Archive for the ‘financial crisis’ Category

What some are saying about the $250 billion infusion of cash into America’s banks

October 16, 2008



Some thoughts by various writers (and one cartoonist) about the United States Treasury’s $250 billion plan to prop up the biggest banks in America:

     Andy Kessler in The Wall Street Journal:” Is this the right thing to do?  Probably not.  Despite some limits on compensation, bad management stays in charge.  Government investment in financial institutions will raise a gazillion temptations and conflicts of interest.  Politicians won’t be able to help themselves and will inevitably meddle. . . . But it’s the only thing to do at this stage.  Next stop is full nationalization and no one wants that.”

     Robert Weissman in Counterpunch: “But the Treasury proposal specifies that the government shares in the banks shall be non-voting.  And there appear to only the most minimal requirements imposed on participating banks.  So, the government may be obtaining a modest ownership stake in the banks, but no control over their operations.”

     Nicholas Von Hoffman in The Nation: “The terms of the deal are generous to the banks and good for Wall Street.  How good they are for everybody else is debatable, but at this point the government has now committed to in actual expenditures or guarantees $2.25 trillion to save these men, their firms, and by extension, it is to be hoped, the rest of the nation.”

     Chris Isidore in “Still, not all critics of the bailout are satisfied with the new plan for direct investment in banks.  Some economists argue the move only encourages more risky behavior down the road and that the free markets should be allowed to work: i.e. more banks should be left to fail and credit should be tight.”

     Editorial in The Washington Post: “The program needs firmer assurances that the government’s cash will not be diverted to shareholders.  At a minimum, for the duration of the program, participating banks should not be permitted to increase dividends, with or without Treasury approval.”

     David Lindorff in Counterpunch: “To avoid this government investment in the U.S. banking industry being labeled ‘socialist,’ Paulson and his fellow conspirator, Fed Chairman Ben Bernanke, are only buying non-voting shares of the banks.  Get it?  They’re giving hundreds of billions of our dollars to bankers in the form of ownership shares of these companies, but they aren’t asking for any say in the banks’ policies in return.”

     Editorial in the Los Angeles Times: “Still, the plan seems to have been thrown together just as hastily as previous efforts, leaving gaping loopholes.  There are no safeguards against banks frittering away the cash provided by the Treasury to pay dividends to shareholders (including, in many cases, their own executives).  The government is rushing to make the investments before it knows the true health of these institutions, meaning it may be throwing good money after bad and encouraging desperate executives to make unacceptably risky bets.”

     News article in“The plan is undoubtedly bold: it marks perhaps the largest foray by the American government into ownership of private enterprise since the second world war.  But it would have looked much bolder a month ago. . . . To a great extent, Hank Paulson, the treasury secretary, and Ben Bernanke, the Federal Reserve chairman, are making up for what were, in retrospect, miscalculations in their earlier efforts.”

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[Hurwitt from]bankstertheftscartoon


Why is the United States treasury propping up shaky banks?

October 15, 2008


Last Monday, U.S. Treasury Secretary Henry “Hank” Paulson called a meeting in Washington of the CEOs of banks that Mr. Paulson wants the American taxpayer to prop up.  Attending the meeting were Kenneth D. Lewis, CEO of Bank of America; Jamie Dimon, CEO of J. P. Morgan Chase; Lloyd C. Blankfein, CEO of Goldman Sachs Group; John J. Mack, CEO of Morgan Stanley; Vikram S. Pandit, CEO of Citigroup; Robert P. Kelly, CEO of Bank of New York Mellon; John A. Thain, CEO of Merrill Lynch & Co.; and Richard M. Kovacevich, CEO of Wells Fargo.

It is expected that the U.S. Treasury will buy $25 billion in preferred stock in Bank of America, J. P. Morgan and Citigroup; between $20 billion and $25 billion in Wells Fargo; $10 billion in Goldman Sachs and Morgan Stanley; and between $2 billion and $3 billion in Bank of New York Mellon Corp. and State Street Corp.  The “Bush’s bank bailout” rescue program will make the United States the biggest owner of banking shares in the country.

University of Missouri, Kansas City (UMKC) economist Michael Hudson referred to the stock purchase plan as “Plan B.”

