Pigs Fighting To Be First in Line at the Trough

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On October
2, 2008, LewRockwell.com
exposed the political truth behind the bailout: that its purpose
is to transfer wealth to Citibank and JP Morgan from the US taxpayer
as well as the Wachovia and Washington Mutual equity holders. Although
many additional state-empowering bells and whistles have been added
to the bailout plan, at its core the bailout dictates that the US
government will purchase somewhere north of $850 billion in subprime
mortgages and otherwise unmarketable mortgage-backed securities
from the financial institutions holding those securities. In the
week prior to the passage of the bailout, the federal government,
through the FDIC and the Office of Thrift Services, forced the transfer
of $307 billion in Washington Mutual assets (including at least
$34 billion in non-performing loans) to JP Morgan for $1.9 billion.
The FDIC also “facilitated” the future transfer of more than $300
billion in assets (including at least $42 billion in non-performing
loans) from Wachovia to Citibank. There can be little question about
how the FDIC “facilitated” these deals. In these gun-to-their-head
transactions, the FDIC brought the gun. The FDIC, as the regulator
of WaMu and Wachovia, has the worldly power to shutter these banks,
liquidate their assets and sell those assets over to whomever it
desires. As it is neither a buyer nor a seller, it brings nothing
more than regulatory leverage to such a transaction. This fact is
palpably demonstrated in JP Morgan–WaMu takeover.

Developments
just prior to and immediately after the bailout illuminate interesting
political and potentially ominous market realities. The political
reality is that George W. Bush, unlike
his father
, is most likely a Morgan man. Press reports indicate
that W himself was involved in these transactions. Comparing the
transactions shows that Morgan received the federal 800-pound gorilla's
unbridled support whereas federal coercion in the Citi-Wachovia
transaction was, by comparison, restrained. In “facilitating” the
JP Morgan–WaMu deal, the FDIC first wrestled WaMu to ground,
executing a midnight foreclosure and repossession of all its assets.
The FDIC then sold WaMu's $302 billion in assets to Morgan for $1.9
billion and wiped out the WaMu equity holders, including a group
that had invested $7 billion six months ago. Monday
JP Morgan further announced that had no intention of hiring or retaining
WaMu management
. Wachovia was just the latest bone thrown to
JP Morgan. In another federally "facilitated" transaction,
on March 17, 2008 JP
Morgan acquired global securities giant Bear Stearns for $236

million, or $2 a share. After shareholders complained, JP Morgan
increased its "offer" fivefold, to
$10 per share
. In February of 2008, Bear Stearns stock had a
market value $93 per share. Citi, by comparison, has not received
the same level of government support. In the Citi-Wachovia transaction,
the FDIC did not actually seize Wachovia's assets.
It only threatened to seize Wachovia's assets, allowed Wachovia
to survive as a legal entity and gave Wachovia until December 31
to close the deal with Citi. If W is not a Morgan man, then he is
not a good negotiator, because the delay has opened the door for
Wachovia to negotiate a better deal.

On the morning
of October 3, in a “surprise
announcement”
Wachovia's management and board of directors seized
the little daylight left open in the Citi deal and negotiated a
deal with Wells Fargo to receive an additional $13 billion for their
shareholders in a transaction that, unlike the Citi transaction,
would not expose the FDIC (US taxpayer) to any direct losses. Wells
Fargo's offer, seven times larger than Citi's, was made the night
before the bailout, at a time when the probability of bailout, according
to Intrade trading,
was 90–95 percent. Wells' offer provides a lesson in Austrian
economics
because it tacitly recognizes that Wells believed
that the bailout would cause Wachovia's subprime portfolio to become
more valuable overnight. It is a basic principle of Austrian economics
that those that are first in line when fiat money is created benefit
the most — the pigs that are first in line at the trough get the
fattest. Wells' offer illustrates this. Wells recognized that Congress
was going to pass the bailout and that as a result Wachovia's unmarketable
portfolio of subprime mortgages would have a willing buyer — the
US taxpayer with newly minted US dollars. Wells' $15 billion offer
($13 billion more than Citi agreed to pay) was the price it was
willing to pay to take Citi's place at the trough. This development
of course sent
Citi into a rage
. Citi
and
Wells
have both obtained court orders authorizing them to go forward with
their transactions as they fight over the right to be first in line
to receive taxpayer funds.

