Global Financial Crisis (Was: Subprime Meltdown)

[ewmayer]

LEGISLATIVE PROPOSAL FOR TREASURY AUTHORITY TO PURCHASE MORTGAGE-RELATED ASSETS

...

Sec. 8. Review.

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.

fas·cism
n.
1. often Fascism
a. A system of government marked by centralization of authority under a dictator, stringent socioeconomic controls, suppression of the opposition through terror and censorship, and typically a policy of belligerent nationalism and racism.
b. A political philosophy or movement based on or advocating such a system of government.
2. Oppressive, dictatorial control.

[only_human]

Originally Posted by ewmayer

fas·cism
n.
1. often Fascism
a. A system of government marked by centralization of authority under a dictator, stringent socioeconomic controls, suppression of the opposition through terror and censorship, and typically a policy of belligerent nationalism and racism.
b. A political philosophy or movement based on or advocating such a system of government.
2. Oppressive, dictatorial control.

I'm reluctantly beginning to be persuaded.

For those who are not sure what we are looking at, there is a copy/version of the "legislative proposal from Treasury Department for authority to buy mortgage-related assets" here: http://blogs.wsj.com/economics/2008/...l-to-congress/ The blog reader comments are edifying too. Several of them make points that I have not seen much in the media but have been creeping onto my radar. One is the shockingly monster sized derivatives market and the suggestion that the Mortgage Backed Security situation, while bad, isn't the correct target.

But mortgages point to tangible property and it is easier to point a fist full of fingers there. This proposal is a sweeping grant of powers, possibly launched at the wrong target but would be grossly ineffectual if instead launched at the quadrillion dollar derivative mess.

I wonder what will happen at the two year sunset of the powers. If the Treasury is still holding a lot of paper will the powers be extended? Or perhaps it will be convenient or politically dangerous not to extend them.

[schickel]

Originally Posted by only_human

If the Treasury is still holding a lot of paper will the powers be extended? Or perhaps it will be convenient or politically dangerous not to extend them.

If I'm not mistaken, this situation would be covered by Section 5, Paragraph d:

(d) Application of Sunset to Mortgage-Related Assets.–The authority of the Secretary to hold any mortgage-related asset purchased under this Act before the termination date in section 9, or to purchase or fund the purchase of a mortgage-related asset under a commitment entered into before the termination date in section 9, is not subject to the provisions of section 9.

Which seems to say that even if the powers of the Secretary are not extended, the Government taxpayers will still be holding the (potentially) bad (toxic) paper.....

Of course, if we, the taxpayers, can buy the MBSes at a substantial discount and very many fewer homeowners than anticipated go into foreclosure on the homes backing the bonds, it could still turn out to be a net gain for us.

I guess the guideline about the price we're going to pay looks to be determined by this paragraph:

Sec. 11. Credit Reform.
The costs of purchases of mortgage-related assets made under section 2(a) of this Act shall be determined as provided under the Federal Credit Reform Act of 1990, as applicable.

I'm going to have to do a little reading to see what that particular act provides for, but I'm betting that our fearless leaders are so vast in their wisdom that two Mersenne primes would be found out of sequence by GIMPS before they would do something stupid like, say, pay premium prices to help bail out the current holders of the MBSes. Oh, wait a minute.....

[only_human]

Originally Posted by schickel

If I'm not mistaken, this situation would be covered by Section 5, Paragraph d: Which seems to say that even if the powers of the Secretary are not extended, the Government taxpayers will still be holding the (potentially) bad (toxic) paper.....

Yes, I read that too....but the bad news of having of paper still on our hands creates the situation that compels extension. Chickens looking at each other: "How is the treasury going to unload this paper?" "What about the stuff the new Resolution Trust Corporation wouldn't touch?" "We better extend those treasury powers, just keep it all going."

