Goldman Sachs' Low Road to High Profits

How Goldman Secretly Bet On the U.S. Housing Crash

By Greg Gordon, McClatchy Newspapers
November 1, 2009

In 2006 and 2007, Goldman Sachs Group peddled more than $40 billion in securities backed by at least 200,000 risky home mortgages, but never told the buyers it was secretly betting that a sharp drop in U.S. housing prices would send the value of those securities plummeting.

Goldman's sales and its clandestine wagers, completed at the brink of the housing market meltdown, enabled the nation's premier investment bank to pass most of its potential losses to others before a flood of mortgage defaults staggered the U.S. and global economies.

Only later did investors discover that what Goldman had promoted as triple-A rated investments were closer to junk.

Now, pension funds, insurance companies, labor unions and foreign financial institutions that bought those dicey mortgage securities are facing large losses, and a five-month McClatchy investigation has found that Goldman's failure to disclose that it made secret, exotic bets on an imminent housing crash may have violated securities laws.

"The Securities and Exchange Commission should be very interested in any financial company that secretly decides a financial product is a loser and then goes out and actively markets that product or very similar products to unsuspecting customers without disclosing its true opinion," said Laurence Kotlikoff, a Boston University economics professor who's proposed a massive overhaul of the nation's banks. "This is fraud and should be prosecuted."

John Coffee, a Columbia University law professor who served on an advisory committee to the New York Stock Exchange, said that investment banks have wide latitude to manage their assets, and so the legality of Goldman's maneuvers depends on what its executives knew at the time.

"It would look much more damaging," Coffee said, "if it appeared that the firm was dumping these investments because it saw them as toxic waste and virtually worthless."

Lloyd Blankfein, Goldman's chairman and chief executive, declined to be interviewed for this article.

A Goldman spokesman, Michael DuVally, said that the firm decided in December 2006 to reduce its mortgage risks and did so by selling off subprime-related securities and making myriad insurance-like bets, called credit-default swaps, to "hedge" against a housing downturn.

DuVally told McClatchy that Goldman "had no obligation to disclose how it was managing its risk, nor would investors have expected us to do so ... other market participants had access to the same information we did."

For the past year, Goldman has been on the defensive over its Washington connections and the billions in federal bailout funds it received. Scant attention has been paid, however, to how it became the only major Wall Street player to extricate itself from the subprime securities market before the housing bubble burst.

Goldman remains, along with Morgan Stanley, one of two venerable Wall Street investment banks still standing. Their grievously wounded peers Bear Stearns and Merrill Lynch fell into the arms of retail banks, while another, Lehman Brothers, folded.

To piece together Goldman's role in the subprime meltdown, McClatchy reviewed hundreds of documents, SEC filings, copies of secret investment circulars, lawsuits and interviewed numerous people familiar with the firm's activities.

McClatchy's inquiry found that Goldman Sachs:

• Bought and converted into high-yield bonds tens of thousands of mortgages from subprime lenders that became the subjects of FBI investigations into whether they'd misled borrowers or exaggerated applicants' incomes to justify making hefty loans.
  
• Used offshore tax havens to shuffle its mortgage-backed securities to institutions worldwide, including European and Asian banks, often in secret deals run through the Cayman Islands, a British territory in the Caribbean that companies use to bypass U.S. disclosure requirements.


• Has dispatched lawyers across the country to repossess homes from bankrupt or financially struggling individuals, many of whom lacked sufficient credit or income but got subprime mortgages anyway because Wall Street made it easy for them to qualify.


• Was buoyed last fall by key federal bailout decisions, at least two of which involved then-Treasury Secretary Henry Paulson, a former Goldman chief executive whose staff at Treasury included several other Goldman alumni.

The firm benefited when Paulson elected not to save rival Lehman Brothers from collapse, and when he organized a massive rescue of tottering global insurer American International Group while in constant telephone contact with Goldman chief Blankfein. With the Federal Reserve Board's blessing, AIG later used $12.9 billion in taxpayers' dollars to pay off every penny it owed Goldman.

These decisions preserved billions of dollars in value for Goldman's executives and shareholders. For example, Blankfein held 1.6 million shares in the company in September 2008, and he could have lost more than $150 million if his firm had gone bankrupt.

With the help of more than $23 billion in direct and indirect federal aid, Goldman appears to have emerged intact from the economic implosion, limiting its subprime losses to $1.5 billion. By repaying $10 billion in direct federal bailout money — a 23 percent taxpayer return that exceeded federal officials' demand — the firm has escaped tough federal limits on 2009 bonuses to executives of firms that received bailout money.

Goldman announced record earnings in July, and the firm is on course to surpass $50 billion in revenue in 2009 and to pay its employees more than $20 billion in year-end bonuses.

THE BLUEST OF THE BLUE CHIPS

For decades, Goldman, a bastion of Ivy League graduates that was founded in 1869, has cultivated an elite reputation as home to the best and brightest and a tradition of urging its executives to take turns at public service.

As a result, Goldman has operated a virtual jobs conveyor belt to and from Washington: Paulson, as Treasury secretary, sent tens of billions of taxpayers' dollars to rescue Wall Street in 2008, and former Goldman employees populate some of the most demanding and powerful posts in Washington. Savvy federal regulators have migrated from their Washington jobs to Goldman.

On Oct. 16, a Goldman vice president, Adam Storch, was named managing executive of the SEC's enforcement division.

Goldman's financial panache made its sales pitches irresistible to policymakers and investors alike, and may help explain why so few of them questioned the risky securities that Goldman sold off in a 14-month period that ended in February 2007.

Since the collapse of the economy, however, some of those investors have changed their opinions of Goldman.

Several pension funds, including Mississippi's Public Employees' Retirement System, have filed suits, seeking class-action status, alleging that Goldman and other Wall Street firms negligently made "false and misleading" representations of the bonds' true risks.

Mississippi Attorney General Jim Hood, whose state has lost $5 million of the $6 million it invested in Goldman's subprime mortgage-backed bonds in 2006, said the state's funds are likely to lose "hundreds of millions of dollars" on those and similar bonds.

Hood assailed the investment banks "who packaged this junk and sold it to unwary investors."

California's huge public employees' retirement system, known as CALPERS, purchased $64.4 million in subprime mortgage-backed bonds from Goldman on March 1, 2007. While that represented a tiny percentage of the fund's holdings, in July CALPERS listed the bonds' value at $16.6 million, a drop of nearly 75 percent, according to documents obtained through a state public records request.

In May, without admitting wrongdoing, Goldman became the first firm to settle with the Massachusetts attorney general's office as it investigated Wall Street's subprime dealings. The firm agreed to pay $60 million to the state, most of it to reduce mortgage balances for 714 aggrieved homeowners.

Attorney General Martha Coakley, now a candidate to succeed Edward Kennedy in the U.S. Senate, cited the blight from foreclosed homes in Boston and other Massachusetts cities. She said her office focused on investment banks because they provided a market for loans that mortgage lenders "knew or should have known were destined for failure."

