Inflationary Crony Capitalism
In proving motivation and intent, timelines often provide the best
evidence of why someone acted as they did. A murderer who insures
the life of his victim months before the crime provides the jury
with compelling evidence of his motive. When looking for reasons
for government action, it is often more difficult because government
and its accomplices are powerful, omnipresent and criminally adept
at hiding the real reasons for their actions. In looking for motivation,
one should therefore always follow the money.
One of, if not the primary, undisclosed motivation for the bailout
plan before Congress is to provide a financial windfall to the Rockefeller
and Morgan (JP
Morgan Chase) banking interests. In order to see this, one must
look beyond the obfuscating din of Wall Street greed, executive
pay, HOPE for homeowners, neighborhood revitalization and other
such nonsense and look at the concerted actions of the Bush administration,
Citicorp and JP Morgan Chase over the last few weeks. The timeline
tells the tale.
On September 25, 2008, the FDIC foreclosed on Washington Mutual,
one of the most troubled and most at-risk banks and one of the largest
holders of subprime mortgages. The day before, the WaMu CEO had
been in negotiations with several suitors, including JP Morgan,
HSBC and Wells Fargo. Although the media reported that JP Morgan
directly acquired WaMu, it did not. JP Morgan purchased WaMu’s assets
from the FDIC after the FDIC, through the Office
of Thrift Supervision, executed what amounts to an overnight
foreclosure and repossession. No bid, no auction and apparently
no discussions with WaMu’s other potential suitors. In short, this
gun-to-their-head sale was about the furthest thing from an arms-length
"commercially reasonable" transaction. Not even the WaMu
board of directors, who were apparently on
a plane at the time of the takeover, knew of the takeover or
the preplanned and orchestrated asset sale to JP Morgan. Immediately
after the takeover, JP Morgan paid the FDIC $1.9 billion for WaMu’s
billion in assets, including deposits and branches. Although
JP Morgan also acquired $34 billion in non-performing loans, acquiring
WaMu's operations in other states was an unequivocal benefit to
JP Morgan. Last year, James Dimon, JP Morgan’s chairman and chief
predicted that JP Morgan would find a means to develop a toe-hold
in the coveted Florida banking market:
James Dimon, J.P. Morgan's chairman and chief executive, has
long coveted Florida as have his customers. Although WaMu is
dominated in Florida by Bank of America and Wachovia, J.P. Morgan
is likely to boost WaMu's 3% market share in the state by tapping
into its base of New York customers who spend the winter months
Last year, one of those New York customers expressed frustration
at J.P. Morgan's annual meeting, telling Mr. Dimon "it galls me"
that the bank didn't have a presence there.
"It p- me off too," Mr. Dimon said, drawing laughter from the
audience. "Believe me, we would love to be much bigger in Florida
and we'll find some way to do it. You will see us there.
The effect of the FDIC takeover and immediate fire sale to JP Morgan
significantly impacted the WaMu equity holders, including an
investment group that had invested $7 billion just six months
ago. They were wiped out. As stated on the FDIC
At this time, the FDIC as Receiver for Washington Mutual Bank
does not anticipate that equity and subordinated debt holders
will receive any recovery on their claims.
On September 29, in what at least facially appears to be a somewhat
less hostile and aggressive transaction, the FDIC "facilitated"
the transfer of Wachovia’s "retail
bank, corporate and investment bank and wealth management businesses
to Citigroup." Wachovia is a large holder of subprime mortgages.
Although details of the deal are incomplete, Citi paid Wachovia
$2.1 billion directly to acquire some liabilities and most of its
assets, including a $312 billion pool of loans, $42 billion of which
are non-performing. Although Wachovia reported
assets of $812.4 billion as of June 30, 2008, it is unclear
how much of these assets will end up in Citi’s hands. Citi further
agreed to tender $12 billion in preferred stock and warrants to
the FDIC. Although the deal appears consensual as the Wachovia shell
remains and the deal does not close until December 31, one can just
imagine how it went down. Pointing to the WaMu takedown just five
days earlier, the FDIC likely told Wachovia that if it did not submit
to the sale to Citi, the FDIC had the power and will to force the
Although the government’s participation in these nakedly unjust
transactions that have violated the property rights of the Washington
Mutual and Wachovia equity holders is itself appalling, it is only
part of the story. The real story lies in the fact that two of the
biggest and most influential US Banks, with the help of the federal
government, have just mugged two of their drunken
friends and are now looking to fence part of their ill-gotten
loot – a pile of worthless or nearly worthless non-performing real
estate loans. This is what the bailout is all about and why it is
so important to the powers that be that it get passed. Any politician
that votes for the bailout violates his oath to protect and defend
the Constitution, in particular the Fifth Amendment which prohibits
government from taking property without just compensation.