Bill Maher had a guest on this week named Naomi Klein who had interesting things to say about government actions during situations like this. I can't seem to get past the flash header on Bill Maher's site to see if they have transcripts but here is a quote about her book:
http://www.naomiklein.org/shock-doctrine/the-book

The Shock Doctrine: The Rise of Disaster Capitalism

In THE SHOCK DOCTRINE, Naomi Klein explodes the myth that the global free market triumphed democratically. Exposing the thinking, the money trail and the puppet strings behind the world-changing crises and wars of the last four decades, The Shock Doctrine is the gripping story of how America’s “free market” policies have come to dominate the world-- through the exploitation of disaster-shocked people and countries.

How many other things like The Patriot Act are sitting in drawers waiting for just the right circumstances to be presented?

[only_human]

UPDATE 2-Paulson: Foreign banks can use US rescue plan

foreign banks will be able to unload bad financial assets under a $700 billion U.S. proposal aimed at restoring order during a devastating financial crisis.

"Yes, and they should. Because ... if a financial institution has business operations in the United States, hires people in the United States, if they are clogged with illiquid assets, they have the same impact on the American people as any other institution," Paulson said on ABC television's "This Week with George Stephanopolous."

Treasury Seeks Asset-Buying Power Unchecked by Courts (Update2)

As congressional aides and officials scrutinized the proposal, the Treasury late yesterday clarified the types of assets it would purchase. Paulson would have authority to buy home loans, mortgage-backed securities, commercial mortgage- related assets and, after consultation with the Federal Reserve chairman, ``other assets, as deemed necessary to effectively stabilize financial markets,'' the Treasury said in a statement.

The Treasury would also have discretion, after discussions with the Fed, to make non-U.S. financial institutions eligible under the program.

First and foremost I question how easily these foreign banks are being directly considered in this process. Obviously all this is interconnected and there are good reasons to do this with careful forethought and scrutiny. Mark me down as a bit skeptical of the final consequences. Here in California, some of us bitterly remember the gaming of deregulated electricity. http://en.wikipedia.org/wiki/Califor...tricity_crisis

Megawatt laundering is the term, analogous to money laundering, coined to describe the process of obscuring the true origins of specific quantities of electricity being sold on the energy market. The California energy market allowed for energy companies to charge higher prices for electricity produced out-of-state. It was therefore advantageous to make it appear that electricity was being generated somewhere other than California.

How much paper laundering will be done? "Hey kiddo, I swap this paper for that paper and my brother can sell it to his uncle, no problem...I'll give you 80 cents on the dollar, but some day I will come to you and ask a favor...." With dark pools of liquidity and crossing networks, perhaps it will even be easy. Why turn down easy money?

[only_human]

http://www.federalreserve.gov/newsev.../20080921a.htm

Release Date: September 21, 2008. For release at 9:30 p.m. EDT

The Federal Reserve Board on Sunday approved, pending a statutory five-day antitrust waiting period, the applications of Goldman Sachs and Morgan Stanley to become bank holding companies.

To provide increased liquidity support to these firms as they transition to managing their funding within a bank holding company structure, the Federal Reserve Board authorized the Federal Reserve Bank of New York to extend credit to the U.S. broker-dealer subsidiaries of Goldman Sachs and Morgan Stanley against all types of collateral that may be pledged at the Federal Reserve's primary credit facility for depository institutions or at the existing Primary Dealer Credit Facility (PDCF); the Federal Reserve has also made these collateral arrangements available to the broker-dealer subsidiary of Merrill Lynch. In addition, the Board also authorized the Federal Reserve Bank of New York to extend credit to the London-based broker-dealer subsidiaries of Goldman Sachs, Morgan Stanley, and Merrill Lynch against collateral that would be eligible to be pledged at the PDCF.

emphasis added

[ewmayer]

Goldman Sachs, Morgan Stanley Become Banks, Ending an Era for Wall Street: The Wall Street that shaped the financial world for two decades ended last night, when Goldman Sachs Group Inc. and Morgan Stanley concluded there is no future in remaining investment banks now that investors have determined the model is broken.


Fannie, Freddie Subprime Buying Spree May Add $100 Billion to Bailout Tab: Freddie Mac Chief Executive Officer Richard Syron stood before investors at New York's Palace Hotel in May last year lauding his company's ``cautious'' avoidance of the subprime-mortgage crisis.