New Orleans' public employees' retirement system, an electrical workers union and the New Jersey carpenters union also are suing Goldman and other Wall Street firms over their losses.

The full extent of the losses from Goldman's mortgage securities isn't known, but data obtained by McClatchy show that insurance companies, whose annuities provide income for many retirees, collectively paid $2 billion for Goldman's risky high-yield bonds.

Among the bigger buyers: Ambac Assurance purchased $923 million of Goldman's bonds; the Teachers Insurance and Annuities Association, $141.5 million; New York Life, $96 million; Prudential, $70 million; and Allstate, $40.5 million, according to the data from the National Association of Insurance Commissioners.

In 2007, as early signs of trouble rippled through the housing market, Goldman paid a discounted price of $8.8 million to repurchase subprime mortgage bonds that Prudential had bought for $12 million.

Nearly all the insurers' purchases were made in 2006 and 2007, after mortgage lenders had lifted most traditional lending criteria in favor of loans that required little or no documentation of borrowers' incomes or assets.

While Goldman was far from the biggest player in the risky mortgage securitization business, neither was it small.

From 2001 to 2007, Goldman hawked at least $135 billion in bonds keyed to risky home loans, according to analyses by McClatchy and the industry newsletter Inside Mortgage Finance.

In addition to selling about $39 billion of its own risky mortgage securities in 2006 and 2007, Goldman marketed at least $17 billion more for others.

It also was the lead firm in marketing about $83 billion in complex securities, many of them backed by subprime mortgages, via the Caymans and other offshore sites, according to an analysis of unpublished industry data by Gary Kopff, a securitization expert.

In at least one of these offshore deals, Goldman exaggerated the quality of more than $75 million of risky securities, describing the underlying mortgages as "prime" or "midprime," although in the U.S. they were marketed with lower grades.

Goldman spokesman DuVally said that Moody's, the bond rating firm, gave them higher grades because the borrowers had high credit scores.

Goldman's securities came in two varieties: those tied to subprime mortgages and those backed by a slightly higher grade of loans known as Alt-A's.

Over time, both types of mortgages required homeowners to pay rapidly rising interest rates. Defaults on subprime loans were responsible for last year's housing meltdown. Interest rates on Alt-A loans, which began to rocket upward this year, are causing a new round of defaults.

Goldman has taken multiple steps to put its subprime dealings behind it, including publicly saying that Wall Street firms regret their mistakes. Last winter, the company cancelled a Las Vegas conference, avoiding any images of employees flashing wads of bonus cash at casinos.

More recently, the firm has launched a public relations campaign to answer the criticism of its huge bonuses, Washington connections and federal bailout. In late October, Blankfein argued that Goldman's activities serve "an important social purpose" by channeling pools of money held by pension funds and others to companies and governments around the world.

KNOWING WHEN TO FOLD THEM

For investment banks such as Goldman, the trick was knowing when to exit the high-stakes subprime game before getting burned.

New York hedge fund manager John Paulson was one of the first to anticipate disaster. He told Congress that his researchers discovered by early 2006 that many subprime loans covered the homes' entire value, with no down payments, and so he figured that the bonds "would become worthless."

He soon began placing exotic bets — credit-default swaps — against the housing market. His firm, Paulson & Co., booked a $3.7 billion profit when home prices tanked and subprime defaults soared in 2007 and 2008. (He isn't related to Henry Paulson.)

At least as early as 2005, Goldman similarly began using swaps to limit its exposure to risky mortgages, the first of multiple strategies it would employ to reduce its subprime risk.

The company has closely guarded the details of most of its swaps trades, except for $20 billion in widely publicized contracts it purchased from AIG in 2005 and 2006 to cover mortgage defaults or ratings downgrades on subprime-related securities it offered offshore.

In December 2006, after "10 straight days of losses" in Goldman's mortgage business, Chief Financial Officer David Viniar called a meeting of mortgage traders and other key personnel, Goldman spokesman DuVally said.

Shortly after the meeting, he said, it was decided to reduce the firm's mortgage risk by selling off its inventory of bonds and betting against those classes of securities in secretive swaps markets.

DuVally said that at the time, Goldman executives "had no way of knowing how difficult housing or financial market conditions would become."

In early 2007, the firm's mortgage traders also bet heavily against the housing market on a year-old subprime index on a private London swap exchange, said several Wall Street figures familiar with those dealings, who declined to be identified because the transactions were confidential.

The swaps contracts would pay off big, especially those with AIG. When Goldman's securities lost value in 2007 and early 2008, the firm demanded $10 billion, of which AIG reluctantly posted $7.5 billion, Viniar disclosed last spring.

As Goldman's and others' collateral demands grew, AIG suffered an enormous cash squeeze in September 2008, leading to the taxpayer bailout to prevent worldwide losses. Goldman's payout from AIG included more than $8 billion to settle swaps contracts.

DuVally said Goldman has made other bets with hundreds of unidentified counterparties to insure its own subprime risks and to take positions against the housing market for its clients. Until the end of 2006, he said, Goldman was still betting on a strong housing market.

However, Goldman sold off nearly $28 billion of risky mortgage securities it had issued in the U.S. in 2006, including $10 billion on Oct. 6, 2006. The firm unloaded another $11 billion in February 2007, after it had intensified its contrary bets. Goldman also stopped buying risky home mortgages after the December meeting, though DuVally declined to say when.

I'VE GOT A SECRET

Despite updating its numerous disclosures to investors in 2007, Goldman never revealed its secret wagers.

Asked whether Goldman's bond sellers knew about the contrary bets, spokesman DuVally said the company's mortgage business "has extensive barriers designed to keep information within its proper confines."

However, Viniar, the Goldman finance chief, approved the securities sales and the simultaneous bets on a housing downturn. Dan Sparks, a Texan who oversaw the firm's mortgage-related swaps trading, also served as the head of Goldman Sachs Mortgage from late 2006 to April 2008, when he abruptly resigned for personal reasons.

The Securities Act of 1933 imposes a special disclosure burden on principal underwriters of securities, which was Goldman's role when it sold about $39 billion of its own risky mortgage-backed securities from March 2006 to February 2007.

The firm maintains that the requirement doesn't apply in this case...

COMING MONDAY: Goldman Takes on New Role - Taking Away People's Homes

Since the economic collapse that swept millions of Americans out of their jobs and homes, Goldman Sachs has moved aggressively to recover its losses. The firm is pursuing marginally qualified borrowers into state courts federal and bankruptcy across the country and seeking to seize their homes. McClatchy examines one couple's multi-year attempt to get Goldman to admit that it had purchased their mortgage.

COMING TUESDAY: Goldman Left Foreign Investors Holding the Subprime Bag

Goldman Sachs and other Wall Street firms turned to secret Cayman Islands deals to draw overseas investors, including European banks and other foreign financial institutions, to invest hundreds of billions of dollars in securities tied to risky U.S. home loans. Unlike U.S. investors that lost money on the securities, however, these overseas institutions have fewer legal options.

