Så lite eskortservice. Gällande sexindustrin ser det ut att vara lite ambivalent. Är proffsighet alltså ett plus eller ett minus?

Første forsidehistorie handler om den falske spin, de "socialt sindede" (læs: kollektivistiske) amerikanere fik sået om Marshall-hjælpen efter WW II. For som historieinteresserede godt ved, så var det ikke Marshall-hjælpen der "reddede" Tyskland, men derimod de østrigsk-økonomiske reformer, der, efter at blive gennemført fra den ene dag til den anden, gjorde det sorte markede, som Adolf Hitlers socialistiske nazistat nødvendiggjorde, unødvendigt og som skabte det positive økonomiske klima, som Forbundsrepublikken nød så godt af.

God vind fremover, skal det lyde herfra!

Jag tänker då på hur utbrett det är att tycka att man ändå inte kan göra någonting åt saker. I senaste Ordfront skriver Daniel Berg om orsakerna bakom den ekonomiska krisen. Artikeln finns tyvärr bara i pappersform, tyvärr eftersom den verkligen är läsvärd. I kapitlet "Apan, Datorn och Cheney" visas en skrämmande bild av den ekonomiska världen upp. Experiment visar nämligen att när proffsinvesterare och ögonbundna testpersoner (som väljer placeringarna genom att kasta pil) får lika mängder kapital att placera samlar de på sig ungefär lika mycket pengar år efter år. Att krama vinster ur det globala kapitalet kan vara enkelt på kort sikt, men i det långa loppet tycks ingen kunna veta hur det lönar sig att placera för att få pengarna att fortsätta växa.

Ursäkta. Ingen människa ska det vara. Berg berättar om petabytes datorer (1 peta= 1000 tera) som Wall Streets största banker använder sig av. Dessa program är nu så avancerade att de rättar till sig själv, läser nyhetssidor och bloggar, allt i jakten på hur pengar borde placeras. Bankernas ekonomer kan vara nöjda. Äntligen ett ekonomiskt förnuft! Vad är det då dessa datorer säger oss? Det undrar Naomi Klein och levererar därefter det hårresande svaret: de investerar hungra gånger mera i vapen- och oljeindustrin än i förnyelsebar energi. Vi lyssnar och köper, för det är det som är lönsamt. Och hur många gånger har inte du hört en beslutsfattare säga att han/hon gärna skulle fatta ett annat beslut, men det går bara inte eftersom vi måste tänka på ekonomin? Och så finns det ingenting mera att säga liksom. Jag förstår det växande missnöjet mot politiker eftersom de flesta inte gör annat än spelar med. Men än så länge är det faktiskt bara människor som kan bedriva politik. Och jag skulle gärna påpeka att vi gillar att skylla allt på dedär eländiga nordamerikanerna, men vilken finländare eller svensk eller whatever som har placerat sina pensionspengar i en fond spelar faktiskt med i dethär systemet.

Under Antiken var det Zeus och gänget som bestämde. Nu är det Wall Streets superdatorer som räknar ut hur länge Irakkriget ska hålla på och var man ska slå till nästa gång. Allt för att inte siffrorna ska peka neråt.

För en tankeväckare om alternativ pengahushållning, läs om en räntefri värld på Forum för Frihet. Dagens finlandssvenska insider-höjdare finns hos Sara. Vidrigheterna i Palestina fortsätter förresten dagligen, trots att gammelmedia inte rapporterar. Läs t.ex. Anna Wester och Pastey.

Drop biobrændslen. USA har siden 2005 har stået i spidsen for at lave mad om til brændstof, men det kan ikke betale sig, når så mange mennesker sulter. I stedet bør man satse på det såkaldte andengenerationsbiobrændsel, hvor man ikke bruger fødevarer som enerigkilde.

Fjern landsbrugsstøtten til de rige lande. Den er godt nok blevet halveret de seneste femten år, men 20 procent af værdien af landbrugsproduktionen i de vestlige lande kommer stadig fra støtte. I udviklingslandene er støtten lig nul, og det giver fra starten en unfair konkurrence.

Gensplejs maden. Det vil betyde, at færre afgrøder bliver angrebet af sygdomme, og det kan forlænge deres holdbarhed. I dag bliver halvdelen af jordens fødevarer ikke brugt til menneskeføde – enten rådner de eller bliver spist af skadedyr.

Forbyd de enkelte lande at lave eksportforbud, som gør det ulovligt at sælge korn til udlandet. Forbuddene svækker den enkelte landmands muligheder for succes – og dermed hans chancer for at levere mere korn, majs eller ris.

Sørg for at give noget akut hjælp til u-landene. Hurtig hjælp kan betyde, at man undgår politisk splid og forhastede beslutninger truffet af desperate regeringer.

At droppe biobrændslen burde være øverst på enhver politikers huskeseddel, men det er tvivlsomt, om det vil gøre tingene meget bedre at satse på "andengenerationsbiobrændsel" i stedet. At der ikke længere bliver puttet mad i benzintanken er en ringe trøst, hvis der alligevel bliver inddraget landbrugsland til dyrkning af briobrændselsafgrøder.

Modstanden mod biotek-mad er endnu en af de områder, hvor miljøbevægelsens mange sager modarbejder hinanden. Gensplejsede fødevarer kan nedsætte CO2-udledningen, nedsætte brugen af pesticider, mindske skovrydningen, for ikke at glemme mere ordinære konsekvenser som at forhindre millioner af mennesker i at sulte.

Der burde i mine øjne også have været en advarsel mod priskontrol, der har de samme negative konsekvenser som eksportforbud. Når landmænd forbydes at sælge til det højeste bud, må de tage til takke med de priser, de kan få i deres hjemland. Derved gør man det mindre tiltrækkende at øge produktionen, og er dermed med til at forværre det problem, som handelsindgrebene skulle have afhjulpet.

Akut hjælp til ulande kan være god til at forhindre akut-indgreb, men kan også fungere som en sovepude, der forhindrer nødvendige reformer. Der må stilles krav til modtagerlandene om at fjerne import- og eksportforhindringer, styrke den private ejendomsret, samt andet, der vil hjælpe dem med at blive uafhængige af almisser i fremtiden.

A week ago, on the day President Bush disavowed government intervention in financial markets, the Federal Reserve announced the fruit of its weekend labor: essentially guaranteeing hundreds of billions in toxic financial derivatives owned by banks. Money laundering has become the de facto standard of Federal Reserve policy.

The financial press has been filled with praise for the US government rescue of Bear Stearns, one of the worst offenders of reason and logic in the issuance of securitized mortgage debt. You have to turn to blogs to get a sense of the malfeasance.

 Excerpt from the Hussman Funds' Weekly Market Comment (3/24/08) regarding the Fed's involvement on JPMorgan's (JPM) deal to buy out Bear Stearns (BSC):In effect, the Federal Reserve decided last week to overstep its legal boundaries ­ going beyond providing liquidity to the banking system and attempting to ensure the solvency of a non-bank entity. Specifically, the Fed agreed to provide a $30 billion "non-recourse loan" to J.P. Morgan, secured only by the worst tranche of Bear Stearns' mortgage debt. But the bank ­ J.P. Morgan ­ was in no financial trouble. Instead, it was effectively offered a subsidy by the Fed at public expense. Rick Santelli of CNBC is exactly right. If this is how the U.S. government is going to operate in a democratic, free-market society, "we might as well put a hammer and sickle on the flag."What is a "non-recourse loan"? Put simply, if the homeowners underlying that weak tranche of debt go into foreclosure, they will lose their homes, and the public will lose as well. But J.P. Morgan will not lose, nor will Bear Stearns' bondholders. This will be an outrageous outcome if it is allowed to stand.

... ­ it's a picnic for insiders, bought and paid for through the abuse of public funds by government officials too unprincipled even to recognize the abuse. The only good thing about this deal is that it buys time while principled ways of busting and restructuring it can be settled.

 At a moment in history when the US treasury is hemorraging ($5000 per second in Iraq), the Bush White House is setting up to do something that can be understood only through a corrective lens that takes every sighting and reverses it: the party of laissez faire, free markets and minimal regulation supports the costliest nationalization of industry in US economic history.

Last week, in addition to rescuing Bear Stearns, the shadow financial system intervened in metals and commodity markets-- beating down anxiety indexes more sharply than at any time in the past half century. At the same time, the coordinated release of quarterly reports whose numbers ever so slightly "exceeded expectations" was enough justification--along with massive buying by US government operations that can only be faintly glimpsed--to send world stock markets back upwards.

Various metaphors have been used to describe US government intervention in the markets, like band-aid solutions to cure a gaping wound. In fact, the US government's attempts to calm investor anxiety at the observable financial disarray is like using chemical foam at the surface to kill a deep-burning coal fire.

 There was more micromanaging of the news cycle by the money launderers this morning:March 24 (Bloomberg) -- Forget lower interest rates. For the Federal Reserve to keep the financial markets from imploding it needs to buy troubled mortgage bonds from banks and securities firms, say the world's biggest Treasury investors.Even after cutting rates by 3 percentage points since September, expanding the range of securities it accepts as collateral for loans and giving dealers access to its discount window, the Fed has been unable to promote confidence. The difference between what the government and banks pay for three- month loans doubled in the past month to 1.92 percentage points.