“Bailout ‘Plan A’ (buy the junk mortgages) has failed” and Plan B is to to “buy ersatz stocks in the banks to recapitalize them without wiping out current mismanagers,” Mr. Hudson wrote in Counterpunch.

Paulson makes an abrupt about-face

“The latest show of government firepower is an abrupt about-face for Mr. Paulson, who just days earlier was discouraging the idea of capital injections for banks,” reported The New York Times.  Mr. Paulson recently told Congress that “the right way to do this is not going around using guarantees or injecting capital,” arguing that Japan had limited success with similar solutions in the 1990s.

“The new plan is designed to bolster bank balance sheets by providing  new capital, removing rotten assets and taking new steps to make sure they have access to the funds they use to operate,” said a front page article in The Wall Street Journal.  “All told, the moves are designed to get money flowing through the system so that banks will lend to companies, consumers and each other.”

Plan B provides for the U.S. Treasury to be granted preferred shares without voting rights or the right to be involved in day-to-day management decisions.  The shares will have a five percent dividend increasing to nine percent after five years.  The participating banks will be prohibited from raising dividends for ordinary investors for three years.

Reporting on his meeting with the bank CEOs, Mr. Paulson stated: “I don’t think there was any banker in that room who was going to look us in the eye and say they had too much capital.”

A retreat from the first rescue plan

According to The New York Times, Plan B “is the largest government intervention in the American banking system since the Depression” and amounts to “retreating from the rescue plan [Plan A] that Mr. Paulson had fought so hard to get through Congress only two weeks earlier.”

Sen. Charles Schumer (D-N.Y.), a cheerleader for Plan A, is now a cheerleader for Plan B.

“The administration’s initial approach to the crisis was to propose buying troubled assets from banks,” Mr. Schumer wrote in an op-ed piece in The Wall Street Journal.  “But direct capital injections into financial institutions . . . always offered a far better prospect of success.”

Mr. Schumer claimed that he along with Democratic leaders Sen. Chris Dodd and Rep. Barney Frank were in favor of Plan B before they were in favor of Plan A.  He claimed that the three of them “made explicit our desire to make direct infusions of capital a part of the approach to solving the crisis during negotiations with the Treasury” before Plan A was passed.

Plan B is prudent even though “[t]here is little question that making the government a major investor in American banks raises thorny questions, especially about the role of the public sector in private markets,” Mr. Schumer wrote.  “So let me be clear — this is a temporary solution to an unprecedented crisis, and the government’s role must be limited.”

Schumer’s claim of being “clear”

Even though Mr. Schumer said that he was being “clear” with Americans, Mr. Schumer did not give any indication of what he considered to be “temporary.”  However, he apparently believes that for the Treasury to take approximately $250 billion in equity stakes in potentially thousands of banks is a “limited” role.

“The only clarity we have is that the crisis is resulting in financial concentration and that the bailout constitutes a massive raid by financial crooks on both taxpayers and central bank reserves in the U.S. and Europe,” wrote a former Assistant Secretary of the Treasury in the Reagan administration, Paul Craig Roberts. 

Mr. Paulson said Tuesday that “we regret having to take these actions [i.e., Plan B].”  He called Plan B “objectionable” but apparently unavoidable.

“In addition to the capital infusions, which will be made this week, the government said it would temporarily guarantee $1.5 trillion in new senior debt issued by banks, as well as insure $500 billion in deposits in non-interest bearing accounts, mainly used by businesses,” The New York Times reported.  “All told, the potential costs to the government of the latest bailout package comes to $2.25 trillion, triple the size of the original $700 billion rescue package, which centered on buying distressed assets from banks.”

No meaningful job creation

Neither Plan A or Plan B provide for any meaningful job creation, which is vital to any effective recovery effort.  The proposed solution to the financial crisis “is a Keynesian policy for banks and big businesses, and the Mellon plan for everyone else,” wrote James Ridgeway, the senior Washington correspondent for Mother Jones.  “This is consistent with the longtime Republican approach, which offers government support to corporations and the rich in the name of stimulating the economy but denies it to the working people who actually create the wealth.”