COMING WEDNESDAY: Why Did Blue-Chip Goldman Take a Walk on Subprime's Wild Side?

Goldman Sachs was among the last Wall Street giants to enter the lucrative world of subprime mortgages. However, it didn't take long before the elite investment house was cutting deals with highflying firms, such as California's New Century Financial, whose lax standards would prove disastrous. Perhaps no lender was more emblematic of the subprime mortgage industry's spectacular rise and fall.

More Coverage (from McClatchy Newspapers)
Story: Mortgage crisis shows why financial regulation is needed
Story: Mystery: Why did Goldman stop scrutinizing loans it bought?
Story: How Moody's sold its ratings - and sold out investors
Graphic: Goldman's revolving door with government
Video: One couple stands up to Goldman Sachs
Video: Goldman Sachs' secret bets
On the Web: State-by-state data on troubled mortgages
On the Web: See our complete Goldman report

Report: Goldman Bet Against Own Products
22 Reasons Why this Recession is Different and Why it Will Endure
How Did America Fall So Fast?
Facing a Total Breakdown of Financial Markets
Goldman's chief executive apologizes for part in fiscal crisis
New Derivatives Legislation "Was Probably Written by JPMorgan and Goldman Sachs"
JP Morgan: Largest Provider of Food Stamp Benefits in the U.S.
Goldman E-Mail Lays Bare Trading Conflicts
Goldman admits 'improper' actions in sales of securities
Goldman Sachs accused of rigging tax vote
Discover to Pay $775 Million to Morgan Stanley in Settlement
Goldman Sachs: Don't Blame Us
On Apr. 7 Goldman Sachs will release its 2009 annual report with a letter to shareholders that will, for the first time, explicitly defend its conduct during the mortgage bubble and subsequent collapse.
U.S. Accuses Goldman Sachs of Fraud
Goldman fraud charges trigger possible wider crackdown
Senate probe: Goldman planned to profit from bust
Goldman “Sideshow” Hyped To Push Through Obama Banking Reform
Supreme Court nominuee Kagan sat on a Goldman Sachs advisory council
What is good for Goldman Sachs is bad for the world

Updated 5/12/10 (Newest Additions at End of List)

Return to The Lamb Slain Home Page

Financial Giants Using Taxpayer Money to Buy Up Other U.S. Lenders

Related Cos.' Ross and Partners May Seek $1 Billion for Bank

SJB National Bank, owned by a private equity firm of financial elites, won approval by the FDIC to bid on failing banks, and is working with Deutsche Bank to raise $1 billion for a new bank that may acquire seized U.S. lenders

Bloomberg
October 30, 2009

Related Cos. founder Stephen Ross and partners Jeff Blau and Bruce Beal Jr. are trying to raise about $1 billion for their new bank that may acquire a seized U.S. lender, people familiar with the plan said.

SJB National Bank, owned by the executives, is working with advisers including Deutsche Bank AG to raise capital in a private placement, according to the people, who declined to be identified because the plans are private.

SJB won approval to bid on failing institutions from the FDIC, according to an Oct. 26 letter from the regulator obtained by Bloomberg News. The FDIC had 416 companies on its list of “problem” lenders as of June 30, and 106 U.S. banks have failed so far this year, the most since 1992.

The executives at New York-based Related received preliminary approval as individuals to establish SJB earlier this year, according to a notice on the U.S. Office of the Comptroller of the Currency’s Web site. Related, the closely held developer of New York’s Time Warner Center, won’t have any stake.

“That would be a nice war chest for them to have,” said Chip MacDonald, a partner with Jones Day in Atlanta who specializes in deals among lenders. “With the approval from the FDIC they could make some really meaningful acquisitions.”

Representatives of Deutsche Bank, SJB and Related declined to comment.

IndyMac, BankUnited

In March, California-based IndyMac Federal Bank, which failed in July 2008, was sold to investors led by Steven Mnuchin, an ex-Goldman Sachs Group Inc. investment banker, and including buyout firm J.C. Flowers & Co. Florida’s BankUnited Financial Corp. was sold in May to firms including Blackstone Group LP and WL Ross & Co.

Related has more than $15 billion of assets including 11 million square feet of commercial property and 17,500 apartment units, according to its Web site.

Ross, 69, completed a purchase of the Miami Dolphins from Wayne Huizenga in January, paying about $1 billion for the National Football League team, its stadium and other properties. He sold stakes to singers Marc Anthony and Gloria Estefan, and her husband, producer Emilio Estefan. The University of Michigan’s business school was named after Ross, following a gift in 2004.

TARP Chief: Banks Possibly 'in More Danger Now'

CNN
October 21, 2009

The banking system today may be in a more precarious position than it was a year ago, the man charged with overseeing a $700 billion bailout program said Wednesday.

Neil Barofsky, the special inspector general managing the Troubled Asset Relief Program, told CNN's Wolf Blitzer on Wednesday that the government's decision to support bank mergers over the past year may have put the U.S. economy more at risk.

"These banks that were too big to fail are now bigger," Barofsky said. "Government has sponsored and supported several mergers that made them larger and that guarantee, that implicit guarantee of moral hazard, the idea that the government is not going to let these banks fail, which was implicit a year ago, is now explicit, we've said it. So if anything, not only have there not been any meaningful regulatory reform to make it less likely, in a lot of ways, the government has made such problems more likely.

"Potentially we could be in more danger now than we were a year ago," he added.

Earlier in the day, Barofsky issued a scathing report criticizing the Treasury Department for not being transparent enough about how bailout money was being spent. He warned that this could have lasting effects.

"I think this cynicism, this anger, this distrust of government that's born in part from a lack of transparency could have far-reaching ramifications, whether there's a next crisis or when anytime the government is going to call on the American people, the taxpayer, to support necessary programs," Barofsky said.

JP Morgan the New Lehman Brothers: Why Make Money Through Commercial Banking When You Can Become a Taxpayer-Backed Investment Bank (How JP Morgan Really Made the $3.6 Billion in Q3 Profits)

mybudget360
October 18, 2009

Toxic mortgages and credit card losses through defaults are rising at a rapid pace. This was also apparent in the earnings report from JP Morgan that reported positive earnings because of non-retail banking activities. Yet the media for whatever reason isn’t highlighting more carefully where the gains are coming from. For example, JP Morgan which swallowed up Washington Mutual and Bear Stearns, posted losses on credit cards and home mortgages yet doubled its earnings from last year in its investment banking division.

Here is one of the key examples of why removing Glass-Steagall Act is such a major problem. The recent meteoric rise in stock prices merely reflects hot money trying to find ground. If we look at actual loan losses they are still on the rise (see chart).

And banks are not lending more as they stated initially with the request for bailout funds. The premise was that trillions were needed or lending would completely dry up. Lending has dried up. Take the mortgage market for example. Loans that are FHA insured now make up the bulk of the market. For non-FHA loans, banks seek to have loans backed by Fannie Mae, Freddie Mac, or Ginnie Mae. In other words, banks are unwilling to lend their own money and will only lend funds backed by the government (aka the American taxpayer).

