Investment Banks Borrowing Billions

Big Wall Street investment companies are taking advantage of the Federal Reserve's unprecedented offer to secure emergency loans, the central bank reported. Investment houses can put up a range of collateral, including investment-grade mortgage backed securities.

The Fed debuted a separate lending facility where Wall Street firms can borrow Treasury securities and put up risky home-loan packages as collateral.

Those firms averaged $32.9 billion in daily borrowing over the past week from the new lending facility, compared with $13.4 billion the previous week. The program, which began last Monday, is part of the Fed's effort to aid the financial system, and the broadest use of the Fed's lending authority since the 1930s.

The Fed also said it would make as much as $200 billion worth of Treasuries available through weekly auctions that started Thursday.

[Excerpt of an article by Jeannine Aversa, AP]

Note: A “billion” is a difficult number to comprehend. The next time you hear of loans or debts in the “billions”, or consider how much a billion is.

Derivatives, the ticking bomb

“Derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal." –Warren Buffet, 2002

A Derivative is an investment that derives its value from another more fundamental investment, as a commitment to buy a bond for a certain sum on a certain date. In recent years, there was a five-fold growth of derivatives, from $100 to $516 trillion. The new derivatives bubble was fueled by five key economic and political trends:

1. Sarbanes-Oxley increased corporate disclosures and government oversight

2. Federal Reserve's cheap money policies created the subprime-housing boom

3. War budgets burdened the U.S. Treasury and future entitlements programs

4. Trade deficits with China and others destroyed the value of the U.S. dollar

5. Oil and commodity rich nations demanding equity payments rather than debt

To grasp how significant this five-fold bubble increase is, let's put that $516 Trillion in the context of some other domestic and international monetary data:

• U.S. annual gross domestic product is about $15 trillion
• Current proposed U.S. federal budget is $3 trillion
• U.S. government's legal debt is $9 trillion
• World's GDPs for all nations is approximately $50 trillion
• Total value of the world's real estate is estimated at about $75 trillion
• Total value of world's stock and bond markets is more than $100 trillion

[By Paul B. Farrel, MarketWatch]

Derivatives and the Shadow Banking System

The Federal Reserve has not only taken action unprecedented since the Great Depression--by lending money directly to major investment banks--but also has put taxpayers on the hook for billions of dollars in questionable trades these same bankers made when the good times were rolling.

Over the last decade, the biggest Wall Street banks and brokerage firms created a dizzying array of innovative products that experts now acknowledge are hard to understand and even harder to value.

One of the fastest-growing and most lucrative businesses on Wall Street in the past decade has been in derivatives. It is a stealth market that relies on trades conducted by phone between Wall Street dealer desks, away from open securities exchanges. How much changes hands or who holds what is ultimately unknown to analysts, investors and regulators.

Used unwisely --when greed and the urge to gamble with borrowed money overtake sensible risk-taking --derivatives can become Wall Street's version of nitroglycerin.

Even the people running Wall Street firms didn't really understand what they were buying and selling, says Byron Wien, a 40-year veteran of the stock market who is now the chief investment strategist of Pequot Capital, a hedge fund.

[Excerpt of an article by Nelson D. Schwartz and Julie Creswell, NY Times News Service]

Federal Reserve's boldest action since Great Depression

The Federal Reserve is the only U.S. institution with the authority and ability to create money out of thin air. And the FED has taken its boldest action since the Great Depression, invoking rarely used powers in an effort to contain a panic threatening to undermine the economy.

Because of the Fed's direct influence over interest rates, the money supply, and the larger economy, some have called the Fed chairman the second most powerful job in Washington after the president.

But the Fed's moves are raising questions about its regulatory powers. In one remarkable week, the Fed:
--engineered the fire sale of bankruptcy-headed Bear Stearns Cos. to J.P. Morgan Chase & Co. with a $30 billion loan.
--offered emergency loans to other securities dealers under terms normally reserved for regulated banks.
--slashed a key short-term interest rate by three quarters of a percentage point, to 2.25 percent. The cut was sixth since September.

