Part Two of Obama and the Stock Market: Democrats caused the Crisis.
March 9, 2009

 
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Last week, I pointed out how people who were suggesting the continued decline in the Stock Market was somehow due to a lack of confidence in President Obama, had NOTHING to base their theory on. Instead, I pointed to reports of continued banking failures that began under President Bush were responsible for those declines (such as the revived financial woes of AIG reporting a record $61.7B in just one quarter and would be seeking another $30Billion in addition to the $150 billion they had already received. That record job losses in January… Bush’s final month in office… continued through February should come as no surprise to anyone. As of last Sunday, Barack Obama had been President for a grand total of 47 days. Polls show “the Recession is Obama’s fault” meme is not gaining traction with anyone but the most deluded hardcore Right-wingers, so the Republican “finger of blame” that points ever-outward is pointing more & more towards the election of a Democratic majority in Congress in 2006.

The story goes like this: “Before Democrats took over, gas was $1.50/gal (nonsense, as I pointed out last week, it was over $2.40/gal), the stock market was over 12,000 (yes, and hit a record 14,000 points six months later on July 19, 2007) and there was no “banking crisis”. To hear Republican’s talk, you’d think everything was going just great when the American people voted for Democrats overwhelmingly in the 2006 midterm elections. But as for that “no banking crisis” nonsense, I did a little research and found a few headlines:

washingtonpost.com
Financial Stocks, Funds Down but Not Out
While Rising Rates, Regulatory Ills Take a Toll, the Long View Looks Better

By Chet Currier
Bloomberg News
Sunday, May 22, 2005;

As ugly as early 2005 has been for stocks in general, it has been worse for owners of financial stocks and financial services mutual funds.

Through May 13, the average among 45 financial sector funds tracked by Bloomberg posted a 7.5 percent loss. That compares with an average 5 percent decline suffered by stock funds of all types.

No surprise, given that the Federal Reserve has been steadily raising short-term interest rates. This tends to squeeze the spread between a financial intermediary’s cost of money and what it can earn from putting the money back out to work.

“As much as the financial world may like to blame the Fed, it’s not the only reason the group has struggled,” said Brad Sorenson, an analyst at Charles Schwab & Co. Until very recently at least, “there’s been a complacency toward risk in the marketplace, reflected in corporate credit spreads that have narrowed over the past two years. During this period, financial institutions chased yields and lowered credit standards.”

Regulatory controversies of one kind or another have jolted the shares of several big financial companies. According to Bloomberg, mortgage giant Fannie Mae is down 24 percent from Jan. 1; its cousin Freddie Mac, 16.8 percent; and American International Group Inc. (AIG), 20.6 percent.
[…]

Brother, can you spare some credit?
Credit derivatives: Capitalism’s magic bullet?

Andrew Leonard
Apr. 13, 2006

[…]
So, basically, the idea is that the more risk is spread out through the financial system, the less likely it would be that a single shock could precipitate a widespread credit crisis. Indeed, the authors of the IMF study say, there is evidence that the maturing of the credit derivative market is already smoothing the ups and downs of the credit cycle — a historically observable pattern in which, over time, credit gets harder and then easier to obtain.

But there may be a couple of problems with the IMF’s generally rosy assessment, underpinned, as usual, by the belief that letting markets handle problems with the least amount of government interference possible is the best way to maintain stability. As a monograph published by the Levy Institute in January notes, the new era of credit derivatives has never been tested by a serious downturn. Many of the largest players, such as hedge funds, are only lightly regulated and highly secretive. Last year, the mere downgrading of General Motors and Ford’s corporate bonds “stunned the credit derivatives market,” says economist Edward Chilcote, causing hedge funds to lose hundreds of millions of dollars. In a real economic downturn “a possible scenario is that many hedge funds will fail simultaneously from exposure to credit derivatives, and banks will rush to buy contracts to cover their exposure. A declaration of bankruptcy by a major corporation would put further pressure on the credit derivatives market. The market might become illiquid, and the potential for a cascade of losses could rise.”
[…]

By mid-2005, concern over the credit market was growing over what rising interest rates and excessive deregulation might do to the credit market. Fannie Mae and Freddie Mac (the GOP’s Whipping-Boy for Wall Street irresponsibility) were already tumbling in the stock market.