This behavior is most pronounced with credit cards. With rising defaults companies are using bailout funds to plug up additional losses. Yet they are also combining the easy money to play their hand on Wall Street. The mix of retail and commercial banking is still occurring even after our economy nearly tanked and we are still in recession nearly 2 years later.

I had an experience with the credit card companies recently that shows what is occurring. One of my cards had a line of $10,000 but I rarely use it. If I did use it, I would pay it off every month. Credit card companies look at people that pay off their balance every month as deadbeats. So last month, I receive a letter stating my balance was lowered to $3,000 simply because my lack of use. Keep in mind that this line had been open for 7 years. So I call up the bank and they tell me I can either stay with the new terms or close my account. This is how banks are playing the system and stealing money from taxpayers.

Don’t be fooled, they are pulling credit back (see chart)...

Bailed-Out Banks Pile On Profit

OfficialWire
October 17, 2009

The largest U.S. banks with federal bailout funds to prop them up piled on profits in the third quarter in a sluggish economy, quarterly reports show.

Some banks have paid back the billions in emergency government aid, but remain indirect or direct beneficiaries of more than $1 trillion in federal investments in the financial markets or the $787 billion economic stimulus package.

It could be said, the remaining firms on Wall Street are also benefiting from the "survivor effect" of having less competition by making it through the financial meltdown while the likes of Bear Stearns, Lehman Brothers, Merrill Lynch, Wachovia and Washington Mutual were plowed under in the financial crisis, The Washington Post reported Friday.

In the third quarter, Goldman Sachs posted earnings of $3.19 billion or $5.25 per share, compared to $1.81 per share for the third quarter of 2008.

Profits still mean big bonuses at banks and Goldman has set aside $5.35 billion for bonus pay this year, 84 percent more than a year ago. JPMorgan Chase said this week it set aside $2.78 billion for commission checks, 28 percent more than a year ago.

Baer-ING Deal Kicks Off Private Banks' M&A Season

Reuters
October 7, 2009

Julius Baer's (BAER1.VX) purchase of ING's (ING.AS) Swiss private banking assets marks the start of a consolidation wave in the wealth management industry, insiders told the Reuters Global Wealth Management summit.

Baer will buy the ING's assets for 520 million Swiss francs ($505 million) -- the biggest acquisition in the European wealth management industry -- with Baer paying about 2.3 percent of assets under management (AUM) excluding surplus capital.

Before the financial crisis began, similar deals attracted prices above 6 percent of AUM. With valuations now low, buys are attractive as banks' liquidity worries recede and the capital market turmoil calms.

"There are some opportunities now that didn't exist two years ago," HSBC's (HSBA.L) global CEO for private banking Chris Meares said in Singapore. "There is no doubt with the industry profits coming down, valuations have got a little better, become more interesting at least for a buyer."

But if markets continue to firm, this situation may not last for long, prompting consolidators to move in on targets quickly before valuations recover.

"There is a lot of hope that if the market continues to go up, then the valuations must go up," said Justin Ong, head of PricewaterhouseCoopers' Asia Pacific wealth management practice.

This could happen at either end of the private banking spectrum, with small firms being netted by slightly larger companies looking to bulk up and the really big players sniffing out weaknesses in rivals for possible mega-deals.

Barclays Wealth (BARC.L) Vice Chairman Gerard Aquilina said her group would be prepared to acquire an entity the size of Julius Baer or bigger to reach its ambitious growth targets.

"There could be a major transformational buy for us," he said in Geneva.

Spiraling regulatory requirements and costs springing from clients demands for improved transparency means banks could be forced to take on entirely new support teams and develop new technology, private bankers said.

Add this to clients' demands for more contact time to explain what advisers are doing with their hard-earned money, and cost pressures could become too great for some banks, forcing them to seek the infrastructure of larger rivals by selling up.

"Competition is tougher, regulation is another important factor. You need to have an infrastructure to allow you to participate in today's environment," said Felipe Godard, JP Morgan Private Bank (JPM.N) managing director and head of European International Markets.

"My guess is that smaller players will be the first ones to look for consolidation to create critical mass," he said.

Large players at the Reuters Wealth Management Summit suggested private banks needed a critical mass of about $10 billion in assets to be competitive.

"Probably if you are below 10 billion, either you buy another bank or you sell," said Guillaume Lejoindre, managing director of SG Private Banking (Suisse) SA.

Reyl & Cies Chief Executive Francois Reyl said the threshold depended on the specific kind of business of a private bank, but added that his Swiss private bank was in several discussions for possible acquisitions and aimed to double its size from 2.5 billion Swiss francs in assets under management by 2012. This would only require a 10 percent increase in the bank's current staff of around 90, Reyl said, suggesting economies of scale were a factor in the bank's drive for acquisitions.

"We're conscious of our size, but yes, we're a consolidator in the middle," he said. "Small banks managing sub-500 million Swiss francs -- which clearly lack the scale -- these are good acquisition targets for us."

HSBC, Others Resume Talks for RBS Asia Units

Reuters
October 8, 2009

HSBC has resumed talks with Royal Bank of Scotland over the purchase of the remaining retail and commercial units that bailed-out RBS owns in Asia, sources said on Thursday.

HSBC's re-started talks over the RBS units comes as Asia-focused HSBC is also involved in the sale of ING's private banking assets in Asia.

HSBC declined to comment.

HSBC and other banks have approached RBS and its advisers about the RBS auction after Standard Chartered's exclusive negotiations with RBS expired recently, the sources said.

RBS is selling its remaining retail and commercial banking divisions in China, India and Malaysia, worth "a few hundred million" dollars, according to a source familiar with the matter. Previous reports put the value of those assets at $200 million.

Sources said talks with potential buyers were in early stages, since StanChart's exclusivity only ended within the past week or so.

The retail and commercial units in Asia were identified as non-core assets back in February, prompting an auction that has seen several starts and stops.

In August, Australia and New Zealand Banking Group Ltd said it agreed to buy some Asian units from RBS for about $550 million. ANZ, Australia's fourth-largest lender, said it would buy RBS' retail, wealth and commercial businesses in Taiwan, Singapore, Indonesia and Hong Kong. ANZ will also buy RBS' institutional businesses in Taiwan, Philippines and Vietnam.

RBS could sell the remaining Asia retail and commercial units separately in each country, another source said.

"RBS is in ongoing discussions with bidders for the remaining assets it has decided to sell in Asia and will make further announcements, as appropriate, in due course," said RBS spokeswoman Yuk Min Hui.

The bank is retaining the wholesale and investment banking business, as well as its international wealth management group.

StanChart declined to comment. Morgan Stanley, RBS's adviser on the Asia sale, also declined to comment.

China's Minsheng Eyes Control of U.S. Bank UCBH

Reuters
October 6, 2009

Minsheng Bank, China's first listed non-state lender, is looking to increase its stake in San Francisco-based UCBH Holdings Inc, in order to bolster the U.S. bank's capital, Bloomberg said, citing two people briefed on the matter.