These steps followed moves to lend $100 billion in cash to banks, and $200 billion in Treasury bonds to cash-strapped investment banks.

"I spent 35 years on Wall Street, have been a Fed watcher for a long time and I have never seen the potential for a more severe credit crisis than this one," said David Jones, chief economist at DMJ Advisors and a former Wall Street economist.

[AP]

When the Bear Stearns fantasy turned into a nightmare

We had a conversation yesterday with a source who is very close to the Bear Stearns situation.

"What went wrong?" we wanted to know. "How could this group of very smart accountants, lawyers, and investment pros have been so wrong about what they had in their own portfolios?"

One day, they think they have a stock worth $30...a few hours later, they sell it for $2--making the whole company worth less than a quarter of the value of their headquarters building. If they had thought it wasn't worth $30, they would have unloaded it then. Instead, they held until forced to turn it over for practically nothing.

"Well" said our source, "They have no reliable way of knowing what their 'assets' are worth. They're not marked to market; they're marked to whatever fantasy they have in their heads at the moment. When the fantasy was positive, the assets were worth something. When the fantasy turned into a nightmare, they panicked and wanted to get rid of them in the worst possible way.

"And the really scary thing is that the other financial institutions are in much the same situation. They don't really know what they have...or what it is worth. There are almost certainly some more horror stories that will be coming out.”

[Excerpt of an article by Bill Bonner, The Daily Reckoning]

Stiglitz: U.S. Financial Crisis Worst since the 30’s

The current financial crisis is the worst the world has seen since the Great Depression of the 1930s and the US Federal Reserve move to cut interest rates will not make much difference, the Nobel Prize winning economist Joseph Stiglitz said on Wednesday.

Stiglitz, who won the Nobel Prize in economics in 2001, is a former chief of the World Bank and chaired former US president Bill Clinton's council of economic advisers.

He said the main problem is the fact that an estimated 2 million Americans are going to lose their homes because they could not repay mortgages which exceed the value of their property, as house prices fell dramatically. "As people walk away from their mortgages there will be more and more defaults - that undermines the whole financial system," he said.

Stiglitz said the Bush administration was bailing out banks, but accused it of refusing to do anything to help poor people stay in their homes which would stabilise the housing market. "It's very easy to do something about it," he said, suggesting the administration could give assistance to write down mortgages to about 90 per cent of the value of a house which would enable people to stay in their properties.

[Of the Iraqi War, Stiglitz said:] "They didn't want Americans to know exactly how bad the war was for the economy so they flooded it with liquidity, they looked the other way with regulations and they deliberately, I think, postponed the problem into the future and now we're paying the price."

[The Economic Times]

Wall Street fears next Great Depression

Wall Street is bracing itself for another week of roller-coaster trading after more than $300bn was wiped off the US equity markets on Friday following the emergency funding package put together by the Federal Reserve and JPMorgan Chase to rescue Bear Stearns.

One UK economist warned that the world is now close to a 1930s-like Great Depression, while New York traders said they had never experienced such fear. The Fed's emergency funding procedure was first used in the Depression and has rarely been used since.

A Goldman Sachs trader in New York said: "Everyone is in a total state of shock, aghast at what is happening. No one wants to talk, let alone deal; we're just standing by waiting. Everyone is nervous about what is going to emerge."

In the UK, Michael Taylor, a senior market strategist at Lombard, the economics consultancy, said on Friday night: "We have all been talking about a 1970s-style crisis but as each day goes by this looks more like the 1930s. No one has any clue as to where this is going to end; it's a self-feeding disaster."

Mr Taylor added that the problems unravelling at Bear Stearns are just the beginning: "There will be more banks and hedge funds heading for collapse."

[By Margareta Pagano, The Independent]

Who's Next After Bear Stearns?

The Bush Administration and FED engineered a deal to at least temporarily save Bear Stearns from bankruptcy, but investors began turning a critical eye to other investment banks amid worries about how far the credit contagion could spread.

