Black Monday Dawning?

by Danny Schechter, NEWS DISSECTOR
September 29, 2008

HOUSE VOTES ON BAILOUT TODAY: A SCHEME BECOMES A DEAL YOU FINANCE

NEW PETITION: BAIL OUT MAIN STREET, NOT WALL STREET


TAKE TWO: THE DEAL MAY BE DONE THIS TIME
IS THE WEST AT RISK?
DEBATING THE DEBATE

One figure before I get into the big $700 billion dollar sellout. They just announced the new defense budget. Any guess at its size? Its less, a mere $612 Billion. How reassuring.

Now the bad news:

The deal seems to done, or at least imposed from the top. As predicted and expected, Congress won some concessions and the rest of us won a major tax hike. There is no guarantee of effective accountability and little evidence that this faith-based initiative can work.

AP Reports:

WASHINGTON - Congressional leaders and the White House agreed Sunday to a $700 billion rescue of the ailing financial industry after lawmakers insisted on sharing spending controls with the Bush administration. The biggest U.S. bailout in history won the tentative support of both presidential candidates and goes to the House for a vote Monday.

The plan, bollixed up for days by election-year politics, would give the administration broad power to use taxpayers' money to purchase billions upon billions of home mortgage-related assets held by cash-starved financial firms.

RGE: THE DETAILS

Sep 28 Tentative deal includes the general but unspecified provision that the financial industry would pay for any outstanding cost for the programme after five years. Main components: 1) $700bn released in installments: $250bn right away, $100bn later if results positive and the option to block the remaining $350bn; 2) equity warrants in return for bad asset purchase to recapitalize institutions and retain upside for taxpayers; 3) The plan also would let the government buy troubled assets from pension plans, local governments and small banks; 4) restrictions on executive compensation; 5) independent oversight board. 6) "the government could use its power as the owner of mortgages and mortgage-backed securities to help more struggling homeowners modify the terms of their home loans" but Democrats jettisoned Bankruptcy reform to lower debt value of purchased mortgages (Reuters). Separately, second stimulus package is also in the making for Main Street next to bailout for Wall Street

INSIDE JOB? OVERSIGHT LACKING:

No member of the public, no labor representative etc…

NEWS TIP: LOOPHOLES GALORE

This part of the legislation:

(e) PREVENTING UNJUST ENRICHMENT.-This subsection does not
apply to troubled assets acquired in a merger or acquisition, or a purchase
of assets from a financial institution in conservatorship or receivership, or
that has initiated bankruptcy proceedings under title 11, United States
Code.

So 'Unjust Enrichment' doesn't apply to JPMorganChase,BofA,Citi, or Barclay's of England because of what has already occurred. Think Lehman's when thinking Barclays.

G STREET IN HYPER-MODE

We hear alot about Wall Steet and Main Street but very little about G Street where the Lobbyists are based in Washington and who are, as I write, are scheming overtime to make sure their clients profit on this "rescue."

ONLY THE BEGINNING-STEVEN PEARLSTEIN IN THE WASHINGTON POST

Global investors no doubt will cheer the weekend's political breakthrough, focusing less on the details than on the perceived commitment by the United States to do whatever is necessary to prevent a meltdown in global financial markets.

But nobody should view even this effort as sufficient to keep the U.S. economy out of recession, stabilize housing markets or prevent the failure of additional banks, investment houses, insurers and hedge funds. Although more than $600 billion in private-sector credit losses have already been posted, a number of private and public-sector analysts now estimate that won't be even half the final tab from the bursting of the greatest credit bubble the world has seen.

ZACK'S RESEARCH: NOT OUT OF THE WOODS

Even after a form of this proposal gets passed, the US economy still has to contend with pieces other than the magnitude of the current financial crisis: extremely weak consumer, an ailing industrial sector, volatile crude oil prices and slowing global growth. So we will be nowhere near "out of the woods" after the bailout package becomes finalized, but it would be a crucial step to rebuilding a broken system.