Write your local paper, senators and congressmen!

Last night, I sent the following letter to the San Jose Mercury News, California senators Barbara Boxer and Dianne Feinstein, and the members of the Senate Banking Committee:

It was with utter disbelief that I read the "Legislative Proposal for Treasury Authority to Purchase Mortgage-Related Assets" (a.k.a. "The $700 Billion Bailout") submitted to the U.S. Congress by Treasury secretary Henry Paulson with the blessing of President Bush. Every American needs to READ and think about the import of this alarming piece of legislation. In Section 2 of the proposal it is proposed to give Mr.
Paulson the authority to "...[enter] into contracts ... without regard to any other provision of law regarding public contracts". That means no competitive bidding, and opens the door to many of the same executives of the financial firms whose rapaciousness got us into this mess to now be asked to HELP FIX THE PROBLEM THEY CREATED, at taxpayer expense. That is like paying an arsonist to head the fire crew. Further, Mr. Paulson proposes he be given the authority to "[designate] financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them." As Karl Denninger puts it, "this is a de-facto nationalization of the entire banking, insurance, and related financial system ... every bank and other financial institution in the United States [will have] become a de-facto organ of the United States Government, if Hank Paulson thinks they should be, and he may order them to do virtually anything that he claims is in furtherance of this act. This might include things like demanding that a bank or other financial institution sell him its paper, even if it forces that firm to collapse and be assumed by the FDIC."

There is more - much more - but absolutely the most frightening part of the bill is in Section 8, where we see "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." In effect, secretary Paulson is asking that his actions be above the law. This is plainly unconstitutional, and I find it shocking (yes, even after 7 years of post-9/11 trampling of the Constitution by the Bush administration) that a top official of the U.S. government would even consider asking for such flagrantly extralegal authority.

I weep to see this once-great nation have fallen so far and succumbed so completely to the politics of perpetual "national emergency" that a credulous, browbeaten congress would even give serious consideration - not to mention the extreme haste with which it is doing so - to such a monstrous piece of legislation. If our founders were around to see it, they would surely weep as well. And somewhere, Osama Bin Laden must be chortling heartily to see us inflict more terror, ignominy and financial harm on ourselves than any international terrorist could ever in his wildest dreams hope to do.

Ernst Mayer
Cupertino, CA

Please, if you care about the future of America, the rule of law, and the world your children and grandchildren will inherit, write to your local newspaper, and e-mail your state senators and representatives! Here are some useful guidelines.

[ewmayer]

Oil Skyrockets on Bailout Plan: Oil soars past $127 a barrel, up $23 in one day, its largest dollar-jump ever, as dollar swoons

"The biggest news is that people are looking at the $700 billion plan as supportive of demand, supportive of the economy," said Peter Beutel. "Everything we are looking at right now says demand has a chance to come back if the economy starts to strengthen."

Dream on, Mr. Oil Bull - the irony is that if oil again tends higher, gasoline and energy costs will follow, which will simply hammer strapped consumers, keep demand low, and delay any already-expected-to-be-very-slow economic recovery. In other words, (bailout ==> dollar devaluation) is guaranteed. But (bailout ==> quick economic recovery) is an extremely dubious proposition.


A trio of New York Times op-ed writers [of varying political slants] weighs in on the Paulson coup d'Etat proposal:

NYT Blogs: Paul Krugman | Cash for Trash: Henry Paulson is demanding extraordinary power for himself to deploy taxpayers’ money on behalf of a plan that, as far as I can see, doesn’t make sense.

The Paulson plan calls for the federal government to buy up $700 billion worth of troubled assets, mainly mortgage-backed securities. How does this resolve the crisis?

Well, it might — might — break the vicious circle of deleveraging, step 4 in my capsule description. Even that isn’t clear: the prices of many assets, not just those the Treasury proposes to buy, are under pressure. And even if the vicious circle is limited, the financial system will still be crippled by inadequate capital.

Or rather, it will be crippled by inadequate capital unless the federal government hugely overpays for the assets it buys, giving financial firms — and their stockholders and executives — a giant windfall at taxpayer expense. Did I mention that I’m not happy with this plan?