Most interesting,
however, is the FDIC's reaction. Erasing all doubt as to the federal
government's impartiality and in a stunning rejection of a private
company's right to enter into a free-market voluntary exchange,
FDIC chairman Sheila Bair indicated that the FDIC would continue
to support the coerced transfer to Citi. Ms. Bair, apparently a
Citi woman, objected to the Wells deal, a deal that was negotiated
in a free market exchange without the FDIC's “facilitation.” Never
mind the interests of the taxpayer (Citi deal placed additional
obligations on FDIC), never mind the interest of the Wachovia investors
and stock owners, never mind the fiduciary obligations of the Wachovia
managers and directors to obtain the best price for the company's
assets, Ms. Bair says Wachovia should stick to Citi deal that her
agency helped coerce: “the
agency is standing behind the agreement it made with Citigroup Inc.”
George Orwell's fiction
has become reality, the pigs are now in charge.

It should be
noted here that, although Wachovia apparently had a contract with
Citi, parties have the right to engage in activities that will result
in an “efficient breach.” That is, even if the Wachovia board executed
an agreement to receive $2 billion for its assets, if Wells has
agreed to pay $13 billion more for those assets Wachovia has the
legal right to breach its contract with Citi and take Wells' better
offer. Citi of course has a remedy in the form of a breach of contract
claim against Wachovia (and against Wells for tortious interference
with its contract with Wachovia). Citi has now brought such a lawsuit
and alleged $60
billion in damages
if it is aced out of the Wachovia deal. $60
billion is the value Citi places on being first in line at the fiat
money trough. In the unlikely event that Citi's case goes forward,
it will be an interesting trial as Citi's damage claim will provide
a lesson in perverted fascist capitalism. Citi's counsel's opening
statement:

Ladies and
gentlemen of the jury, we will show you how the bailout gave us
the right to profit $60 billion by selling a portfolio of unmarketable
securities to you, the taxpayer, and further by buying Wachvoia's
$300-plus billion in deposits and branches for a mere $2 billion
in a deal that was facilitated by our friends, the FDIC. Wells
intentionally and maliciously interfered with our contract when
it had the temerity to pay Wachovia's shareholders $13 billion
more than we agreed to pay and further did not allow the FDIC
to facilitate their offer.

This is the
sad political reality behind the Citi-Wells-Wachovia dispute.

The market
reality following the bailout is potentially much more ominous.
Assuming that there has been no short-term market manipulation in
JP Morgan stock, either from the President's
Working Group on Financial Markets
, the so-called “plunge protection
team” or others, then the price of JP Morgan stock may portend a
precipitous drop in the future value of the dollar. Hidden in the
financial news last week was the fact that, coincident with its
takeover of WaMu, JP
Morgan announced the sale, on a first-come, first-served basis,
of $10 billion in common stock at $40.50 per share
. The infusion
of $10 billion in capital to the $165 billion JP Morgan of course
should have some diluting effect and put some downward pressure
on JP Morgan's stock. The new offering resulted in approximately
250 million new shares of JP Morgan stock, about seven percent of
the total 3.4 billion shares outstanding. One would expect to see
a seven percent decline in the JP Morgan share price following the
sale because of the dilution. Yesterday, however, JP Morgan stock
came to a crashing close of $39.32. This is an 18 percent drop from
September 25, the date of the WaMu takeover, and, more importantly,
almost 3 percent lower than the $40.50 offering.

All
of this is troubling because students of Austrian economics know
that the primary beneficiaries of monetary and fiscal inflation
are those who are first in line when the money is created. As of
October 2, the result of the federally orchestrated takedowns was
that JP Morgan was unquestionably first in line to receive perhaps
the largest share of the $850 billion-plus in funds that will be
created out of thin air (Treasury will issue bonds which the Federal
Reserve will buy with newly minted inflationary dollars) once the
bailout is enacted. Applying this principle, JP Morgan stock should
be skyrocketing up, not going down. The principle, however, applies
only where the fiat currency retains some marketable value. If the
fiat currency has no value, it doesn't matter where you are in line.
JP Morgan's share price over the last week may be just a snapshot
in time as JP Morgan's overall market capitalization is still up
approximately five percent since the bailout was announced, but
if JP Morgan's rapidly declining share price continues it will show
that the market believes that JP Morgan's right to be first in line
to receive as much as $850 billion in newly printed dollars is perhaps
as worthless as the securities sold in exchange. If this is true,
it is the end of the dollar. Wells Fargo should take note of this
fact before pushing forward with its acquisition of Wachovia's subprime
portfolio — the market may be telling Citi and Morgan that their
deals represent nothing more than an exchange of one pile of worthless
paper for another pile of worthless paper.

October
8, 2008

Bill
Butler [send him
mail
] is a Minneapolis attorney and the owner of Butler
Liberty Law
.

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