The preferred equity financing “provides financing on very favorable terms — much more so than those  exacted by [Warren] Buffett’s Berkshire Hathaway . . . when it provided infusions of preferred equity recently to Goldman Sachs or General Electric,” wrote Randall W. Forsyth of Barron’s.  “Good thing for major banks issuing huge chunks of preferred that the master investor has opted to stay in Omaha rather than move to Washington [to become Secretary of the U.S. Treasury].”

“We’re providing large sums of money to financial institutions without receiving anything in return — no job creation, no investment in the country’s infrastructure, no reduction of foreclosures — just plenty of money to buy stock in banks which probably would have failed otherwise,” wrote Ron Shimshock, founder of Freeople, a website that supports pro-freedom candidates for public office.

“Leaving the issue of fraud aside, the bail out scam is also doomed to fail because it avoids diagnosis and dodges the heart of the problem: the inability of more than five million homeowners to pay their fraudulently ballooned mortgage obligations,” wrote Drake University economist Ismael Hossein-zadeh in Counterpunch.  “Instead of trying to salvage the threatened real assets or homes and save their owners from becoming homeless, the bailout scheme is trying to salvage the phony or fictitious assets of the Wall Street gambler and reward their sins by sending taxpayers’ good money after gamblers’ bad money.  It focuses on the wrong end of the problem.” 

Not enough good money to redeem all the bad money

Mr. Hossein-zadeh added: “The second major problem with the bailout scheme is simply that it is unfeasible and ineffectual because there is just not enough good money to redeem all the bad money that has ballooned or bubbled to a multiple of the good money and/or real assets.”

The risk of Plan A and Plan B is on the American taxpayer. 

“Should banks fail despite the capital injection, the Treasury would be likely to lose most, if not all, of its investment,” wrote Floyd Norris of The New York Times.  “The government would be treated the same as other preferred stockholders, who generally suffer major losses in bank failures.”

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Barack Obama states during his campaign for president that the United States is “in the worst financial crisis since the Great Depression”

October 9, 2008



The headlines throughout the world on October 8, 2008:

Tokyo: “Aso likens U.S. ills to ’29 crash.”— The Japan Times Online.

London: “Global markets in turmoil following interest rate cut.”  — The Telegraph.

Berlin — “THE WIDENING CRISIS: Central banks cut interest rates, Britain bails out banks.”— Spiegel Online International.

Paris — “Central banks unleash rate cut offensive against finance turmoil.”— Agence France-Presse.

New York — “Central banks cut rates world-wide in emergency move.”— The Wall Street Journal.

Emergency interest rate cuts

“The Federal Reserve, European Central Bank, Bank of England, Bank of Canada and Sweden’s Riksbank cut interest rates in an emergency coordinated bid to ease the economic effects of the financial crisis,” according to Bloomberg News.

The Dow Jones Industrial Average lost 13 percent in the past five trading days.  In fact, the Dow lost one third of its value this year after ending Tuesday down another 5.1 percent.  The Dow dropped below the 10,000 mark that it first reached in 1999.

Even after the $700 billion bailout rescue plan, the chairman of the U.S. Federal Reserve, Benjamin Bernanke, admitted that the risk has increased for economic troubles.  This is understandable since even the proponents of the bailout have no idea whether it will work as intended.

“We don’t have a choice now of debating whether it is a good or bad thing,” said Rep. Barney Frank (D-Mass.) at the start of the bailout negotiations.

“Three days after the [bailout] plan was approved, it looks like a pebble turned into a churning sea,” wrote Mark Landler, European economic consultant, in the New York Times on Oct. 6, 2008.

Too many loans to persons who could not afford to pay

It is known, however, what caused the need for some kind of government intervention.  Most economists are in agreement that the primary reason for the current financial crisis is that banks made too many loans to persons who could not afford to repay if there was the slightest downturn in asset values.

“The present crisis, which has its roots in the unsupervised expansion of credit in the United States, has spread from subprime mortgages to toxic securities, to the entire global financial system, where it has savaged equities markets and is now threatening to do incalculable damage to the US and European banking systems,” wrote Mike Whitney, financial columnist.