The only tool left may be for the Fed to help facilitate a Resolution Trust Corp.-type agency that would buy bonds backed by home loans, said Bill Gross, manager of the world's biggest bond fund at Pacific Investment Management Co. While purchasing some of the $6 trillion mortgage securities outstanding would take problem debt off the balance sheets of banks and alleviate the cause of the credit crunch, it would put taxpayers at risk.

The US taxpayer is about to be force fed bad mortgage debt, that honest people didn't ask for-- created by Wall Street where incomes average $387,000 (NY Times, March 24, 2008 "With Economy Tied to Wall St. New York Braces for Job Cuts") and fostered by a culture of corruption rippling all the way down through mortgage brokers, appraisers, and local zoning officials for whom the hard currency of fraud is as likely Bahamian poker chips as dollars.

Poor America.

Alan Farago of Coral Gables, who writes about the environment and the politics of South Florida

Bush, kreditkrisen,Crisis, Neoliberalism, nyliberalism, Free trade, frihandel, Financial Crisis, Structural Crisis, USA economy, Clinton, Credit Crisis, Neoliberalism, nyliberalism, Bush, credite Crisis, Neoliberalism, nyliberalism, Free trade, frihandel, Financial Crisis, Structural Crisis, USA economy, Clinton, Credit Crisis, Neoliberalism, nyliberalism, nyliberal 

By BINOY KAMPMARKWe have heard it for some time now: the market is divine, lending its magical corrective qualities to sort out the good from the bad. A character portrait of George Bush by a former teacher of his, Professor Yoshi Tsurumi (1 March 2004), recalled a pupil's suspicion of such monitoring bodies as the Federal Trade Commission and Securities Exchange Commission.

These bodies were 'unnecessary hindrances to "free market competition".' The New Deal received characteristic opprobrium ­ it was 'socialism'. As for poverty: it was the simple result of a poor work ethic. Someone supposedly more qualified to assess the levers of the market, Alan Greenspan, added a few pointers to this bald-faced view of market forces. In the late 1990s, when the hedge fund Long-Term Capital Management was registering losses in the billions, Greenspan, as Federal Reserve chairman, attempted to initiate a rescue package that would still keep the free marketeers happy.

After all, the economy would, in time, re-order itself.  But not even Greenspan was willing to let things float. As he put it in his testimony to the House Committee on Banking and Financial Services (1 October, 1998), the Federal Reserve had taken some measures to facilitate 'private-sector refinancing' of LTCM. With characteristic opaqueness, he argued that the Reserve's measures 'were designed solely to enhance the probability of an orderly private-sector readjustment, not to dictate the path that adjustment would take.' Despite some tinkering, free-market orthodoxy would remain.As Professor of political economy at Harvard, Benjamin M. Friedman notes (New York Review of Books, 20 March) various attempts at regulating heated economic activity in this decade were rebuffed. The US Treasury suggestion in 2001 that subprime lenders subject themselves to monitoring, with a 'best practices' code, and the Department of Housing and Urban Developments attempt to control real estate transactions, all came to nought.  

A suspicion of regulating agencies on the part of the Bush administration (by no means the only one) and a system of buccaneering capitalism has led to one sad truth: the private sector is inviolable when it produces; and a needy cripple when it doesn't. When it performs, there is a rush to praise executives and line their wallets ­ they made the right decisions, and did the company good. Company profits are a result of business acumen, the genius of market capitalism.  When the company fails, we must all fail with it. Corporate success is the success of the few; corporate failure, a collective one. This is the underlying message of salvaging measures by governments and their regulatory bodies. The global subprime crisis has triggered bailout strategies across several countries. This suggests a grand admission: the market is not magical in its self-corrective wisdom, and its harmful effects must be neutralised. 

 The list of free market apostates is growing. Governments, after peddling the wonders of robust competition, are now viewing it with fear, even panic. Previously feted market ideologues are either shedding their skin or going into hiding. Consider the most recent example of apostasy: the Federal Reserve's actions regarding Bear Stearns. With the demise of the mortgage securities specialist, Ben S. Bernanke and his fellow governors decided to ditch the policy of non-interventionism. Bloomberg correspondent Craig Torres provided a précis of the action: treasury notes would effectively be swapped for 'privately issued mortgage-backed securities held by Wall Street firms' (15 March). Willem Buiter, economics professor at the London School of economics shuddered at the policy shift. This was 'socialism for the rich, which is both inefficient and morally objectionable.' The Reserve had become creditors of the otherwise doomed enterprise. In the words of Vincent Reinhart, former director of the Division of Monetary Affairs, such actions were 're-drawing the relationship of the Federal reserve with the rest of the financial system' (15 March). In Britain, Gordon Brown, with Chancellor Alistair Darling at the helm of the Exchequer, took a pseudo-socialist path An ailing Northern Rock, the Newcastle-based lender, has been, for all intents and purposes, nationalised. Offers by such giants as Virgin were dismissed as providing insufficient 'value for money to the taxpayer' (BBC News, 17 February).  

Darling attempted to minimise the significance of the move, hoping to hide the British government's new love for market control. 'The bank will be run at arm's length and on a commercial basis.' With inverted logic, the protection of Northern Rock has now become a collective duty ­ tax payers are to foot the bill of failed private speculations because it's in their best interest to do so.Some banks on the continent have faced similar problems, with now familar government responses. The German banking system suffered the jitters last summer when IKB Deutsche Industriebank fell on the sword of American subprime speculation.

A third bailout of the dying beast was assured in February this year by German finance minister, Peer Steinbrück. While private banks were expected to foot some of the bill, the government would provide two-thirds of the $2.2 billion dollars. The list of bank welfare recipients continues to grow.The consequences of such bailouts are gradually coming to the fore. The Federal Reserve is finding its resources depleted. Numerous governments, despite a previously pathological aversion to regulation, are suddenly nervous by unfettered competition. While the Free Market deity is far from dead, it is expiring. Greenspan, amidst the economic carnage, is unrepentant. Writing in his memoir The Age of Turbulence, he argues that 'the benefits of broadened home ownership are worth the risk.' Given the current crisis, with a shrinking base of homeowners, Greenspan may have been a little too optimistic. For that, we are left with a socialism tailored for the wealthy. 

Binoy Kampmark was a Commonwealth Scholar at Selwyn College, University of Cambridge.

Bush, kreditkrisen,Crisis, Neoliberalism, nyliberalism, Free trade, frihandel, Financial Crisis, Structural Crisis, USA economy, Clinton, Credit Crisis, Neoliberalism, nyliberalism, Bush, credite Crisis, Neoliberalism, nyliberalism, Free trade, frihandel, Financial Crisis, Structural Crisis, USA economy, Clinton, Credit Crisis, Neoliberalism, nyliberalism, nyliberal 

Endgame: Unregulated Private Money CreationWhat had emerged going into the new millennium after the 1999 repeal of Glass-Steagall was an awesome transformation of American credit markets into what was soon to become the world’s greatest unregulated private money creation machine. The New Finance was built on an incestuous, interlocking, if informal, cartel of players, all reading from the script written by Alan Greenspan and his friends at J.P. Morgan, Citigroup, Goldman Sachs, and the other major financial houses of New York. Securitization was going to secure a "new" American Century and its financial domination, as its creators clearly believed on the eve of the millennium.

Key to the revolution in finance in addition to the unabashed backing of the Greenspan Fed, was the complicity of the Executive, Legislative and Judicial branches of the US Government right to the Supreme Court. In addition, to make the game work seamlessly, it required the active complicity of the two leading credit agencies in the world—Moody’s and Standard & Poors. It required a Congress and Executive branch that would repeatedly reject rational appeals to regulate over-the-counter financial derivatives, bank-owned or financed hedge funds or any of the myriad steps to remove supervision, control, transparency that had been painstakingly built up over the previous century or more. It required that the major government-certified rating agencies give their credit AAA imprimatur to a tiny handful of poorly regulated insurance companies called Monolines, all based in New York.

The monolines were another essential part of the New Finance. The interlinks and consensus behind the massive expansion of securitization among all these institutional players was so clear and pervasive it might have been incorporated as America New Finance Inc. and its shares sold over NASDAQ. Alan Greenspan anticipated and encouraged the process of asset securitization for years before his actual nurturing of the phenomenal real estate bubble in the beginning of the first decade of the new Century. In a pathetic attempt to deny his central role after the fall, Greenspan last year claimed that the problem was not mortgage lending to sub-prime customers but the securitization of the sub-prime credits. In April 2005, he sung a quite different hymn to sub-prime securitization.

 Addressing the Federal Reserve System’s Fourth Annual Community Affairs Research Conference, the Fed chairman declared, "Innovation has brought about a multitude of new products, such as subprime loans and niche credit programs for immigrants. Such developments are representative of the market responses that have driven the financial services industry throughout the history of our country. With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers…The mortgage-backed security helped create a national and even an international market for mortgages, and market support for a wider variety of home mortgage loan products became commonplace. This led to securitization of a variety of other consumer loan products, such as auto and credit card loans."

