The “Dirty Little Secret” Of the US Bank Bailout

In an unusually frank article published in Saturday's New York Times, the newspaper's economic columnist, Joe Nocera, reveals what he calls "the dirty little secret of the banking industry"--namely, that "it has no intention of using the [government bailout] money to make new loans."

As Nocera explains, the plan announced October 13 by Treasury Secretary Henry Paulson to hand over $250 billion in taxpayer money to the biggest banks, in exchange for non-voting stock, was never really intended to get them to resume lending to businesses and consumers--the ostensible purpose of the bailout. Its essential aim was to engineer a rapid consolidation of the American banking system by subsidizing a wave of takeovers of smaller financial firms by the most powerful banks.

Nocera cites an employee-only conference call held October 17 by a top executive of JPMorgan Chase, the beneficiary of $25 billion in public funds. Nocera explains that he obtained the call-in number and was able to listen to a recording of the proceedings, unbeknownst to the executive, whom he declines to name.

Asked by one of the participants whether the $25 billion in federal funding will "change our strategic lending policy," the executive replies: "What we do think, it will help us to be a little bit more active on the acquisition side or opportunistic side for some banks who are still struggling."

Referring to JPMorgan's recent government-backed acquisition of two large competitors, the executive continues: "And I would not assume that we are done on the acquisition side just because of the Washington Mutual and Bear Stearns mergers. I think there are going to be some great opportunities for us to grow in this environment, and I think we have an opportunity to use that $25 billion in that way, and obviously depending on whether recession turns into depression or what happens in the future, you know, we have that as a backstop."

As Nocera notes: "Read that answer as many times as you want--you are not going to find a single word in there about making loans to help the American economy."

Later in the conference call the same executive states, "We would think that loan volume will continue to go down as we continue to tighten credit to fully reflect the high cost of pricing on the loan side."

"It is starting to appear," the Times columnist writes, "as if one of the Treasury's key rationales for the recapitalization program--namely, that it will cause banks to start lending again--is a fig leaf.... In fact, Treasury wants banks to acquire each other and is using its power to inject capital to force a new and wrenching round of bank consolidation."

Early this month, he explains, "in a nearly unnoticed move," Paulson, the former CEO of Goldman Sachs, put in place a new tax break worth billions of dollars that is designed to encourage bank mergers. It allows the acquiring bank to immediately deduct any losses on the books of the acquired bank.

Paulson and other Treasury officials have made public statements calling on the banks that receive public funds to use them to increase their lending activities. That, however, is for public consumption. The bailout program imposes no lending requirements on the banks in return for government cash.

Already, the credit crisis has been used to engineer the takeover of Bear Stearns and Washington Mutual by JPMorgan, Merrill Lynch by Bank of America, Wachovia by Wells Fargo and, last Friday, National City by PNC.

What the Wall Street Journal on Saturday called the "strong-arm sale" of National City provides a taste of what is to come. The Treasury Department sealed the fate of the Cleveland-based bank by deciding not to include it among the regional banks that will receive government handouts. It then gave Pittsburgh-based PNC $7.7 billion from the bailout fund to help defray the costs of a takeover of National City. PNC will also benefit greatly from the tax write-off on mergers enacted by Treasury.

All of the claims that were made to justify the bank bailout have been exposed as lies. President Bush, Federal Reserve Chairman Ben Bernanke and Paulson were joined by the Democratic congressional leadership and Barack Obama in warning that the bailout had to be passed, and passed immediately, despite massive popular opposition. Those who opposed the plan were denounced for jeopardizing the well being of the American people.

In a nationally televised speech delivered September 24, in advance of the congressional vote on the bailout plan, Bush said it would "help American consumers and businessmen get credit to meet their daily needs and create jobs." If the bailout was not passed, he warned, "More banks could fail, including some in your community. The stock market would drop even more, which would reduce the value of your retirement account.... More businesses would close their doors, and millions of Americans could lose their jobs ... ultimately, our country could experience a long and painful recession."

One month later, the bailout has been enacted, and all of the dire developments--banks and businesses disappearing, the stock market plunging, unemployment skyrocketing--which the American people were told it would prevent are unfolding with accelerating speed.

While Obama talks about the need for all Americans to "come together" in a spirit of "shared sacrifice"--meaning drastic cuts in Medicare, Medicaid, Social Security and other social programs--and the cost of the bailout is cited to justify fiscal austerity, the bankers proceed to ruthlessly prosecute their class interests.

As the World Socialist Web Site warned when it was first proposed in mid-September, the "economic rescue" plan has been revealed to be a scheme to plunder society for the benefit of the financial aristocracy. The American ruling elite, utilizing its domination of the state and the two-party political system, is exploiting a crisis of its own making to carry through an economic agenda, long in preparation, that could not be imposed under normal conditions.

The result will be greater economic hardship for ordinary Americans. The big banks will have even greater market power to set interest rates and control access to credit for workers, students and small businesses.

While no serious measures are being proposed, either by the Bush administration, the Republican presidential candidate or his Democratic opponent, to prevent a social catastrophe from overtaking working people, the government is organizing a restructuring of the financial system that will enable a handful of mega-banks to increase their power over society.

