Posts Tagged ‘treasury’
The Times continues its reporting on the Greek crisis:
Echoing the kind of trades that nearly toppled the American International Group, the increasingly popular insurance against the risk of a Greek default is making it harder for Athens to raise the money it needs to pay its bills, according to traders and money managers.
These contracts, known as credit-default swaps, effectively let banks and hedge funds wager on the financial equivalent of a four-alarm fire: a default by a company or, in the case of Greece, an entire country. If Greece reneges on its debts, traders who own these swaps stand to profit.
“It’s like buying fire insurance on your neighbor’s house — you create an incentive to burn down the house,” said Philip Gisdakis, head of credit strategy at UniCredit in Munich.
Fabulous. So let me see if I have this straight: our banks sold Greece predatory loans which they knew Greece would never be able to repay – then they took out “insurance” on those loans, effectively betting against Greece’s solvency. Heads they win; tails Greece loses. It’s important to note that this is the exact same behavior they indulged in during the sub-prime fiasco. They sold loans to people whom they knew would never be able to pay them back, and then bet that those loans would default. If, by some miracle, the debtor was able to pay these banks back, they’d get a nice interest rate. If, as the banks bet, the debtor couldn’t pay them back, they’d get re-imbursed via the Credit Default Swaps. It’s a classic win-win for the banks – and a lose-lose for whatever poor sucker they entrapped.
Only now its happening on the level of entire countries. I want to stress that Greece is neither the first nor the last nation to default on account of the malfeasance of US banks. Iceland came before it, and Spain, Ireland, or even France are likely to come afterward.
It is clear that our banks are purely malevolent forces, who benefit only from the destruction of others, and that, for the sake of the world economy, they must be thoroughly audited and broken up. And it is equally clear that this will never happen.
This is serious. The Asia Times reports today that China is ready to start selling off its US Treasury Notes, ostensibly as a “punishment” for the recent US sales of arms to Taiwan. I and others previously warned about what would happen if China decided to let go of its dollar holdings – the gist is that China is the only thing standing between the US and catastrophic inflation. Previously these fears were pooh-poohed by establishment figures with the familiar arguments: “China needs us more than we need them”, “Who will China sell its surpluses to?” I even heard someone say, “Without us, the Chinese will be cavemen”. Well, it looks like China might have found itself a new trading partner, if this Asia Times article is any indication:
Dollar-denominated risk assets, including asset-backed securities and corporates, are no longer wanted at the State Administration of Foreign Exchange (SAFE), nor at China’s large commercial banks. The Chinese government has ordered its reserve managers to divest itself of riskier securities and hold only Treasuries and US agency debt with an implicit or explicit government guarantee. This already has been communicated to American securities dealers, according to market participants with direct knowledge of the events.
It is not clear whether China’s motive is simple risk aversion in the wake of a sharp widening of corporate and mortgage spreads during the past two weeks, or whether there also is a political dimension. With the expected termination of the Federal Reserve’s special facility to purchase mortgage-backed securities next month, some asset-backed spreads already have blown out, and the Chinese institutions may simply be trying to get out of the way of a widening. There is some speculation that China’s action has to do with the recent deterioration of US-Chinese relations over arm sales to Taiwan and other issues. That would be an unusual action for the Chinese to take–Beijing does not mix investment and strategic policy–and would be hard to substantiate in any event.
Where do you think we’re getting the money to prosecute these $5,000 per second conflicts in the Middle East? Where did the money for our $2,500,000,000,000 (and counting) bank bailouts come from? China. They make our money real. Without their manufacturing powerhouse backing us up, our dollars are worthless. What, you think the world is going to value our “service economy” at $13,000,000,000,000 per annum if that money weren’t backed by Chinese promises? Not likely. And now those promises are now increasingly under threat.
“We’ve got strong financial institutions . . . Our markets are the envy of the world. They’re resilient, they’re…innovative, they’re flexible. I think we move very quickly to address situations in this country, and, as I said, our financial institutions are strong.”
– Hank Paulson, Treasury Secretary, March 16, 2008
“We must [enact a program quickly] in order to avoid a continuing series of financial institution failures and frozen credit markets that threaten American families’ financial well-being, the viability of businesses, both small and large, and the very health of our economy,”
– Hank Paulson, Treasury Secretary, September 23, 2008
“I really didn’t get it until very late in 2005 and 2006.”
Reuters (13 September 2007), “Greenspan says didn’t see subprime storm brewing“
Thanks, Alan. Now back to your regularly scheduled programming.
Bloomberg has a fantastic front-page report on Treasury Secretary Geithner’s latest abuses. I mentioned previously that Geithner was instrumental in AIG receiving 100 cents on the dollar in their bailout. Essentially, the Federal Reserve agreed to print the full value of AIG’s misbegotten “derivatives” and hand it to them, no questions asked. AIG initially indicated it was willing to “get a haircut” (that is, receive 95 or even 90 cents for every dollar they lost gambling), but quickly backpedaled when it became clear the Fed was going to bail them out 100%.