GOLDMAN SHOPPING FOR BARGAINS

FT: Goldman Sachs is seeking to acquire up to $50bn in assets from ailing US banks as part of its push into commercial banking, Goldman executives say

NAKED CAPITALISM:There was confusion up until the midnight hour on Saturday:

First sighting from Clusterstock, will add updates as they come in:

Update (12:35 a.m.): Nancy Pelosi speaks first. (She calls it "a buy-in"-not a bailout.) She says we have a deal. Harry Reid is up next. He credits Pelosi with coming up with a new idea in the final hour but doesn't even hint at what that is! Hank Paulson sounds less reassuring, mentioning that there is lots of work left to be done and concluding "so far, so good."

Gregg just sounds glad to be able to go to bed. Roy Blunt admits he hasn't talked to the House Republicans but seems confident. Blather from Dodd about how "unpleasant" having to "go through all this" has been.
Clusterstock again:

Update (12:37 a.m.): It's a secret deal! Until they get it down on paper overnight, we won't know what they agreed to.

Except, except. We imagine that that the staff members and lawmakers will quickly be leaking details to reporters.


WHAT BAILOUT EMERGENCY? THE WHITE HOUSE ADMITS IT DREW UP PLANS FOR IT MONTHS AGO
TO SEND A SIGNAL TO ASIA

WHY DID THEY DO THIS DEAL ON THE WEEKEND? A:

The US Congress is not expected to start voting on the deal until tomorrow.

But politicians in Washington have reached their goal of striking a deal to send a reassuring message before today's opening of the Australian and Asian stockmarkets

But, guess what? Asian Markets did NOT respond as Washington hoped they would. "Asian stock markets fell on Monday as the US Congress prepared to begin voting on the $700 billion financial bailout plan…."

PRESSURE FROM CHINA BEHIND BAILOUT?

The architects of the bailout cannot be pleased by this news. Cam Hui writes more about this aspect which US media has downplayed on Seeking Alpha:

While some have pointed to the breakdown in the credit markets as the compelling reason for a bailout, there is gathering evidence that the US authorities succumbed to Chinese pressure to "make them whole", so to speak, on China's investments in US paper.

The Washington Post recently reported [emphasis, mine]:

As U.S. officials were deciding in August whether to take over Fannie Mae and Freddie Mac, the Treasury Department held informal talks with officials from the People's Bank of China, the country's central bank. At that time, investors in Fannie Mae and Freddie Mac in China were dramatically reducing their holdings. The U.S. side told China that a cash infusion was in the works; China said that it expected the U.S. government to "do whatever is necessary" to protect the investments.

As an indication of further pressures, China also signaled that it could shift away from USD assets. Given the size of the US current account deficit, a buyer's strike of USD paper would send long rates soaring and the economy would nose-dive into a serious recession, if not another Depression. In that case, the US authorities may have caved into Chinese pressure and chosen to bail out Agency paper


FT: ASIA ON EDGE: CHINA MOVES TO "DECOUPLE," PREVENT A CRASH
China takes steps to prevent stock markets crashing

Asian stock markets have suffered more than those in Europe and the US as investors have retreated amidst the growing uncertainty, fulfilling general expectations of greater vulnerability.

This time last year the talk was of decoupling, expressing the hope that Asian economies and stock markets would continue to perform well despite the expected slowdown in Europe and the US. Much of this hope was predicated on the continued strength of the Chinese economy and the increasing economic interdependence among Asian countries. Most countries in the region have developed strong economic ties with China since the Asian economic crisis in the 1990s.

NOTE: THERE IS STILL A CHANCE OF A REPUBLICAN REVOLT! THE BILL MAY NOT PASS EVEN NOW.

Alternet offers five reasons why.

FINANCIAL TIMES: WEST AT RISK

Thursday afternoon was the moment America realised its version of capitalism is
not working any more. You could feel the pain of that eureka moment from Wall
Street to Main Street, where the middle class howled at the magnitude of a
mooted $700bn bail-out package.

The most direct expression of this epiphany was on Capitol Hill, where an
apostate faction of House Republicans declared their 11th-hour opposition to
the financial plan being advanced by their own president and secretary of the
Treasury. Part of what was going on was political posturing ahead of the
November 4 election. But at the heart of the rebellion was the fear that, as
Jen Hensarling, the Texas congressman who led the resistance said, the rescue
plan would lead the US down "the road to socialism".


THE COLUMBUS DISPATCH" THE NEXT BUBBLE TO BURST-CREDIT SWAPS NOT COVERED BY THIS DEAL


Remember that simpler time before you had ever heard the term "subprime
mortgage"?

