Nightmare on Wall Street
by Lila Rajiva
The furor over the AIG rescue and the possibility that American banks might be nationalized have turned March into a financial horror film: Zombies on the street, empty vaults, tentacled monsters, and cryptic pronouncements from a parallel universe. It deserves rewinding and deconstruction, episode by episode. March Madness March begins with stocks near the lows of last year's crash and gold above the band of resistance (930–940), from where it can move higher with confidence. The dollar index (DX) is trading at around 88–89, the highest it's been since 2005. Gold moving up generally signals fear of political and financial instability or of currency debasement and inflation. Gold moving down signals stock market optimism or deflationary fears. This isn't always so, of course. Gold's relationship to the stock market, as well as to the dollar index, has sometimes been inverse, sometimes parallel, sometimes uncorrelated. On Friday, February 27, 2009, the Dow is at 7,062.93 (close) and gold is at $952.00 (London PM fix). Now look at everything that happens in March:
What's Bugging Gold? With all that going on, spot gold prices should be trading well over $1000, the Dow should be under 6000, and the Dollar Index under 80. Instead, at the end of March, stocks end up 700 points or so higher than at the beginning of the month, gold ends below its band of resistance, and the dollar recovers strongly to above 85. The reason? Markets are about the public's perception, and in March, rightly or wrongly, public perception focused mainly on three things.
Did this happen randomly? The record suggests otherwise. Rewind to the beginning of March and notice what stories get played, when they get played, and how. Notice that gold's remarkably odd behavior reinforces the media "spin" and tones down the effect of massively important events each time they occur. Episode One: Dead Banks Walking Paul Krugman's op-ed "The Revenge of the Glut" appears in the New York Times on Sunday, March 1, blaming Asian savings for the financial crisis rather than Federal Reserve policy. Monday, March 2, 2009 On Monday, arch zombie bank, American International Group, Inc. (AIG) announces a loss of around $62 billion for Quarter 4, 2008. AIG has gotten more than $150 billion in federal aid since its near-bankruptcy last fall, and it's due another $30 billion. AIG's death rattle means that firms in business with it are in trouble too. That means credit and business are going to decline for a long while. And that means, Look out, Dow 5000... Meanwhile, pension fund shortfalls are exploding the balance-sheets of some of the biggest companies in the Chicago area to the tune of billions of dollars. Dow 6,763.29 The Dow goes down sharply, over 300 points, or 4.15%, presumably on the deflationary implications of the AIG revelations. But gold doesn't go down nearly as much as the Dow, confirming its value-holding ability in a deflation. Tuesday, March 3 Investment guru and hero of the kill-the-zombies crowd Jim Rogers frantically warns that propping up AIG instead of letting it fail will drag bad times on for decades and destroy the American economy and dollar. The economic news still isn't good. As unemployment goes up and consumer confidence stumbles, monthly auto sales fall to a multi-decade low. Against this background, the Fed launches the TALF (the term asset-backed loan facility), covering $200 billion of loans ($20 billion of TARP funds, leveraged 10 times), which is intended to support autos, credit cards, student loans and small business lending. Once the TALF is expanded to its full state, it will have access of up to $1 trillion and will support commercial and residential mortgage-backed securities, asset-backed securities, and corporate loans (through the soon-to-be downgraded collateral loan obligations). The three main benefits to a TALF investor are the following:
Dow 6,726.02 The Dow stays the same, probably because it's already dropped massively. The promise of credit from TALF might be helping it too. Gold goes down a bit more on the bad economic news. Thursday, March 5 In front of the Senate Committee on Banking, Housing, and Urban Affairs in DC, zombie spokesman, Donald L. Kohn, Vice Chairman of the Federal Reserve, explains the new Don't Ask Don't Tell policy of the Fed (working with the Treasury) on AIG. It goes like this: Don't ask us which firms did business with AIG and we won't tell you... Even though they'll be getting large chunks of taxpayer bail-out money. Revealing names would – get this – undermine confidence and cause financial instability, says Kohn, without cracking a smile. Dow 6,594.44 Gold moves up a bit, while the Dow falls sharply, by almost 300 points, most likely spurred by renewed concerns over the extent of the government's commitment on AIG. March 6, Friday Comes Friday and Reuters reports that Goldman Sachs Group Inc. and Morgan Stanley are among those firms that got tax-payer funds via the AIG rescue. This is confirmed by the weekend edition of the Wall Street Journal which cites confidential documents showing that the insurance monster paid at least two dozen U.S. and foreign financial institutions about $50 billion. Both Goldman and Germany's Deutsche Bank AG got about $6 billion for 2008, Quarter 4. The other bums included Merrill Lynch (now part of Bank of America), Societe Generale (France), Calyon/Credit Agricole (France), Barclays (UK), Rabobank (Holland), Danske (Denmark), HSBC (UK), Royal Bank of Scotland (UK), Banco Santander (Spain), Morgan Stanley, Wachovia, Bank of America, Lloyds Banking Group (UK). $90 billion of this graveyard robbery went to US and foreign counter-parties and it divides up as follows:
