25 February 2009


Drowning, not Waving

Notes from the economic vortex.

Cost of the bailout.

This from GetLiberty.Org via WealthIsNotTheProblem:

And while there is some confusion as to the current price tag of this growing "Bailout Mania", we know that over the past sixteen weeks the U.S. government has poured nearly $10 trillion dollars into "correcting" the market.

You heard that right - $10 trillion dollars.

What about the $2 trillion in FDIC assurances, $1.75 trillion in Federal Reserve commercial paper purchases, $900 billion in term auction facility lending, $600 billion to insure money market funds, $600 billion to cover Fannie and Freddie’s worthless mortgage-backed securities, $550 billion for discount Federal Reserve loans, $500 billion to insure FDIC deposits, $300 billion for FHA mortgage relief, $250 billion for Citigroup debt, $225 billion for securities loan facility lending, $200 billion for Fannie and Freddie’s debt, $112 billion for A.I.G., and on down the line.

Add all those numbers up and you’re dealing with more than twice the inflation-adjusted cost of rebuilding post-World War II Germany, the Louisiana Purchase, NASA’s entire budget (since its inception), the S&L bailouts, Roosevelt’s New Deal, the Korean War, the Vietnam War, the Gulf War, and the Iraq War – combined.

With only a fraction of the total bailout tab on the books, our national debt has already soared to more than $10.7 trillion dollars. That’s an astounding 72.5 percent of our gross domestic product (GDP). Eight years ago, the debt was $5.6 trillion, or 58 percent of our GDP.

How liable is the US taxpayer?

From the same source and the Washington Post:

At the end of the last fiscal year, in September, the total public debt held by the American people (excluding debt issued to the Social Security Trust Fund or held by the Federal Reserve) stood at $5.8 trillion, or 41 percent of gross domestic product -- about what the debt-to-GDP ratio has averaged since 1956. But the Congressional Budget Office projects deficits of $1.9 trillion over the next two years. Add almost $800 billion of stimulus spending, and U.S. debt soars to 60 percent of GDP by 2010 -- the highest level since the early 1950s, when the nation was working off its World War II and Korean War debts.

The other major cause for concern is that the federal government has taken on massive "contingent liabilities" -- loans and guarantees that don't become actual costs until the borrower defaults and the federal guarantee has to be honored.

Bianco Research, a Chicago financial research firm, puts the total of such contingent liabilities (as of Dec. 29) at more than $8 trillion.

And here's a pleasant reminder from Al Martin about the legacy of Bushonomics:
In the first decade of the 21st century, there was:

$14 Trillion of depleted value in equities, bonds and other traded securities.
$7 Trillion depletion of real estate value.
$1 Trillion depletion due to pension losses.
$1 Trillion depletion in the national savings rate.
50 States increased their indebtedness by $3.5 Trillion
50 million Americans lost their health care.
3 million lost their pensions.
30 million Americans filed for bankruptcy.
5 million corporations filed for bankruptcy -- with millions more to come.
By the end of the decade we will see the planet earth financially exhausted.

The problem is that government -- more specifically that government in power in the US for 1981 to 1992 and again from 2001 to 2009 -- spent more money than the aggregate increase in income that debt financing consumption was producing for government via increased tax revenue, thus leaving perpetual deficits.

The main reason this was done was for wealth consolidation. Nothing consolidates wealth like debt-financed government spending. Nothing so moves wealth from the hands of the many into the hands of the few like government misspending.

This includes enormous wasteful spending on "defense." In fact "defense" was the key spending initiative throughout the first and second Bushonian Regimes.

And then there's the SWAPs....

Imagine you bought a car for $5000 and insured it with XYZ. Imagine, further, that XYZ allows share market investors who had nothing to do with you to punt on whether or not your car is going to crash, and to bet using only a 5% deposit. So some gamblers put up $2 million in cash betting that you will crash, others put up $1 million cash betting that you will not. But on XYZ's books it shows up as $40 million of bets that you will crash and $20 million that you won't, neither of these transactions backed by any assets whatsoever. XYZ knows you're a good driver but one day some fool drives into your car. XYZ suddenly finds it has to pay out $20 million. Why? Because its dodgy books say so. XYZ then tells you that you can reinsure your new car but it will cost you 10% of your income for the next 20 years.

Think that's unfair? Bizarre? Can't happen? Think again. That's exactly what has happened with global products called swaps, highly geared insurance gambles conducted only on paper and having no real asset backing. Until recently, Barclays Bank in the UK had a swaps exposure greater than the entire GDP of the UK! All on paper, all backed by nothing.