The logic of the crisis seems to call for an intervention, not at step 4, but at step 2: the financial system needs more capital. And if the government is going to provide capital to financial firms, it should get what people who provide capital are entitled to — a share in ownership, so that all the gains if the rescue plan works don’t go to the people who made the mess in the first place.

That’s what happened in the savings and loan crisis: the feds took over ownership of the bad banks, not just their bad assets. It’s also what happened with Fannie and Freddie. (And by the way, that rescue has done what it was supposed to. Mortgage interest rates have come down sharply since the federal takeover.)

But Mr. Paulson insists that he wants a “clean” plan. “Clean,” in this context, means a taxpayer-financed bailout with no strings attached — no quid pro quo on the part of those being bailed out. Why is that a good thing? Add to this the fact that Mr. Paulson is also demanding dictatorial authority, plus immunity from review “by any court of law or any administrative agency,” and this adds up to an unacceptable proposal.

I’m aware that Congress is under enormous pressure to agree to the Paulson plan in the next few days, with at most a few modifications that make it slightly less bad. Basically, after having spent a year and a half telling everyone that things were under control, the Bush administration says that the sky is falling, and that to save the world we have to do exactly what it says now now now.

NYT William Kristol | A Fine Mess

A huge speculative housing bubble has collapsed. We’re going to have a recession. Unemployment will go up. Credit is going to be tighter. The challenge is to contain the damage to a “normal” recession — and to prevent a devastating series of bank runs, a collapse of the credit markets and a full-bore depression.

Everyone seems to agree on the need for a big and comprehensive plan, and that the markets have to have some confidence that help is on the way. Funds need to be supplied, trading markets need to be stabilized, solvent institutions needs to be protected, and insolvent institutions need to be put on the path to a deliberate liquidation or reorganization.

But is the administration’s proposal the right way to do this? It would enable the Treasury, without Congressionally approved guidelines as to pricing or procedure, to purchase hundreds of billions of dollars of financial assets, and hire private firms to manage and sell them, presumably at their discretion There are no provisions for — or even promises of — disclosure, accountability or transparency. Surely Congress can at least ask some hard questions about such an open-ended commitment.

And I’ve been shocked by the number of (mostly conservative) experts I’ve spoken with who aren’t at all confident that the Bush administration has even the basics right — or who think that the plan, though it looks simple on paper, will prove to be a nightmare in practice.

But will political leaders dare oppose it? Barack Obama called Sunday for more accountability, and I imagine he’ll support the efforts of the Democratic Congressional leadership to try to add to the legislation a host of liberal spending provisions. He probably won’t want to run the risk of actually opposing it, or even of raising big questions and causing significant delay — lest he be attacked for risking the possible meltdown of the global financial system.

What about John McCain? He could play it safe, going along with whatever the Bush administration and the Congress are able to negotiate.

If he wants to be critical, but concludes that Congress has to pass something quickly lest the markets fall apart again, and that he can’t reasonably insist that Congress come up with something fundamentally better, he could propose various amendments insisting on much more accountability and transparency in how Treasury handles this amazing grant of power.

Comments by McCain on Sunday suggest he might propose an amendment along the lines of one I received in an e-mail message from a fellow semi-populist conservative: “Any institution selling securities under this legislation to the Treasury Department shall not be allowed to compensate any officer or employee with a higher salary next year than that paid the president of the United States.” This would punish overpaid Wall Streeters and, more important, limit participation in the bailout to institutions really in trouble.

Or McCain — more of a gambler than Obama — could take a big risk. While assuring the public and the financial markets that his administration will act forcefully and swiftly to deal with the crisis, he could decide that he must oppose the bailout as the panicked product of a discredited administration, an irresponsible Congress, and a feckless financial establishment, all of which got us into this fine mess.

The Fleecing of America: World leaders converge on a battered New York this week for the United Nations General Assembly, my advice to them is: think Damien Hirst.


Mish Shedlock reminds his readers of his April 3 post in which he lays out his "Fed Uncertainty Principle", specifically FUP Corollary 2:

The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.

