will not be a friendly contest, and
anyone who thinks that current trade relations and capital flows will
continue despite that is liable to be disappointed. (Are you reading
this Tom Friedman?)
Long before the mathematical projections of oil depletion play out,
the oil markets themselves - and all the complex operations that they
comprise, such as drilling and exploration, and the movement of
tankers around the planet - will destabilize and seize up. We will no
longer be any oil exporter's "favored customer". Many of the exporters
will enjoy watching us suffer. Contrary to the political
platitude-du-jour, the USA will never become "energy independent" in
the way we currently imagine. Rather we'll become energy independent
by being deprived of imported oil, and we'll be thrown back on our own
dwindling supplies - which means that we're not going to run our
system of daily life the way it has been set up to run. When Americans
can no longer run their cars on a whim, they will simply go apeshit
and you can kiss normal politics goodbye.
The financial system that emerges from this cataclysm, and the economy
it serves (which is supposed to be the master of its capital
deployment "arm", not its servant) will likely be modest to a degree
that will shock and embarrass everyone currently connected with what
we have lately called finance. If it even trades in paper, that paper
will have to stand for something based in reality, either a productive
activity or a genuine asset. It may take decades for this society to
even regain the confidence necessary to operate such an elementary
system - or it may not come back at all, at least as far as the
horizon lies before us. That's how bad the mischief and the damage has
been.
It's not hard to understand why the Bernankes, Paulsons, Lawrence
Kudlows and other public representatives of capital keep pretending
that everything is under control. On the other side of their pretenses
lies disorder and hardship. One wonders, of course, what they really
see in their private minds' eyes. Do they actually believe that the
statistics issued by their serveling agencies amount to a plausible
picture of reality? Are they so lost in their fantasies of
"management" that they think they're controlling events?
My guess is that their credibility is spent. In the weeks ahead,
nobody will know who or what to believe. We may even run out of
questions to ask as we just all collectively stand there in a thrall
of wonder and nausea, watching the nation's financial house burn down.
{1}: http://www.rgemonitor.com/blog/roubini/242906/
http://jameshowardkunstler.typepad.com/clusterfuck_nation/
http://www.billtotten.blogspot.com http://www.ashisuto.co.jp