US insurance giant AIG received $18.7 billion in payments tied to swaps in September last year as part of the US bailout package. That's right, billions in US tax dollars paid on what are nothing more than paper debts. Nearly all the debts of failing US finance houses are this way: book-keeping entries untied to the real world. These companies are squealing not because cars have been crashed or houses fallen down but because they insist on dealing with contrived paper debts as if they are real -- and they want ordinary taxpayers everywhere to pay for them. Currently, leading US and European politicians and bankers are happy to sustain this lie while the real economy nose dives for want of sensible economic practices.

This is the crunch issue. Derivatives form the overwhelming liability of the big US banks, none of it connected to the real world, none of it backed by assets. This is pure gambling.

The US government bailout of the AIG swaps demonstrates a commitment to paying out totally artificial paper debts with no connection to the real world.

AIG gets another dishonorable mention. When the US taxpayer bails you out by buying preferred shares see if you can kick them in the teeth as you take their money.

This via Bloomberg:

American International Group Inc., the insurer bailed out by the U.S., may restructure its $150 billion rescue package for a second time in four months as the recession and slumping stock market cut the value of its assets.

AIG may convert the government’s preferred shares into common stock to reduce pressure on the company’s cash flow, a person familiar with the situation said yesterday. New York- based AIG pays a 10 percent dividend on preferred stock, and none on common shares.

Bernanke has signalled to the big guys that this is the preferred method for sticking it to the taxpayer:

Federal Reserve Chairman Ben S. Bernanke rejected the idea that officials plan to use reviews of banks’ balance sheets as a pretext for government takeovers of the nation’s largest lenders.

The Treasury will buy convertible preferred stock in the 19 largest U.S. banks if stress tests determine they need more capital to weather a deeper-than-forecast recession, Bernanke told lawmakers in Washington today. The shares would be converted to common equity stakes only as extraordinary losses materialize, he said.

“I don’t see any reason to destroy the franchise value or to create the huge legal uncertainties of trying to formally nationalize a bank when it just isn’t necessary,” Bernanke said at the Senate Banking Committee hearing.

So what about all that $700B bailout money thrown to the banks late last year?

Until September, excess reserves hovered at or below about US $2 billion, but have ballooned to over $600 billion as of November 19, 2008. Read in conjunction with our discussion above on the Fed “printing money”, the Fed has thrown money at the banking system, but the banks are hoarding the cash , they do not lend.

That's right, they're hoarding the money, waiting for assets to crash and then buying up cheap. Excess reserves are the cash holdings held by the banks above the statutory minimum levels required as banking institutions, so they're not required to hold it in order to function.

Commissions, fees and rip offs.

Of last year’s $700 billion bailout of the US finance markets none of it was accountable, just a freebie to insolvent US banks. $70 billion of it went on fees and commissions to the same fraudsters who brought us where we are today.

Creative bankruptcy and off shoring the bailout.

Two months before the Iraq invasion, Bearing Point, an offshoot of a company that had destroyed financial records as part of the $50B Enron fraud, was awarded an $80M government contract to draw up a plan for Iraq's transition to a "free market" economy. Their 108 page manual mentioned "privatization" no fewer than fifty-one times. So 200 Iraqi government owned enterprises were sold off in a fire sale to foreign investors in defiance of Geneva Conventions outlawing the practice. Bearing Point went on to get $240M in US contracts in Iraq and $100M in Afghanistan. Recently, it filed for Ch11 bankruptcy in New York. There is something deeply disturbing about a supposedly reputable accounting firm like Bearing Point going bankrupt, a company with a raft of secure government contracts, a company paid to bring the benefits of "free markets" to Iraq. But that's only half the problem: their bankruptcy is only for their US operations. It seems their tax haven holdings in places like the Cayman Islands are to remain secure and unexamined. They're not alone in this practice.

A Jan 17 US Government Accounting Office (GAO) Report found that of 100 large public US companies 83 of them used tax havens to significantly reduce their US tax liability.

Many of these have been recipients of the recent US government financial bailouts: Bank of America($45B); Citigroup($45B); American Express($3.4B); and Goldman Sachs($10B). And the public has no idea how those funds have been used, some of which have almost certainly gone into those offshore accounts beyond the reach of the US government.

US auto firms have been caught in the swindle. General Motors got $13.4B in bailout money and then promptly squirreled it away in 11 offshore subsidiaries; their financing arm, GMAC, received $5B in bailout and sent that into two offshore accounts.

