Topic: Economic Policy
Bailout This! The most recent report from the Comptroller of the Currency seems to have gone unnoticed in Washington and the press. If banks are not lending because of increased capital requirements in the face of Credit Default Swaps, other derivatives and loan defaults then the report goes a long way in describing exactly why.by Andrew Hughes
(libertarian)
Tuesday, January 27, 2009
Idiocy is usually described as "endlessly repeating the same process, hoping for a different result". Lawrence Summers, Timothy Geithner, Nancy Pelosi, Joe Biden et al are straining at the leash to get the Bailout Ball rolling once again. The stabilization of the financial sector, as elusive as it has been so far, has become the Holy Grail of Economic salvation. That makes $8.5 Trillion worth of trying and $0 of result. The Knights of the Oval Table are gathered to plan their mission as their beleaguered subjects are trying to batter down the castle gates. It's no small wonder that Geithner wants to get the money out the door as soon as the end of this week.
The most recent report from the Comptroller of the Currency seems to have gone unnoticed in Washington and the press. If banks are not lending because of increased capital requirements in the face of Credit Default Swaps, other derivatives and loan defaults then the report goes a long way in describing exactly why.
Credit Exposure to Capital ratio. Amounts in $Millions
Bank
Assets
Derivatives
Credit Exposure to Capital Ratio
J.P. Morgan Chase
$1,768,657
$87,688,008
400.2
Citi
$1,207,007
$35,645,429
259.5
Bank Of America
$1,359,071
$38,673,967
177.6
HSBC
$181,587
$4,133,712
664.2
The assets comprise largely of Real estate, residential mortgage, student, car and credit card loans. With the rise in defaulting mortgages, delinquent credit card and other debt the problem can only get worse. To recapitalize the banks to the point where exposure is low enough to encourage lending would take trillions and that's before any more fallout from the collapsing economy. Lending also requires creditworthy borrowers, the number of which is in a nosedive. The $165 Trillion in notional derivatives and the associated credit risk related to $15 Trillion in Credit Default Swaps illustrated below is the poison apple that the taxpayer has been forced to bite into.
Bank
Total Credit Derivatives
J.P. Morgan Chase
$9,177,731
Citi
$2,939,783
Bank Of America
$2,480,672
HSBC
$1,152,948
When the "credit crunch" began and Washington began the rush to solve the problem with taxpayer cash, no accounting of this derivative nightmare was ever brought to bear. In all the deliberations and press releases there was not a single mention of the fact that the primary cause of the bank collapse was due to these "instruments of mass destruction". It was widely discussed in the blogosphere but, like the real reasons for invading Iraq, never made it in to the mainstream media. As with Iraq, one would have to assume that the reason was to obfuscate the facts and cajole a shocked public in to accepting as a remedy whatever was proposed by Paulson, Bernanke and Bush. The latter had to be completely aware of the OCC data at the time and to assume that they did not is simply not credible. It would have been completely obvious that $700 Billion would do absolutely nothing to alleviate the crisis. As witnessed in the ensuing months since the TARP bill, how the money was used has been obfuscated and concealed.This was always a scam.
Even as the economic indicators broke one record after another, the recipients of the TARP funds were selling Credit Default Swaps to each other, betting on each other's downfall. They knew the game was up and wanted to profit on the way down as much as they had on the way up. All the major Banks on Wall St. are seeing mounting losses and the failure of one will increase the losses of the other. They are joined at the hip and will fall like a house of cards.
The question begs to be asked, and this is where the cynic in me dominates, what's the plan? When they do fall will the Government nationalize the last one standing for the good of the country and socialize even more of the losses? This would be the coup of the millennium and give birth to a new Governmental paradigm. To have this complete before the economy and society have completely broken down would be a good reason to declare a real National Emergency and declare Martial Law, the legislation, executive orders and infrastructure of which are already in place. How can one not be a cynic when we reflect on what has happened so far?
The numbers are in and the scam stands exposed to those who will look. Which way the story unfolds from here is anyone's guess. But I am ready to bet that Congress will not include the OCC data in the upcoming debate on the next round of cash for the Banks.
