Update: Citigroup buys out Wachovia Corp. banking operations for $2.16 billion after its share price collapsed due to nonperforming mortgages. Although the bank did not technically fail, shareholders have lost almost all of their value since they will receive only $1 per share in the deal. Wachovia's stock traded at $59 in April of 2006. Some stock analysts saw the development as a response to a run on Wachovia's bank deposits in the wake of Washington Mutual's seizure by the FDIC. Citigroup's share fell 12% after the deal was announced. [toon credit: Rex Babin]{9/29/08}Perhaps Congress is finally having its fiscal epiphany: it will take a lot more than $700 billion to put Uncle Humpty Dumpty back together again. The House voted down the
latest bailout plan for greedy capitalists on the Street of Broken Dreams. Some analysts say a bailout will be more on the order of $2 trillion dollars, or enough to devalue treasury instruments which really will be the end because then our foreign creditors (China and the Saudis) will finally pull the plug on us and take their surplus money elsewhere[1]. It may be painful, but a comeuppance is long overdue. Only the pain of a long recession similar to what Japan experienced in the 90's will cure the easy credit addiction of our FIRE economy {2/18/08}. Banks leveraged themselves as much as 30 times assets. And now that the bottom has fallen out of the real estate market, they are left with assets--in the form of collateralized debt obligations--worth less than 50% of their booked value. No other banker will lend to a bank that is counting near worthless investments as assets. Merrill Lynch, bought out by Bank of America recently, sold its toxic CDOs for 22 cents on the dollar.To compound the problem the $500 trillion derivatives market is also deleveraging because of increasing defaults and no more money flowing into it. Many financial institutions are dependent on the shadow credit market to finance their daily operations. When that source of capital freezes as it has now, many bankruptcies will follow[2]. Capitalists and their handmaidens in Washington are trying to convince taxpayers that sometime down the road taxpayers may obtain a return on the toxic mortgage debt they want bought up by Uncle Humpty[3]. Don't count on it, Kimosabe! It is reasonable to expect that the most irredeemable of the bad debt will be dumped on the government. The market is not pricing the actual value of the securities because if it did, most of its current private holders would already be bankrupt. If the federal government exposure in a bailout is held at $2 trillion, it will add at least $1 trillion to the national debt or enough new debt to cause the Treasury bond market to fall. Not everybody gets rich in a capitalist society, Horatio Alger stories notwithstanding. Spending tax money to convert our economy to energy independence and improving infrastructure would have a better long term effect on the nation's economic health. Tell your congressman that you want the golden tasseled priests of Mamon brought to book, not introduced to Mo' Money, otherwise you might be standing in line for bread and not a fistfull of devalued dollars.
[1]"Unfortunately, I don't see the U.S. Treasury Department's rescue plan being effective without actually addressing the problems facing both the CDO [collateralized debt obligations] and the CDS [credit default swaps] markets. The Treasury Department's initiative will create more problems than they attempt to solve and will eventually saddle taxpayers with so much debt that they risk sinking the dollar, and worse, the U.S. government's investment grade rating. That would be calamitous." UK Market Oracle 9/28/08
[2] Based on recently released FDIC information 1,479 US banks and 158 savings & loans are at risk of failure. Of those with $5 billion or more in assets, 61 banks and 25 thrifts are heavily exposed to nonperforming mortgages.
[3] When FDR's New Deal bought up nonperforming mortgages in the Depression, the goverment managed to realize a small gain when the economy stabilized.