The uncritical advocates of "free markets" refuse to accept that if corporations are allowed to steal money, they will. The Obama bailout addresses none of these concerns but an increasingly riled public from Iceland to Latvia, and now the US, are saying "enough." Unless corporations are forced to pay their fair share of taxes and forgo fraud then they deserve nothing. Ordinary people are rebelling against a shyster, rigged economy but the odds are stacked against them.

Perhaps TARP II will save us.

No it won't. Major US financial institution XXX has an asset that is valued at $100, obtained using fancy bookwork and dodgy ratings. Because the asset purchase was highly leveraged last years stock market slide has brought the real (ie market tradeable) value to $10. The asset is now paying a dividend of $3, but this process is unsustainable. XXX does not want to sell and realize a loss. It wants the government to buy this toxic asset at book value ($100).

But the US government does not want to take on worthless assets or be perceived as doing so. So it now offers a program, TARP II, a public private partnership where the government provides 95% of non-recourse financing to institutional investors to purchase these sorts of assets. Non-recourse financing allows a bank to loan to a farmer to grow a crop. If the crop grows they get their money back plus interest; if it fails they get whatever the crop is finally worth. Hedge fund YYY puts up $5 to purchase XXX's asset using $95 provided by the US government. They get $3 dividend a year and in two years they have a 100% return on their investment. The asset inevitably fails and the US taxpayer wears a loss of $95.

Now magnify that by hundreds of billions and understand why TARP II spells disaster. At some point the US will be unable to sell this debt by issuing US Treasury notes and foreign buyers flee the market. On that black day the US will be forced into cash accounting. Social Security and Medicare payments will be cut back dramatically, the US dollar will be devalued by 80%, consumer prices skyrocket by 300%, wages stay fixed and 40% of Americans go unemployed. A devastating global economic collapse ensues. This is not a game. It is where Obama's plan is heading unless serious structural reforms are put in place including a write down of toxic paper debts held by leading US finance companies. More here.

So why are economies shutting down?

Three main reasons:

(1) Big finance companies are refusing to write down their debts, insisting, instead, that taxpayers everywhere pay for their losses rather than their shareholders.

(2) Ordinary consumers are spending less and saving more in response to share market and property falls leading to reduced consumer demand for goods and services and job losses.

(3) Credit markets have dried up in the face of Obama's unwillingness to provide certainty in the financial markets. Karl Denninger spells it out:

Folks, you need to understand something very clearly, because Bernnake and the rest of the policymakers have laid out the truth for you - if you care to listen.

Fully 2/3rds of credit provided in our economic system is non-bank lending.

That is, it is hedge funds, sovereign wealth funds, pension funds, insurance companies and both foreign and domestic private investors who have extra capital they do not need at the moment, and they are willing to lend that money into the economy.

These are the buyers of securitized debt instruments.

This market is closed.

Both ASF (American Securitization Forum) and Federal Reserve statistics say that there has been essentially no securitized debt issuance over the last six months.


That market is closed because this class of investors was gang raped by the pernicious and outrageous fraud up and down the line within the market.

And don't rely on the Obama administration to save anyone. The bankster sharks are inside the safety pool and circling fast.

This from Mike Whitney:

In truth, Geithner did us all a big favor on Tuesday by exposing himself as a stooge of the banking industry. Now everyone can see that the banks are working the deal from the inside.

Geithner has assembled a phalanx of Wall Street flim-flam men to fill out the roster at Treasury. His chief-of-staff is lobbyist from Goldman Sachs. The new deputy secretary of state is a former CEO of Citigroup. Another CFO from Citigroup is now assistant to the president, and deputy national security adviser for International Economic Affairs. And one of his deputies also came from Citigroup. One new member of the president's Economic Recovery Advisory Board comes from UBS, which is currently being investigated for helping rich clients evade taxes.

The Obama White House is a beehive of big money guys and Wall Street speculators.

The banking lobby has already set the agenda. All the hooplah about "financial rescue" is just a smokescreen to hide the fact that the same scofflaws who ripped off investors for zillions of dollars are back for their next big sting; a quick vacuuming of the public till to save themselves from bankruptcy. It's a joke.

Obama floated into office on a wave of Wall Street campaign contributions and now it's payback time. Prepare to get fleeced. Geithner is fine-tuning a "public-private" partnership for his buddies so they can keep their fiefdom intact while shifting trillions of dollars of toxic assets onto the people's balance sheet. They've affixed themselves to Treasury like scabs on a leper. Geithner is "their guy", a Trojan Horse for the banking oligarchs. He's already admitted that his main goal is to, "keep the banks in private hands". That says it all, doesn't it?

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