The fact that a major investment bank could reach the verge of buckling -- and be sold at such a discount -- sent dismay through Wall Street and beyond.

"One reaction is shock that a company that reaffirmed its book value at around $84 on Wednesday can be worth $2 per share four days later on Sunday," said Deutsche Bank analyst Mike Mayo.

The price represents roughly 1 percent of what the investment bank was worth just 16 days ago.

The financial industry wants to know exactly how badly Bear Stearns bet on mortgage-backed investments. Unwinding the nation's fifth-biggest investment houses should provide some insight into what other financial institutions might have on their books.

Wall Street analysts say the rescue bid was more than just saving one of the world's largest investments banks -- it was a prop for the U.S. economy and the global financial system.

[AP]

The Dollar has been shoved off a cliff

The dollar has been shoved off a cliff and no one knows where it will land.

Recently, the Wall Street Journal broke down the relationship between the dollar and oil and revealed the ugly truth; that consumers are getting gouged at the pump because of the Bush Administration's policies, not Saudi greed:

“Since 2001 the dollar price of oil and gold have run almost in tandem. The price of gold has risen 240% since 2001, while the price of oil has risen 270%. That means that if the dollar had remained “as good as gold” since 2001, oil today would be selling at about $30 a barrel, not $100. Gold has traditionally been a rough proxy for the price level, so the decline of the dollar against gold and oil suggests a US monetary that is supplying too many dollars”.” (“Oil and the Dollar” Wall Street Journal)

There it is in black and white. Bush's dollar policy has taken us where Bin Laden never could; the edge of ruin. The consumer is getting clobbered, the country is slipping into recession, and the greenback is hanging by a thread.

There's another reason to believe the dollar won't rebound, too, that is, that Fed chairman Bernanke is deliberately undercutting the dollar to stimulate the economy. … Unfortunately, there are roughly $6 trillion in US dollar-backed assets around the world which could be quickly dumped on US shores if Bernanke goofs up and foreign holders of USDs start selling their paper on the open market. That would trigger a round of Wiemar-like hyperinflation in the homeland that would terminate the dollar's position as the world's reserve currency as well as America's role as the global superpower.

[Excerpt of an article by Mike Whitney, ICH]

So what caused the Mortgage Banking Scandal?

So what caused the Mortgage Banking Scandal? In one word --GREED!

"It became commonplace for banks to outsource their mortgage lending to free-lance brokers. Instead of doing their own credit checks they relied, often exclusively, on various online credit questionnaires … where no follow-up was done.

"It became common practice for mortgage lenders to offer brokers bonus incentives to bring in more signed mortgage loan volume, another opportunity for massive fraud. The banks got more gain from making high volumes of loans than selling for securitization.

"The world of traditional banking was being turned on its head. Many US banks, simply to churn loan volume and returns, gave what they cynically called "Liars’ Loans." They knew the person was lying about his credit and income to get that dream home. They simply didn’t care. And they sold the risk once the ink was dry on the mortgage.

"A new terminology arose after 2002 for such loans, such as "NINA" mortgages—No Income, No Assets. "No problem, Mister Jones. Here’s $400,000 for your new home, enjoy."

[Excerpt of an article by F. William Engdahl, Global Research]

International experts foresee collapse of U.S. economy

Harry Koza in the Globe and Mail quotes Bernard Connelly, the global strategist at Banque AIG in London, who claims that the likelihood of a Great Depression is growing by the day.

Martin Wolf, celebrated columnist of the U.K.-based Financial Times, cites Dr. Nouriel Roubini of the New York University's Stern School of Business, who, in 12 steps, outlines how the losses of the American financial system will grow to more than $1 trillion - that's one million times $1 million. That amount is equal to all the assets of all American banks.

Every day now, thousands of people all over the U.S. and Great Britain are walking away from their homes - simply mailing their house keys to the banks - as housing bailout plans fail. With unemployment growing, the next phase will hit commercial real estate making the financial institutions the unwilling owners not only of quickly depreciating houses, but also of empty strip malls and even larger shopping centers.

