Quickly, and with dispatch hastened by fear: The "in extremis" Bush Administration is now co-starring with hulk Hank Paulson and the scholarly Ben Bernanke in an epic economic drama the scale of which has not seen since the Republican fin de siècle epic that debuted in 1929 (Ben's area of expertise). The scene has been set, the schema played out, a year of denouement, and now it's time for the endgame. Recently discussing the mess they allowed to happen on their watch, the Hank and Ben show has been testifying to years of reckless mortgage lending practices, the sins of which have left portfolios full of toxic debt-swap securities, often deceptively repackaged in opaque derivative contracts that are now self-destructing (like canaries in a mine) in their holders' hands.
Much of the blame has been erroneously placed on the doorsteps of folks who purchased homes of their own on low-down-payment, adjustable-rate contracts, which they initially thought they could handle. Conditions change--the interest rate and payment balloons, or the wage-earning status of the household falls--the family goes through foreclosure, and is forced to move out, losing whatever equity and interest payments they had in the property. Jacking up of the interest rates on these mortgages made the paper more attractive as individual contacts were repackaged into larger financial instruments (debt swaps) and resold to investment houses, hedge funds, pension and trust funds, international sovereign wealth funds and banks, including international central banks in the form of US securities (many of which have been supporting, paying for both our material lifestyles and our national internal and external debt overhangs).
Through reckless leveraging (often at rates of 1/20 or 1/30 capital ratios), and opaque packaging (often in derivative form) of this debt--sold, profits and commissions skimmed, weaker paper repackaged, sold, profits and commissions skimmed, repackage weaker paper, sold, skimmed profits and commission, repackaged, sale, and so on--eventually all that's left in the package is trash. It is in this opaque process that the real malfeasance can be witnessed, not in those individuals who bought more home than they could afford. Now the foxes, who have been regularly raiding the chicken coop and absconding with too many hard-earned nest eggs, are shamelessly pitching for the coup de grâce: a $700 billion taxpayer-backed bailout with Treasury funds (one report had that amount as approximately $2,300 for every man, woman and child in the country), all this with no verifiable assurances that this infusion of funds would force open the blocked credit arteries in the national and international financial markets, the continued damming of which, according to Paulson and Bernanke will result in a further tightening of credit, a slowdown of economic activity, higher unemployment, lower income levels, less spending... big scary bears loose in the markets, for sure.
Many throughout this nation and, more important at this point, in Congress, are not convinced that a blank check should be written for Hank to hand out to his cohorts in the corridors of power and wealth at Goldman Sachs and the other remaining "big boys" on Wall Street, London and other international financial capitals. Recent rumors,--and these financial shell games have been catalyzed with rumor since the time of the House of Fugger in the sixteenth century--have suggested that uninsured individual money market accounts, such as IRA or 401(k)s, may also be fair game for covering the losses on the criminally dangerous exposures of these highly leveraged instruments of toxic debt.
All Americans, and their representatives and advocates, must state, unequivocally, to the scavengers feeding on their own carrion, that if these liquid money market accounts are raided, those executing those transactions, without the holder of the accounts approval, will be vigorously prosecuted with penalties including court costs, fines and restitution, as well as the loss of trading licensure (under specific laws to be passed forthwith in Congress, in conjunction with all states' attorneys general, making, retroactively, such raids illegal). The least these highly paid "confidence men" could do is to begin to unload some of the gold they have been buying up (its price soared some $70 per ounce in a single session recently) and transform that frozen asset into liquidity; come on, boys, it's only 58,000 lbs of the stuff, about twenty-nine tons. Transfer the bullion to the Treasury as surety, and Treasury will provide the liquidity and clean up some of the messes you and your traders have wrought.
Instead of the American taxpayer bailing out the holders and guarantors of these toxic assets, and providing liquidity to markets that have been abandoned by their own architects through aggressive short-selling of assets and refuge to havens like precious metals, the players themselves must be assertively encouraged to collectively cough up the liquidity to jump-start the credit markets. If such participation is not forthcoming, the major players should be identified and hounded until they come up with a rollover of their own profits made during the past twelve months back into the use in the credit markets, thus providing liquidity. If this does not happen, very hefty capital gains taxes must be levied on profits from asset reallocations in the 2008, earmarked to repay any payouts by Treasury.
