Update: This is not what I had in mind when I wrote that buying stock in failing banks is preferable to buying worthless securities. Britain and European countries talked of nationalizing banks or at least taking a controlling interest, while Secretary Paulson, the die hard enabler[1], gave in to his Wall Street cronies and promised that the government’s stock purchases would not be real. There would be no dilution of existing shareholders, and the government’s investment would be non-voting! Paulson even agreed not to ask executives to give up their golden parachutes, exorbitant annual bonuses or salaries[2]. The first thing the Germans did was fire the head of Hypo bank. No wonder the casino stock market jumped over 900 points: it's another sweetheart deal for our financial masters. Where is the required writedown of assets? Where is the relief for homeowners? Where is the prosecution of the financial con men who wrote all these predatory loans and then leveraged them thirty times? Why are the speculators only paying a flat 15% in capital gains tax while wage earners pay progressive income tax and FICA at a much higher rate? One of the first items on President Obama's desk should be a bill to make the chairman of the Federal Reserve an elected public office. Or would you prefer they bring back debtors' prisons too?[1] According to a former Assistant Secretary of the Treasury in the Reagan Administration, "the greatest mistake was made in 2004...the investment banks, led by [then Goldman Sachs CEO] Paulson, met with the Securities and Exchange Commission....Paulson convinced the SEC Commissioners to exempt the investment banks from maintaining reserves to cover losses on investments. The exemption granted by the SEC allowed the investment banks to leverage financial instruments beyond any bounds of prudence."
[2]The nine initial banks voluntarily selling preferred shares are Bank of America, Merrill Lynch, Bank of New York Mellon, Citigroup, Goldman Sachs, J.P. Morgan Chase, Morgan Stanley, State Street and Wells Fargo.
{10/10/08}
To possibly avoid the cataclysm of a latter day Great Depression, the United States government is on the verge of an ideological shift of seismic significance. This Saturday the outgoing President will be discussing the nationalization of US banks that receive direct financial aid from the United States Treasury. Prime Minister Gordon Brown has already taken this step after Germany did so in its rescue of Hypo Real Estate bank, and is encouraging other nations to take similar steps in a coordinated way. Britain's banks will get an unprecedented 50 billion pound (€64 billion) government lifeline and emergency loans from the Bank of England. The government will buy preference shares from Royal Bank of Scotland Group PLC, Barclays PLC and at least six other banks, and provide about 250 billion pounds of loan guarantees to refinance debt. The Bank of England will make at least 200 billion pounds available. The plan doesn't specify how much each bank will get. That means the UK government will at least partially nationalize its most important international banks.In contrast Secretary Paulson's plan is a "market" approach in which the US government is stuck buying the most toxic asset backed securities from favored banks at dubious prices. But the plan hurriedly passed by Congress does contain a provsion allowing the Treasury to purchasing equity in companies getting direct infusions of money. From a social justice perspective, a shift from crony capitalist doctrine is long overdue. If private risks are being socialized as has been done in the $1.8 trillion rescue program so far, then equity demands the public should benefit as equity owners in any recovery of value. It is ironic that fate has dictated this latest crisis of capital should occur during a conservative laissez faire regime like that of George W. Bush. However he is being advised by economists, among them Mr. Bernancke of the Federal Reserve, who well understand the mistakes of the Hoover administration in responding to world deflation after the stock market collapse of 1929. Only massive government injections of capital worldwide can restore confidence in banks and restart lending. That capital of course, is
fiat money. Unregulated offshore hedge funds, deregulated banking and insurance, and derivative markets gone viral created, with the collaboration of sympathetic policy makers in government[1], this perfect storm. If the international credit system is to be taken off the shoals with tax money, then the policies that got us to these desperate straits must be changed and for good, free market rhetoric and falling stock markets aside. As one financial advisor put it,"we are all socialists now".
[1]Eric Dinallo, the Superintendent of the New York Insurance Department, testified at the AIG oversight hearing, that funding cutbacks in recent years directed by the Regime had reduced the department that regulates $80 trillion in asset backed securities (ABS), which includes the toxic sub-prime and Alt-A mortgage securities and much more. The Bush Administration took the staff from more than one hundred people down to one. Secretary Paulson, as CEO of Goldman Sachs, was the most aggressive promoter of AB S products on the Street of Broken Dreams.
Chart: MoneyCafe.com. Most adustable rate mortgages (ARMs) are tied to the 1 year LIBOR rate which failed to respond to the coordinated discount rate cut by central banks this week. Washington Mutual and Countrywide wrote more than $300 billion worth of option ARMs in the three years from 2005 to 2007, concentrated in California. Golden West, the creator of the option ARM, and now a part of Wachovia, wrote many billions more. The bulk of these loans will not reset until 2009-11. The 'walk away syndrome' will then be at work. In California as in few other places have so many taken on so much debt with so little equity. So the crisis in California will get much worse. If the first stage of the foreclosure crisis was about people who could not afford their mortgages,the next stage will be about people who have every reason not even to try to pay their mortgages.http://globaleconomicanalysis.blogspot.com/2008/04/walking-away-next-mortgage-crisis.html
Wackydoodle sez: "Boy howdy, I am headin' to the hills to work my claim!"