Well, there is another financial instrument that could be about to become firmly
fixed in the water-cooler lexicon: credit-default swap.

These are contracts that banks, hedge funds and other institutions purchase to
cover potential losses on corporate debt, municipal bonds or mortgage
securities they have bought. If a company defaults on bond payments or goes
under, the swap issuer must pay a claim.

It's another of Wall Street's financial innovations that's creating fear and
hand-wringing among Washington financial regulators, so much so that U.S.
Securities and Exchange Commission Chairman Christopher Cox called on Congress
on Monday to "immediately" grant authority to regulate them.

REACTIONS: KUCINICH SAYS NO

"The $700 billion bailout for Wall Street, is driven by fear not fact. This is too much money in too a short a time going to too few people while too many questions remain unanswered.

Why aren't we having hearings on the plan we have just received? Why aren't we questioning the underlying premise of the need for a bailout with taxpayers' money? Why have we not considered any alternatives other than to give $700 billion to Wall Street? Why aren't we asking Wall Street to clean up its own mess? Why aren't we passing new laws to stop the speculation, which triggered this? Why aren't we putting up new regulatory structures to protect investors? How do we even value the $700 billion in toxic assets?

"Why aren't we helping homeowners directly with their debt burden? Why aren't we helping American families faced with bankruptcy. Why aren't we reducing debt for Main Street instead of Wall Street? Isn't it time for fundamental change in our debt based monetary system, so we can free ourselves from the manipulation of the Federal Reserve and the banks? Is this the United States Congress or the board of directors of Goldman Sachs? Wall Street is a place of bears and bulls. It is not smart to force taxpayers to dance with bears or to follow closely behind the bulls.

THOM HARTMANN: How Wall Street Can Bail Itself Out Without Destroying The Dollar

For Grover "Drown Government In The Bathtub" Norquist, this bailout deal will work out very well. At a proposed cost of $4,780 per taxpayer, it'll further the David Stockman strategy of so indebting us that the next president won't have the luxury of even thinking of new social spending (expanding health care, social security, education, infrastructure, etc.); taxes will even have to be raised just to pay for the bailout. It'll debase our currency, driving up commodity prices and interest rates, which will benefit the Investor Class while further impoverishing the pesky Middle Class, rendering them less prone to protest (because they're so busy working trying to pay off their debt). It'll create stagflation for at least the next half decade, which can be blamed on Democrats who currently control Congress and, should Obama be elected, be blamed on him.

But there's another way: Create an agency to fund the bailout, loan that agency the money from the treasury, and then have that agency tax Wall Street to pay us (the treasury) back.

Mike Whitney: THEY ARE BROKE

The financial system is blowing up. Don't listen to the experts; just look at the numbers. Last week, according to Reuters, "U.S. banks borrowed a record amount from the Federal Reserve nearly $188 billion a day on average, showing the central bank went to extremes to keep the banking system afloat amid the biggest financial crisis since the Great Depression." The Fed opened the various "auction facilities" to create the appearance that insolvent banks were thriving businesses, but they are not. They're dead; their liabilities exceed their assets. Now the Fed is desperate because the hundreds of billions of dollars of mortgage-backed securities (MBS) in the banks vaults have bankrupt the entire system and the Fed's balance sheet is ballooning by the day. The market for MBS will not bounce back in the foreseeable future and the banks are unable to roll-over their short term debt. Game over. The Federal Reserve itself is in danger. So, it's on to Plan B; which is to dump all the toxic sludge on the taxpayer before he realizes that the whole system is cratering and his life is about to change forever. It's called the Paulson Plan, a $700 billion boondoggle which has already been disparaged by every economist of merit in the country.

From Reuters:

"Borrowings by primary dealers via the Primary Dealer Credit Facility, and through another facility created on Sunday for Goldman Sachs, Morgan Stanley, and Merrill Lynch, and their London-based subsidiaries, totaled $105.66 billion as of Wednesday, the Fed said."

See what I mean; they're all broke. The Fed's rotating loans are just a way to perpetuate the myth that the banks aren't flat-lining already. Bernanke has tied strings to the various body parts and jerks them every so often to make it look like they're alive. But the Wall Street model is broken and the bailout is pointless.