In short, the AIG rescue is a soup kitchen for Europe's most toney banks, funded by the plebes here. Meanwhile, Treasury agrees to convert $25 Billion of the TARP preferred stock for 36% of the common stock of Citi. At close of business Friday, 36% of Citi has sunk to $3 billion. That amounts to a $22 billion loss to the public. The same day, March 6, news comes that the Brits have bailed out their own bastion of stiff-upper-lipped money men, Lloyds, for £260 billion. That makes Lloyds the second British bank to go on the dole (the first being Royal Bank of Scotland). And it adds more pressure on Barclays and other lenders to go the same way. Depending on your perspective Lloyds is being "nationalized"... or the British Treasury is being turned over to the kleptocrats. As these huge revelations emerge, Paul Krugman publishes another op-ed, "The Big Dither," cracking the whip at the Obama administration for slow-poking and floating plan after plan only for commentators to shoot down. Krugman correctly describes the latest incarnation of the Geithner plan, which proposes to make low-interest non-recourse loans to private investors to buy up troubled assets, as a heads-you-win, tails-we-lose proposition. It would profit investors if asset prices went up but would let them walk away if prices fell a lot. Geithner himself admits: "There's capital that wants to come into the system but just can't get financing." Translation, just give us the leverage and we''ll do the buying... (Maybe like that sweet 30:1 leverage that got us into this mess in the first place, eh?) But having trashed the Bernanke-Geithner plan, Krugman wants to rush through nationalization. His argument for this is astonishingly weak. If it's not done right now, he says, the government is going to have to come in later with "trillions of dollars" to restore the financial system to health. Enough already with the idle chatter, says Comrade Krugman, as the Fed stone-walls on AIG's counter-parties. Nationalize... er ... socialize... er... power to the people... whatever... just get on with it! Dow 6,626.94 Dow ends a bit higher. And Gold rises too, most likely on the AIG revelations and fear of worse to come. Note: Gold's rise is surprisingly muted for a commodity that moves $50–70 in a day. Episode Two: World War 4 Alert Weekend, March 7–8 In a piece in the Sidney Morning Herald, former Australian PM Paul Keating is quoted as saying, "By frightening the Chinese into building their vast $US2 trillion foreign reserves, Geithner was responsible for the build-up of tremendous imbalance in the world financial system. This imbalance, in turn, the reports allege, contributed to the global financial crisis which has since devastated the world economy." The article adds a new twist to the "Asian savings" meme, pinning the blame not on the Fed but on Tim Geithner. The reports once again help take the attention off the Fed's role in the global financial crisis and its unholy bail-out of AIG's European counter-parties. As reports about the AIG deal circulate and stir up public anger, the USNS Impeccable, a survey ship (read, spy-ship) faces off with Chinese ships in what the US claims are international waters off Hainan island. But the encounter is also within 200 miles of the Chinese coast, a zone China considers its exclusive economic zone. Hainan is also a key strategic base in the South China Sea and the location of China's biggest submarine base. This comes just days after US military talks with China resume. The US claims it's a Chinese provocation, although it's hard to believe that a Chinese spy ship snooping around Americans coasts would be greeted with brotherly love. It seems more likely to be a US provocation. Notice that the incident reinforces Barack Obama's provocative warnings to the Chinese about currency manipulation during the presidential campaign. Obama was apparently playing to the part of his base that is China-hawkish and protectionist. Notice that this is also a neo-conservative position, as human rights interventionists (let's call them liberventionists) would like to see a tougher US posture in places like China and Darfur. In short, the big government wing in both parties likes the "Chinese currency manipulation" motif. The Fed-centric or "Uncle Alan-did-it" narrative of the financial crisis has become more and more popular as people notice that its advocates (mostly followers of Austrian economics) have been on target predicting the financial crisis. The mainstream financial press, which makes it money promoting the mythology of the managed market, has been caught off-guard. Bottom-line, the Fed-centric critique has credibility. Unsurprisingly, the establishment must undermine that credibility to preserve its own.... Monday, March 9 That suspicion becomes stronger on Monday when two announcements redirect attention to China: National Intelligence Director Dennis Blair says Chinese policies "seem to be in a more military, aggressive stance." Simultaneously, Tony Blair calls the incident "the most serious "since