Record Dow plunge as bailout bill defeated

In a stunning vote that shocked the capital and worldwide markets, Congress defeated a $700 billion emergency rescue for the nation's financial system, ignoring urgent warnings from President Bush and congressional leaders of both parties that the economy could nosedive without it.

The Dow Jones industrials plunged nearly 800 points, the most ever for a single day. The 777-point decline for the day surpassed the 684-point drop on the first trading day after the Sept. 11, 2001, terror attacks.

[AP]

Ron Paul on the bailout package

Whenever a Great Bipartisan Consensus is announced, and a compliant media assures everyone that the wondrous actions of our wise leaders are being taken for our own good, you can know with absolute certainty that disaster is about to strike.

The bailout package that is about to be rammed down Congress’ throat is not just economically foolish. It is downright sinister. ... It promises the American people a never-ending nightmare of ever-greater debt liabilities they will have to shoulder.

Two weeks ago, financial analyst Jim Rogers said the bailout of Fannie Mae and Freddie Mac made America more communist than China! "This is welfare for the rich," he said. "This is socialism for the rich. It’s bailing out the financiers, the banks, the Wall Streeters."

The Federal Reserve System is actually positioning itself as the savior, rather than the culprit, in this mess!

[From an article by Republican member of Congress Ron Paul, LewRockwell]

WaMu becomes biggest bank to fail in US history

As the debate over a $700 billion bank bailout rages on in Washington, one of the nation's largest banks — Washington Mutual Inc. — has collapsed under the weight of its enormous bad bets on the mortgage market.

The Federal Deposit Insurance Corp. seized WaMu on Thursday, and then sold the thrift's banking assets to JPMorgan Chase & Co. for $1.9 billion.

WaMu, founded in 1889, is the largest bank to fail by far in the country's history.

[AP]

$1,000,000,000,000: The astonishing cost of US government's desperate bid to rid the economy of toxic debt

Business insiders fear the total cost of the bail-out could rise to as much as $1 trillion or $1,000,000,000,000.The plan would give the government broad powers to buy the bad debt of any US financial institutions for the next two years.

The move is part of the largest financial bail-out since the Great Depression and the sum involved is equivalent to almost one third of the British economy.

It also would raise the statutory limit on the national debt from $10.6 trillion to $11.3 trillion! [What tax payers owed when the debt was "only" 9 Trillion]

[Excerpt of an article by Kate Foster, The Scotsman]

"Days away from a complete meltdown of our financial system"

On Friday morning, Senator Christopher Dodd, the head of the Senate Banking Committee, interviewed on ABC's “Good Morning America.”, revealed that just hours earlier at an emergency meeting convened by Secretary of the Treasury Henry Paulson and Federal Reserve chairman Ben Bernanke, lawmakers were told that "We’re literally maybe days away from a complete meltdown of our financial system.” Dodd added somberly, that in his three decades of serving in public office, he had "never heard language like this.”

The system is at the breaking point, and despite Wall Street's elation from the proposed $1 trillion dollar bailout to remove toxic mortgage-backed debt from banks balance sheets, the market is still correcting in what has become a vicious downward cycle. This cycle will persist until the bad debts are accounted for and written off for or until the exhausted dollar-system collapses altogether. Either way, the volatility and violent dislocations will continue for the foreseeable future.

The problems cannot be resolved by shifting the debts of the banks onto the taxpayer. That's an illusion. By adding another $1 or $2 trillion dollars to the National Debt, Paulson is just ensuring that interest rates will go up, real estate will crash, unemployment will soar, and foreign central banks will abandon the dollar.

No one has any idea of the magnitude of the deleveraging ahead or the size of the debts that will have to be written down. That's because 30 years of deregulation has allowed a parallel financial system to arise in which over $500 trillion dollars in derivatives are traded without any government supervision or accounting. These counterparty transactions are interwoven throughout the entire "regulated" system in a way that poses a clear and present danger to the broader economy.

The Federal Reserve has lost control of the system. The market is driving interest rates now, and the market is terrified.

[Excerpt of a commentary by Mike Whitney]

As rotten foundations crumble

From pubs in London to bars in New York, everyone is asking the same question: Why is this financial crisis different? The answer is simple albeit not sexy. The rot has set in.