All students of Austrian economics know that those who benefit
the most from an inflationary infusion of currency in a central-bank
fiat system are those that are first in line at the fiat money trough.
From 2001 to date, this was the no-bid military contractors who
were the first-in-line beneficiaries of an irresponsible fiscal
policy that spent money the United States did not have. George W.
Bush managed the war and the country according to the philosophy
of Judge Reinhold’s character in the Ruthless People: "If
we can’t afford it, we’ll f***ing finance it!" From 2001 until
2007 this also included homeowners who responded to the Federal
of artificially low interest rates by refinancing and sapping the
equity out of their homes.
The real reason that the bailout is "necessary," and
"essential" is not that credit markets will freeze or
that the world will end. By forcing the takeover of WaMu and Wachovia,
the Bush Administration, Citi and JP Morgan have bet that together
they can coerce and lobby Congress into passing a law that will
allow Citi and JP Morgan to dump their newly acquired subprime loans
on the gullible and unsuspecting taxpayer. If the bailout is successful,
Citi and JP Morgan will have scored a two-fer. Not only will they
have vastly increased their market share and asset base in the FDIC
orchestrated takeovers, they will also be first in line at the fiat
money creation trough as the Fed prints the money that will fund
the Treasury’s above-market purchase of their subprime booty. Nice
work if you can get it.
Those that claim that the government will "make money"
on the loans or that purchasing these unmarketable securities is
a good public investment are either fools or liars. It is of course
possible that Congress through the bailout and the Federal Reserve
by printing money can effectively double
the money supply and that this can, over a course of time lead
to a scenario where a $100,000 non-performing loan is satisfied
when the underlying property is sold for $200,000. This, however,
is not "making money," it is devaluing the dollar. By
the time the house sells for $200,000 gas will be $8.00 a gallon
and gold will be $1800 an ounce. The Federal Reserve and the Bush
Administration are complicit in the bailout because they do not
want to face the sobering reality of a crash on the Bush Administration’s
watch and believe that they can inflate their way out of the problem.
Men plan and God laughs.
Bailout advocates have offered two powerful fallacies in support
of the bailout. The first is that credit markets are "frozen"
and that only government action can loosen them up. Although banks
generally are apparently now less willing to lend than they were
just a year ago, banks are businesses and businesses are profit-seekers.
Banks, like most businesses, are always willing to provide their
service or produce their good if the price is right. Banks will
not, however, lend at low rates when they believe that their own
borrowing costs or market interest rates will rise in the near future.
When the "market" price of money is consistent with their
projections of future costs, banks will lend. It is important here
to note that the Fed Funds rate and the prime rate are rates that
are artificially influenced by the Federal Reserve through its purchase
and sale of Treasury Securities on the open market. These rates
are therefore only an imperfect reflection of market interest rates.
Real market interest rates, like commercial
paper and LIBOR,
are beginning to rise. This is perhaps the best evidence that the
banks are beginning to "loosen up." Banks will lend, but
at a higher rate that accounts for the Federal Reserve’s recent
inflationary actions. Note that the only rate in the LIBOR chart
linked above that has gone down in the last 30 days is the Fannie
Mae 30-year mortgage rate. This is more evidence that government
doesn’t know the price of anything as it is creating an inflationary
arbitrage opportunity for homeowners.
second and somewhat compelling reason for supporting the bailout
is that the new "mark to market" accounting rule, FASB
157, has artificially caused solvent entities to become insolvent
and therefore the government must act to correct this artificial
situation. This is wrong because it assumes that the rule is dictating
the value of the non-performing loan. It is not. FASB 157 just makes
formal what the market would ineluctably recognize – a non-performing
mortgage loan is worth the value of the underlying asset less the
costs of liquidating it. Although FASB 157 is causing some firms
to become insolvent on paper and is giving banks and insurers fits
in managing their government-mandated reserve ratios, FASB 157 simply
compels that these institutions acknowledge reality – that is always
a good thing. If interest rates are on the rise, very few Americans
have sufficient savings to make the 20% down payment necessary for
a mortgage and there are millions of properties encumbered with
non-performing loans (large supply and no demand), then these non-performing
loans in a high interest rate environment may be worth as little
as 40 percent of their face value. Changing rules or pumping the
economy with increasingly worthless paper will do nothing to solve
this fundamental problem; indeed, it will just create more problems,
more asset bubbles, and bigger and broader future problems.
Butler [send him
mail] is a Minneapolis attorney and the owner of Butler
© 2008 LewRockwell.com