500 Trades Away from Armageddon
financial system is in major meltdown, and the Paulson bailout is only
going to keep the charade sputtering along. It's time for Main Street
to say 'No' to Wall Street.
By Mike WhitneyThe
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 bankrupted
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.
Federal Reserve itself is in danger. So, it's on to Plan B; which is to
dump all the toxic sludge on the taxpayers before they realize that the
whole system is cratering. It's called the Paulson Plan, a $700 billion
outrage which has already been disparaged by every economist of merit
in the country.
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."
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.
week, there was a digital run on the banks that most people never even
heard about; a "real time" crash. An article in the New York Post by
Michael Gray gave a blow by blow description of how events unfolded.
Here's a clip from Gray's "Almost Armageddon":
"The market was 500 trades away from Armageddon on Thursday...Had the
Treasury and Fed not quickly stepped into the fray that morning with a
quick $105 billion injection of liquidity, the Dow could have collapsed
to the 8,300-level - a 22 percent decline! - while the clang of the
opening bell was still echoing around the cavernous exchange floor.
According to traders, who spoke on the condition of anonymity, money
market funds were inundated with $500 billion in sell orders prior to
the opening. The total money-market capitalization was roughly $4
trillion that morning.
panicked selling was directly linked to the seizing up of the credit
markets - including a $52 billion constriction in commercial paper -
and the rumors of additional money market funds ‘breaking the buck,’ or
dropping below $1 net asset value.
Fed's dramatic $105 billion liquidity injection on Thursday
(pre-market) was just enough to keep key institutional accounts from
following through on the sell orders and starting a stampede of cash
that could have brought large tracts of the US economy to a halt."
paper is the lubricant that keeps the financial markets functioning.
When confidence vanishes, investors withdraw their money, normal
business operations become impossible, and the markets collapse. End of
story. So, rather than restore the public's confidence by strong
leadership and behavior designed to reassure investors; President Bush
decided to give a major prime-time speech stating that if Paulson's
emergency bailout package was not passed immediately, the nation's
economy would vaporize into the ether.
week, the commercial paper market, (much of which is backed by
mortgage-backed securities) shrunk by $61 billion to $1.702 trillion,
the lowest level since early 2006. So, Paulson's bailout will
effectively underwrite CP as well as the whole alphabet soup of
mortgage-backed derivatives for which there is currently no market. The
US taxpayer is not only getting into the plummeting real estate market,
he is also backstopping the entire financial system including
defaulting car loan securities, waning student loan securities,
flailing home equity loan securities and faltering credit card
securities. The whole mountainous pile of horsecrap-debt is about to be
stacked on the back of the maxed-out taxpayer and the ever-shriveling
did Treasury Secretary Paulson figure out that recapitalizing the
banking system would cost $700 billion? Or did he just estimate the
amount of money that could be loaded on the back of the Treasury's
flatbed truck when it sputters off to shower his buddies at Goldman
Sachs with freshly minted greenbacks? The point is, that Paulson's
calculations were not assisted by any economists at all, and they
cannot be trusted. It is a purely arbitrary, "back of the envelope"
type figuring. According to Bloomberg: Swiss investor Marc Faber, known
for a long track record of good calls, believes the damage may come to
Faber, managing director of Marc Faber Ltd. in Hong Kong, said the U.S.
government's rescue package for the financial system may require as
much as $5 trillion, seven times the amount Treasury Secretary Henry
Paulson has requested....
$700 billion is really nothing,'' Faber said in a television interview.
``The Treasury is just giving out this figure when the end figure may
be $5 trillion.''
people who follow these matters would trust Faber's assessment way over
Paulson's. In his latest blog entry, economist Nouriel Roubini said
that "no professional economist was consulted by Congress or invited to
present his/her views at the Congressional hearings on the Treasury
rescue plan." Roubini added:
"The Treasury plan is a disgrace: a bailout of reckless bankers,
lenders and investors that provides little direct debt relief to
borrowers and financially stressed households and that will come at a
very high cost to the US taxpayer. And the plan does nothing to resolve
the severe stress in money markets and interbank markets that are now
close to a systemic meltdown."
is right on all counts. So far, more than a 190 prominent economists
have urged Congress not to pass the $700 bailout bill. There is growing
consensus that the so-called "rescue package" does not address the
central economic issues and has the potential to make a bad situation
The Bankers’ Coup
industry rep. Paulson is the ringleader in a bankers’ coup the results
of which will decide America's economic and political future for years
to come. The coup leaders have drained tens of billions of dollars of
liquidity from the already-strained banking system to trigger a freeze
in interbank lending and hasten a stock market crash. This, they
believe, will force Congress to pass Paulson's $770 billion bailout
package without further congressional resistance. It's blackmail.
yet, no one knows whether the coup-backers will succeed and further
consolidate their political power via a massive economic shock to the
system, but their plan continues to move jauntily forward while the
economy follows its slide to disaster.
bailout has galvanized grassroots movements which have flooded
congressional FAXs and phone lines. Callers are overwhelmingly opposed
to any bailout for banks that are buckling under their own toxic
mortgage-backed assets. One analyst said that the calls to Congress are
50 per cent "No" and 50 percent "Hell, No". There is virtually no
popular support for the bill.