In the presidential debate in Nashville the night before the headlines quoted above, neither Sen. McCain or Sen. Obama appeared to have any real plan for stabilizing the economy.  Consider, for example, the responses of the candidates to the first question of the debate: “With the economy on the downturn and retired and older citizens and workers losing their incomes, what’s the fastest, most positive solution to bail these people out of the economic ruin?”

Sen. Obama’s most substantive response:

I think everybody knows now we are in the worst financial crisis since the Great Depression. . . . Now, step one was a rescue package that was passed last week.  We’ve got to make sure that works properly.  And that means strong oversight, making sure that investors, taxpayers are getting their money back and treated as investors. . . . It means help for homeowners so that they can stay in their homes.  It means that we are helping state and local governments set up road projects and bridge projects that keep people in their jobs.  And then long-term we’ve got to fix our health care system, we’ve got to fix our energy system that is putting such an enormous burden on families. . . .  (Emphasis added.)

Sen. McCain’s most substantive response:

Americans are angry, they’re upset, and they’re a little fearful.  It’s our job to fix the problem.  Now, I have a plan to fix this problem and it has got to do with energy independence.  We’ve got to stop sending $700 billion a year to countries that don’t want us very — like us very much.  We have to keep Americans’ taxes low.  All Americans’ taxes low.  Let’s not raise taxes on anybody today.  We obviously have to stop this spending spree that’s going on in Washington. . . . We’ve got to have a package of reforms and it has got to lead to reform prosperity and peace in the world.  And I think that this problem has become so severe, as you know, that we’re going to have to do something about home values.  You know that home values of retirees continues to decline and people are no longer able to afford their mortgage payments.  As president of the United States, . . . I would order the secretary of the treasury to immediately buy up the bad home loan mortgages in America and renegotiate at the new value of those homes — at the diminished value of those homes and let people be able to make those . . . payments and stay in their homes. . . . [U]ntil we stabilize home values in America, we’re never going to start turnign around and creating jobs and fixing our economy.

Sen. McCain may be right about the need to stabilize home values.  According to the Federal Reserve, housing is one third of all U.S. wealth.  The Federal Reserve reported that during the second quarter of 2008, housing was valued at $19.4 trillion.

Sen. McCain understated the mood of Americans when he stated that Americans are “a little fearful.”  A CNN/Opinion Research Corp. poll conducted during the past week revealed that a majority of Americans “believe that another economic depression is likely” and that the United States will experience a “25 percent unemployment rate, widespread bank failures and millions of Americans homeless and unable to feed their families.”

Sen. Obama’s ideas on tackling the problem are also subject to criticism.

“Obama’s tax and redistribution policies will not resurrect jobs, wages or the price of stocks in American retirement accounts,” wrote Peter Morici, former chief economist of the U.S. International Trade Commission.  “Ordinary Americans who have to earn their livings outside the cosseted confines of Wall Street will not be much better off two years from now. . . . If Obama wants to make Americans better off, he would serve them better by straightening out the banks and taking substantive action on the trade deficit with China.”

Both Sen. McCain and Sen. Obama acknowledged that the financial crisis threatens to ruin America’s image of being a military power.

“There’s no doubt, and history shows us, that nations that are strong militarily over time have to have a strong economy, as well,” Sen. McCain said.  “And that is one of the challenges that America faces.”

“There has never been a nation in the history of the world that saw its economy decline and maintained its military superiority,” Sen. Obama said.

Opposition to the “rescue” plan

America’s primary plan to prevent economic decline is the $700 billion bailout rescue.  But there is significant voter angst over the bailout.  According to a new CNN/Money poll, 40 percent of Americans viewed the plan as an attempt to rescue the overall economy.  However, “53 % saw the bill as mostly a bailout for Wall Street.”

Most Americans are not aware of another government bailout effort that is underway.  Chairman Bernanke recently doubled the so-called Term Auction Facility lending program for banks to $900 billion, which is about the same size as the Fed’s entire balance sheet.  The Fed on Tuesday loaned $138 billion to 71 banks.  The Fed previously loaned $150 billion and plans to lend $150 billion in one-month and three-month loans in six auctions through December.  There is a sense of urgency and desperation as the economy heads toward deeper recession and perhaps depression.

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Encyclopedia Brittania