Long-time readers of Mugsy’s Rap Sheet will be familiar with my frequent concern over interest rates. Massive borrowing by Republicans to fund the Federal Government while simultaneously cutting taxes (what Bush Sr. called “Voodoo economics” when he ran against Reagan in 1980) quadrupled the National Debt under Ronald Reagan (from $1T in 1980 to $4T by 1988), but the problem literally EXPLODED under George W. Bush cutting taxes in a time of war, adding an additional $5TRILLION… more than all 42 previous presidents combined (including Reagan)… to the National Debt (from $5.7T to just under $11T today). The more you borrow, the more of your tax dollars are spent simply to pay interest on the debt so that other countries (and Americans buying bonds) will continue to loan us money. That’s fewer tax dollars available to spend on things from health care and police to explosives detectors in airports and tighter security around chemical and nuclear plants. So the government must keep interest rates high enough to attract foreign investment, without raising them so high that people spend less and save more by putting their money in the bank for the high interest rate, thus slowing the economy. It’s a delicate balancing act.

Problem is, under Bush, the economy got SO bad, they cut interest rates to the bone (a record low 0.25%) to encourage spending… usually on big-ticket items like cars & houses. (see where this is going?) But with bills to pay and less tax revenue coming in, the Bush Administration was forced to raise interest rates even while the economy was still struggling to keep its head above water. Quickly, people that bought homes with “Adjustable Rate Mortgages” (ARM’s) suddenly saw their payments double & triple. People, no longer able to afford to pay their mortgage, were defaulting on their loans and going into foreclosure. Banks, losing Billions, stopped loaning money, hurting the car market… which was already hurting because the Bush Administration’s rollback of economy standards made the automakers top-heavy with low mileage SUV’s when gas prices crept up to $4/gal (explained last week). Cars became more expensive at a time when sales were already slowing.

* Kaboom *

And Republicans want you to believe “it’s all the Democrats fault”. Republicans fall for this nonsense because of a convent form of political myopia* where they cannot accurately remember what happened more than three months ago or foresee the consequences of their actions in the immediate future (see: Iraq).
——————

And on an unrelated note, it’s was bugging me for quite a while: “Why am I having so much trouble feeling comfortable with Treasury Secretary Tim Geithner?” Maybe this has something to do with it:

Tim Geithner and Dr. Jack Kevorkian
Tim Geithner and Dr. Jack Kevorkian


I’m sure it hasn’t helped reassure anyone that President Obama chose someone that resembles “Dr. Death” to rescue the economy. 🙂
 

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March 9, 2009 · Admin Mugsy · One Comment - Add
Posted in: myth busting, Politics

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  1. gadfly - March 16, 2009

    From Joel Skousen
    World Affairs Brief
    3-13-9

    As the US Treasury Department continues to brag that the US has not yet been forced to make good on its guarantees of toxic debt held by the major insider banks (Citigroup, JP Morgan, Bank of America, etc) we find they have been using a back door to funnel money to their friends–AIG the world insurance giant holding the largest share of derivative contracts that guarantee those toxic debts against default. In point of fact, those debts are defaulting in ever increasing number, and AIG is having to pay out billions. But, those billions are being replenished by additional bailout funds from the Treasury–while the rest of the nation suffers from lack of credit. Why should the American taxpayer be bailing out gambling bets based on promises to pay that were utterly fraudulent? Now we find out that AIG is also the preferred avenue of funneling money into European banks. Lastly, what do all these insider banks have in common? They constitute the private owners of the Federal Reserve. It all begins to make sense why only the largest banks are receiving these funds and why the regulators continue to squeeze the smaller banks with millions in new surcharges–forcing them into liquidation. The fix is in.

    International law professor Richard Cummings, writing for Lew Rockwell.com, says, “Fed Chairman Ben Bernanke has resisted calls from Congress that he release the names of the banks that were recipients of the bailout money the Fed gave to AIG to prevent it from collapsing. AIG insured its counterparties against losses from mortgage-backed derivatives. The Fed poured $85 billion into AIG, which paid out $37.3 billion of that money to counterparties that had purchased a certain type of derivative-based protection from AIG, called multi-sector credit default swaps.