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Bill O'Reilly Attacks Barney Frank 10-2-08

the FED Balance sheet

The rise was all the more worrying as it came despite an extraordinary expansion of credit by the central banks. Analysts at BNP Paribas noted the Federal Reserve alone had expanded its balance sheet by an astonishing 49 per cent in the past three weeks, taking its assets to $1,390bn.
It also broke with tradition to lend to companies directly by buying unsecured commercial paper.

”This is very important, because it means that the Fed has crossed the Rubicon of unsecured lending,” said Stephen Stanley, chief economist at RBS Greenwich Capital.

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CME to start exchange to trade CDS

On Tuesday, CME Group and Citadel announced they would be creating an electronic trading platform for credit-default-swap contracts. The venture between the two Chicago firms is meant to launch within 30 days and would provide a fully integrated trading and clearing platform for the complex derivative contracts that have been one of the flash points of the credit crisis.

I'm not a fundamental analyst, but could this be a buy on CME?

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US Credit Rating, AAA in question?

“By keeping its stake in AIG below 80 per cent, as it did when it nationalized mortgage giants Fannie Mae and Freddie Mac 10 days earlier, the US government will be able to keep the company's finances off its accounts. But pressure is building on the pristine triple-A credit rating of the US government, the chairman of Standard & Poor's sovereign ratings committee said. The bail-out ‘has weakened the fiscal profile of the United States’, John Chambers said. ‘There's no God-given gift of a triple-A rating, and the US has to earn it like everyone else,’” according to The Independent.

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Commercial Real Estate and Las Vegas

The share price of General Growth Properties Inc., the Chicago real estate investment trust that owns two major East Bay shopping centers, dropped 42 percent Tuesday.
Investors are increasingly nervous that General Growth, the nation’s second-largest owner of retail centers with a portfolio that includes NewPark Mall in Newark and Southland Mall in Hayward, will not be able to pay off its loan debt of more than $3 billion that comes due in late 2009, especially now with the credit crisis.
Shares in the company closed at $4.50 on the New York Stock Exchange on Tuesday, a drop of $3.25. That’s the lowest closing price on General Growth stock since the company’s initial public offering 15 years ago.
The company also has several loans maturing in the next two months, including a $650 million loan to the Fashion Show mall in Las Vegas and a $250 million loan to the Shoppes at the Palazzo, also in Las Vegas. Both loans come due Nov. 28.
Since refinancing real estate debt has become almost impossible in the current financial climate, officials of General Growth have reportedly been considering a wide array of options to raise money, including selling off some of the more than 200 malls it currently owns.

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The Fed Credit Card, coming soon

Look out Visa, Mastercard; The Fed Card coming soon. .09% on balance transfers over 100K, morgages and unsecured credit cards, upside down car loans and more welcome. No payments for 9 months. No congressional approval needed. Iceland citizens are also welcome.
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Foreclosure vs. Battle Ground states

an interesting way to look at the election.



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Market Bottom at Dow 9.5K

Although a retest may come, it looks like 2008 lows might have been booked. Although the insurance companies remain subject to more stock price drops, the overall market may have adjusted. The largest risk to US stocks now comes from the overseas banking and currency crisis unfolding. We are now long several names, including options on stocks such as AAPL and more.

With so much news coming out in the last few weeks, probably the most signficant is what is coming in the housing industry.

Reducing the principal on pay-option adjustable-rate mortgages so as to restore
equity that the borrowers have lost.
B of A said Countrywide wouldn't charge
the borrowers any fees to modify the loans, and it will waive prepayment
penalties for subprime and pay-option ARM loans.
The bank also will lay out
$150 million to help Countrywide customers who are already in foreclosure or are
at serious risk of foreclosure. And it will pay as much as $70 million to help
Countrywide customers who've lost their homes to make the transition to other
living arrangements.

I guess help is on the way. Also, the large exchanges are now moving forward to help create a way to move the CDS price discovery mechanism forward.

The credit derivatives markets will on Monday set the price tag for settling up
to $500bn of contracts related to Fannie Mae and Freddie Mac, the US mortgage
lenders whose seizure by the US government had the unexpected knock-on effect of
triggering defaults on derivatives deals.
This price – called the recovery
value – will in turn determine the payouts that have to be made by insurers and
banks that offered credit cover on the mortgage financiers in recent months.

Stay tuned... the street sweepers are now coming.

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60 Minutes Shadow Bank Special

Watch and enjoy the story

Watch CBS Videos Online

or just hit the link


60 Minutes looked at one of the selling documents of such a security with Frank Partnoy, a former derivatives broker and corporate securities attorney, who now teaches law at the University of San Diego. "It's hundreds and hundreds of pages of very small print, a lot of detail here," Partnoy explains. Asked if he thinks anyone ever reads all this fine-print, Partnoy says, "I doubt many people read it." These complex financial instruments were actually designed by mathematicians and physicists, who used algorithms and computer models to reconstitute the unreliable loans in a way that was supposed to eliminate most of the risk.

"Obviously they turned out to be wrong," Partnoy says. Asked why, he says, "Because you can't model human behavior with math."