a Chinese plane collided with a U.S. electronic surveillance plane, also off Hainan in the early months of George W. Bush's presidency. On the economic front, the financial markets continue to buckle: It looks increasingly as if pain will shift to holders of bonds and other securities, since debt from financial institutions – including some of the biggest banks, like Citi and Bank of America – is widely held by investors, from pension funds to insurance companies. LIBOR (the London interbank offer rate, roughly equivalent to the US Fed funds rate) has been rising from a low of 1.08 per cent in mid-January to 1.31 per cent. The renewed pressure in LIBOR is pressuring interest-rate swap spreads that reflect the credit quality of banks in the inter-dealer derivatives market. Forward measures of LIBOR show the market expects no let up in stress in 2009. The end of March threatens a triple whammy for banks:
Dow 6,547.05 The Dow falls even further. Note: Gold edges downward too, not upward, as you would expect from the credit market pressures and international tensions. Episode Three: The Oracles Speak Tuesday, March 10 The next day, Federal Reserve Chairman Ben Bernanke chimes in with gingerly expressed regret for not preventing the borrowing binge of the last few years, although, yes, he'd recognized that "massive capital flows from abroad" were behind the binge. "The global imbalances were the joint responsibility of the United States and our trading partners," he admits. Then he bravely allows as to how the US and said partners "collectively did not do enough to reduce those imbalances." This is to the Council on Foreign Relations (CFR), Tuesday. Yessir, we were bad. But our trading partners (China) were just as bad, sending us all that dough. Barely a week after the third rescue of Citigroup Inc., U.S. officials are again examining what new steps to stabilize the bank if its problems should mount. Citi has over $500 billion of foreign deposits (relative to a balance sheet of a little under $2 trillion). This is easily the biggest structured investment vehicle (SIV) exposure of any bank. Citi shares are now near $1 apiece. Despite this evidence of deterioration, Federal officials cautiously describe the discussions as "contingency planning." Citi's PR line is that it hasn't seen corporate clients or trading partners withdrawing their business. It also claims its capital levels are among the highest in the industry. A conveniently leaked internal memo by Citi's CEO Pandit announces that the bank is on its way to its strongest quarter since 2007. But while this happy talk is going on for public consumption, note that Federal Reserve Chairman Bernanke is demanding that the Senate budget committee give him even more power: "I'd like to challenge the Congress to give us a framework, where we can resolve a multinational complicated financial conglomerate like Citigroup, like AIG, or others, if that became necessary," he says. (My emphasis.) Dow 6,926.49 Immediately, the Dow shoots up 379.44 points to 6,926.49, its biggest one-day gain this year (5.8 percent) and one of the biggest since World War II, apparently just on Citi's optimistic assessment of its condition. Gold sinks. Wednesday, March 11 On Wednesday The New York Post reports that, contrary to early reports, the Madoff family and inner circle seem to be deeply involved with money laundered through "an English bank." (my emphasis) Then, in The Wall Street Journal, the Oracle of Oracles himself pronounces judgment. The Fed didn't cause the housing bubble.... It's all the fault of Asian savers, says Sir Alan, to give him the title the Queen of England bestowed on him in 2002 for his "contribution to global economic stability." (This must have been given in the same spirit as Kissinger's Nobel Prize for peace, because if the Fed Chairman made any contributions to economic stability in twenty years they're as invisible to the eye as Carla Bruni's contributions to burka-wear). Notice that Greenspan's announcement about Asian savings reinforces the op-ed by Krugman (March 1), the news reports about Geithner (March 7) and Bernanke's speech to the CFR (March 10). Dow 6,930.40 Stocks and gold stay roughly where they are, gold just below the psychologically important 900 level. But over the next two days, the yellow metal recovers to above $920, in the absence of any news helpful to the economy. The news out of China, especially, isn't good, with crude imports diving to a 26-month low in February and trade data showing that the world's third-largest economy is being hurt more than anticipated from the global recession. Chinese PM Wen Jia Bao also expresses his concern about the "safety of our assets," which could be his response to the "Asian savings" meme. The Chinese are obviously concerned that the Fed Reserve will continue with its inflationary policy to the detriment of China's vast holdings in US Treasuries. Weekend, March 14-15 Public outrage at the AIG bonuses mounts over the weekend. Bernanke's comments about "our trading partners" are played on the prime-time TV show 60 Minutes in an unprecedented PR offensive from the Fed. Bernanke also repeats his belief that the US will come out of the recession by 2010. Question: If all we have on our hands is 6 more months of recession, why do we need government intervention at all? Monday, March 16 President Obama announces that he