The world's investment banks are basically houses built on pillars of money. Sometimes those pillars are cash, often bonds; these days pillars are made up of derivatives, swaps, options and other frighteningly complex instruments.

But these pillars are the strength that supports not only the bank itself, but also its debts and liabilities. What has happened is that the rot has got into the pillars and no-one noticed. If they were wooden it would be worms. The very financial instruments that make up the core of the banks are questionable.

No-one can say for certain how much these instruments are worth, if anything. No-one knows if counterparties to deals are financially secure and will be around tomorrow. The very structure became doubtful.

[CNN]

Fear grips the market

The Federal Reserve gave a two-year, $85 billion loan to American International Group Inc. (AIG) in exchange for a nearly 80 percent stake in the insurer. Wall Street had feared that the conglomerate, which has its tentacles in various financial services industries in 130 countries around the world, would follow the investment bank Lehman Brothers Holdings Inc. into bankruptcy.

However, Wall Street stumbled again even after the government bail out.
"People are scared to death," said Bill Stone, chief investment strategist for PNC Wealth Management. "Who would have imagined that AIG would have gotten into this position?"

He said the fear gripping the market reflects investors' concerns that AIG wasn't able to find a lifeline in the private sector and that Wall Street is now fretting about what other institutions could falter.

The two independent Wall Street investment banks left standing — Goldman Sachs Group Inc. and Morgan Stanley — remain under scrutiny, as does Washington Mutual Inc., the country's largest thrift bank.

[AP]

The slow-motion run on retail banks

With the "financial storm of the century" hitting financial institutions, many Americans are worried about the safety of their bank deposits. While the FDIC insures individual accounts up to $100,000, the reaction to IndyMac's failure this summer -- lines outside retail branches -- shows Americans have limited faith in the Federal Deposit Insurance Corp., which guarantees individual accounts up to $100,000.

Americans are justified to be worried, says Nouriel Roubini, of NYU's Stern School and RGE Monitor, who notes there is already a "slow-motion run on retail banks" occurring nationwide.

That "run" could accelerate as people realize the FDIC fund has about $50 billion to "insure" about $1 trillion in assets at the nation's financial institutions, says Roubini. "They're going to run out of money" unless Congress acts soon to recapitalize the FDIC.

Roubini is one of the few market watchers to correctly predict the severity of this ongoing credit crisis. If nothing else, he says people with accounts exceeding $100,000 in value should spread their money - and the risk - among different firms.

Lehman Brothers: tectonic shifts under the foundations of the U.S. financial system

Three of the top five U.S. investment banks have now fallen victim to the credit crunch.

The demise of Lehman Brothers, the fire sale of Merrill Lynch - the next potential domino in the chain - and news that insurer AIG is asking the Federal Reserve for emergency funding, has sent shock waves around the world.

These really are seismic events. As one commentator put it: “Tectonic plates are shifting under the foundations of the U.S. financial system,” and we’re all likely to feel the ground shake.

Foreigners, not the US Mortgage Market, drove the Fannie - Freddie Bailout

In an interview with The Washington Times, Council on Foreign Relations Geo-Economics Fellow Brad Setser said of the federal bailout of the Fannie-and-Freddie debt: “I suspect this is the first case where foreign central banks [ie China, Japan, Europe, the Middle East and Russia] exercised their leverage as creditors to push the U.S. government to make a policy decision that protected their interests.”

The problem is that the U.S. government has established what could be a costly and ill-advised precedent - the bailout. First it was The Bear Stearns Cos., now it’s Fannie Mae and Freddie Mac, and tomorrow it could be Lehman Brothers Holdings Inc.

FreedomWorks, a conservative non-profit organization that’s based in Washington, characterized the Fannie Mae/Freddie Mac bailout as a deal by politicians that’s nothing more than a transfer of “possibly hundreds of billions of U.S. tax dollars to sophisticated investors and governments overseas.”

[Excerpt of an article by William Patalon III, Money Morning]

Lehman Brothers, 4th largest US investment bank losses hit world stocks

World stocks have slipped after Lehman Brothers, the fourth largest US investment bank, reported a massive third-quarter loss of about $4 billion. Lehman had already reported losses of $2.4 billion in the second quarter.

