Thanksgiving Week 2008 saw the continued acceleration of the privatization of profit, socialization of loss, and stripping of some big national assets (money and domestic credibility; international credibility was destroyed a long time ago) with the support (or studied indifference) of George W. Bush and Richard Cheney. There is a lack of confidence in the markets for equity and debt due to participants being unable to trust balance sheets, counterparties, or the word of Treasury Secretary Henry Paulson.
There is every reason to believe that public pressure (e-mails, faxes, telephone calls, letters, and postcards) to members of Congress will push them away from privatization of profit for Henry Paulson’s pals.
An illuminating article on how the nation lined the pockets of Wall Street at the suggestion (and arguable breach of fiduciary duty owed to Citigroup) of current Citigroup Director (and ex-Treasury Secretary) Robert Rubin, is available at Citigroup Pays for a Rush to Risk, Bank Saw No Red Flags Even as It Made Bolder Bets, by Eric Dash and Julie Creswell, The New York Times.
A discussion of the $7.8T ($26,000 for every American) committed so far ($1.7T "loans," $3.0 "investments," and $3.1 guarantees) is available at U.S. Plans $800 Billion in Lending to Ease Crisis, by Edmund L. Andrews, The New York Times. For context, the total federal budget of the United States of America for the fiscal year ending September 30, 2009, is about $3.1T. This means bait and switch artist Henry Paulson (aka Secretary of the Treasury), obtained approval under false pretenses using means and instrumentalities of interstate wire communications to spend up to $350B for the purpose of buying distressed real estate assets without further Congressional approval. He has managed to spend or commit the U.S. to spend almost 23 times that amount and the equivalent of almost 3 years of total federal spending on his way out of town.
A discussion of some of what should happen now is available at Time for a Bank Holiday, by William Greider, The Nation.
The acute problem arose from subprime lending for residential real estate. The massive balance of trade and balance of payments deficits America has been posting for years is a manifestation of another contributing factor. That is the deliberate evisceration of the American economy (and in particular the manufacturing sector) by those fast-talking arrogant free traders. They could not be bothered to arrange a level playing field (e.g., similar labor and environmental requirements) as they sent manufacturing offshore to the benefit of nominally American-based multinationals and their shareholders and to the detriment of American workers and the national security.
Communicate with your representatives in Congress and especially with the chair of the Senate Banking Committee (Sen. Chris Dodd (D. - Conn.) and the House Financial Services Committee (Rep. Barney Frank (D.-Mass.) and tell them you are opposed to the continued privatization of profit and socialization of loss in monumental amounts and will hold them responsible. When emergency legislation was crammed through the Congress (which again rolled over without asking the proper questions or enough questions as it has many times in the last eight years), the safeguard was that there was supposed to be transparency about all activities and expenditures. There has been almost no transparency. The Bloomberg financial reporting service has filed a federal lawsuit seeking the information that should have been provided. Messrs. Dodd and Frank have done almost nothing to enforce the law requiring transparency. By their inaction and acquiescence (as opposed to their words which are cheap), they risk giving the impression of appearing to be collaborating in the bait and switch orchestrated by Sec. Paulson.
There is very good reason to believe that public pressure (e-mails, faxes, telephone calls, letters, and postcards) to members of Congress will push them away from privatization of profit for Henry Paulson’s pals.
Only when the government and the public understand the full scope of the problem can a reasonable response be developed. Right now, Sec. Paulson is merely throwing money at the problem because he is scared (bearing in mind this is a family publication) out of his mind. He has no idea whether the roughly $8T of guarantees, expenditures, and commitments will suffice to unfreeze the credit markets and get the economy moving.
To that end, as noted by William Greider, the essential first step is to determine the actual financial state of each bank and other financial institution. In short, there must be a detailed listing of all assets (on balance sheet and off sheet) and liabilities of each institution. Sec. Paulson should have demanded this information when he was first approached for a handout by his pals on Wall Street. It is reliably reported that he did not ask for this information. His excuse? It will require time and money to obtain the data and put it into useful form; if Treasury does not have it, the Congress should allocate the millions needed to assemble the data starting right now. If we can spend or obligate about $8T in a spasm of uninformed activity, we can spend the $10 or $20 or $50 million which might be needed to get the accountants and others to gather and analyze the information.