Bloomberg News: "Erik Brynjolfsson, of the Massachusetts Institute of
Technology's Sloan School, said his main objection ‘is the breathtaking
amount of unchecked discretion it gives to the Secretary of the
Treasury. It is unprecedented in a modern democracy.’
suspect that part of what we're seeing in the freezing up of lending
markets is strategic behavior on the part of big financial players who
stand to benefit from the bailout,’ said David K. Levine, an economist
at Washington University in St. Louis, who studies liquidity
constraints and game theory.’” (Mish's Global Economic Trend Analysis)
suspicions are well-founded. "Market Ticker's" Karl Denninger confirms
that the Fed has been draining the banking system of liquidity in order
to blackmail Congress into passing the new legislation. Here's
Effective Fed Funds rate has been trading 50 basis points or more below
the 2% target for five straight days now, and for the last two days, it
has traded 75 basis points under. The IRX is demanding an immediate
rate cut. The Slosh has been intentionally drained by over $125
billion in the last week and lowering the water in the swamp exposed
one dead body - Washington Mutual - which was immediately raided on a
no-notice basis by JP Morgan. Not even WaMu's CEO knew about the raid
until it was done....The Fed claims to be an ‘independent central
bank.’ They are nothing of the kind; they are now acting as an
arsonist. The Fed and Treasury have claimed this is a ‘liquidity
crisis’; it is not. It is an insolvency crisis that The Fed, Treasury
and the other regulatory organs of our government have intentionally
allowed to occur."
resistance, spearheaded by Internet bloggers (like Mish, Roubini and
Denninger) are demonstrating that they can mobilize tens of thousands
of "peasants with pitchforks" and be a factor in political decision
making. It also helps to have elected officials, like Senator Richard
Shelby, who stand firm on principle and don't faint at the first whiff
of grapeshot (like his weak-kneed Democratic counterparts) Shelby has
shouldered the full-weight of executive pressure which has descended on
him like a Appalachian rockslide. As a result, there's still a slight
chance that the bill will have to be shelved and the industry reps will
have to go back to Square One.
country's economic predicament is steadily deteriorating. Orders for
manufactured durable goods were off 4.5 percent last month while
inventories continued to rise. Unemployment is soaring and the housing
crash continues to accelerate. Credit Suisse now expects 10.3 million
foreclosures (total) in the next few years. Numbers like that are not
accidental, but part of a larger scheme to use monetary policy as a way
to shift wealth from one class to another while degrading the nation's
overall economic well-being. More alarming, the country's primary
creditors are now staging a rebellion that is likely to cut off the
flow of capital to US markets sending the dollar plummeting and
triggering a deflationary credit collapse. This is from Reuters:
regulators have asked domestic banks to stop lending to U.S. financial
institutions in the interbank money markets to prevent possible losses
during the financial crisis, the South China Morning Post reported
Thursday. The China Banking Regulatory Commission's ban on interbank
lending of all currencies applied to U.S. banks, but not to lenders
from other countries, the report added."
News reports that Dallas Federal Reserve Bank President Richard Fisher
has broken with tradition and lambasted the proposed bailout saying
that it "would plunge the U.S. government deeper into a fiscal abyss."
From Bloomberg: "The plan by Treasury Secretary Henry Paulson to buy
troubled assets from financial institutions would put 'one more straw
on the back of the frightfully encumbered camel that is the federal
government ledger,' Fisher said today in the text of a speech in New
York. 'We are deeply submerged in a vast fiscal chasm.'...The seizures
and convulsions we have experienced in the debt and equity markets have
been the consequences of a sustained orgy of excess and reckless
behavior, not a too-tight monetary policy," Fisher said to the New York
University Money Marketeers Club." (Bloomberg)
the cure for hyperbolic "credit excesses and reckless behavior" cannot
be "more of the same." In fact, Paulson's bailout does not even address
the core issues which have been obscured by demagoguery and threats.
The worthless assets must be written-down, insolvent banks must be
allowed to go bust, and the crooks and criminals who engineered this
financial blitz on the nation's coffers must be held to account.
carnage from Greenspan's low interest rate, "easy money" binge is now
visible everywhere. Inflated home and stock values are crashing as the
gas continues to escape from the massive equity bubble. The FDIC will
have to be recapitalized--perhaps, $500 billion--to account for the
anticipated loss of deposits from failing banks caught in the
cross-hairs of asset-deflation and steadily contracting credit.
Recession is coming, but economic collapse can still be avoided if
Paulson's misguided plan is abandoned and corrective action is taken to
put the country on solid financial footing. Market Ticker lays out
framework for a workable solution to the crisis, but they must be acted
on swiftly to rebuild confidence that major systemic changes are
all off-balance sheet "assets" back onto the balance sheet, and force
the valuation models and identification of individual assets out of
Level 3 and into 10Qs and 10Ks. Do it now. : (In other words, no more
Enron-type accounting mumbo-jumbo and no more allowing the banks assign
their own "values" to dodgy assets)
all OTC derivatives onto a regulated exchange similar to that used by
listed options in the equity markets. This permanently defuses the
derivatives time bomb. Give market participants 90 days; any that are
not listed in 90 days are declared void; let the participants sue each
other if they can't prove capital adequacy. (If trading derivatives
contracts can damage the "regulated" system, than that trading must
take place under strict government regulations)
leverage by all institutions to no more than 12:1. The SEC
intentionally dropped broker/dealer leverage limits in 2004; prior to
that date 12:1 was the limit. Every firm that has failed had double or
more the leverage of that former 12:1 limit. Enact this with a six
month time limit and require 1/6th of the excess taken down monthly.
(Ed: The collapse in the "structured finance" model is mainly due to
too much leverage. For example, Fannie Mae and Freddie Mac had $80 of
debt for every $1 dollar of capital reserves when they were taken into
there's going to be a bailout, let's get it right. Paulson's $700
billion bill does nothing to fix the deep structural problems in the
financial markets; it merely pushes the day of reckoning a little
further into the future while shifting the burden of payment for toxic
assets onto the taxpayer.
Mike Whitney lives in Washington state. He can be reached at firstname.lastname@example.org.