The investment bank has already taken $7 billion in credit-related write-downs and losses since the start of the global credit crisis.

No plans for an injection of fresh capital into the bank have been released after a Korean firm backed out of investing.

[Aljazeera.net]

US Treasury adopts orphans Fannie Mae and Freddie Mac

The U.S. government announced plans to place the two mortgage giants, Fannie Mae and Freddie Mac, under “conservatorship” (aka as bankruptcy), the most sweeping government intervention into the financial markets in American history. If these two companies are nationalized, it will add $5.3 trillion dollars to the nation's balance sheet. (And considering the $5.3 trillion in mortgages that Fannie-Freddie own or guarantee, the impact is actually thirteen times greater than the Bear Stearns' failure)

When the U.S. military spends money abroad to fight the New Cold War, these dollars are recycled increasingly into U.S. mortgage-backed securities, because there is no other market large enough to absorb the sums involved. The central banks of China, Japan and Korea are major holders of these securities. Remember, we do not permit foreigners – especially Asians – to buy high-tech, “national security” or key infrastructure.

The Treasury therefore has given informal assurances to foreign governments that they will guarantee at least the dollar value of the money their central banks are recycling. A failure to provide investment guarantees to foreigners would thwart the continuation of U.S. overseas military spending.

The best that this weekend’s bailout can do is to postpone the losses on bad mortgage debts. But this is a far cry from actually restoring the ability of debtors to pay. It is pure hypocrisy for Wall Street’s Hank Paulson to claim that all this is being done to “help home owners.” They are vehicles off whom to make money, not the beneficiaries. They are at the bottom of an increasingly carnivorous and extractive financial food chain.

[Excerpt of interview with Michael Hudson, former Wall Street economist]

$200 billion Interest alone on the enormous U.S. debt

The U.S. government is like anyone with a nearly maxed out credit card: the more debt the country accrues, the more it must pay in interest, which makes it harder to run down the original debt.

And the picture gets worse when the rates go up. That could happen to Uncle Sam if those who buy U.S. debt grow concerned about the country's ability to pay what it owes, or because inflation starts to erode the value of bond yields.

The end result: "Taxpayers have to pay more and more on the national credit card," says Robert Bixby, executive director of a deficit watchdog group, adding that the country paid $200 billion in debt interest last year alone.

Washington is also charging the cost of the wars in Iraq and Afghanistan to its national credit card. So far, the government has spent between $700 billion and $800 billion since 2001.

So exactly how much is a Trillion Dollars?

Dr. Nouriel Roubini of the New York University's Stern School of Business, suggests that the losses of the American financial system will grow to more than $1 trillion.

So exactly how much is a trillion dollars?

That's one million times $1 million. Or one thousand times $1 billion.

An amount that is equal to all the assets of all American banks.

Read more

The American Economy: Give or take a trillion dollars

We've been reading a lot in the press where a “trillion dollars” or so is tossed around:

The Bush administration revealed America's budget deficit will climb to a record high of more than half-a-Trillion dollars.

As of February ’08, the meltdown in the US subprime real-estate market has led to a global loss of 7.7 trillion dollars in stock-market value.

In order to bail out Fanny Mae and Freddy Mac, Congress increased the national debt by a whopping $800 billion sending it over the $10 trillion mark for the first time in history!

The U.S. annual gross domestic product is about $15 trillion.

Since the passage of NAFTA and the creation of the World Trade Organization in 1994, America’s massive trade deficits has surpassed $5 trillion.

Foreigners own $2.5 trillion more of American assets than Americans own of foreign assets.

There are roughly $6 trillion in US dollar-backed assets around the world which could be quickly dumped if foreign holders of US dollars start selling their paper on the open market.

The non-partisan Government Accountability Office that says the U.S. government faces a $53 Trillion shortfall to cover the costs of promised benefits in its entitlement programs: Medicare, Medicaid and Social Security.

Meanwhile, the U.S.’s national debt is expanding by about $1.4 billion a day -- or nearly $1 million a minute.