That 2005 speech was about the time he later claimed to have suddenly realized securitization was getting out of hand. In September 2007 once the crisis was full force, CBS’ Leslie Stahl asked why he did nothing to stop "illegal or shady practices you knew were taking place in sub-prime lending." Greenspan replied, "Err, I had no notion of how significant these practices had become until very late. I didn’t really get it until late 2005 and 2006." (emphasis added-w.e.)As far back as November 1998, only weeks after the near-meltdown of the global financial system through the collapse of the LTCM hedge fund, Greenspan had told an annual meeting of the US Securities Industry Association, "Dramatic advances in computer and telecommunications technologies in recent years have enabled a broad unbundling of risks through innovative financial engineering.

The financial instruments of a bygone era, common stocks and debt obligations, have been augmented by a vast array of complex hybrid financial products, which allow risks to be isolated, but which, in many cases, seemingly challenge human understanding." That speech was the clear signal to Wall Street to move into asset-backed securitization in a big way. After all, hadn’t Greenspan just demonstrated through the harrowing Asia crises of 1997-98 and the systemic crisis triggered by the August 1998 sovereign debt default that the Federal Reserve and its liquidity spigot stood more than ready to bailout the banks in event of any major mishap? The big banks were, after all, clearly now, Too Big To Fail—TBTF.The Federal Reserve, the world’s largest and most powerful central bank with what was arguably the world’s most liberal market-friendly Chairman, Greenspan, would back its major banks in the bold new securitization undertaking. When Greenspan said risks "which seemingly challenge human understanding," he signaled that he understood at least in a crude way that this was a whole new domain of financial obfuscation and complication. Central bankers traditionally were known for their pursuit of transparency among banks and conservative lending and risk management practices by member banks. Not ‘ole Alan Greenspan.

Most significantly, Greenspan reassured his Wall Street securities underwriting friends in the Securities Industry Association audience that November of 1998 that he would do all possible to ensure that in the New Finance, the securitization of assets would remain for the banks alone to self-regulate. Under the Greenspan Fed, the foxes would be trusted to guard the henhouse. He stated: "The consequence (of the banks’ innovative financial engineering-w.e.) doubtless has been a far more efficient financial system…The new international financial system that has evolved as a consequence has been, despite recent setbacks, a major factor in the marked increase in living standards for those economies that have chosen to participate in it.It is important to remember--when we contemplate the regulatory interface with the new international financial system--the system that is relevant is not solely the one we confront today. There is no evidence of which I am aware that suggests that the transition to the new advanced technology-based international financial system is now complete.

Doubtless, tomorrow's complexities will dwarf even today's.It is, thus, all the more important to recognize that twenty-first century financial regulation is going to increasingly have to rely on private counterparty surveillance to achieve safety and soundness. There is no credible way to envision most government financial regulation being other than oversight of process. As the complexity of financial intermediation on a worldwide scale continues to increase, the conventional regulatory examination process will become progressively obsolescent--at least for the more complex banking systems. (emphasis added-w.e.)

One might naively ask, why then surrender all those powers like Glass-Steagall to the private banks far beyond possible official regulatory purview? Again in October 1999, amid the frenzy of the dot.com IT stock market bubble mania, a bubble which Greenspan repeatedly and stubbornly insisted he could not confirm as a bubble, he once again praised the role of financial derivatives and "new financial instruments…reallocating risk in a manner that makes risk more tolerable. Insurance, of course, is the purest form of this service. All the new financial products that have been created in recent years, financial derivatives being in the forefront, contribute economic value by unbundling risks and reallocating them in a highly calibrated manner. He was speaking of securitization on the eve of the all-but certain repeal of the Glass-Steagall Act.The Fed’s "private counterparty surveillance" brought the entire international inter-bank trading system to a screeching halt in August 2007, as panic spread over the value of the trillions of dollars in securitized Asset Backed Commercial Paper and in fact most securitized bonds. The effects of the shock have only begun, as banks and investors slash values across the US and international financial system. But that’s getting ahead of our story.

Deregulation, TBTF and Gigantomania among banksIn the United States, between 1980 and 1994 more than 1,600 banks insured by the Federal Deposit Insurance Corporation (FDIC) were closed or received FDIC financial assistance. That was far more than in any other period since the advent of federal deposit insurance in the 1930s. It was part of a process of concentration into giant banking groups that would go into the next century. In 1984 the largest bank insolvency in US history threatened, the failure of Chicago’s Continental Illinois National Bank, the nation’s seventh largest, and one of the world’s largest banks. To prevent that large failure, the Government through the Federal Deposit Insurance Corporation stepped in to bailout Continental Illinois by announcing 100% deposit guarantee instead of the limited guarantee FDIC insurance provided. This came to be called the doctrine of "Too Big to Fail" (TBTF). The argument was that certain very large banks, because they were so large, must not be allowed to fail for fear of the chain-reaction consequences it would have across the economy. It didn’t take long before the large banks realized that the bigger they became through mergers and takeovers, the more sure they were to qualify for TBTF treatment. So-called "Moral Hazard" was becoming a prime feature of US big banks.

That TBTF doctrine was to be extended during Greenspan’s Fed tenure to cover very large hedge funds (LTCM), very large stock markets (NYSE) and virtually every large financial entity in which the US had a strategic stake. Its consequences were to be devastating. Few outside the elite insider circles of the very large institutions of the financial community even realized the doctrine had been established. Once the TBTF principle was made clear, the biggest banks scrambled to get even bigger. The traditional separation of banking into local S&L mortgage lenders, large international money center banks like Citibank or J.P. Morgan or Bank of America, the prohibition on banking in more than one state, one by one were dismantled. It was a sort of "level playing field" but level for the biggest banks to bulldoze over and swallow up the smaller and create cartels of finance of unprecedented scope. By 1996 the number of independent banks had shrunk by more than one-third from the late 1970s, from more than 12,000 to fewer than 8,000. The percentage of banking assets controlled by banks with more than $100 billion doubled to one-fifth of all US banking assets.

The trend was just beginning. The banks’ consolidation was a direct outgrowth of the removal of geographic restrictions on bank branching and holding company acquisitions by the individual states, formalized in the 1994 Interstate Banking and Branch Efficiency Act. Under the rubric of "more efficient banking" a Darwinian survival of the biggest ensued. They were by no means the fittest. The consolidation was to have significant consequences a decade or so later as securitization exploded in scale beyond the banks’ wildest imagination.J.P.Morgan blazes the trailIn 1995, well into the Clinton-Rubin era, Alan Greenspan’s former bank, J.P. Morgan, introduced an innovation that was to revolutionize banking over the next decade.

Blythe Masters, a 34-year old Cambridge University graduate hired by the bank, developed the first Credit Default Swaps, a financial derivative instrument that ostensibly let a bank insure against loan default; and Collateralized Debt Obligations, bonds issued against a mixed pool of assets, a kind of credit derivative giving exposure to a large number of companies in a single instrument. Their attraction was that it was all off the bank’s own books, hence away from the Basle Accord’s 8% capital rules. The goal was to increase bank returns while eliminating the risk, a kind of "having your cake and eating it too," something which in the real world can only be very messy.J.P.Morgan thereby paved the way to transform US banking away from traditional commercial lenders to traders of credit, in effect, into securitizers.

The new idea was to enable the banks to shift risks off their balance sheets by pooling their loans and remarketing them as securities, while buying default insurance, Credit Default Swaps, after syndicating the loans for their clients. It was to prove a staggering development, soon to hit volumes measured in the trillions for the banks. By the end of 2007 there were an estimated $45,000 billion worth of Credit Default Swap contracts out there, giving bondholders the illusion of security. That illusion, however, was built on bank risk models of default assumptions which are not public and, if like other such risk models, were wildly optimistic. Yet the mere existence of the illusion was sufficient to lead the major banks of the world, lemming-like, into buying mortgage bonds collateralized or backed by streams of mortgage payments from unknown credit quality, and to accept at face value a Moody’s or Standard & Poors AAA rating. Just as Greenspan as new Fed chairman turned to his old cronies at J.P. Morgan when he wanted to grant a loophole to the strict Glass-Steagall Act in 1987, and as he turned to J.P. Morgan to covertly work with the Fed to buy derivatives on the Chicago MMI stock index to artificially manipulate a recovery from the October 1987 crash, so the Greenspan Fed worked with J.P. Morgan and a handful of other trusted friends on Wall Street to support the launch of securitization in the 1990’s, as it became clear what the staggering potentials were for the banks who were first and who could shape the rules of the new game, the New Finance. It was J.P. Morgan & Co. that led the march of the big money center banks beginning 1995 away from traditional customer bank lending towards the pure trading of credit and of credit risk. The goal was to amass huge fortunes for the bank’s balance sheet without having to carry the risk on the bank’s books, an open invitation to greed, fraud and ultimate financial disaster.