The next domino to fall will be credit card defaults, and after that... who knows?

The most frightening forecast so far comes from the Global Europe Anticipation Bulletin: "The end of the third quarter of 2008 (thus late September, a mere seven months from now) will be marked by a new tipping point in the unfolding of the global systemic crisis.

The report goes on to say that we are entering a period for which there is no historic precedent. What we will have, instead, is truly a global momentous threat - a true turning point affecting the entire planet and questioning the very foundations of the international system upon which the world was organized in the last decades.

The report emphasizes that it is, first and foremost, in the United States where this historic happening is taking an unprecedented shape (the authors call it "Very Great U.S. Depression").

Concerning stock markets, the GEAB anticipates that international stocks would plummet by 40 to 80 per cent depending where in the world they are located, all affected in the course of the year 2008 by the collapse of the real economy in the U.S. by the end of summer.

The European authors of this report - it appears simultaneously in French, German and English - state that they simply and without prejudice try to describe in advance the consequences of the ominous trends at play, so readers can … take the proper means to protect themselves from the most negative effects.

[Excerpt of an article by Bert Hielema, Belleville Intelligencer]

Why the Gold Boom, Dollar Bust

Forget the fact that over the last 6 months gold has skyrocketed from $670 an ounce to now-approaching $990 an ounce, and yet it’s hardly even been mentioned in the mainstream media.

Michael Byrd, of the Austin Report offers some background:

Many of today's currency problems began in World War I when the gold standard was first abandoned.

On August 15, 1971, President Nixon severed the link between the U.S. dollar and gold. Since 1973, flexible exchange rates were introduced and chaos has prevailed in the global financial system. Jacques Rueff, an advisor to President Charles de Gaulle, described the situation in his book The Monetary Sin of the West: “Since the abandonment of the gold standard, i.e. the only system that ever worked, the world has been moving from one crisis to the next, from deflation to inflation, from economic boom to bust."

The sudden jump in the price of gold after central banks gave up on control was confirmation of a loss of confidence in the U.S. dollar. In the absence of a gold-market-valued U.S. dollar, investors chose to put their faith in gold alone. Consequently, the price of gold rose from $35 per troy ounce in 1969 to almost $850 in 1980. As a result, the value of the U.S. dollar fell against gold and has never recovered since 1971.

Note the similarities in the 1970's and today—rising commodity prices, record oil prices, an unpopular War while the government refuses to cut back other expenses, and a massive trade deficit. These factors combined with a trade deficit to create a situation in which the dollar was worth less than the gold used to back it.

Playing musical chairs on the deck of the Titanic

I once heard the expression used, “playing musical chairs on the deck of the Titanic", and feel it fairly accurately describes the various attempts to avoid a shipwreck of the economy!

Are the Fed’s attempts to help going to do that much good? Since the FED is what has caused much of the financial mess, isn’t this kind of like asking the Mafia to donate drug money toward research for curing addiction?

The Federal Reserve IS the problem. Greenspan and the FED knowingly caused this mess.

The probability is that nothing effective will be done by the Fed or the Government. We are going to have to ride out the recession-depression, during which time all elements of the population will have plenty of time to contemplate the level of greed at all levels, that contributed to this mess.

The principal shareholders of the Fed

What most American citizens don't realize is that the Federal Reserve, which controls the U.S. currency, inflation, and deflation at the cost of the American people, is a private corporation.

While the name “Federal Reserve” might suggest otherwise, it is simply a private company set up by big bankers in 1913, a company that makes decisions based on profits, as required by stockholders.

The principal shareholders of the Fed are: the Rothschilds, Lazard Freres, Israel Schiff, Kuhn-Loeb Co., Warburg Co., Lehman Brothers, Goldman-Sachs, the Rockefeller family, and the J.P. Morgan interests.

The fact that Americans hold a great deal of private debt isn't troublesome to them, merely profitable.