And the saddest thing of all, except for possibly [and the odds are slim] restoring some slight amount of confidence in the broken financial system, the proposed bailout legislation DOES NOTHING WHATSOEVER to address the fundamentals of the problem, which is that reckless Greenspan-era Fed lending policies resulted in the biggest speculative asset bubble in the history of the world, a fake phase of "robust economic growth" fueled by an unprecedented explosion in consumer indebtedness, and that bubble WILL continue to deflate until fundamentals get somewhere close to long-term-sustainable. But that will require a massive paydown of consumer debt and many millions more mortgage defaults and bank-owned homes flooding the market. None of that [ultimately healthy] process can be "speeded along" by playing shell games with the debt, nor by sticking as much of it as possible to the fiscally prudent [which is ultimately what the bailout does], nor by illegal manipulation pf the equity markets in a misguided attempt to artificially prop up stock prices.

[ewmayer]

Spotted in the reader comments to a recent article in Barry Ritholz`s The Big Picture blog:

The Evolution of a Used-Car Salesman

August 1, 2007
BEIJING (Reuters) - "Treasury Secretary Henry Paulson said on Wednesday the repricing of credit risk was hitting financial markets, but U.S. subprime mortgage fallout remained largely contained due to the strongest global economy in decades."

May 7, 2008
"In an interview with The Associated Press, Paulson said that the turmoil that has gripped Wall Street and took a turn for the worse yet again in March has eased somewhat. 'There`s progress,' he said. 'I think we`re closer to the end of this than the beginning.'"

July 21, 2008
'Our banking system is a safe and a sound one,' Paulson insisted on CNN's "Late Edition." He had earlier told CBS, the list of troubled banks would grow.
But 'this is a very manageable situation ... our regulators are focused on it.'

Sept 21, 2008
"Only $700B and worth every penny. Trust me."

Oh, wait - did I say $700 Billion? My mistake - it`s actually $1.8 TRILLION and counting.


Financial Times: Hedge fund returns money

The best-performing hedge fund manager of the past two years has closed down his funds and is returning money to investors after concluding that the danger of losing money from a bank collapse is too high.

Andrew Lahde, founder of California’s Lahde Capital, told investors last week that further credit problems – the basis of his profits – were likely but the reliance of the bet on bank counterparties made it too risky.

The move by Mr Lahde, who returned 870 per cent last year in one fund betting against subprime mortgages, and was at one point up more than 1,000 per cent, underscores the threat that is posed to hedge funds by bank failures.

It's only Monday, and we already have our Moron of the Week: Multiple MotWee winner and Wall Street shill Paul LaMonica strikes again:

Be ticked off - but get over it: You should be angry about the $700 billion plan to save banks. But once the rage subsides, realize that doing nothing would be disastrous.

NEW YORK (CNNMoney.com) -- Americans are very angry about the proposed bailout of the banking sector and Wall Street...and with good reason.

There should be outrage. We should all be disgusted that the government was forced into this situation. I'm infuriated that it came to this.

Of course, we should cap executive pay, which was obscene at many financial firms, immediately. And we should make sure that the CEOs, CFOs and other big wigs that drove their companies into near ruin with overleveraged bets on risky mortgages should not get big severance packages.

But make no mistake. The alternative that many CNNMoney.com readers seem to be calling for - i.e. let all the banks and Wall Street crash and burn - is not viable. In fact, it's incredibly short-sighted.

So once the blind rage subsides, people will hopefully take a long-hard look at what the government has proposed and come to the realization that doing nothing to rid the nation's banks of all the poisonous mortgage assets on their balance sheets would be far far worse.

"Taxpayers have every right to be angry because we've gotten into this mess by a combination of irresponsible behavior and lax regulation," said Chris Probyn, chief economist with State Street Global Advisors in Boston.

"However, if you look forward, by letting those responsible pay the price, there will be a spillover effect and the economy could go into sharp and protracted recession."