Almost every major bank in the world, from Deutsche Bank to UBS to Barclays to Royal Bank of Scotland to Societe Generale soon followed like eager blind lemmings. None however came close to the handful of US banks which came to create and dominate the new world of securitization after 1995, as well as of derivatives issuance. The banks, led by J.P. Morgan, first began to shift credit risk off the bank balance sheets by pooling credits and remarketing portfolios, buying default protection after syndicating loans for clients. The era of New Finance had begun. Like every major "innovation" in finance, it began slowly. Very soon after, the new securitizing banks such as J.P. Morgan began to create portfolios of debt securities, then to package and sell off tranches based on default probabilities. "Slice and dice" was the name of the new game, to generate revenue for the issuing underwriting bank, and to give "customized risk to return" results for investors.

Soon Asset Backed Securities, Collateralized Debt Securities, even emerging market debt were being bundled and sold off in tranches.On November 2, 1999, only ten days before Bill Clinton signed the Act repealing Glass-Steagall, thereby opening the doors for money center banks to acquire brokerage business, investment banks, insurance companies and a variety of other financial institutions without restriction, Alan Greenspan turned his attention to encouraging the process of bank securitization of home mortgages. In an address to America's Community Bankers, a regional banking organization, at a conference on mortgage markets, the Fed chairman stated: The recent rise in the homeownership rate to over 67 percent in the third quarter of this year owes, in part, to the healthy economic expansion with its robust job growth. But part of the gains have also come about because innovative lenders, like you, have created a far broader spectrum of mortgage products and have increased the efficiency of loan originations and underwriting.

Ongoing progress in streamlining the loan application and origination process and in tailoring mortgages to individual homebuyers is needed to continue these gains in homeownership…Community banking epitomizes the flexibility and resourcefulness required to adjust to, and exploit, demographic changes and technological breakthroughs, and to create new forms of mortgage finance that promote homeownership. As for the Federal Reserve, we are striving to assist you by providing a stable platform for business generally and for housing and mortgage activity. (emphasis mine—w.e.) Already on March 8 of that same year, 1999, Greenspan addressed the Mortgage Bankers’ Association where he strongly pushed real estate mortgage backed securitization as the wave of the future. He told the bankers there, "Greater stability in the supply of mortgage credit has been accompanied by the unbundling of the various aspects of the mortgage process. Some institutions act as mortgage bankers, screening applicants and originating loans. Other parties service mortgage loans, a function for which efficiencies seem to be gained by large-scale operations. Still others, mostly with stable funding bases, provide the permanent financing of mortgages through participation in mortgage pools. Beyond this, some others slice cash flows from mortgage pools into special tranches that appeal to a wider group of investors.

In the process, mortgage-backed securities outstanding have grown to a staggering $2.4 trillion…, automated underwriting software is being increasingly employed to process a rapidly rising share of mortgage applications. Not only does this technology reduce the time it takes to approve a mortgage application, it also offers a consistent way of evaluating applications across a number of different attributes, and helps to ensure that the down-payment and income requirements and interest rates charged more accurately reflect credit risks. These developments enabled the industry to handle the extraordinary volume of mortgages last year with ease, especially compared to the strains that had been experienced during refinancing waves in the past.

One key benefit of the new technology has been an increased ability to manage risk (sic). Looking forward, the increased use of automated underwriting and credit scoring creates the potential for low-cost, customized mortgages with risk-adjusted pricing. By tailoring mortgages to the needs of individual borrowers, the mortgage banking industry of tomorrow will be better positioned to serve all corners of the diverse mortgage market. (emphasis mine-w-e-)." But only after the Fed punctured the dot.com stock bubble in 2000 and after the Greenspan Fed dropped Fed funds interest rates drastically to lows not seen on such a scale since the 1930’s Great Depression, did asset securitization literally explode into a multi-trillion dollar enterprise.Securitization—the Un-Real DealBecause the very subject of securitization was embedded with such complexity no one, not even its creators fully understood the diffusion of risk, let alone the simultaneous concentration of systemic risk.

Securitization was a process in which assets were acquired by some entity, sometimes called a Special Purpose Vehicle (SPV) or Special Investment Vehicle (SIV). At the SIV the diverse home mortgages, let’s say, were assembled into pools or bundles as they were termed. A specific pool, say, of home mortgage receivables, now took life in the new form of a bond, an asset backed bond, in this case a mortgage backed security. The securitized bond was backed by the cash flow or value of the underlying assets. That little step involved a complex leap of faith to grasp. It was based on illusory collateral backing whose real worth, as is now dramatically clear to all banks everywhere, was unknown and unknowable.

Already at this stage of the process the legal title to the home mortgage of a specific home in the pool is legally ambiguous, as I pointed out in Part I. Who in the chain actually has in his or her physical possession the real, "wet signature" mortgage deed to the hundreds and thousands of homes in collateral? Now lawyers will have a field day for years to come sorting out Wall Street’s brilliant opacities. Securitization usually applied to assets that were illiquid, that is ones that were not easily sold, hence it became common in real estate. And US real estate today is one of the world’s most illiquid markets. Everyone wants out and few want in, at least not at these prices. Securitization was applied to pools of leased property, to residential mortgages, home equity loans, on student loans, credit card or other debts. In theory all assets could be securitized as long as they were associated with a steady and predictable cash flow. That was the theory. In practice, it allowed US banks to skirt tougher new Basle Capital Adequacy Rules, Basle II, designed explicitly in part to close the loophole in Basle I that let US and other banks shove loans wholesale into off-the-books special entities called Special Investment Vehicles or SIVs.

Financial Alchemy: Where the fly hits the soup Securitization, thus, converted illiquid assets into liquid assets. It did this, in theory, by pooling, underwriting and selling the ownership claims to the payment flows, as asset-backed securities (ABS). Mortgage-backed securities were one form of ABS, the largest by far since 2001.Here’s where the fly hit the soup.With the US housing market beginning back in 2006 in sharp downturn and rates on Adjustable Rate Mortgages (ARMs) moving sharply higher across the United States, hundreds of thousands of homeowners were being forced to simply "walk away" from their now un-payable mortgages, or be foreclosed on by one or another party in the complex securitization chain, very often illegally, as an Ohio judge recently ruled. Home foreclosures for 2007 were 75% higher than in 2006 and the process is just beginning, in what will be a real estate disaster to rival or likely exceed that of the Great Depression.

In California foreclosures were up an eye-popping 421% over the year before. That growing process of mortgage defaults in turn left gaping holes in the underlying cash payment stream intended to back up the newly issued Mortgage Backed Securities. Because the entire system was totally opaque, no one, least of all the banks holding this paper, knew what was really the case, what asset backed security was good, or what bad. As nature abhors a vacuum, bankers and investors, especially global investors, abhor uncertainty in financial assets they hold. They treat it like toxic waste. The architects of this New Finance, based on the securitization of home mortgages, however, found that bundling hundreds of disparate mortgages of varying credit quality from across the USA into a big MBS bond wasn’t enough. If the Wall Street MBS underwriters were to be able to sell their new MBS bonds to the well-endowed pension funds of the world, they needed some extra juice. Most pension funds are restricted to buying only bonds rated AAA, highest quality. But how could a rating agency rate a bond which was composed of a putative spream of mortgage payments from 1,000 different home mortgages across the USA? They couldn’t send an examiner into every city to look at the home and interview its occupant.

Who could stand behind the bond? Not the mortgage issuing bank. They sold the mortgage immediately, at a discount, to get it off their books. Not the Special Purpose Vehicle, they were just there to keep the transactions separate from the mortgage underwriting bank.No something else was needed. Deux Maxima! in stepped the dauntless Big Three (actually Big Two) Credit Raters, the rating agencies.

The ABS Rating GameNever ones to despair when confronted by new obstacles, clever minds at J.P. Morgan, Morgan Stanley, Goldman Sachs, Citigroup, Merrill Lynch, Bear Stearns and a myriad of others in the game of securitizing the exploding volumes of home mortgages after 2002, turned to the Big Three rating agencies to get their prized AAA. This was necessary because, unlike issuance of a traditional corporate bond, say by GE or Ford, where a known, physical bricks ‘n mortar blue-chip company with a long-term credit history stood behind the bond, with Asset Backed Securities no corporation stood behind an ABS. Just a lot of promises on mortgage contracts across America. The ABS or bond was, if you will, a "stand alone" artificial creation, whose legality under US law has been called into question.

That meant a rating by a credit rating agency was essential to make the bond credible, or at least give it the "appearance of credibility," as we now realize from the unraveling of the present securitization debacle.At the very heart of the new financial architecture that was facilitated by the Greenspan Fed and successive US Administrations over the past two decades and more, was a semi-monopoly held by three de facto unregulated private companies who operated to provide credit ratings for all securitized assets, of course for very nice fees.Three rating agencies dominated the global business of credit ratings, the largest in the world being Moody’s Investors Service. In the boom years of securitization, Moody’s regularly reported well over a 50% profit on gross rating revenues. The other two in the global rating cartel were Standard & Poor's and Fitch Ratings. All three were American companies intimately tied into the financial sinews of Wall Street and US finance. The fact that the world’s rating business was a de facto US monopoly was no accident. It was planned that way, as a main pillar of the financial domination of New York. The control of the credit rating world was for the US global power projection almost tantamount to US domination in nuclear weapons as a power factor. Former Secretary of Labor, economist Robert Reich, identified a core issue of the raters, their built-in conflict of interest. Reich noted, "Credit-rating agencies are paid by the same institutions that package and sell the securities the agencies are rating. If an investment bank doesn't like the rating, it doesn't have to pay for it. And even if it likes the rating, it pays only after the security is sold. Get it? It's as if movie studios hired film critics to review their movies, and paid them only if the reviews were positive enough to get lots of people to see the movie."Reich went on, "Until the collapse, the result was great for credit-rating agencies.