Minsheng is planning to approach U.S. regulators for approval to boost its stake in UCBH to at least 50 percent from the present 9.6 percent, the people told the news agency.

Minsheng has an option to increase its stake to about 20 percent, according to the news agency.

UCBH, which is operating under an enforcement order from the Federal Deposit Insurance Corp and the California Department of Financial Institutions, said last month two top executives resigned after a board audit panel raised concerns about the actions of several current and former officers.

Minsheng and UCBH could not be immediately reached for comment by Reuters.

Banking Superpowers

Note that JP Morgan Chase (which acquired Washington Mutual on September 25, 2008), Wells Fargo (which acquired Wachovia on October 12, 2008), and Bank of America (which acquired an additional 8.4 percent state in China Construction Corp. on November 18, 2008), are amoung the nine banks that were partially "nationalized" in October 2008. Note also that ICBC is majority-owned by the Chinese Government.

US: Watchdog Says Treasury Misled Public About Cost of Bank Bailout

WSWS
October 6, 2009

Neil Barofsky, a top overseer of the US bank bailout program, published an audit Monday in which he asserted that Bush administration Treasury officials misled the public about the financial condition of firms receiving bailout funds. The revelations amount to an admission by an agency of the federal government that top government officials lied to the public about potential losses in order to push through the bailout program.

Barofsky, the special inspector general for the Troubled Asset Relief Program (TARP), noted that in selling the bailout to the American people, Bush administration officials repeatedly insisted that the banking system was sound and claimed that the public stood to retrieve the $700 billion in taxpayer money allocated under TARP, perhaps with a profit.

Barofsky’s report cited Treasury Secretary Henry Paulson, who stated on October 14, 2008: “These are healthy institutions, and they have taken this step for the good of the US economy.”

The same day, the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corporation said in a joint statement: “These healthy institutions are taking these steps to strengthen their own positions and to enhance the overall performance of the US economy.”

These statements came the day after Paulson met privately with the heads of the nine largest US banks and obtained their agreement to accept a combined total of $125 billion in public funds, at interest rates highly favorable to the banks.

According to Barofsky, however, “Contemporaneous reports and officials' statements to SIGTARP (Special Inspector General for TARP) during this audit indicate that there were concerns about the health of several of the nine institutions at that time.”

Barofsky took care to couch his exposure in non-accusatory terms. The conclusion he drew was not that Paulson and other top Bush officials should be indicted and prosecuted for fraud and conspiracy. Rather, he advised that “federal officials should take more care in publicly characterizing the nature and objectives of their initiatives,” so as to maintain the credibility of their program to bail out Wall Street.

Nevertheless, his report sheds light on the existence of a conspiracy between the major banks, the Bush administration and the Democratic-controlled Congress to carry out the greatest diversion of public resources to the financial aristocracy in history—a process that has been accelerated by the Obama administration.

Barofsky was somewhat less reserved in an interview Monday on CNN, in which he said:

“Secretary of Treasury Hank Paulson came out to repeatedly emphasize how healthy these institutions were, and as a result, that this infusion of capital would get them lending again, and as we disclose in our audit, this just wasn’t an accurate statement.” He added, “The Treasury and the Federal Reserve had serious concerns about the health of these institutions.”

Asked about the likelihood that the US government would recoup the money it spent bailing out the banks, Barofsky said:

“I think it’s extremely unlikely that we’re going to have a dollar-for-dollar return, and I don't think the program is designed to have a dollar-for-dollar return.”

Barofsky’s audit goes into some detail regarding last year’s takeover of Merrill Lynch by Bank of America. The report notes that while rivals Citigroup and JPMorgan Chase each received $25 billion in bailout money, Bank of America received not only its allocated $25 billion, but also the $10 billion slated for Merrill Lynch. Bank of America later received an additional $20 billion in emergency funds, as well as guarantees on hundreds of billions of dollars worth of assets, after Merrill revealed disastrous fourth-quarter losses amounting to $15.3 billion.

There is considerable evidence suggesting that Bank of America, under pressure from Paulson and Federal Reserve Chairman Ben Bernanke, concealed the real state of Merrill, as well as Merrill’s plans to award its executives millions of dollars in bonuses, from both Bank of America shareholders and the public in order to complete its takeover of the investment bank. Congressional hearings have been held on the deal and New York Attorney General Andrew Cuomo is reportedly considering issuing indictments in connection with the takeover.

This is not the first time an oversight body has issued criticisms of the bailout program. On July 20, Barofsky chided the Obama administration Treasury Department for failing to demand that the banks disclose what they were doing with the taxpayer money they had received, and warned that the bailout could end up costing the government up to $23 trillion. Earlier that month, the Congressional Oversight Panel, another oversight body for the TARP, found that the government was receiving just 60 cents on the dollar on many obligations owed to it by the banks.

These revelations have been simply ignored. The TARP oversight bodies have no real power, and neither the Obama administration nor the Democratic-controlled Congress has any intention of responding to their disclosures or acting on their recommendations for greater “transparency.”

The Financial World As We Knew It Is Over

A Year After Financial Crisis, the Consumer Economy Is Dead

By Kevin G. Hall, McClatchy Newspapers
September 8, 2009

One year after the near collapse of the global financial system, this much is clear: the financial world as we knew it is over, and something new is rising from its ashes.

Historians will look to September 2008 as a watershed for the U.S. economy.

On Sept. 7, the government seized mortgage titans Fannie Mae and Freddie Mac. Eight days later, investment bank Lehman Brothers filed for bankruptcy, sparking a global financial panic that threatened to topple blue-chip financial institutions around the world. In the several months that followed, governments from Washington to Beijing responded with unprecedented intervention into financial markets and across their economies, seeking to stop the wreckage and stem the damage.

One year later, the easy-money system that financed the boom era from the 1980s until a year ago is smashed. Once-ravenous U.S. consumers are saving money and paying down debt. Banks are building reserves and hoarding cash. And governments are fashioning a new global financial order.

Congress and the Obama administration have lost faith in self-regulated markets. Together, they're writing the most sweeping new regulations over finance since the Great Depression. And in this ever-more-connected global economy, Washington is working with its partners through the G-20 group of nations to develop worldwide rules to govern finance.

"Our objective is to design an economic framework where we're going to have a more balanced pattern of growth globally, less reliant on a buildup of unsustainable borrowing . . . and not just here, but around the world," said Treasury Secretary Timothy Geithner.

The first faint signs that the U.S. economy may be clawing its way back from the worst recession since the Great Depression are only now starting to appear, a year after the panic began. Similar indications are sprouting in Europe, China and Japan.

Still, economists concur that a quarter-century of economic growth fueled by cheap credit is over. Many analysts also think that an extended period of slow job growth and suppressed wage growth will keep consumers — and the businesses that sell to them — in the dumps for years.

"Those things are likely to be subpar for a long period of time," said Martin Regalia, the chief economist for the U.S. Chamber of Commerce. "I think it means that we probably see potential rates of growth that are in the 2-2.5 (percent) range, or maybe . . . 1.8-1.9 (percent)." A growth rate of 3 percent to 3.5 percent is considered average.

