what happened? what went wrong?

House and Global Investors Vote "No" on Paulson Bailout
Black Monday?
By MIKE WHITNEY

Today the US House rejected Treasury Secretary Paulson's $700 billion
Emergency Economic Stabilization Act of 2008 (Here's the roll call vote
on the bailout). Paulson said he has the votes, but Paulson was wrong.
The House bucked the Paulson's claim that buying up the illiquid
mortgage-backed assets from the nation's banks would be enough to save
the financial system from an impending meltdown. The jury remains out on
that question, too. Professor Nouriel Roubini, chairman of Roubini
Global Economics, summed it up like this, "You're not resolving the two
fundamental issues: You still have to recapitalize the banking system,
and household debt is going to stay high". A large number of economists
believe Roubini is right. The bill would not solve the underlying
problems.

There is a crisis. The banking system is undercapitalized, the credit
markets are frozen, and foreign creditors are beginning to slow their
purchases of US debt. It's all bad. At the same time the number of
casualties among the financial giants--Bear Stearns, Indymac, AIG,
Lehman, Washington Mutual--continues to grow. Three more struggling
European banks were added to the list of financial institutions that
needed emergency government assistance this past weekend. It's no wonder
Congress feels like they have to do something to stop the bleeding.

Before the stock market opened on Monday, the futures markets had
slumped heavily into negative territory, while the TED spread, an
indicator of stress in interbank lending, had widened to 3.19, a level
that suggests another rocky week of trading ahead. Could this be another
Black Monday?

Paulson's bill was designed to avert a system-wide crash by clearing the
banks' balance sheets so they could resume extending credit to consumers
and businesses. The hope was that massive infusion of capital would
"turn back the clock" to the happy days of low interest speculation and
bubble economics. Paulson is a "one trick pony" who firmly adheres to
the belief that wealth creation depends on maximum leverage and an ever-
weakening currency. But that world view is no longer applicable after
reaching Peak Credit, where consumers are no longer able to make the
interest payments on their loans and businesses and financial
institutions are forced to curb their spending and dump their toxic
assets at firesale prices. The system is deleveraging and nothing can
stop it. Paulson has yet to accept the new reality.

Besides, there was no guarantee that the banks would use the money in
the way that Paulson imagines. As one Wall Street veteran explained to
me, "I don't see one penny of that $700 billion ending up helping the
broader economy. I see it being used to prop up share prices so the
insiders can salvage as much as possible when dumping their shares".

Indeed, the $700 billion is just part of a massive "pump and dump"
scheme engineered with the tacit approval of the US Treasury and the
Federal Reserve. Once the banksters have offloaded their fraudulent
securities and crappy paper on Uncle Sam, they will do whatever they
need to do pad the bottom line and drive their stocks up. That means
they will shovel capital into hard assets, foreign currencies, gold,
interest rate swaps, carry trade swindles, and Swiss bank accounts. The
notion that they will recapitalize so they can provide loans to US
consumers and businesses in a slumping economy is a pipedream.

The US is headed into its worst recession in 60 years. The housing
market is crashing, securitzation is kaput, and the broader economy is
drifting towards the reef. The banks are not going to waste their time
trying to revive a moribund US market where consumers and businesses are
already tapped out. No way; it's on to greener pastures. They'll move
their capital wherever they think they can maximize their profits. In
fact, a sizable portion of the $700 billion will likely be invested in
commodities, which means that we'll see another round of hyperbolic
speculation in food and energy futures pushing food and fuel prices into
the stratosphere. Ironically, the taxpayers? largesse will be used
against them, making a bad situation even worse.

Then again, if a rehabbed bill isn't passed, no one can predict with
certainty what will happen. Here's how Tim Shipman summed it up in
"Bailout Failure Will Cause US Crash", in the UK Telegraph:

"Officials close to Paulson are privately painting a far bleaker
portrait of the fragility of the global economy than that advanced by
President George W Bush in his televised address last week.