Profits at Moody's more than doubled between 2002 and 2006. And it was a great ride for the issuers of mortgage-backed securities. Demand soared because the high ratings had expanded the market. Traders didn't examine anything except the ratings…a multibillion-dollar game of musical chairs. And then the music stopped." That put three global rating agencies—Moody’s, S&P, and Fitch—directly under the investigative spotlight. They were de facto the only ones in the business of rating the collateralized securities—Collateralized Mortgage Obligations, Collateralized Debt Obligations, Student Loan-backed Securities, Lottery Winning-backed Securities and a myriad of others—for Wall Street and other banks. According to an industry publication, Inside Mortgage Finance, some 25% of the $900 billion in sub-prime mortgages issued over the past two years were given top AAA marks by the rating agencies. That comes to more than $220 billion of sub-prime mortgage securities carrying the highest AAA rating by either Moody’s, Fitch or Standard & Poors. That is now coming unwound as home mortgage defaults snowball across the land.Here the scene got ugly. Their model assumptions on which they gave their desired AAA seal of approval was a proprietary secret. "Trust us."

According to an economist working within the US rating business, who had access to the actual model assumptions used by Moody’s, S&P and Fitch to determine whether a mortgage pool with sub-prime mortgages got a AAA or not, they used historical default rates from a period of the lowest interest rates since the Great Depression, in other words a period with abnormally low default rates, to declare by extrapolation that the sub-prime paper was and would be into the distant future of AAA quality.

 The risk of default on even a sub-prime mortgage, so went the argument, "was historically almost infinitesimal." That AAA rating from Moody’s in turn allowed the Wall Street investment houses to sell the CMOs to pension funds, or just about anybody seeking "yield enhancement" but with no risk. That was the theory.As Oliver von Schweinitz pointed out in a very timely book, Rating Agencies: Their Business, Regulation and Liability, "Securitizations without ratings are unthinkable." And because of the special nature of asset backed securitizations of mortgage loans, von Schweinitz points out, those ABS, "although being standardized, are one-time events, whereas other issuances (corporate bonds, government bonds) generally affect repeat players. Repeat players have less incentive to cheat than ‘one time issuers.’"

Put the other way, there is more incentive to cheat, to commit fraud with asset backed securities than with traditional bond issuance, a lot more.

 Moody’s, S&P’s unique status

The top three rating agencies under US law enjoy an almost unique status. They are recognized by the Government’s Securities and Exchange Commission (SEC) as Nationally Recognized Statistical Rating Organizations (NRSROs). There exist only four in the USA today. The fourth, a far smaller Canadian rater, is Dominion Bond Rating Service Ltd. Essentially, the top three hold a quasi monopoly on the credit rating business, and that, worldwide.

 The only US law regulating rating agencies, the Credit Agency Reform Act of 2006 is a toothless law, passed in the wake of the Enron collapse. Four days before the collapse of Enron, the rating agencies gave Enron an "investment grade" rating, and a shocked public called for some scrutiny of the raters. The effect of the Credit Agency Reform Act of 2006 was null on the de facto rating monopoly of S&P, Moody’s and Fitch.

The European Union, also reacting to Enron and to the similar fraud of the Italian company Parmalat, called for an investigation of whether the US rating agencies rating Parmalat has conflicts of interest, how transparent their methodologies were (not at all) and the lack of competition.

After several years of "study" and presumably a lot of behind-the-scenes from big EU banks involved in the securitization game, the EU Commission announced in 2006 it would only "continue scrutiny" (sic) of the rating agencies. Moody’s and S&P and Fitch dominate EU ratings as well. There are no competitors.

 It’s a free country, ain’t it?The raters under US law were not liable for their ratings despite the fact that investors worldwide depend often exclusively on the AAA or other rating by Moody’s or S&P as validation of creditworthiness, most especially in securitized assets. The Credit Agency Reform Act of 2006 in no way dealt with liability of the rating agencies. It was in this regard a worthless paper. It was the only law dealing with the raters at all.As von Schweinitz pointed out, "Rule 10b-5 of the Securities and Exchange Act of 1934 is probably the most important basis for suing on the grounds of capital market fraud." That rule stated "It shall be unlawful for any person…to make any untrue statement of a material fact." That sounded like something concrete. But then the Supreme Court affirmed in a 2005 ruling, Dura Pharmaceuticals, ratings are not "statements of a material fact" as required under Rule 10b-5. The ratings given by Moody’s or S&P or Fitch are rather, "merely an opinion." They are thereby protected as "privileged free speech," under the US Constitution’s First Amendment.

Moody’s or S&P could say any damn thing about Enron or Parmalat or sub-prime securities it wanted to. It’s a free country ain’t it? Doesn’t everyone have a right to their opinion?

 US courts have ruled in ruling after ruling that financial markets are "efficient" and hence, markets will detect any fraud in a company or security and price it accordingly…eventually. No need to worry about the raters then… That was the "self-regulation" that Alan Greenspan apparently had in mind when he repeatedly intervened to oppose any regulation of the emerging asset securitization revolution.

The securitization revolution was all underwritten by a kind of "hear no evil, see no evil" US government policy that said, what is "good for the Money Trust is good for the nation." It was a perverse twist on the already perverse saying from the 1950’s of then General Motors chief, Charles E. Wilson, "what’s good for General Motors is good for America."

 Monoline insurance: Viagra for securitization?For those CMO sub-prime securities that fell short of AAA quality,there was also another crucial fix needed. The minds on Wall Street came up with an ingenious solution.

The issuer of the Mortgage Backed Security could take out what was known as Monoline insurance. Monoline insurance for guaranteeing against default in asset backed securities was another spin-off of the Greenspan securitization revolution.

 Although monoline insurance had begun back in the early 1970’s as a guarantee for municipal bonds, it was the Greenspan securitization revolution which gave it its leap into prominence.

As their industry association stated, "The monoline structure ensures that our full attention is given to adding value to our capital market customers." Add value they definitely did. As of December 2007, it was reliably estimated that the monoline insurers, who call themselves "financial guarantors," eleven poorly capitalized, loosely regulated monoline insurers, all based in New York and regulated by that state’s insurance regulator, had given their insurance guarantee to enable the AAA rated securitization of over $2.4 trillion worth of Asset Backed Securities. (emphasis mine—f.w.e.).

 Monoline insurance became a very essential element in the fraud-ridden Wall Street scam known as securitization. By paying a certain fee, a specialized (hence the term monoline) insurance company would insure or guarantee a pool of sub-prime mortgages in event of an economic downturn or recession in which the poor sub-prime homeowner could not service his monthly mortgage payments.To quote from the official website of the monoline trade association, "The Association of Financial Guaranty Insurers, AFGI, is the trade association of the insurers and re-insurers of municipal bonds and asset-backed securities. A bond or other security insured by an AFGI member has the unconditional and irrevocable guarantee that interest and principal will be paid on time and in full in the event of a default." Now they regret ever having promised that as sub-prime mortgage resets, growing recession and mortgage defaults are presenting hyperbolic insurance demands on the tiny, poorly capitalized monolines.

The main monoline insurers were hardly household names: ACA Financial Guaranty Corp., Ambac Assurance, Assured Guaranty Corp. BluePoint Re Limited, CIFG, Financial Guaranty Insurance Company, Financial Security Assurance, MBIA Insurance Corporation, PMI Guaranty Co., Radian Asset Assurance Inc., RAM Reinsurance Company and XL Capital Assurance.

 A cautious reader might ask the question, "Who insures these eleven monoline insurers who have guaranteed billions indeed trillions in payment flows over the past five or so years of the ABS financial revolution?"

No one, yet, was the short answer. They state, "Eight AFGI member firms carry a Triple-A claims paying ability rating and two member firms carry a Double-A claims paying ability rating." Moody’s, Standard & Poors and Fitch gave the AAA or AA ratings.

 By having a guarantee from a bond insurer with an AAA credit rating, the cost of borrowing was less than it would normally be and the number of investors willing to buy such bonds was greater.

For the monolines, guaranteeing such bonds seemed risk-free, with average default rates running at a fraction of 1 per cent in 2003-2006. As a result, monolines leveraged their assets to build their books, and it was not being uncommon for a monoline to have insured risks 100 to 150 times the size of its capital base. Until recently, Ambac had capital of $5.7 billion against guarantees of $550 billion.