will "pursue every single legal avenue to block these bonuses and make the American taxpayers whole," playing on public anger. The Treasury International Capital (TIC) report discloses that in January international sales and purchases of U.S. assets showed a net outflow of $148.9 billion for the month, compared to net inflows of $196 billion during the credit crisis in October 2008. Foreigners no longer feel that America makes a good investment for their money. Apparently to counter that perception and ease off on his criticism of the Chinese, Obama says publicly, "I think that not just the Chinese Government, but every investor, can have absolute confidence in the soundness of investments in the United States." Dow 7,216.97 Stocks stay the same, gold sinks a bit, probably on the twin reassurances from Bernanke and Obama. The market is now waiting for the FOMC (Federal Open Market Committee) to move on Wednesday. Wednesday, March 18 On the day of the FOMC decision, the EU meets in Brussels to assess the effect of the stimulus programs and prepare for the G20 summit on April 2 in London. It also discusses US pressures to pass more stimulus plans. Dow 7,486.58 The day winds down with stocks again up and gold clearly below 900. The FOMC decision is a bomb shell. The Fed will buy $300 billion in treasuries, as well as agency (GSE) debt and mortgages-backed securities. This is effectively a commitment to print another trillion dollars After hours, gold shoots up above its resistance band around 930–940. Stocks move down. The dollar which was around 88 tanks across the board by over 5% to under 83. By the close of the next day gold is at $956.50, well over its band of resistance. Gold bulls are certain it will shoot up even further. Friday, March 20 But on Friday, unexpectedly, the confrontation with China subsides as suddenly as it flamed into existence. The China Daily announces that the "Sino-US sea standoff appears to have ended." On the home front, Citigroup's chief financial officer, Gary Crittenden, leaves his post and becomes chairman of Citi Holdings, the unit created to sell off the bank's riskier assets. Dow 7,278.38 Note: Bernanke's announcement essentially guarantees the future debasement of the dollar. So why isn't gold shooting up in response? Monday, March 23 Geithner finally announces details of his private-public partnership. The press has been begging for them for the last two months, with no response. Simultaneously, there's some good news on the economy: US existing home sales are up at the fastest rate in 6 years (45% of it is in foreclosures). Dow 7,775.86 The Dow takes a huge leap up and Gold moves slightly down as the market accepts the news from Treasury as a good sign. Tuesday March 24 Then the AIG bonus affair also fizzles out as executives return their bonuses. There is an encouraging article in Investor's Business Daily that argues that the stock market really bottomed in 2001–2002. Current market conditions parallel 1938, not 1929. Hurrah, the depression is behind us. This bit of fluff overshadows a statement by prosecutors that the Madoff fraud in Europe involves criminal issues. (my emphasis) As the news turns rosy everywhere suddenly, Geithner demands unprecedented powers for the Treasury Secretary to run non-bank financial institutions, citing the fall out of AIG's collapse on the economy. Dow 7,660.21 Gold Underwhelms By the end of the week, after a month of relentless international friction and spiraling financial and economic collapse exacerbated by make-shift and venal policies from the Treasury and the Federal Reserve, the Dow is actually at 7776.18, a full 700 points higher than at the beginning of March, Gold – the crisis commodity – is below the band of resistance and looking weak, and the Dollar Index is trading strongly over 85. Gold's underwhelming performance did not surprise everyone, of course. The Gold Anti-Trust Action Committee, the leading activist group on gold manipulation has alleged for many years that leading bullion banks (such as, Goldman Sachs and JP Morgan Chase) have been colluding secretively with central banks and world monetary authorities to sell gold whenever necessary, so that rising bullion prices don't tip off the market to insidious currency debasement. In fact, GATA is now pressing for an independent audit of US gold reserves at Fort Knox, something that hasn't been done since President Eisenhower. GATA's efforts are commendable. But attention needs to go equally to another kind of manipulation – the manipulation of public perception. Between the Lines Take the nationalization debate. On the face of things, nationalization versus private-public partnership seems to be a debate pitting the good guy, the People's Pundit (Paul Krugman) against the bad guys, the Bankers' Bozos (Geithner and Bernanke). But these terms preempt thinking about more limited and nuanced approaches. And that makes you wonder if the public isn't being set up to be patsies, no matter which of the two sides it picks. Take Krugman's March 1 op-ed, "The Revenge of the Glut," which blames the crisis on Asian savers. It's published on the Sunday just before the Fed Reserve begins stone-walling on AIG and before Bernanke and Greenspan also decry the Asian savings glut. On that, the Pundit and the Bozos are singing from the same page. Then, look at Krugman's March 6 op-ed, "The Big Dither," where