As if "do nothing and simply let the financial markets collapse" and "buy up all of Wall Street's toxic paper at a hefty premium, reward the crooks who ran the whole Ponzi scheme by paying them to be on the 'Friends of Hank' RTC2 payroll, all without getting anything in return" are the only possible options.

[only_human]

Originally Posted by ewmayer

Oh, wait - did I say $700 Billion? My mistake - it`s actually $1.8 TRILLION and counting.
[...]
As if "do nothing and simply let the financial markets collapse" and "buy up all of Wall Street's toxic paper at a hefty premium, reward the crooks who ran the whole Ponzi scheme by paying them to be on the 'Friends of Hank' RTC2 payroll, all without getting anything in return" are the only possible options.

Since the statutory debt ceiling has been raised $1.5 Trillion this year this year, that extra headroom alone grossly the backs possibility that these figures are in the ballpark. Mish is quoting CNBC's Reuters wire feed and the numbers look ok.

A subtext that we know but is worth mentioning occasionally is that most of the purchased securities have some value and that there will be some recovery of money spent -- with estimates varying from very little to making a profit. Of course, much depends on how much gaming and accommodation of special interests or friends occur.

What will really tell me the fix is in is if we hear that this is a good time to totally revise paper currency and that existing currency will be devalued to help the the ongoing crisis. Then I will be in full panic mode.

PS
Assuming 100 million working Americans:

• $700 Billion = $7,000 per worker
• $1.8 Trillion = $18,000 per worker

[ewmayer]

Morgan Stanley, Goldman Search for Deposits; Regional Banks May Be `Lunch': Morgan Stanley and Goldman Sachs Group Inc., the two largest remaining independent U.S. securities firms, may add to the $81 billion of financial services deals unveiled during the past week as they morph into banks.

The irony here is that the Fed and Treasury`s desperate measure of last Thursday to guarantee [generally high-yielding] money market funds without limit until further notice in an effort to keep that $3 Trillion market from collapsing will likely hasten [or outright casue] the demise of many struggling regional banks, by hurting their ability to attract new deposits. The fact that Paulson`s ex-firm Goldman will be one of the chief beneficiaries of this [as well of the evntual Mother of All bailouts] should be no surprise ... it`s good to be frined of Hank.


Paulson, Bernanke May Find Painful Parallels in 1990s Nordic Bailout, Bust: If Henry Paulson and Ben S. Bernanke want to know what happens when central banks and governments bail out financial institutions, they should be ``learning Swedish.''

But hey, these are the same idiots who completely ignored the painful decades-=long lessons of the Japanese real estate bubble and subsequent bust ... the arrogant "our markets are much more dynamic", "subprime crisis is contained", "financial system is sound" crowd. To learn a lesson, you have to first be willing to learn, which requires you to admit that you don`t know everything .. and folks like Paulson and Bernanke don`t strike me as fitting that mold, certainly not at this stage of their careers.


The Independent | Fury at $2.5bn bonus for Lehman's New York staff

Up to 10,000 staff at the New York office of the bankrupt investment bank Lehman Brothers will share a bonus pool set aside for them that is worth $2.5bn (£1.4bn), Barclays Bank, which is buying the business, confirmed last night.

The revelation sparked fury among the workers' former colleagues, Lehman's 5,000 staff based in London, who currently have no idea how long they will go on receiving even their basic salaries, let alone any bonus payments. It also prompted a renewed backlash over the compensation culture in global finance, with critics claiming that many bankers receive pay and rewards that bore no relation to the job they had done.

...

Many of Lehman's UK staff are particularly angry about the US payouts because it has emerged that in the days running up to the bankruptcy, some $8bn in cash was transferred out of the account of the bank's European business into accounts at the New York head office.

There is no suggestion any of this cash was used to supplement the bonus fund, but partly as a result of the transfers, PricewaterhouseCoopers (PWC), the administrator to the European business, initially found it impossible to guarantee salaries would be paid. The September wages of thousands of European staff were only secured in the middle of last week, when PWC negotiated a £100m loan to fund the payments. PWC wrote to Lehman Brothers' head office in New York last week, requesting the repayment of the $8bn, but a spokesman said yesterday that the administrator had received no formal response.