 In 1998, the NY State Insurance Superintendent's office, the only regulator of monolines, agreed to allow monolines to sell credit-default swaps (CDSs) on asset-backed securities such as mortgage backed securities. Separate shell companies would be established, through which CDSs could be issued to banks for mortgage backed securities.The move into insuring securitized bonds was spectacularly lucrative for the monolines. MBIA’s premiums rose from $235m in 1998 to $998m in 2007. Year on year premiums last year increased 140%. Then along came the US sub-prime mortgage crisis, and the music stopped dead for the monolines, dead.

As the mortgages within bonds from the banks defaulted - sub-prime mortgages written in 2006 were already defaulting at a rate of 20 per cent by January 2008—the monolines were forced to step in and cover the payments.

 On February 3, MBIA revealed $3.5 billion in writedowns and other charges in three months alone, leading to a quarterly loss of $2.3 billion. That was likely just the tip of a very cold iceberg. Insurance analyst Donald Light remarked, "The answer is no one knows," when asked what the potential downside loss was. "I don't think we will know to perhaps the third or fourth quarter of 2008."

Credit ratings agencies have begun downgrading the monolines, taking away their prized AAA ratings, which means a monoline could no longer write new business, and the bonds it guarantees no longer would hold a AAA rating.

 To date, the only monoline to receive downgrades from two agencies - usually required for such a move to impact on a company - is FGIC, cut by both Fitch and S&P. Ambac, the second largest monoline, has been cut to AA by Fitch, with the other monolines on a variety of different potential warnings.

The rating agencies did "computer simulated stress tests" to decide if the monolines could "pay claims at a default level comparable to that of the Great Depression." How much could the monoline insurers handle in a real crisis? They claimed, "Our claims-paying resources available to back members' guarantees…totals more than $34 billion."

 That $34 billion was a drop in what will rapidly over the course of 2008 appear to be a bottomless bucket. It was estimated that in the Asset Backed Securities market roughly one-third of all transactions were "wrapped" or insured by AAA monolines. Investors demanded surety wraps for volatile collateral or that without a long performance history.

According to the Securities Industry and Financial Markets Association, a US trade group, at the end of 2006 there was a total of some $3.6 trillion worth of Asset Backed Securities in the United States, including of home mortgages, prime and sub-prime, of home equity loans, credit cards, student loans, car loans, equipment leasing and the like. Fortunately not all $3.6 trillion of securitizations are likely to default, and not all at once. But the AGFI monoline insurers had insured $2.4 trillion of that mountain of asset backed securities over the past several years. Private analysts estimated by early February 2008 that the potential insurer payout risks, under optimistic assumptions, could exceed $200 billions. A taxpayer bailout of that scale in an election year would be an interesting voter sell.

 Off the books

The entire securitization revolution allowed banks to move assets off their books into unregulated opaque vehicles. They sold the mortgages at a discount to underwriters such as Merrill Lynch, Bear Stearns, Citigroup, and similar financial securitizers. They then in turn sold the mortgage collateral to their own separate Special Investment Vehicle or SIV as they were known. The attraction of a stand-alone SIV was that they and their potential losses were theoretically at least, isolated from the main underwriting bank. Should things ever, God forbid, run amok with the various Asset Backed Securities held by the SIV, only the SIV would suffer, not Citigroup or Merrill Lynch.

The dubious revenue streams from sub-prime mortgages and similar low quality loans, once bundled into the new Collateralized Mortgage Obligations or similar securities, then often got an injection of Monoline insurance, a kind of financial Viagra for junk quality mortgages such as the NINA (No Income, No Assets) or "Liars’ Loans," or so-called stated-income loans, that were commonplace during the colossal Greenspan Real Estate economy up until July 2007.

 According to the Mortgage Brokers’ Association for Responsible Lending, a consumer protection group, by 2006 Liars’ Loans were a staggering 62% of all USA mortgage originations. In one independent sampling audit of stated-income mortgage loans in Virginia in 2006, the auditors found, based on IRS records that almost 60% of the stated-income loans were exaggerated by more than 50%. Those stated-income chickens are now coming home to roost or far worse. The default rates on those Liars’ Loans, which is now sweeping across the entire US real estate market, makes the waste problems of Tyson Foods factory chicken farms look like a wonderland.

None of that would have been possible without securitization, without the full backing of the Greenspan Fed, without the repeal of Glass-Steagall, without monoline insurance, without the collusion of the major rating agencies, and the selling on of that risk by the mortgage-originating banks to underwriters who bundled them, rated and insured them as all AAA.

 In fact the Greenspan New Finance revolution literally opened the floodgates to fraud on every level from home mortgage brokers to lending agencies to Wall Street and London securitization banks to the credit rating agencies. Leaving oversight of the new securitized assets, hundreds of billions of dollars worth of them, to private "self-regulation" between issuing banks like Bear Stearns, Merrill Lynch or Citigroup and their rating agencies, was tantamount to pouring water on a drowning man. In Part V we discuss the consequences of the grand design in New Finance.

F. William Engdahl is the author of A Century of War: Anglo-American Oil Politics and the New World Order (Pluto Press) and Seeds of Destruction: The Hidden Agenda of Genetic Manipulation 

The most troubling thing about this piece is that it is quite plausible.

Of Roubini's twelve steps, the first eight are economic and financial market conditions that are putting severe stress on the financial system; the last four describe the resulting crisis. Since the piece is long, I've edited down the sections that cover issues that are likely to be most familiar to readers.

From RGE Monitor:

Why did the Fed ease the Fed Funds rate by a whopping 125bps in eight days this past January?.... the flow of bad macro news in mid-January did not justify, by itself, such a radical inter-meeting emergency Fed action followed by another cut at the formal FOMC meeting.

To understand the Fed actions one has to realize that there is now a rising probability of a “catastrophic” financial and economic outcome, i.e. a vicious circle where a deep recession makes the financial losses more severe and where, in turn, large and growing financial losses and a financial meltdown make the recession even more severe...

That is the reason the Fed had thrown all caution to the wind – after a year in which it was behind the curve and underplaying the economic and financial risks – and has taken a very aggressive approach to risk management....

To understand the risks that the financial system is facing today I present the “nightmare” or “catastrophic” scenario that the Fed and financial officials around the world are now worried about. Such a scenario – however extreme – has a rising and significant probability of occurring. Thus, it does not describe a very low probability event but rather an outcome that is quite possible.

Start first with the recession that is now enveloping the US economy. Let us assume – as likely - that this recession – that already started in December 2007 - will be worse than the mild ones – that lasted 8 months – that occurred in 1990-91 and 2001. The recession of 2008 will be more severe for several reasons: first, we have the biggest housing bust in US history with home prices likely to eventually fall 20 to 30%; second, because of a credit bubble that went beyond mortgages and because of reckless financial innovation and securitization the ongoing credit bust will lead to a severe credit crunch; third, US households – whose consumption is over 70% of GDP - have spent well beyond their means for years now piling up a massive amount of debt, both mortgage and otherwise; now that home prices are falling and a severe credit crunch is emerging the retrenchment of private consumption will be serious and protracted. So let us suppose that the recession of 2008 will last at least four quarters and, possibly, up to six quarters. What will be the consequences of it?

Here are the twelve steps or stages of a scenario of systemic financial meltdown associated with this severe economic recession…

First, this is the worst housing recession in US history and there is no sign it will bottom out any time soon. At this point it is clear that US home prices will fall between 20% and 30% from their bubbly peak; that would wipe out between $4 trillion and $6 trillion of household wealth..... a 30% fall in home values would imply that over 10 million households would have negative equity in their homes and would have a big incentive to use “jingle mail” (i.e. default, put the home keys in an envelope and send it to their mortgage bank)....

Second, losses for the financial system from the subprime disaster are now estimated to be as high as $250 to $300 billion. But the financial losses will not be only in subprime mortgages and the related RMBS and CDOs. They are now spreading to near prime and prime mortgages as the same reckless lending practices in subprime (no down-payment, no verification of income, jobs and assets (i.e. NINJA or LIAR loans), interest rate only, negative amortization, teaser rates, etc.) were occurring across the entire spectrum of mortgages; about 60% of all mortgage origination since 2005 through 2007 had these reckless and toxic features. So this is a generalized mortgage crisis and meltdown, not just a subprime one. And losses among all sorts of mortgages will sharply increase as home prices fall sharply and the economy spins into a serious recession. Goldman Sachs now estimates total mortgage credit losses of about $400 billion; but the eventual figures could be much larger if home prices fall more than 20%. Also, the RMBS and CDO markets for securitization of mortgages – already dead for subprime and frozen for other mortgages - remain in a severe credit crunch, thus reducing further the ability of banks to originate mortgages. The mortgage credit crunch will become even more severe.

Also add to the woes and losses of the financial institutions the meltdown of hundreds of billions of off balance SIVs and conduits; this meltdown and the roll-off of the ABCP market has forced banks to bring back on balance sheet these toxic off balance sheet vehicles.... And because of securitization the securitized toxic waste has been spread from banks to capital markets and their investors in the US and abroad, thus increasing – rather than reducing systemic risk – and making the credit crunch global.

Third, the recession will lead – as it is already doing – to a sharp increase in defaults on other forms of unsecured consumer debt: credit cards, auto loans, student loans..... As the Fed loan officers survey suggest the credit crunch is spreading throughout the mortgage market and from mortgages to consumer credit, and from large banks to smaller banks.