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The people running the show are now realizing that simply injecting "capital" into banks (it's really just more debt they're getting but's that's for another time) won't work. So now they are moving to the idea of nationalizing financial sector. That is obviosly unsustainable at best and catastrophic at worst. So, what will they come up after they figure out nationalization won't work? They have no other choice (to keep the scam going) but to create a sort a Federal Reserve for private depositors. They'll create one bank, or more, under the same umbrella, that most people will have no choice but to put their money into. Why do I think this? What other options do they have. They know that foreign governments will stop buying our debt, that's why the fed announced they will start buying treasuries to "lower interest rate". Interest rates are nothing but a cover because they know our debt will go unfunded otherwise. Seems like the scam is coming to and end quite soon.
By the definition of "IDIOCY" as you're using it, I guess your repeated rants about the failure of the bailout would qualify.
How can you possibily say there has been "no result"? There has not been a meltdown, no total economic collapse, people walking the streets like the 1930's. No meltdown bigger than the Soviet Union had is what one writer posted not too long ago.
The country has been SAVED! How can you say that isn't a positive result?
Too many people like you are frightened by LARGE NUMBERS. And, it's because you don't understand them. Weren't you even one of those who ranted about the INAUGURATION costing too much? I'll bet Shaquille O'Neal could have paid for it HIMSELF!
Get a hold of yourself, man! This isn't the game of MONOPOLY anymore. We're playing with some BIIIIIIIG numbers. Prices are down, homes are available for purchase, stocks are cheap. What more do you want? Somebody to GIVE you something?
Posted By: Jake, the champion of the constitution
Date: 2009-01-27 18:44:46
Dear Andrew,
I suppose I agree with MC a little (and far more politely :) I think the desperate rearguard and day-to-day tactic changes by Paulson and Bernanke and now Geithner have simply delay actions.
So LTCM in '98, Bear Stearns, Lehman Bros., the bank bailouts, the Citi breakup, the investment banks becoming holding banks, the dead investment banks marrying the dead banks, etc. etc. All it did was to DELAY and hide some of the more massive failings.
As to WHY there is a delay, well, it did get the new President into the White House without any rioting. The problem is that the entire OTC market is basically "dark" so its hard to know anything for sure except that it looks like a big storm on the horizon.
For me, the future is also just educated guesswork. Obviously, anyone who is smart enough to have this all figured out for sure is not going to be sharing it with anyone. That person(s) will just be waiting to make their killing - but most likely also have to be connected with government insiders. My big thing is gold and silver, but I fully understand that in the short term and possibly even medium-term these could get thrashed by governments, for as long as people are still able to eat, play, and live comfortably in the US with their fiat mirage money.
One group, sort of like MC, says hold on, all we will get is a long recession, massive inflation and then pull out of the Mises crack-up boom (until the next cycle busts, of course) http://news.goldseek.com/KennethGerbino/1233040620.php
Many others, like Jim Sinclair of jsmineset.com, just say its armaggedon, get your gold now and batten down the hatches.
For instance, there are some reports from British insiders that their whole banking system almost went under in October. http://www.dailymail.co.uk/news/article-1127278/Revealed-Day-banks-just-hours-collapse.html
As for me, I will let MC buy up all the house and stocks for the moment. I would be very surprised to see any inflation-adjusted real increases in the Case-Shiller and DOW within a year. I wrote on derivatives a bit earlier, and I happen to side more with Sinclair's reasoning (and humor) than most other commentators - which certainly doesn't mean either of us will be 100% correct.
Posted By: Andrew Hughes
Date: 2009-01-28 03:48:03
Hey Guys,
Thanks for the feedback. I'd be inclined to be with you Jake on Gold and Silver, as for stocks the only transaction investors seem to be making money on are inverse etf's or anything else that bets on the downfall of someone or other, be it a country or a Blue Chip, not exactly the kind of market atmosphere which breeds confidence for the future.
Whether a recession or a greater depression is anyones guess. The opposing opinions from all the big players who have been doing this all their lives only go to show that nobody really knows. But in my opinion I think we have been had and to quote FDR "The practices of the unscrupulous money-changers stand indicted in the court of public opinion,".