The market has determined Sec. Paulson appears not to be sure of the magnitude of the problem or the underlying facts. He gave $25B of public money to Citigroup in early October and at the same time forced eight (8) other banks many of whom did not need the money to also take $25B apiece. The excuse was that he did not want the market to realize how weak Citigroup was. The collapse in Citigroup’s stock in November indicated it did not take long for major market participants to realize the weakness and seek to profit from it through short sales of Citigroup’s stock. In short, in just this one instance, Henry Paulson wasted $200B of the people’s money.
To be sure, the government must do what it can, for many reasons, to avoid another Great Depression. In this regard, it is a problem to keep the economy and lending system operating and at the same time raise more capital for private banks. It is difficult to find people to run major financial institutions on short notice. However, Sec. Paulson had no difficulty finding new management for Fannie Mae and Freddie Mac on short notice. If the people are going to put up this amount of money ($7.8T and rising) they should get, at a minimum, control of the institutions which would eventually be re-privatized. They should also get immediate reinstatement of the Glass-Steagall Act (generally banning banks from both taking deposits and issuing securities) and robust regulatory controls. In addition, we need a total ban on the types of derivatives which led to this disaster (e.g., CDOs and CDSs) for any part of any institution in any way using any part of the U.S. financial system, and a full stop to the merger mania in the financial sector. As William Greider noted, one part of the solution is to have small to medium size community-based banks (as opposed to distant imperious mega-banks) lending to and serving the real economy.
Note that while Sec. Paulson gave Citigroup another $20B (and received 8% preferred stock in return) on about November 23, at the close of trading on November 21, the government could have purchased the entire company for about $23B. The bottom line is that Sec. Paulson gave away $45B of the people’s money to Citigroup and felt compelled to give away another $200B to hide Citigroup’s actual dire position. He has received in return promises to repay the money (or dividends in the case of the preferred stock) from financial institutions. Sec. Paulson hoped these institutions would start making worthwhile loans to real businesses but did not require enforceable promises to do so in return for this $245B slice of public money.
What could Dodd and Frank do if they actually wanted to do something useful rather than ineffectually moan on television about how concerned they are? What can a member of the public ask them to do?
Messrs. Dodd and Frank could:
1. Write Sec. Paulson and tell him to send the Congress by the close of business on Tuesday, Dec. 2, 2008, three things:
a. a complete list of all funds expended, all guarantees issued, all commitments made and (where a specific institution was involved) the name of the institution.
b. a list of all over-the-counter derivatives (Collateralized Debt Obligations and Credit Default Swaps and any others which have been conjured into effect) held by any institution with a headquarters in the United States (given that it appears Sec. Paulson has not bothered to gather this information, he probably will not be able to produce it).
c. the same information as in part b. but for international institutions trading in the U.S. (If Sec. Paulson states in writing under penalty of perjury that he can produce the international data, he gets another week for the international data)
2. If Sec. Paulson fails to produce any item, serve a subpoena on him for the documents and his testimony to occur Dec. 4, 2008). Then serve one on the relevant institutions: every bank, brokerage, hedge fund, private equity fund, investment bank, and other institution the chairs think might have useful information. The subpoenas should require production of a list of certain information concerning the derivatives to which they are a party within one week (by Dec. 10, 2008).
For each OTC derivative (feel free to add your own suggestions), state:
1. The amount of the obligation
2. The term of the obligation (start date and end date)
3. The yardstick for the value of the derivative (e.g. creditworthiness of certain fully identified debt issued by AIG)
4. The amount paid for (or received for) the derivative
5. The maximum amount which the institution are obligated to pay (or which the institution can receive) under the terms of the derivative
6. The counterparty(ies)
7. The terms of any obligation to post additional collateral (or to receive additional collateral).
8. Whether the institution owns the underlying instrument (e.g., if the institution has a contract insuring $10M of certain identified AIG debt, does the institution own that amount of certain identified AIG debt)?
We seem to be stuck with it at least until January 20. How much additional damage Treasury Secretary Henry Paulson will do in that time remains to be seen. You may wish to try to limit that damage by urging the various Members of Congress to be involved actively rather than supinely accepting whatever unknowing uninquiring asset stripping seems to suit Henry Paulson’s fancy.