    “The counterparties have never been disclosed but the Wall Street Journal reported that they included Goldman Sachs, Merrill Lynch, UBS and Deutsche Bank. AIG and the Federal Reserve Bank of New York have unwound many of these contracts. To do this, they offered to buy the CDOs (collateralized debt obligations) that were originally insured by those agreements. The counterparties sold these assets at a discount, but were compensated in full in return for allowing AIG to extricate itself from the obligations. The counterparties also got to keep the $37.3 billion in collateral, according to the Wall Street Journal.

    “While Bear Stearns was collapsing, Goldman Sachs boasted that it had insulated itself by buying insurance against the mortgage-backed derivatives. As it turns out, it was, in fact, rescued by the Fed when it bailed out AIG. In 2007, Lloyd Blankfein, Goldman Sachs’ CEO, received $70 million in compensation, including bonuses, $27 million in cash… At the time the New York Fed came to AIG’s assistance, Secretary of the Treasury Timothy Geithner was its head. Blankfein is still drawing down millions in compensation. The rationale for his compensation is the alleged profitability of Goldman Sachs, which raked in over $9 billion in 2006. It should also be noted that the bailout stopped Goldman stock from plummeting, thereby protecting not only Blankfein’s fortune, but that of Hank Paulson, the former chairman of Goldman Sachs, who was Secretary of the Treasury under George W. Bush.

    “This is perhaps the greatest financial scandal in American history but most Americans are totally ignorant of it. On top of this, the AIG bailout enabled John Thain to pay out billions in bonuses while he headed Merrill Lynch, just prior to its sale to Bank of America, a recipient of billions of bailout money, this while the unemployment rate is headed towards ten percent and the market collapse has caused losses in the trillions. Were the names of the banks made officially public, there would be cries of outrage so loud as to be deafening, making any further bailouts dubious for political reasons. And while Bernanke has said that he would not permit the big banks to fail, the looting of America by some of the richest and most powerful people, such as Blankfein and Thain, goes on, with no end in sight. Pandit the bandit now says Citigroup is profitable, enabling its stock to rise above a dollar, generating a temporary euphoria in the market. The cheers going up on CNBC can be heard all the way to Warren Buffett’s coffers. And American tax payers are not only bailing out the American banks, they are also bailing out Europe.”

    Toni Reinhold of Reuters answers “Who got AIG’s bailout billions?” “The Wall Street Journal reported… that some of the banks paid by AIG since the insurer started getting taxpayer funds were: Goldman Sachs Group Inc, Deutsche Bank AG, Merrill Lynch, Societe Generale, Calyon, Barclays Plc, Rabobank, Danske, HSBC, Royal Bank of Scotland, Banco Santander, Morgan Stanley, Wachovia, Bank of America, and Lloyds Banking Group.” I think it’s the large number of foreign banks that would be particularly irritating to the public if it knew the extent of this largess.

    WHO OWNS THE FED?

    Jim Quinn unravels for us the real link between all this insider dealing. Who really owns the Federal Reserve. It’s not the US government and its not you the taxpayer. “The average American does not know much about the Federal Reserve. The government and the Federal Reserve prefer to operate in the shadows. If the American public understood what their policies have done to their lives, they would be rioting in the streets. Henry Ford had a similar opinion: ‘It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.’

    “Most Americans believe that the Federal Reserve is part of the government. They are wrong. It is a privately held corporation owned by stockholders. The Federal Reserve System is owned by the largest banks in the United States. There are Class A, B, and C shareholders. The owner banks and their shares in the Federal Reserve are a secret. Why is this a secret? It is likely that the biggest banks in the country are the major shareholders. Does this explain why Citicorp, Bank of America and JP Morgan, despite being insolvent, are being propped up by Ben Bernanke and Timothy Geithner?” It does, indeed.

    Tony Rheinholt continues: “The U.S. Federal Reserve has refused to publicize a list of AIG’s derivative counterparties and what they have been paid since the bailout, riling the U.S. Senate Banking Committee. Federal Reserve Vice Chairman Donald Kohn testified before that committee on Thursday that revealing names risked jeopardizing AIG’s continuing business. Kohn said there were millions of counterparties around the globe, including pension funds and U.S. households.” What this means is that AIG is only paying out on SOME of its obligations, and US Pension funds are NOT on that list. In other words, the bailout monies are only going to a select few. AIG has absorbed $180B so far, with no end in sight, no transparency, and no sign of changing this pattern.