The unemployment rate rose to 9.7 percent in August and is expected to peak above 10 percent in the months ahead. It's already there in at least 15 states. Regalia thinks that it could be five years before the U.S. economy generates enough jobs to overcome those lost and to employ the new workers entering the labor force.

All this is likely to keep consumers on the sidelines.

"I think this financial panic and Great Recession is an inflection point for the financial system and the economy," said Mark Zandi, the chief economist for forecaster Moody's Economy.com. "It means much less risk-taking, at least for a number of years to come — a decade or two. That will be evident in less credit and more costly credit. If you are a household or a business, it will cost you more, and it will be more difficult to get that credit."

The numbers bear him out. The Fed's most recent release of credit data showed that consumer credit decreased at an annual rate of 5.2 percent from April to June, after falling by a 3.6 percent annual rate from January to March. Revolving lines of credit, which include credit cards, fell by an annualized 8.9 percent in the first quarter, followed by an 8.2 percent drop in the second quarter.

That's a sea change. For much of the past two decades, strong U.S. growth has come largely through expanding credit. The global economy fed off this trend.

China became a manufacturing hub by selling attractively priced exports to U.S. consumers who were living beyond their means. China's Asian neighbors sent it components for final assembly; Africa and Latin America sold China their raw materials. All fed off U.S. consumers' bottomless appetite for more, bought on credit.

"That's over. Consumers can do their part — spend at a rate consistent with their income growth, but not much beyond that," Zandi said.

If U.S. consumers no longer drive the global economy, then consumers in big emerging economies such as China and Brazil will have to take up some of the slack. Trade among nations will take on greater importance.

In the emerging "new normal," U.S. companies will have to be more competitive. They must sell into big developing markets; yet as the recent Cash for Clunkers effort underscored, the competitive hurdles are high: Foreign-owned automakers, led by Toyota, reaped the most benefit from the U.S. tax breaks for new car purchases, not GM and Chrysler.

Need a loan? Tough luck: Many U.S. banks are in no condition to lend. Around 416 banks are now on a "problem list" and at risk of insolvency. Regulators already have shuttered 81 banks and thrifts this year.

The Federal Deposit Insurance Corp. reported on Aug. 27 that rising loan losses are depleting bank capital. The ratio of bank reserves to bad loans was 63.5 percent from April to June, the lowest it's been since the savings-and-loan crisis in 1991.

For all that, the U.S. economy does seem to be rising off its sickbed. The latest manufacturing data for August point to a return to growth, and home sales are rising. Indeed, there are many encouraging signs emerging in the global economy.

It's all growth from a low starting point, however, and many economists think that there'll be a lower baseline for U.S. and global growth if the new financial order means less risk-taking by lenders and less indebtedness by companies and consumers.

That seems evident now in the U.S. personal savings rate. It fell steadily from 9.59 percent in the 1970s to 2.68 percent in the easy-money era from 2000 to 2008; from 2005 to 2007, it averaged 1.83 percent.

Today, that trend is in reverse. From April to June, Americans' personal savings rate was 5 percent, and it could go higher if the unemployment rate keeps rising. Almost 15 million Americans are unemployed — and countless others are underemployed or uncertain about their job security, so they're spending less and saving more.

A few years ago, banks fell all over themselves to offer cheap home equity loans and lines of consumer credit. No more. Even billions in government bailout dollars to spur lending haven't changed that.

"The strategy that was stated at the beginning of the year — which is that you would sustain the banking system in order that it would resume lending — hasn't worked, and it isn't going to work," said James K. Galbraith, an economist at the University of Texas at Austin.

Over the course of 2008, the nation's five largest banks reduced their consumer loans by 79 percent, real estate loans by 66 percent, and commercial loans by 19 percent, according to FDIC data. A wide range of credit measures, including recent FDIC data, show that lending remains depressed.

Why? The foundation of U.S. credit expansion for the past 20 years is in ruin. Since the 1980s, banks haven't kept loans on their balance sheets; instead, they sold them into a secondary market, where they were pooled for sale to investors as securities. The process, called securitization, fueled a rapid expansion of credit to consumers and businesses. By passing their loans on to investors, banks were freed to lend more.

Today, securitization is all but dead. Investors have little appetite for risky securities. Few buyers want a security based on pools of mortgages, car loans, student loans and the like.

"The basis of revival of the system along the line of what previously existed doesn't exist. The foundation that was supposed to be there for the revival (of the economy) . . . got washed away," Galbraith said.

Unless and until securitization rebounds, it will be hard for banks to resume robust lending because they're stuck with loans on their books.

"We've just been scared," said Robert C. Pozen, the chairman of Boston-based MFS Investment Management. He thinks that the freeze in securitization reflects a lack of trust in Wall Street and its products and remains a huge obstacle to the resumption of lending that's vital to an economic recovery.

Enter the Federal Reserve. It now props up the secondary market for pooled loans that are vital to the functioning of the U.S. financial system. The Fed is lending money to investors who are willing to buy the safest pools of loans, called asset-backed securities.

Through Sept. 3, the Fed had funded purchases of $817.6 billion in mortgage-backed securities. These securities were pooled mostly by mortgage finance giants Fannie Mae, Freddie Mac and Ginnie Mae. In recent months, the Fed also has moved aggressively to lend for purchase of pools of other consumer-based loans.

Today, there's little private-sector demand for new loan-based securities; government is virtually the only game in town. That's why on Aug. 17, the Fed announced that it would extend its program to finance the purchase of pools of loans until mid-2010. That suggests there's still a long way to go before a functioning securitization market — the backbone of consumer lending — returns to a semblance of normalcy.

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Consolidating the Banking System into the Hands of a Few 'Financial Terrorists'

Consolidating the Banking System into the Hands of a Few 'Financial Terrorists'

CIT Crisis Threatens Wave of Business Failures and Layoffs

By Barry Grey, World Socialist Web Site
July 18, 2009

The Obama administration has refused to provide government backing for outstanding debt or other emergency aid to CIT, a New York-based bank that finances nearly one million small and midsize companies in the U.S.

The collapse of CIT’s efforts to secure government relief on Wednesday has left the 101-year-old bank teetering on the edge of bankruptcy and threatens a cut-off of funding to retailers and suppliers. That could result in a wave of bankruptcies and closures, leading to tens of thousands of layoffs.

The administration’s decision to deny aid to CIT stands in sharp contrast to its policy of providing unlimited bailouts to major banks that cater to large corporations and big investors.

It is of a piece with its decision to drive General Motors and Chrysler into bankruptcy in order to impose tens of thousands of layoffs and slash the wages and benefits of auto workers, its opposition to bailing out auto dealerships slated for closure, and its rejection of any federal aid to California or other states facing fiscal insolvency.

It is also in line with the administration’s policy of allowing weaker and smaller financial institutions to fail in order to effect a further consolidation of the banking system in the hands of a few giant Wall Street firms.