Fourth, while there is serious uncertainty about the losses that monolines will undertake on their insurance of RMBS, CDO and other toxic ABS products, it is now clear that such losses are much higher than the $10-15 billion rescue package that regulators are trying to patch up..... The monolines should be downgraded as no private rescue package – short of an unlikely public bailout – is realistic or feasible given the deep losses of the monolines on their insurance of toxic ABS products.

Next, the downgrade of the monolines will lead to another $150 of writedowns on ABS portfolios for financial institutions that have already massive losses. It will also lead to additional losses on their portfolio of muni bonds. The downgrade of the monolines will also lead to large losses – and potential runs – on the money market funds that invested in some of these toxic products. The money market funds that are backed by banks or that bought liquidity protection from banks against the risk of a fall in the NAV may avoid a run but such a rescue will exacerbate the capital and liquidity problems of their underwriters. The monolines’ downgrade will then also lead to another sharp drop in US equity markets that are already shaken by the risk of a severe recession and large losses in the financial system.

Fifth, the commercial real estate loan market will soon enter into a meltdown similar to the subprime one....

Sixth, it is possible that some large regional or even national bank that is very exposed to mortgages, residential and commercial, will go bankrupt. Thus some big banks may join the 200 plus subprime lenders that have gone bankrupt. This, like in the case of Northern Rock, will lead to depositors’ panic and concerns about deposit insurance. The Fed will have to reaffirm the implicit doctrine that some banks are too big to be allowed to fail. But these bank bankruptcies will lead to severe fiscal losses of bank bailout and effective nationalization of the affected institutions. Already Countrywide – an institution that was more likely insolvent than illiquid – has been bailed out with public money via a $55 billion loan from the FHLB system, a semi-public system of funding of mortgage lenders. Banks’ bankruptcies will add to an already severe credit crunch.

Seventh, the banks losses on their portfolio of leveraged loans are already large and growing. The ability of financial institutions to syndicate and securitize their leveraged loans – a good chunk of which were issued to finance very risky and reckless LBOs – is now at serious risk. And hundreds of billions of dollars of leveraged loans are now stuck on the balance sheet of financial institutions at values well below par (currently about 90 cents on the dollar but soon much lower)..... And add to this problem the fact that some actual large LBOs will end up into bankruptcy as some of these corporations taken private are effectively bankrupt in a recession and given the repricing of risk; convenant-lite and PIK toggles may only postpone – not avoid – such bankruptcies and make them uglier when they do eventually occur....

Eighth, once a severe recession is underway a massive wave of corporate defaults will take place. In a typical year US corporate default rates are about 3.8% (average for 1971-2007); in 2006 and 2007 this figure was a puny 0.6%. And in a typical US recession such default rates surge above 10%. Also during such distressed periods the RGD – or recovery given default – rates are much lower, thus adding to the total losses from a default. Default rates were very low in the last two years because of a slosh of liquidity, easy credit conditions and very low spreads (with junk bond yields being only 260bps above Treasuries until mid June 2007). But now the repricing of risk has been massive: junk bond spreads close to 700bps, iTraxx and CDX indices pricing massive corporate default rates and the junk bond yield issuance market is now semi-frozen. While on average the US and European corporations are in better shape – in terms of profitability and debt burden – than in 2001 there is a large fat tail of corporations with very low profitability and that have piled up a mass of junk bond debt that will soon come to refinancing at much higher spreads. Corporate default rates will surge during the 2008 recession and peak well above 10% based on recent studies. And once defaults are higher and credit spreads higher massive losses will occur among the credit default swaps (CDS) that provided protection against corporate defaults. Estimates of the losses on a notional value of $50 trillion CDS against a bond base of $5 trillion are varied (from $20 billion to $250 billion with a number closer to the latter figure more likely). Losses on CDS do not represent only a transfer of wealth from those who sold protection to those who bought it. If losses are large some of the counterparties who sold protection – possibly large institutions such as monolines, some hedge funds or a large broker dealer – may go bankrupt leading to even greater systemic risk as those who bought protection may face counterparties who cannot pay.

Ninth, the “shadow banking system” (as defined by the PIMCO folks) or more precisely the “shadow financial system” (as it is composed by non-bank financial institutions) will soon get into serious trouble. This shadow financial system is composed of financial institutions that – like banks – borrow short and in liquid forms and lend or invest long in more illiquid assets. This system includes: SIVs, conduits, money market funds, monolines, investment banks, hedge funds and other non-bank financial institutions. All these institutions are subject to market risk, credit risk (given their risky investments) and especially liquidity/rollover risk as their short term liquid liabilities can be rolled off easily while their assets are more long term and illiquid. Unlike banks these non-bank financial institutions don’t have direct or indirect access to the central bank’s lender of last resort support as they are not depository institutions. Thus, in the case of financial distress and/or illiquidity they may go bankrupt because of both insolvency and/or lack of liquidity and inability to roll over or refinance their short term liabilities. Deepening problems in the economy and in the financial markets and poor risk managements will lead some of these institutions to go belly up: a few large hedge funds, a few money market funds, the entire SIV system and, possibly, one or two large and systemically important broker dealers. Dealing with the distress of this shadow financial system will be very problematic as this system – stressed by credit and liquidity problems - cannot be directly rescued by the central banks in the way that banks can.

Tenth, stock markets in the US and abroad will start pricing a severe US recession – rather than a mild recession – and a sharp global economic slowdown. The fall in stock markets – after the late January 2008 rally fizzles out – will resume as investors will soon realize that the economic downturn is more severe, that the monolines will not be rescued, that financial losses will mount, and that earnings will sharply drop in a recession not just among financial firms but also non financial ones. A few long equity hedge funds will go belly up in 2008 after the massive losses of many hedge funds in August, November and, again, January 2008. Large margin calls will be triggered for long equity investors and another round of massive equity shorting will take place. Long covering and margin calls will lead to a cascading fall in equity markets in the US and a transmission to global equity markets. US and global equity markets will enter into a persistent bear market as in a typical US recession the S&P500 falls by about 28%.

Eleventh, the worsening credit crunch that is affecting most credit markets and credit derivative markets will lead to a dry-up of liquidity in a variety of financial markets, including otherwise very liquid derivatives markets. Another round of credit crunch in interbank markets will ensue triggered by counterparty risk, lack of trust, liquidity premia and credit risk. A variety of interbank rates – TED spreads, BOR-OIS spreads, BOT – Tbill spreads, interbank-policy rate spreads, swap spreads, VIX and other gauges of investors’ risk aversion – will massively widen again. Even the easing of the liquidity crunch after massive central banks’ actions in December and January will reverse as credit concerns keep interbank spread wide in spite of further injections of liquidity by central banks.

Twelfth, a vicious circle of losses, capital reduction, credit contraction, forced liquidation and fire sales of assets at below fundamental prices will ensue leading to a cascading and mounting cycle of losses and further credit contraction. In illiquid market actual market prices are now even lower than the lower fundamental value that they now have given the credit problems in the economy. Market prices include a large illiquidity discount on top of the discount due to the credit and fundamental problems of the underlying assets that are backing the distressed financial assets. Capital losses will lead to margin calls and further reduction of risk taking by a variety of financial institutions that are now forced to mark to market their positions. Such a forced fire sale of assets in illiquid markets will lead to further losses that will further contract credit and trigger further margin calls and disintermediation of credit. The triggering event for the next round of this cascade is the downgrade of the monolines and the ensuing sharp drop in equity markets; both will trigger margin calls and further credit disintermediation.

Based on estimates by Goldman Sachs $200 billion of losses in the financial system lead to a contraction of credit of $2 trillion given that institutions hold about $10 of assets per dollar of capital. The recapitalization of banks sovereign wealth funds – about $80 billion so far – will be unable to stop this credit disintermediation – (the move from off balance sheet to on balance sheet and moves of assets and liabilities from the shadow banking system to the formal banking system) and the ensuing contraction in credit as the mounting losses will dominate by a large margin any bank recapitalization from SWFs. A contagious and cascading spiral of credit disintermediation, credit contraction, sharp fall in asset prices and sharp widening in credit spreads will then be transmitted to most parts of the financial system. This massive credit crunch will make the economic contraction more severe and lead to further financial losses. Total losses in the financial system will add up to more than $1 trillion and the economic recession will become deeper, more protracted and severe.

A near global economic recession will ensue as the financial and credit losses and the credit crunch spread around the world. Panic, fire sales, cascading fall in asset prices will exacerbate the financial and real economic distress as a number of large and systemically important financial institutions go bankrupt. A 1987 style stock market crash could occur leading to further panic and severe financial and economic distress. Monetary and fiscal easing will not be able to prevent a systemic financial meltdown as credit and insolvency problems trump illiquidity problems. The lack of trust in counterparties – driven by the opacity and lack of transparency in financial markets, and uncertainty about the size of the losses and who is holding the toxic waste securities – will add to the impotence of monetary policy and lead to massive hoarding of liquidity that will exacerbates the liquidity and credit crunch.