    Proof that we haven’t even turned the corner yet comes from Greg Gordon and Kevin G. Hall of McClatchy Newspapers (itself a losing enterprise like dozens of other print media): “America’s five largest banks, which already have received $145 billion in taxpayer bailout dollars, still face potentially catastrophic losses from exotic investments if economic conditions substantially worsen, their latest financial reports show. Citibank, Bank of America, HSBC Bank USA, Wells Fargo Bank and J.P. Morgan Chase reported that their ‘current’ net loss risks from derivatives —- insurance-like bets tied to a loan or other underlying asset —- surged to $587 billion as of Dec. 31. Buried in end-of-the-year regulatory reports that McClatchy has reviewed, the figures reflect a jump of 49 percent in just 90 days.”

    Not counted in those write downs, of course, are the funds they are getting through the back door, which are not accounted for publicly. “While the potential loss totals include risks reported by Wachovia Bank, which Wells Fargo agreed to acquire in October, they don’t reflect another Pandora’s Box: the impact of Bank of America’s Jan. 1 acquisition of tottering investment bank Merrill Lynch, a major derivatives dealer.”

    SQUEEZING THE SMALL SOLVENT BANKS

    The next part of the fix is the most evil, in my opinion. The Fed and the US Treasury have given trillions of paper dollars to insider banks, and yet they are letting the FDIC run short of money so that this “insurer” of the public’s deposits ($250,000 and below) can have an excuse to jack up the insurance premiums (surcharges) to member banks. These new “temporary” fees are more than most small bank profits, and will ensure that these banks fail.

    As Paul Kiel writes in ProPublica, “It’s looking increasingly like the FDIC will have to turn to Treasury to help it weather the storm… FDIC’s deposit insurance fund has plummeted in the past year as a growing number of banks have failed. The fund relies on fees from member banks, and Bair held out hope that a recent bump in those feeswould provide enough cushion. But if it doesn’t, Bair said, people shouldn’t be nervous about their FDIC-insured accounts: ‘It is important for people to understand, we’re backed by the full faith and credit of the United States government. The money will always be there. We can’t run out of money.'” Then why has the fee increased? Why penalize the banks that have been conservative, and limited their growth for safety?

    Bill Butler describes the “squeeze play” going on: “FDIC Chairwoman Sheila Bair announced last week that the quasi-public insurance monopoly would become insolvent in the next few months if it is not allowed to implement a one-time, draconian surcharge on all U.S. banks. This charge will, in some cases, wipe out last year’s profits. At the same time, the FDIC has requested an additional $500 billion ‘loan’ from Congress [notice that a loan requires the member banks to pay it off. A bailout would not. They choose to ask only for the loan as a justification for the surcharge].

    “Small, solvent, well-run local and regional banks have objected. They rightly claim that they are not the problem. These banks have a solid and growing deposit base and many of them service their own loans and so did not get caught in the trap of originating bad loans and dumping them on the secondary mortgage market in federally-guaranteed bundles. Whether they know it or not, these banks intuit that, like Social Security, there is no FDIC “fund.” FDIC insurance, like social security, is just another government-coerced Ponzi scheme — a tax that, according to former FDIC commissioner Bill Isaac, goes immediately to the Treasury to buy “spending . . . on missiles, school lunches, water projects, and the like.”

    “Rather than increasing their taxes and punishing their relatively good behavior, these small banks suggest that the FDIC look first to Bailout Banks, the Wall Street mega-banks that have received nearly a trillion dollars in unearned, government-supplied capital via the printing press, for any increased insurance premium/tax. Ms. Bair rejected these pleas by claiming that FDIC law does not allow her to ‘discriminate’ against banks based on their size. Clever [Actually, there is a basis for discrimination since the larger one’s 1) caused the problem and 2) are the recipients of taxpayer backed funds]. What is really going on is that the Bailout Banks are using the government and its insurance monopoly to help them gain market share by drastically increasing the operating costs of their smaller, better-run and scrappy competitors.” We are about to see the worst banks absorb the smaller sound banks–a great injustice, and totally engineered.
    ————————————————–

    So you see, the only “change” with BO is who (at least on the government side) is running the scams now.

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