CIT is the 26th largest bank in the United States. Its bankruptcy would represent the fourth largest bank failure, by assets, in U.S. history. As of Friday, the bank was seeking to stave off filing for Chapter 11 bankruptcy protection, a development that could rapidly lead to its liquidation.

It was reportedly in talks Friday with Goldman Sachs, JPMorgan Chase, and Morgan Stanley (a spinoff of JPMorgan) on securing credit either to avert a bankruptcy filing, or secure sufficient financing to survive in bankruptcy court.

The New York Post reported that JPMorgan, the biggest U.S. bank, by assets, was interested in acquiring CIT’s factoring unit, the bank’s biggest and most lucrative business.

As the country’s largest factor, CIT buys the receivables of thousands of manufacturers and suppliers, mainly to retail businesses. For a fee, it pays its clients cash up front so they do not have to wait 30 to 90 days for retailers to pay for their supplies and inventory. It also guarantees suppliers that they will be paid even if retailers whom they supply go bankrupt.

CIT controls 60 percent of the U.S. market for factors. It is a factor for some 2,000 manufacturers and suppliers whose goods are sold at 300,000 retailers across the country.

Both suppliers and retailers fear that a CIT bankruptcy will disrupt the flow of cash and credit, disrupting supply chains and leaving businesses unable to pay their bills.

Gail Dudack, chief investment strategist at Dudack Research Group, told clients:

“The company’s collapse would certainly ripple through thousands of small and medium business that rely on CIT for trade financing and lending. This raises the risk of more bankruptcies and more unemployment and would be a significant negative for an already fragile economy.”

Roy Calcagne, CEO of Craftsmaster Furniture, said CIT’s crisis could disrupt the entire supply chain of the furniture industry.

“There could be a huge ripple effect that I’m not sure the government is fully aware of,” he said, “especially if you look at all the ways this impacts supply chains. It could be devastating for our industry.”

Jerry Reisman, a bankruptcy attorney at the law firm Reisman, Peirez and Reisman, told Reuters that he was “deluged” with desperate calls from apparel companies concerned about losing access to credit.

“The government’s decision will,” he said, “result in many companies being unable to make payroll on Friday and inability to pay suppliers. Many of these companies and their suppliers will be forced to file bankruptcy themselves, causing a further decline in the economy.”

CIT, which has an $80 billion balance sheet, has had eight straight quarters of losses, totaling $3 billion. Beginning in 2004, when its current CEO, Jeffrey Peek, took control, the bank plunged into subprime mortgages and student loans. The impact of the subprime collapse and resulting credit crunch has had a particularly crippling effect on CIT, which does not take deposits but rather relies on short-term commercial credit to finance its long-term debt.

For the past two years it has been cut off from wholesale credit markets. Last December, it obtained permission from the government to register as a bank holding company in order to receive $2.3 billion in cash under the Troubled Asset Relief Program (TARP).

CIT has $1.1 billion in debt coming due in August followed by $2.5 billion due by year’s end. The Federal Reserve Board reportedly carried out a “stress test” on the bank earlier this week and concluded it needed at least $4 billion in capital to stay afloat.

Its speculation-driven problems are not essentially different from those of giant banks and financial firms such as Goldman Sachs, JPMorgan Chase, Citigroup, Bank of America and American International Group, which have received tens of billions in taxpayer handouts and are deemed by the Obama administration “too big to fail.”

An administration spokesman said the decision to deny CIT emergency support demonstrated that Obama has “a very high standard” as to which firms can receive government assistance. More to the point, it demonstrates the degree to which the administration’s economic policies are dictated by the biggest Wall Street players.

Since the financial crisis erupted last year, the government has engineered the disappearance of Bear Stearns, Lehman Brothers, Merrill Lynch, Wachovia and Washington Mutual, immensely increasing the economic power of the strongest mega-banks, particularly Goldman Sachs and JPMorgan Chase.

There are a host of smaller regional banks that are sliding toward bankruptcy, further increasing the dominance of the biggest Wall Street firms. At a Senate Banking Committee hearing on Thursday, Senator Jim Bunning, Republican from Kentucky, said Federal Deposit Insurance Corporation Chairman Sheila Bair had told him another 500 banks could fail “unless something dramatic happens.”

The decision to deny aid to CIT came amidst spectacular second-quarter earnings reports by Goldman Sachs and JPMorgan Chase. Goldman reported record earnings of $3.44 billion and JPMorgan reported a sharp rise in profits to $2.7 billion for the quarter. Both banks reaped the vast bulk of their profits from their investment banking and trading divisions.

They are benefiting from the demise of competitors and the ongoing troubles at Bank of America and Citigroup, which gives them greater access to fees generated by underwriting stocks and bonds, while they take advantage of market volatility to place their own bets on stock and bond price fluctuations. Neither these, nor other major banks, are using the lifeline provided by government cash and other subsidies to significantly increase lending to businesses or consumers.

They continue to hide an estimated $2 trillion in toxic assets on their balance sheets, refusing to sell the nearly worthless assets at market prices or write down their value. JPMorgan, even as it reported higher profits, noted large losses in consumer loans and commercial real estate. Citigroup and Bank of America, in their earnings reports released on Friday, similarly reported growing losses in these sectors. These assets will continue to deteriorate as the impact of mass unemployment leads to more defaults on consumer loans and prime mortgages, and the recession further depresses commercial real estate values.

Goldman set aside nearly half of its quarterly revenues of $13.8 billion for salaries and bonuses, setting the stage for record compensation packages for executives and senior employees. This is in line with a general resumption by the banks of seven-and-eight-digit windfalls for top executives.

White House Chief of Staff Rahm Emanuel implicitly alluded to the bumper earnings reports by Goldman and JPMorgan in justifying the decision to cut off CIT.

“Given the sense of calm,” he said, “it is a symbol of a different phase” in the government’s rescue of the banking system.

Similarly, Obama’s top economic adviser Lawrence Summers in a speech in Washington DC declared that the U.S. financial system was “back from the abyss,” and Treasury Secretary Timothy Geithner said the financial markets were sending “important signs of recovery.”

Record pay and profits at Goldman Sachs
Goldman Sachs: Did it cause the problems in the first place?
Morgan and Goldman are the Sole Survivors
Morgan and Goldman Among Biggest Beneficiaries of $700 Billion Bailout Plan
JPMorgan Big Winner After Collapse, Becoming Megabank
JPMorgan made credit derivatives big, then backed off before they blew up
JPMorgan is one big dog in the sand box of the derivative playground
A History of Credit Derivatives
Why Markets Crash in October
CIT Group Board OKs Rescue Loan from Bondholders
The REAL Battle Over America’s Banking System



Read More...

JPMorgan Chase - Credit Derivatives, Interest-Rate Swaps

By InvestorProtection.com

JPMorgan Chase & Co. is a global financial services firm with assets of $2.1 trillion and operations in more than 60 countries. For years, the company made big profits by arranging complex investment deals involving credit derivatives for states, cities, hospitals, school districts and other entities that sell debt in the municipal bond market.