Now Bloomberg reports that in addition to giving AIG an essentially blank cheque, Geithner instructed AIG to deceive the public on who their “counter-parties” were, on who would benefit from the AIG bailout. Much as the Banking Trusts of the 1920s, our mega-conglomerates today are heavily invested in one another – a bailout to one goes to pay back its creditors elsewhere in the banking system. This proved invaluable in convincing the public to bail AIG out. As Machiavelli wrote, if one must rule by robbery, it is best to conduct a big crime all at once, rather than small ones continuously. By giving a massive ($200 billion +) bailout to AIG, the government could thereby distribute their gift to other banks (the “counter-parties”) without the attention of the public, whose ire would be focused solely on AIG.
Later it turned out that Goldman Sachs, the firm which regularly gets to choose the Treasury Secretary (Geither was their first choice, and his predecessor, Hank Paulson, worked at Goldman for 35 years), was one of the AIG counterparties.
One of the most salient passages in Hugh Son’s excellent article, way up high in the 3rd paragraph:
The New York Fed took over negotiations between AIG and the banks in November 2008 as losses on the swaps, which were contracts tied to subprime home loans, threatened to swamp the insurer weeks after its taxpayer-funded rescue. The regulator decided that Goldman Sachs and more than a dozen banks would be fully repaid for $62.1 billion of the swaps, prompting lawmakers to call the AIG rescue a “backdoor bailout” of financial firms.
“It appears that the New York Fed deliberately pressured AIG to restrict and delay the disclosure of important information,” said Issa, a California Republican. Taxpayers “deserve full and complete disclosure under our nation’s securities laws, not the withholding of politically inconvenient information.”
So it seems obvious that Geithner did not want the public to know the extent of Goldman Sach’s involvement with this bogus “derivative” scheme, likely so as not to tarnish Goldman’s image of having never received a bailout.
But whatever the reason, this latest report adds to the already exhaustive list of opacity, malfeasance, and outright cronyism that has plagued this crisis. We cannot approach any semblance of fair economic policy (let alone fantasies of a “free market”), if one corporation regularly gets to appoint Treasury officials and make policy.
The Financial Press is busy crowing over the loss estimates for the Paulson Bailout, claiming that losses have been “cut” by $200 Billion dollars. Of course, this still leaves $500 Billion unaccounted for, but standards for good news have fallen to the extent that a $500 billion loss is considered a ray of hope.
Unfortunately, we will be spared even that brief ray. Research from ProPublica conclusively debunks the claim that TARP losses have been mitigated, if only for the fact that the program has not yet finished.
As they say:
The latest estimate accounts for only the first year of spending, and the TARP’s spending isn’t done. Treasury says it expects the ultimate cost to be higher. Treasury Secretary Tim Geithner extended  the TARP thru Oct. 3, 2010, the TARP’s second birthday, earlier this week. He said, though, that Treasury didn’t expect to deploy more than $550 billion of the $700 billion available. As of today, Treasury has committed a total of about $407.3 billion  (that’s excluding companies that have refunded their bailout money ).
The TARP still has a little less than half its funds to distribute; meanwhile bank failures haven’t even begun to slow (three more failed this Friday, bringing the total to 167 this year), and unemployment still hovers around 17-20 per cent. It seems a bit premature to be declaring victory for the TARP.
You may recall Obama’s war speech last week wherein he set a definite timetable for withdrawal from Afghanistan. Specifically, his words were:
And as Commander-in-Chief, I have determined that it is in our vital national interest to send an additional 30,000 U.S. troops to Afghanistan. After 18 months, our troops will begin to come home.
Straight, direct, no real room for ambiguity there. “After 18 months our troops will (not “might”, not “could”) come home.”
How, then, to explain this article in today’s New York Times with the headline “No Firm Plans for a US Exit From Afghanistan”? Well, let’s see:
In a flurry of coordinated television interviews, Defense Secretary Robert M. Gates, Secretary of State Hillary Rodham Clinton and other top administration officials said that any troop pullout beginning in July 2011 would be slow and that the Americans would only then be starting to transfer security responsibilities to Afghan forces under Mr. Obama’s new plan.
Clever, clever Obama! The soldiers will begin coming home in July 2011, but he never specified how quickly! By this logic our presence in Afghanistan could still be unlimited. We only have to send one soldier home per year.
Here’s some justification from an important-sounding General:
“We have strategic interests in South Asia that should not be measured in terms of finite times,” said Gen. James L. Jones, the president’s national security adviser, speaking on CNN’s “State of the Union.” “We’re going to be in the region for a long time.”
See, it’s okay! We’ve got “strategic interests” in South Asia, apparently so important that they must be measured in infinite terms. Just don’t bother trying to find out what those “interests” might be.
Mr. Gates said that under the plan, 100,000 American troops would be in Afghanistan in July 2011, and “some handful, or some small number, or whatever the conditions permit, will begin to withdraw at that time.”
When Obama thundered to West Point that US troops will begin coming home in 2011, he neglected to mention that “handful” bit. But who can blame him – the speech sounded so much better with the deception left in.
Well at least we might have a chance at catching Osama Bin Laden. Isn’t that right, Mr. Gates?
Mr. Gates said it had been “years” since the United States had had reliable intelligence about Mr. bin Laden, but he said it was still the assumption of American intelligence agencies that he was hiding in North Waziristan, in Pakistan.