Monday, March 16, 2009

The Honeymoon Is Ending

We're back to financial news being made on Sundays. The latest was an attempt to bury the news, meaning the disclosure by AIG yesterday of the largest recipients of government largesse.

Please read Jesse for a withering critique at his post today, "AIG: A Scandal of Epic Proportion." While your humble blogger has read numerous online criticisms of the bailouts from bloggers, including from Jesse, this is the first that has explicitly joined EBR in placing responsibility where by law and common sense it has to be placed, which is at the desk of the President. George Bush was no less responsible for Henry Paulson than Barack Obama is for Tim Geithner.

Here are Jesse's introductory comments:

"Goldman Sachs had said in the past that its exposure to A.I.G.’s financial trouble was 'immaterial'."

Well, it appears it was immaterial because they had set things up so they could not lose. It seems fairly obviously that a relatively small department within AIG, the Financial Products division, was operating under the regulatory radar and was used as a patsy by a number of the Wall Street banks, who had no worries about losses because of their power to obtain the US government as a backstop to losses.

This is a scandal of epic proportion. 'Outrage' barely manages to express the appropriate reaction.Obama is an educated, intelligent President, and can hardly retreat behind the clueless buffoon defense used by so many CEO's and officials. He is directly responsible for this outcome now.

The honeymoon for the Obama Administration is over. Geithner and Summers should resign over their handling of AIG, and there should be no question that the Fed has no business regulating anything more complex than a checking account.

The difficulty with which we are faced is that despite their mugging for the camera and emotional words the Republicans are owned body and soul by Wall Street and Big Business.

Getting behind a third party for president is symbolic but ineffective. Giving a significant number of congressional seats to a third party will send a chilling and practical message to both the President and the Congress that enough is enough.

You may click over to Jesse's site to then read the NY Times article on this topic, into which Jesse's comments are interpolated. It is worth the read. EBR readers know that the thesis here is that the Establishment has engaged over the past year in the greatest financial wealth transfer from a citizenry to corporations in modern times.

Here's what's probably enough for most people from the Times article and Jesse's commentary in boldface, for those who don't want to link to the full article with all of Jesse's comments.

A.I.G. Lists the Banks to Which It Paid Rescue Funds
March 16, 2009

Amid rising pressure from Congress and taxpayers, the American International Group on Sunday released the names of dozens of financial institutions that benefited from the Federal Reserve’s decision last fall to save the giant insurer from collapse with a huge rescue loan.

Financial companies that received multibillion-dollar payments owed by A.I.G. include Goldman Sachs ($12.9 billion), Merrill Lynch ($6.8 billion), Bank of America ($5.2 billion), Citigroup ($2.3 billion) and Wachovia ($1.5 billion).

Big foreign banks also received large sums from the rescue, including Société Générale of France and Deutsche Bank of Germany, which each received nearly $12 billion; Barclays of Britain ($8.5 billion); and UBS of Switzerland ($5 billion).

A.I.G. also named the 20 largest states, starting with California, that stood to lose billions last fall because A.I.G. was holding money they had raised with bond sales.

In total, A.I.G. named nearly 80 companies and municipalities that benefited most from the Fed rescue, though many more that received smaller payments were left out.

The list, long sought by lawmakers, was released a day after the disclosure that A.I.G. was paying out hundreds of millions of dollars in bonuses to executives at the A.I.G. division where the company’s crisis originated. That drew anger from Democratic and Republican lawmakers alike on Sunday and left the Obama administration scrambling to distance itself from A.I.G.

“There are a lot of terrible things that have happened in the last 18 months, but what’s happened at A.I.G. is the most outrageous,” Lawrence H. Summers, an economic adviser to President Obama who was Treasury secretary in the Clinton administration, said Sunday on “This Week” on ABC. He said the administration had determined that it could not stop the bonuses.

(Among the outrages was the appointment of that sly old fox Larry Summers and his sidekick Tim Geithner by President Obama, and their continued tenure in any so-called reform government. - Jesse) . . .

He (Ben Bernanke on '60 Minutes' last night) went on: “Here was a company that made all kinds of unconscionable bets. Then, when those bets went wrong, they had a — we had a situation where the failure of that company would have brought down the financial system.” (AIG was a setup with the very banks, Goldman Sachs and crew, that you are bending our economy over backwards to save, Ben - Jesse) . . .

“A.I.G.’s trading partners were not innocent victims here,” said Senator Christopher J. Dodd, the Connecticut Democrat who presided over one recent hearing. “They were sophisticated investors who took enormous, irresponsible risks.” (Do something about it then you windbag - Jesse) . . .

Representative Barney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee, implicitly questioned the Treasury Department’s judgment about the whether the bonuses were binding. (I would question if Barney Frank is competent to hold office since he has also been a key player - Jesse) . . .

In some ways, the best part of the article comes at the end:

Among the beneficiaries of the government rescue were Wall Street firms, like Goldman Sachs, JPMorgan and Merrill Lynch that had argued in the past that derivatives were valuable risk-management tools that skilled investors could use wisely without any intervention from federal regulators. Initiatives to regulate financial derivatives were beaten back during the administrations of Presidents Bill Clinton and George W. Bush.

Goldman Sachs had said in the past that its exposure to A.I.G.’s financial trouble was “immaterial.” . . .

Until last fall’s liquidity squeeze, A.I.G. officials also dismissed those who questioned its derivatives operation, saying losses were out of the question.

In other words, the incompetence, greed and outright lying that has gone in the financial sector is staggering.

The recent mid-decade boom was perhaps the greatest synchronized global boom ever.
The current bust may be equally epic. We are witnessing the lowest synchronized global government interest rates ever. This only happens in deflationary times. Such times are devastating for stocks, especially when prices of public companies are well above their working capital and even above their tangible book value.

Those stock market analysts who look to the few major market bottoms dating from 1932 as a guide to future stock market behavior have as much predictive power behind them as those who pointed out, after George Bush became President in 2000 after losing the popular vote, that the two prior elected Presidents who lost the popular vote to their opponents went on to be one-term Presidents.

We can only hope that we have seen the all-time bottom for the stock market.

In the face of the public's gradual recognition of the prior and ongoing thefts as described above, and the almost certain significant economic deterioration coming in the months ahead, the case to put new money into stocks appears weak, short-term trading strategies aside.

Fundamentally much more important is whether Eastern Europe will bring down Western European banks, whether the British Government will default on its debts, and even whether the U.S. Government will finally get a comeuppance in the debt markets.

(P.S.: John Quincy Adams and Rutherford B. Hayes were the one-term Presidents whose defeated opponent beat them in popular vote count.)

Copyright (C) Long Lake LLC 2009

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