The one thing I have learned over the years of politics is that what's revealing is not what they say but what the dont say. That's why I emphasis the OCC data and it's lack of coverage. It reminds me of the many warnings the U.S. government got before 911 only to ignore them and any discussion of them was stopped on the spot.
The speed and sense of urgency of the bailout bill's passage is another red flag to me. Plans like this are only expedited when it's to their benefit or that of their handlers. Could anyone imagine a Bill that actually gave taxpayers money right in to their hand being rammed down the throat of the Congress Critters and being told that if they didn't pass the bill right now, the taxpayer would suffer?
Master C,
Your comments, though a little disingenuous at times,always play a kind of Devil's Advocate for me. I read them and reflect on my own argument as a kind of reality check. I know you have spent many years as an Economics teacher and also as a banking sector professional. I will happily yield to your experience in these matters.
I see the system from the viewpoint of an IT guy who knows systems and how each part interacts with the other. When I look at an economy I see the various parts and the interaction between them. When I look at Derivatives, I see gambling pure and simple.
But there are a couple of questions I have for you...
If you, as a banker, saw similiar OCC data on your bank, how would it make you feel ?
How would you defuse the Derivatives situation so it no longer posed a threat to banking ?
How are mounting Bank losses seen as a positive result of TARP ?
What would you do in Geithner's position to pull the economy out of its nosedive ?
I'll agree with you that the economy has not gone in to meltdown as of yet, but a meltdown is always preceded by "Meltdown in Progress".
But, myself, I'm going to invest in a sailboat, fishing line and a Tin Foil Hat
No one's claiming clairvoyance about what's going to happen. All we can do is look at what's going on. I think of it kind of like the little boy who stuck his thumb in the hole in the dike in the old dutch story. It kept the dike from bursting, but it was a very precarious situation.
To say that the US, and the rest of the world, it seems, is NOT in some DEEP WATER would be like GW Bush telling us we're WINNING in Iraq ~ not true. But, to not acknowledge that all this bailout money hasn't done ANYTHING is ludicrous. If nothing else, it seems to have bought us some time.
And, has happened before, it may be that the US comes out of this BETTER than all the other nations who have been dependent on us to keep buying stuff from them.
When your BEST CUSTOMER stops buying from you and you're more dependent on them than you should be, you better have a PLAN B to go to, or you're going to sink, too.
Someone on NC wrote about us being reliant on China a month ago or so. Not true. China is reliant on us! We pay their bills! We give them work! Of course, they'll learn how to adjust to that pretty soon, but for now, we're BOTH dependent upon each other.
I used to ask my classes ~ If I owe you $1 million dollars, who is more dependent on whom? Me on you, or you on me? Of course, it's the LENDER who's dependent upon the BORROWER to pay back the money. Now, if there's collateral involved, etc, then you've got a different situation. But, the Chinese don't have any collateral. What are they going to do, come over and take some of our highways or buildings? I don't think so.
I can't say that this whole bailout scheme isn't going to crumble like a graham cracker, but I've seen them pull more hocus pocus moves out of government action than I ever would have guessed they could. After all, this whole "economy" thing is a lot of ILLUSION anyway. It's perception. It's going along with the system. If there's a run on the banks, or a collapse of a money system, or even a power grid breakdown ~ we see the ILLUSION as reality, and it scares everyone into hysteria.
Next time you see David Copperfield or Lance Burton hanging over a stage full of spikes in a straightjacket with a fire burning the rope that keeps him from dropping down on them, remember: it's all an ILLUSION. He USUALLY escapes. Will he do it THIS time? We never know until the show is over.
Looking at the exposure, I'd say the jig is up. They can print money all they want, which may delay the inevitable but it is just that, inevitable. As for a power grab through martial law, that's been done before in other countries. Never ends well for the ensuing dictator and don't forget, this is America. A weakened America but still..........
You guys always say the same thing ~ THE END IS NEAR! And, you know, you've been saying it for such a loooooooog time, that you're like an ECHO; never get any smarter, never say anything different, never change your inflection ~ but the end is still not here... not here.... not here.... not here.
Seems like you'd eventually learn.... learn... learn...
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