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 But that world view is no
longer applicable after reaching Peak Credit, where consumers are no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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Mike Whitney lives in Washington state. He can be reached at
fergiewghitney@xxxxxxx





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