The Back Alley Archives

We are headed for an Economic Depression worse than the 1930s at Warp Speed folks, and it is not going to happen because of "fundamentals" or even because "the credit markets froze up."

No, it is going to happen because both the Bush and Obama administrations are intentionally, with malice aforethought, ignoring the black-letter law of the land for the purpose of covering up their own malfeasance and misfeasance, and neither political party or the American People will get off their fat asses and demand that it be stopped.

Your job, prosperity and wealth are on the line America - right here, right now.

This is not some abstract failure in the market - this is a series of actions that have been taken with the full intention of screwing you, by both Democrats and Republicans, so that a handful of robber barons masquerading as capitalists do not have to face the music for their acts.

Secretaries Paulson and Geithner subverted the PCA law by allowing failed banks to engage in massive accounting fraud (which also means they are engaged in securities fraud). Treasury is telling the world that resolving the failed banks will require roughly $2 trillion dollars. That has to mean that the failed banks are insolvent by roughly $2 trillion. The failed banks, however, are reporting that they are not simply solvent, but "well capitalized." The regulators flout PCA by permitting this massive accounting and securities fraud. (Note that by countenancing this fraud they make it extremely difficult to ever prosecute these elite white-collar frauds.)

The government should go in, forcibly review their full books (including off balance sheet nonsense) and then bankruptcy judges should break them up and they should be sold off to banks that are actually solvent. We have a process prescribed BY LAW that details what happens, if the FDIC, SEC, et al would just enforce it. It's really, really fucking simple to anyone with half a brain, a set of balls, or a bank account (ie re-election campaign fund) not padded by large multinational banks. The problem here is the big banks put everyone in office and lobby harder than anyone else...they can't let the government enforce the law because they know they'd all be fucked if the government ever decided to fulfill its obligations to we the people.

The entire point of this thread is that Obama/Geithner are continuing to ignore the law, just like Bush/Paulson did...all we need to do is enforce the law...put the fraudsters in jail and then private capital can start flowing again. As it stands, private capital will never come back because it simply can't account for the fraud, cheating and theft that our fearless leaders continue to allow.

Fact is that intentional and willful misconduct by our government agencies, both as acts of omission and commission, has resulted in these firms, institutions and nations suffering crippling losses.

These acts of malfeasance and misfeasance in government agencies include (but are not limited to):

* "23A Exemption" letters
* Willful and improper classification of funds (IndyMac) which kept the FDIC from taking enforcement action in a timely fashion
* Willful removal of leverage limits (championed by and granted as a consequence of Henry Paulson's request before he joined Treasury; every one of the 5 firms that has blown up had 2x or more the formerly legal limit)
* Willful removal of bank leverage limits and reserve ratios by The Fed and Congress in permitting "sweeps" along with allowing The Fed authority to set reserve ratios wherever it would like, including to zero.
* Willful failure to police CDS margins and capital adequacy (e.g. AIG and others) thereby leading firms to be deeply insolvent yet continuing to operate as if nothing was wrong - until the cash ran out and we suddenly had a systemic crisis.
* Willful failure to enforce suitability regulations on mortgage lenders, along with intentional preemption of state predatory lending laws.
* Willful blindness related to the blatant and outrageous false statements made by both lenders and borrowers; the essence of "liar loans."
* Willful blindness related to both Madoff and Stanford Financial
* Willful blindness related to ratings agency conflicts of interest, "ratings shopping" and known-flawed ratings models.
* Willful blindness with regards to firms selling securities to customers which they were shorting at the same time - without disclosing this fact to the customer they were marketing to.
* Refusal to take action related to the false statements of executives on the health of their firms on national TV networks such as CNBC, when reliance on those statements led to complete wipeouts (Bear Stearns and Lehman)
* Misleading statements related to the health of Fannie and Freddie made by administration officials, leading to near-total losses for both common and preferred shareholders.
* Most recently, misleading statements related to the intended path for banks and capital adequacy, including Citibank.

These private sources of capital have quite reasonably withdrawn from the marketplace. They will not return until they can be assured that losses they suffer will result only from their own poor investment decisions and not from willful concealment of losses and even fraud by those in whom they invest nor from changes in the rules imposed by fiat from Washington DC. These private capital sources also want to see indictments, prosecutions and imprisonment - along with ejection of the parties responsible in both private enterprise and our government.

This is a serious problem for our capital markets and economy generally as without this private capital we are doomed to a massive economic contraction. Conservatively speaking, assuming our government can actually fund the $9-10 trillion they've promised, which I believe is a pure fantasy (it would represent nearly a tripling of the public float of US Debt!) we would suffer a 30% contraction in GDP over the next 18-24 months.

If they cannot fund those commitments much beyond the $1 trillion already spent, the contraction would be more on the order of 50%.

Then you tell me man. Should we let the banks fail? Should we do nothing? Seriously, what do you think we should do?

Interesting commentary that even some Republicans are talking about nationalizing pre-privatizing the banks now.

It seems to me that this is one area where government funds could be put to very good use -- and be guaranteed to make a profit. The government starts buying up lots of corporate bonds where there's a negative CDS basis -- Tyler cites CIT, Marriott Hotels, Home Depot, Temple-Inland and Omnicom as examples of credits where the basis is 300bp or more -- and then buys CDS protection on those bonds; it then promises to hold both the bonds and the CDS to maturity. Naturally, the government would buy the CDS protection on the new CDS exchange which it's trying to get the market to set up.

The result would be good for credit spreads, as bond prices would rise. It would be good for price discovery, as the confusion generated by the huge difference between bond and CDS prices would largely go away. It would lock in significant profits for the government. And it would get the new CDS exchange off to a flying start. What's not to love?

The bigger question for now is whether any of these authorities will act effectively before the public simply goes apeshit and starts burning down Greenwich, Connecticut. The dangerous shift in public mood is liable to occur with shocking swiftness, in the manner of "phase change," where one moment you see a bewildered bunch of flabby clown-citizens vacuously enraptured by "American Idol," and the next moment they are transformed into a vicious mob hoisting flaming brands to the window treatments of a hedge funder's McMansion. The moment of opportunity for avoiding that outcome is looking sickeningly slim right now.
Another thing that President Obama can set into motion anytime -- and pull himself back to the head of the curve of leadership -- is to either by executive order or by proposal to congress, shut down the credit default swap system for a period of time while procedures are drawn up to place all these dubious contracts in a "clearing" market, where the holders of them will have to come clean about what they're sitting on. The lack of this procedure is allowing zombie banks to hold the United States hostage for never-ending bail-out ransoms. None of these banks are going to survive another six months anyway, so the basic blackmail motif that the whole money system will collapse if ransoms are not paid is a bluff that has to be called sooner or later in any case. So Mr. Obama might as well get on with it.
Once these two matters are dealt with -- an earnest start-up of prosecutions and disabling the credit default swap blackmail racket -- then perhaps a stressed-out and impoverished public might be induced to not go apeshit and instead get on with the mighty task of rebuilding our nation along lines that have a plausible future.