One Republican said that the message from government officials is that
'the economy is dropping into the john.' He added: 'We could see falls
of 3,000 or 4,000 points on the Dow [the New York market that currently
trades at around 11,000]. That could happen in just a couple of days.

'What?s being put around behind the scenes is that we?re looking at
1930s stuff. We?re looking at catastrophe, huge, amazing catastrophe.
Everybody is extraordinarily scared. It?s going to be really, really
nasty.'?

The fear on Capital Hill is palpable, especially among the Democrats who
have led the effort to pass Paulson's boondoggle ASAP. Speaker of the
House, Nancy Pelosi, and fellow Democratic Party leaders, Chris Dodd,
Harry Reid and the blabbering blowhard from Massachusetts, Barney Frank,
did everything in their power to sandbag dissenters, quash resistance,
and rush the bill to a vote without the usual deliberation and debate.
Rep. Marcy Kaptur (D-Ohio) was one of many angry members of congress who
lashed out at Pelosi's highhandedness. It's all caught on a one minute
video:

Rep. Marcy Kaptur: "The normal legislative process that should accompany
a monumental proposal to bail out Wall Street has been shelved. Yes,
shelved! Only a few insiders are doing the dealing. These criminals have
so much power they can shut down the normal legislative process of the
highest lawmaking body in this land. All the committees that should be
scanning every word that is being negotiated have been benched. And that
means the American people have been benched. We are constitutionally
sworn to protect this country against all enemies foreign and domestic,
and yes, my friends, there are enemies....The people who are pushing
this bill are the very same one's who are responsible for the implosion
on Wall Street. They were fraudulent then; and they are fraudulent
now.We should say No to this deal".

Republicans were equally furious at the way the Pelosi Politburo kept
the rank and file out of loop as much as possible. Rep. Michael Burgess
(R-Texas) summarized the feelings of a great many congressmen who felt
they were being railroaded by Pelosi and Co: "We have seen no bill. We
have been here debating talking points ...House Republicans have been
cut out of the process and derided by the leaders of the House Democrats
as "unpatriotic" for not participating in supporting the bill. Mr.
Speaker, I have been thrown out of more meetings in the last 24 hours
than I ever thought possible as an elected official of 800,000 citizens
of N. Texas....Since we didn't have hearings, since we didn't have
markup, let's at least put this legislation up on the Internet for 24
hours and let the American people see what we have done in the dark of
night. After all, I have never gotten more mail on a single issue than
on this bill that is before us tonight."

Rep Dennis Kucinich (D-Ohio) gave the best speech of the day railing
against the financial industry and defending the interests of working
class Americans.

Rep. Dennis Kucinich: "The $700 bailout bill is being driven by fear not
fact. This is too much money, in too short of time, going to too few
people, while too many questions remain unanswered. Why aren't we having
hearings...Why aren't we considering any other alternatives other than
giving $700 billion to Wall Street? Why aren't we passing new laws to
stop the speculation which triggered this? Why aren't we putting up new
regulatory structures to protect the investors? Why aren't we directly
helping homeowners with their debt burdens? Why aren't we helping
American families faced with bankruptcy? Isn't time for fundamental
change to our debt-based monetary system so we can free ourselves from
the manipulation of the Federal Reserve and the banks? Is this the US
Congress or the Board of Directors of Goldman Sachs??

There was greater opposition to the Paulson bill than any legislation in
the last half century. The groundswell of public outrage has been
unprecedented, and yet, Congress, completely insulated from the demands
of their constituents, continues to blunder ahead following the same
pro-industry script as their ideological twins in the White House.
There's not a dime's worth of difference between the two parties. Not
surprisingly, neither Pelosi nor any of the Democratic leadership has
even met with any of the more than 200 leading economists who have
stated unequivocally that the bailout will not address the central
problems that are wreaking havoc on the financial system. Instead, they
have caved in to Bush's demagoguery and the spurious claims of G-Sax
bagman Henry Paulson, a man who has misled the public on every issue
related to the subprime/financial fiasco so far.