Make no mistake about it, this whole scenario has been designed and executed by individuals and organizations, very insulated and powerful, and they know how they would like this to play out. They are attempting to force the American taxpayer, through fear tactics, to commit buy up the bad debt they are holding, wiping their slates clean; they will then use the funds they have sequestered during their massive sell-offs of these toxic assets, the short-selling of shares in financial sector stocks and the dumping of rising foreign currencies (causing sell-offs and runs recently in Russia and India, to name two) to buy up shares and other assets at depressed valuations. This is a great game with very high stakes that those with the largest bankrolls usually win because of their weighted penetrations in markets; they are able to bring prices up and down in various sectors because of funds they put in or withdraw.
They are asking too much this time. The American people are not going to stand for this. The FBI has already been called to action, but we must be careful and there must be tight oversight of how these agents are to proceed, what evidence they are to collect, and how that information will be made available to the public and law makers in a transparent and timely manner. All investigation and evidence must be undertaken, compiled and presented by independent, non-interested parties.
Wall Street firms are already queuing up to "handle" the $700 billion worth of transactions that would need to take place if there is an ill-advised bailout as requested by Paulson and company. This must not be so. Congress should create a fund to be administered by eminent members of academia and the pool of retired executives with little or no conflict-of-interest issues. The heads of this administration would work with Congress, Treasury and the financial community to investigate this crisis, identify any criminal activity and malfeasance on the part of executives and traders, encourage and facilitate the re-entry of "hoarded profits" back into liquid assets, and the drafting of legislation that punishes the worst offenders, and collect revenue from the excessive profits taken and hoarded by some during the last year.
As always, one fears that as the investigations get too close to powerful players, the dogs will be called off (e.g., the Carlyle Group, or huge opaque hedge funds protected by Charles Schumer). This must not happen--if there is any time that the profiteers must be held accountable it is now, it is their time to pay back into the system they wiped clean of profitable assets. The cynical manipulation of the markets for their own profit cannot go unpunished. If they choose not to take care of the mess, there must be legislation and tax law that will remedy the situation.
John McCain, and most Republicans, as well as the powers that be on Wall Street, worked hard for years to deregulate the financial markets and to allow market forces to work as the internal regulation; the SEC was given a weak mandate and a small staff. Bush, McCain, Paulson and Bernanke all talked about problems in the credit markets over the past year, but were capital ratio requirements adjusted, aggressive short-selling of positions reported and investigated, was there discussion of making such trades illegal, especially when executed with highly leveraged instruments? McCain must not given the reins in the midst of this crisis, with Phil Gramm (remember, the economy is strong and we are a nation of whiners) given control over Treasury and oversight of the markets.
But many in the Democratic camp have to be watched like hawks as well. Robert Rubin did a fine job at Treasury under Bill Clinton, but at the end his term the groundwork had already been laid for an out-of-control Fannie Mae and Freddie Mac and a decade of poorly leveraged lending in the housing and other credit markets. Offshore and private equity markets and hedge funds expanded their penetration and financial clout, often moving markets with financial instruments with questionable valuations and capital cover. Incredible amounts of wealth has been created in the last eight years, and although a good deal of it has been gleaned as profits taken and the markets have suffered by these sell-offs, much of the wealth still exists, in massive holdings. Those in control of those holdings must be identified and called upon to inject $700 billion of liquidity into the credit markets. If they do not, they must be forced to. It is as simple as that.
Hank Paulson and Ben Bernanke have many of the phone numbers they need, they must make the calls. If not, the culture wars Karl Rove and the Republicans are attempting to engineer in this presidential campaign will instead be, more correctly, turned into a class war, and guess who has the numbers to win that one.
Mark Kuechle
Santa Fe, NM
09/25/2008 @ 2:49pm
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