STEPHEN LENDMAN-GLOBAL RESEARCH:

The crime of the century. The greatest one ever. Author Danny Schechter calls it "Plunder." The title of his important new book on the subprime and overall financial crisis. Economist Michael Hudson and others refer to a kleptocracy. A Ponzi scheme writ large. Maybe an out-of-control Andromeda Strain. An economic one. Deadly. Unrecallable. Science fiction now real life. Potentially catastrophic. World governments trying to contain it. Trying everything but not sure what can work. Maybe only able to paper it over for short-term relief. Buy time but in the end vindicate the maxim that things that can't go on forever, won't.

The world as we know it is changing. Industrial capitalism. The entire global economic system. Interconnected. What affects one nation touches others. If the troubled country is America it reaches everywhere, and if the crisis is great enough, the disease may be fatal and human wreckage catastrophic. Precisely the current dilemma that world leaders and financial experts are scrambling to figure out. Desperate to contain, and not sure what, if anything, can work. How did this happen and why?

The result of unfettered capitalism's fatal flaw - unbridled greed in a rigged system that rewards the few at the expense of most others. First an explanation of how it works. Free-wheeling, "free market" Chicago School fundamentalism the way economist Milton Friedman championed it in his 1962 book "Capitalism and Freedom" and taught it to students for decades. He believed that government's sole function is "to protect our freedom both from (outside) enemies….and from our fellow-citizens." Preserve law and order. Enforce private contracts. Protect private property and "foster competitive (unregulated) markets." Everything else in public hands is "socialism….blasphemy." Not to be tolerated.

THE ECONOMIST (LONDON)

No government bail-out of the banking system was ever going to be pretty. This one deserves support SAVING the world is a thankless task. The only thing beyond dispute in the $700 billion plan of Hank Paulson, the treasury secretary, and Ben Bernanke, chairman of the Federal Reserve, to stem the financial crisis is that everyone can find something in it to dislike. The left accuses it of ripping off taxpayers to save Wall Street, the right damns it as socialism; economists disparage its technicalities, political scientists its sweeping powers. The administration gave ground to Congress, George Bush delivered a televised appeal and Barack Obama and John McCain suspended the presidential campaign. Even so, as The Economist went to press, the differences remained. There was a chance that Congress would say no.

Spending a sum of money that could buy you a war in Iraq should not come easily; and the notion of any bail-out is deeply troubling to any self-respecting capitalist. Against that stand two overriding arguments. First this is a plan that could work. And, second, the potential costs of producing nothing, or too little too slowly, include a financial collapse and a deep recession spilling across the world: those far outweigh any plausible estimate of the bail-out's cost.

UK: ANOTHER BANK NATIONALIZED

LONDON (Reuters) - Britain's government will nationalize troubled mortgage lender Bradford & Bingley and is discussing the sale of its savings book and branches, people in the banking industry familiar with the matter said.

The Treasury is leading talks on the rescue of the bank and said on Sunday discussions were continuing. A full statement will be made by finance minister Alistair Darling before Monday's market opening.

The Treasury would have preferred a private sector rescue for Britain's ninth biggest mortgage provider but rivals appear unwilling to come in as a "white knight" amid a global credit crisis and weakening British housing market.

DEAN BAKER: Ending Welfare as We Know it Now

Like many other economists I have been writing about the conditions under which the taxpayers should be willing to hand over vast sums to the Wall Street wrecking crew. This is inevitably involves a game of chicken to some extent. But a properly designed bailout turns it into a simple question of revealed preference.

We give Wall Street terms that require giving up so much equity that the banks really don't want to take the deal. They will take the deal because they have to take the deal, the alternative is bankruptcy.

There is a very simple way to determine whether the deal is the right deal.

If the deal is the right deal, the stock market should rally; the threat of a financial meltdown will be pushed back, if not eliminated. However, if it's the right deal the financial stocks will not rally, they might even plummet.

The right deal will not give the shareholders anything. It will require the banks to surrender so much equity in exchange for their bailout that the share price could fall when the bailout is announced. After all, the shareholders of AIG were not happy when the Fed stepped in and keep the giant insurer operating. If we get the right deal, the stockholders of the surviving financial companies should be almost as unhappy.

So, there you have it. The right deal means stock market up, financial stocks down. Or to put another way, no deal until we see the "For Sale" signs in the Hamptons.

MEMO TO DEAN: There is a wave of foreclosures already in the Hamptons.