There are parts of Paulson's Emergency Economic Stabilization Act of
2008 that every US taxpayer should understand, even though the media is
keeping those facts obscured. In sections 128 and 132; the proposed bill
would have suspend "mark to market" accounting. This means that the
banks would no longer be required to assess the worth of their assets
according to what similar assets fetched on the open market. For
example, Merrill Lynch just sold $31 billion of mortgage-backed
securities for $6 billion, which means that similar bonds should be
similarly priced. Simple; right? The banks need to adjust the value of
those assets on their balance *** accordingly. This gives investors
and depositors the ability to know whether their bank is in bad shape or
not. But Paulson's bill lifted this requirement and allowed the banks to
assign their own arbitrary value to these assets, which is the same old
Enron-style accounting scam.

Paulson's bill also proposed the "Elimination of FASB 157 and 0%
reserves". This is just as sketchy as it sounds. FASB or Financial
Services Regulatory Relief Act reads:

"Federal Reserve Banks are authorized to pay banks interest on reserves
under Section 201 of the Act. In addition, Section 202 permits the FRB
to change the ratio of reserves a bank must maintain relative to its
transaction accounts, allowing a zero reserve ratio if appropriate. Due
to federal budgetary requirements, Section 203 provides that these
legislative changes will not take effect until October 1, 2011."

It's all legal mumbo jumbo to conceal the fact that the banks can
continue to operate with insufficient capital, which is why the system
is currently blowing up. It all get's down to this: The reason the
system is exploding is because the various financial institutions have
been allowed--via deregulation--to act as banks and create as much
credit as they choose without a sufficient capital base. When one reads
about massive deleveraging, this relates directly to the fact that
under-capitalized businesses were operating with too much debt in
relationship to their capital. That's it in a nutshell; forget about the
CDOs, the MBSs, the CDS and the whole alphabet soup of derivatives
garbage. They were all inserted into the system so Wall Street
landsharks could expand credit without supervision and balance trillions
of dollars of debt on the back of a one dollar bill. This is why Paulson
wants to suspend the rules which would bring credibility and trust back
to the system. After all, that might impinge on Wall Street's ability to
enrich itself at the public's expense.

Nouriel Roubini sites a study by Barry Eichengreen, "And Now the Great
Depression", which points out why Paulson's $700 billion plan is likely
to fail:

"Whenever there is a systemic banking crisis there is a need to
recapitalize the banking/financial system to avoid an excessive and
destructive credit contraction. But purchasing toxic/illiquid assets of
the financial system is NOT the most effective and efficient way to
recapitalize the banking system....

?A recent IMF study of 42 systemic banking crises across the world
provides evidence of how different crises were resolved.

?First of all only in 32 of the 42 cases there was government financial
intervention of any sort; in 10 cases systemic banking crises were
resolved without any government financial intervention. Of the 32 cases
where the government recapitalized the banking system only seven
included a program of purchase of bad assets/loans (like the one
proposed by the US Treasury). In 25 other cases there was no government
purchase of such toxic assets. In 6 cases the government purchased
preferred shares; in 4 cases the government purchased common shares; in
11 cases the government purchased subordinated debt; in 12 cases the
government injected cash in the banks; in 2 cases credit was extended to
the banks; and in 3 cases the government assumed bank liabilities. Even
in cases where bad assets were purchased ? as in Chile ? dividends were
suspended and all profits and recoveries had to be used to repurchase
the bad assets. Of course in most cases multiple forms of government
recapitalization of banks were used." (Nouriel Roubini's Global
EonoMonitor.)

In short, it wouldn't work. Nor was it designed to work. The bill was
just Paulson's way of carving a silver canoe for he and his brandy-
drooling investor buddies so they can paddle away to some offshore haven
while the rest of us drown in a bottomless ocean of debt.
.

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