In this meltdown scenario US and global financial markets will experience their most severe crisis in the last quarter of a century.

Can the Fed and other financial officials avoid this nightmare scenario that keeps them awake at night? The answer to this question – to be detailed in a follow-up article – is twofold: first, it is not easy to manage and control such a contagious financial crisis that is more severe and dangerous than any faced by the US in a quarter of a century; second, the extent and severity of this financial crisis will depend on whether the policy response – monetary, fiscal, regulatory, financial and otherwise – is coherent, timely and credible. I will argue – in my next article - that one should be pessimistic about the ability of policy and financial authorities to manage and contain a crisis of this magnitude; thus, one should be prepared for the worst, i.e. a systemic financial crisis.

Bush, CLINTON, Credit Crisis, credite Crisis, Crisis, Financial Crisis, Free trade, frihandel, kreditkrisen, Neoliberalism, nyliberalism, Structural Crisis, USA economy

By PAM MARTENSAmericans learned two new truths last week from the Bush Administration's version of Life's Little Instruction Book: if you're a Wall Street miscreant you're thrown a lifeline; if you're a Wall Street crime fighter you're thrown a land mine.In the first effort, the Feds effectively handed a Federal Reserve ATM card to JPMorgan to funnel your tax dollars to the teetering Bear Stearns brokerage firm to address counterparty risks that have been building for at least 4 years as the Feds snoozed.

ounterparty risk is the trillions of dollars of insurance contracts (credit default swaps and other derivatives) taken out by Wall Street firms on each others (counterparty) bonds, bundled mortgage and commercial debt (collateralized debt obligations). The firms have used unregulated over-the-counter contracts to perform this risk transfer alchemy and funded their own company, Markit Group Ltd., to take the place of a regulated exchange for price discovery.In the second effort, the Feds tapped the Department of Justice, Internal Revenue Service, U.S. Attorney's office in New York, FBI, five federal judges and a busy federal court to root out that Code Red threat to our national security: consensual sex.

The sex involved a prostitution ring and Democratic New York State Governor, Eliot Spitzer, who was savaged and forced to step down by an avenging media mob abundantly fed with well placed leaks from a suspiciously homogenous group called "anonymous law enforcement officials." Governor Spitzer, in his former role as New York State Attorney General, had taken the lead in rooting out Wall Street crimes against small investors because the Federal Reserve was preoccupied with lobbying to remove regulations on Wall Street's crime factory.As usual, the Feds handed the bill to the governed with no thought to the will of the governed.While mainstream media called the Bear Stearns bailout the first brokerage bailout since the Great Depression, in truth it was the second in seven months.

The first brokerage bailout came without all the media fanfare because it arrived not on the wings of a public announcement but in five pages of indecipherable Fed jargon addressed to the General Counsel of Citigroup.Here is the effective message sent by the Federal Reserve to Citigroup in its letter of August 20, 2007: now that we have allowed you to become both too big to fail and too big to bail by repealing the depression era investor-protection law known as the Glass-Steagall Act at your mere beckoning, we have to bend more rules to keep you afloat. So, for example, the rule that says the Federal Reserve is not allowed to lend to brokerages, just banks, from its discount window can be tweaked for you by lending up to $25 billion to you and then we'll let you lend it to your brokerage arm. The Federal Reserve Act rule that says a bank can't loan more than 10% of its capital stock and surplus to its brokerage affiliate, we'll let you go as high as about 30% and say it's in the public interest.By giving Citigroup an exemption from Rule 23A of the Federal Reserve Act, by allowing it to funnel up to $25 Billion from the Fed's discount window to its brokerage clients who were getting hit with margin calls, the Federal Reserve and Chairman Ben Bernanke telegraphed an incredibly dangerous message to global markets: we're just as unaccountable as Wall Street.

The Federal Reserve as enabler under Alan Greenspan created today's problem and today's Crony Fed under Ben Bernanke is killing off what's left of U.S. financial credibility. (I had barely finished typing these words on Monday, March 17, 2008, when a news alert came across my screen advising that the Federal Reserve was taking the breathtaking step of making direct loans to all brokerage firms which are primary dealers for Treasury securities.)The Federal Reserve is stumbling around in the dark and regularly bumping into the next bailout because it stopped being an independent monetary force and started taking its marching orders from Wall Street quite some time ago.

Here's what Nancy Millar, President at the time of the National Organization for Women in New York City, presciently testified in writing to the Securities and Exchange Commission in August 2001. (Ms. Millar edited and signed this testimony while I and other Wall Street activists provided input. This testimony is available in full on the SEC's web site.)We thank the Securities and Exchange Commission for extending the comment period to September 4, 2001 in the critical area of bank oversight now that the lines between banks and brokerage firms have been blurred with the repeal of the Glass-Steagall Act.We believe that the comments made in the letter dated June 29, 2001 from the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency should be disregarded in their totality. The banks of America have enough lobbyists and trade associations to argue their case before the SEC. It is not the charter or mandate of these three regulatory bodies to lobby on behalf of banks.The body of evidence that should dictate how the SEC must now proceed since Congress saw fit to eliminate the critical protections afforded the investing public in the Glass-Steagall Act, resides in the tens of thousands of pages of transcripts of the Pujo Committee hearings held in 1913 and the Pecora Committee hearings of 1933 and 1934.

Fancy promises from regulators that banks functioning in the dual role as brokerage firms can and will be self-policing is not what the SEC or Congress should rely on. The well-developed history of egregious abuses bestowed on the investing public prior to the enactment of Glass-Steagall, and since its recent repeal, is what the SEC and Congress must look to. To believe that the dynamics of power and greed have been materially altered in nine decades is to engage in naiveté at the public's peril.Our Nation's prosperity, democracy and the productivity of its citizens demand a level playing field to acquire and safeguard financial assets. Society crumbles when assets achieved through years of honest hard work can be fleeced by brokerage firms masquerading as insured-deposit banks. It is the role of federal regulators to maintain a level playing field through stringent regulation.We ask that the SEC immediately impose the same regulations that govern outside broker-dealers to securities' operations within banks. And, we herewith ask Congress to reconsider the repeal of the Glass-Steagall Act or be held accountable for the peril that unfolds from this unwise and inadequately deliberated decision.If ever there was evidence that America is now facing that peril, it was the most recent news that the Bush administration's much touted "free and efficient market" had priced Bear Stearns at $30 a share at the close of trading on Friday, March 14, 2008 but on further examination of its books over the weekend, it was valued at $2 a share and absorbed by JPMorgan at that price.Equally troubling is the growing awareness among Wall Street veterans that neither the Federal Reserve nor the U.S.

Treasury comprehend was has happened here, much less how to contain it. Here's what we heard from Hank Paulson, the Treasury Secretary, last week:"regulation needs to catch up with innovation and help restore investor confidence but not go so far as to create new problems, make our markets less efficient or cut off credit to those who need it."Innovation? Less efficient? Is there anything at all that looks innovative or efficient about Wall Street today? It is a seized up house of cards built on a toxic formula of hubris, corruption and free market madness.Before there is a complete breakdown, Congress must quickly address the five key reasons we have today's mess on our hands:

(1) Incentive: from mortgage brokers paid higher fees to sell subprime loans rather than prime loans, to stockbrokers paid dramatically higher fees to sell mortgage-backed securities rather than U.S. Treasury securities, to investment bankers paid dramatically higher fees to package Collateralized Debt Obligations rather than issue plain vanilla corporate bonds, Wall Street has been incentivized to greed rather than honest service to investors.(2) Artificial Demand: The above outsized incentive produced a glut of unwanted and unneeded product that had to be eventually hidden off Wall Street's balance sheet in Structured Investment Vehicles (SIVs) or dressed up to look like Commercial Paper and buried in mom and pop money market funds. It is this glut and the lack of transparency as to where else this toxic paper is hiding that is creating the fear and panic on Wall Street.

(3) Counterparty Risk: The regulators allowed Wall Street firms/banks to balloon their asset base and pretend they were meeting capital adequacy tests by buying "insurance" in the form of derivative contracts. There was only one problem with these "hedging" techniques; the counterparty in many cases was just another Wall Street firm or an inadequately capitalized municipal bond insurer. Instead of spreading risk, the risk was concentrated among the same players.

(4) Glass-Steagall Act: Congress was incentivized through Wall Street campaign financing to throw reason and judgment out the window and repeal the only law that stood between the country and another 1929. Glass-Steagall must be restored; and public financing of federal campaigns is the only means of restoring the will of the governed to Washington.

Pam Martens worked on Wall Street for 21 years; she has no securities position, long or short, in any company mentioned in this article. 

Bush, kreditkrisen,Crisis, Neoliberalism, nyliberalism, Free trade, frihandel, Financial Crisis, Structural Crisis, USA economy, Clinton, Credit Crisis, Neoliberalism, nyliberalism, Bush, credite Crisis, Neoliberalism, nyliberalism, Free trade, frihandel, Financial Crisis, Structural Crisis, USA economy, Clinton, Credit Crisis, Neoliberalism, nyliberalism,   

- Public announcement GEAB N°23 (March 16, 2008) -