he demands nationalization at once. His argument is that government is going to have pour trillions into the crisis anyway, so why not now and why not with government control, so the government gets the upside as well? If that's the extent of his reasoning, it's clearly flawed. For starters, it's perfectly possible for the government to do nothing now and also nothing later. It could just stick to prosecuting wrong-doers and ensuring a safety net and redress for victims. Throw a few more jail terms at the problem, and some of the money we think has vanished might reappear. Bottom line: There's no need for the public to absorb the bad debt of banks at all...with subsidized loans or anything else. Just let the bank's bond-holders take the losses. Secondly, with such a crooked set of players, why wouldn't nationalization just put more power into the hands of the banking cartel? Thirdly, whatever upside potential remaining bank assets might have, they might not cover the explicit and hidden costs of a full-scale government take-over. Fourthly, the Swedish solution that Krugman likes to push turns out not to have been nationalization at all. In Sweden in the 1990s, only one bank, Gota Bank, was taken over and that only after it had collapsed. So says William Isaac, the only one in the debate who's actually nationalized a bank ("Bank Nationalization is Not the Answer," Wall Street Journal, February 24, 2009). Isaac points out that Sweden's largest bank was about a tenth as big as any one of the three largest banks in the US. Unlike Sweden, the ten largest banking companies in the US hold two-thirds of the nation's banking assets. If what's needed is to put some institutions into receivership and to make sure bondholders take losses that the public's now taking, why not just say that? Why use the term nationalization, which has much broader implications and can set precedents we don't want in other areas? Look at how government's intervention is actually playing out, anyway:
According to several experts,
That is, the stated purpose of the program and the way it's set up are at odds. At best, that's incompetent. At worst, it is fraudulent. Question: What are TALF and other programs like it really about?
On March 20, the Federal agency that regulates credit unions, the National Credit Union Administration (NCUA), took control of U.S. Central Federal Credit Union, a huge wholesale credit union with about $34 billion in assets based in Lenexa, Kansas, as well as Western Corporate Federal Credit Union, in San Dimas, Calif., and put them into conservatorship. Total assets of both come to $57 billion. Corporate credit unions provide wholesale credit to the much larger group of retail credit unions that keeps consumer credit flowing to their members. The two unions were said to have failed government stress tests and the government now runs these institutions through conservatorship.
What's noteworthy is that the immediate costs of the takeover will come out of an industry-maintained insurance fund, but will eventually mean higher premiums on retail credit unions. Retail unions compete for market share in their communities with banks. We know that Citi, for instance, has had huge losses in its credit card business, as well as in its sub-prime loans, and that it has recently launched a new product, Citi Forward, to regain market share. It's quite plausible that the Federal action is related to this. Question: What's really behind the take-over of corporate credit unions? Now, go back and look at how Bernanke, Krugman, and Greenspan have all repeatedly rattled the anti-Chinese sabre, by emphasizing the Asian savings glut. Hammering away at this meme makes perfect sense if you want to steer public attention away from the Fed's responsibility for the bubble. Why? Because if the Fed Reserve (and Treasury) did cause the bubble, then
"Nationalization" could actually be no more than "internationalization" – linguistic cover for a power-grab across national lines by a globalist banking cabal, masquerading as economic therapy for your friendly neighborhood business. That's why, at this point the important thing is not which proposal is being batted around; whether it's diddled this way and called "nationalization," or twiddled that and called "helping the market," or "preprivatization," or anything else. None of it is likely to do anything but stick private losses to the public, as long as the government remains trapped in the sticky web of Goldman Sachs, AIG, Citi & Friends. Before any further government money gets thrown into the black hole of bad banks, we need full transparency for present government actions and complete investigations of past ones. As soon as possible and as thoroughly as possible, the public needs to know what Treasury and Federal Reserve officials, senior regulators, and the managers of our mega-banks have really been up to for at least the last 15 years. April 1, 2009 Lila Rajiva [send her mail] is the author of the ground-breaking study, The Language of Empire: Abu Ghraib and the American Media (MR Press, 2005), and the co-author with Bill Bonner of Mobs, Messiahs and Markets (Wiley, 2007). Visit her blog. Copyright © 2009 Lila Rajiva
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To
some of us it looks as if both nationalization and private-public
partnership just end up giving more power to the government. 