In 2007, the collapse of the subprime market and the subsequent liquidity squeeze caused many of these financing arrangements to sour, forcing countless public agencies to come up with billions of dollars to pay for increased interest payment costs.

JPMorgan also is credited with launching the credit derivatives market back in the late 1990s, a market that billionaire investor Warren Buffett has often referred to as “weapons of mass destruction.”

Holy Smokes, JPMorgan Chase Holding $92,000,000,000,000 in Derivatives

By MyProps.org

That's $92 trillion for those who aren't able to count that many zeros. Here's the complete chart if you want to see what other banks are holding. Do the math: $92 trillion is 74 times JPMorgan's assets and 7 times the entire Gross Domestic Product of the United States.

The value is a "notional value," meaning they didn't actually spend $92 trillion to acquire the contracts. Derivatives are highly leveraged (which can actually make them worse). But their "direct exposure" is a lot less than $92 trillion, as much of the derivatives are hedged.

However, no one knows exactly what derivatives JPM, or any bank, are holding (the derivative system is entirely unregulated); and as Warren Buffet pointed out in 2002, bankers cannot be trusted to just "do the right thing" with derivatives.

It's impossible that 100% of JPM's derivatives are hedged, but surely the vast majority are. But when you're talking $92 trillion, the tinniest mistake can spell doom: a 1.7% adjustment of the $92 trillion wipes out their assets.

It's interesting that JPM has yet to really tank, compared to most of its peers. That may be coming soon though. Their Chase division of course has massive exposure to consumer credit card debt, which is the next shoe to drop. Not to mention JPM acquired Bear Stearns, a cesspool of toxic waste.

Source for the data:
Comptroller of the Currency
OCC’s Quarterly Report on Bank Derivatives Activities (p. 21)
Third Quarter 2007

Nations are Trapped on a Debt Treadmill from Which There is No Escape

Nations are Trapped on a Debt Treadmill from Which There is No Escape

Obama’s New World Order

By Stephen Lendman, Global Research
April 10, 2009

This article addresses Washington’s financial coup d’etat in the context of discussing Michael Hudson’s important, very lengthy, and detailed Global Research article on April 5 titled: “The Financial War Against Iceland - Being Defeated By Debt is as Deadly as Outright Military Warfare.” It reviews the key information in advance of Hudson’s April 14 scheduled appearance on The Global Research News Hour.

The global economic crisis was no accident. It was long ago hatched, and has been brewing for years, gestating, percolating, then bubbling into the 2000 tech crash, a mere prelude for today’s greater one spreading everywhere like a cancer, but hitting the developing world and most indebted nations hardest.

Hudson: “Iceland is Under Attack - Not Militarily But Financially.”

What’s true for Iceland holds everywhere, including the developed world, the idea being to enrich finance capitalism through state-sponsored debt bondage and neo-feudal impoverishment.

Like many others, “It owes more than it can pay” and is bankrupt. It was planned that way, and the idea is to strip-mine the nation and its people of their resources, enterprises, assets, land, homes, jobs and futures through perpetual debt bondage.

Bankers get enriched. Nations and people, however, are discarded like trash, with the IMF as enforcer, to be reinvigorated with an additional (G 20-pledged) $750 billion, quadrupling its resources to $1 trillion if fulfilled.

Wall Street and Western European bankers planned it and now ordered the government “to sell off the nation’s public domain, its natural resources, and public enterprises to pay (its) financial gambling debts.” Also, raise permanent taxes at the worst possible time, then suck the maximum wealth from the country leaving behind an empty hulk and impoverished, desperate population.

It’s called dystopia, which Merriam-Webster defines as “an imaginary place where people lead dehumanized and often fearful lives,” the opposite of utopia under conditions of deprivation, poverty, disease, violence, oppression, and terror, much like in Orwell’s Nineteen Eighty-Four.

"My recent novel [Nineteen Eighty-Four] is NOT intended as an attack on Socialism or on the British Labour Party (of which I am a supporter) but as a show-up of the perversions ... which have already been partly realized in Communism and Fascism. ...The scene of the book is laid in Britain in order to emphasize that the English-speaking races are not innately better than anyone else and that totalitarianism, if not fought against, could triumph anywhere." - George Orwell, June 16, 1949

Permanent debt bondage “is as deadly as outright military” defeat. Loss of livelihoods and assets leave people vulnerable to sickness, despair, and early deaths, much like what happened to post-Soviet Russia under Washington-imposed “shock therapy:”

• 80% of farmers went bankrupt;
• around 70,000 state factories closed;
• unemployment became epidemic;
• a permanent underclass was created;
• poverty rose from two million in 1989 to 74 million by the mid-1990s, and in half the cases it was desperate;
• alcoholism and drug abuse soared; so did HIV/AIDS 20-fold; suicides also and violent crime four-fold; and
• the population declined by 700,000 a year; by 2007 it was 10% lower than in 1989 because of sharply reduced life expectancies.

Iceland, the developing world, and the West take note: this cancer is heading everywhere, courtesy of banker-imposed diktats, mainly from America and the UK. They insist Iceland “impoverish its citizens by paying debts in ways (they’d) never follow” even though the government has no way to do it.

No matter. “They are quite willing to take payment in the form of foreclosure on the nation’s natural resources, land and housing, and a mortgage on the next few centuries of its future”—perpetual debt bondage no different than the spoils of war under permanent occupation.

However, in this case, debtors are convinced to pay voluntarily “to put creditor interests above the economy’s prosperity (and) national interest.” Their indebtedness comes at a huge cost—“chronic currency depreciation (and) domestic price inflation for many decades to come.”

Contrast this to how developed countries, like America, handle debt—by inflating (not deflating) their way out to pay it off with cheap (reduced purchasing power) money because inflation erodes its value. It’s simple—by printing money and running budget deficits the way Washington did after Nixon closed the gold window in August 1971, ended the 1944 Bretton Woods Agreement, and no longer let dollars be backed by gold or converted into it in international markets.

A new monetary system creates money like confetti, and lets us spend and live beyond our means--then have developing and indebted nations pay the price.

In recent years, dollar weakness and price inflation “wiped out much of the US international debt.”

The Iceland model turns “this inflationary solution inside out… in violation of traditional credit practice.” Instead of currency inflation, Iceland “inflate(d) its way into debt, not out of it, (by) indexing (it) to the rate of inflation,” thus guaranteeing “a unique windfall for banks at the expense of wage earners and industrial profits.” The result: destruction of its traditional way of life.

Iceland must “repudiate this debt bomb” to escape. It’s indexed to inflation and “will never lose value.” It’s caught in a destructive whirlpool creating economic shrinkage, falling assets and wages in the face of perpetually burgeoning debt, the same global model needing to be exposed and renounced “now.” Otherwise, economies will be hollowed out, “capital formation will plunge,” people will be impoverished, and many won’t survive.

Hudson’s Background

His expertise comes from “having been an insider to imperial-style plundering… for forty years”—as an economist for Chase Manhattan Bank, Arthur Andersen, and the UN Institute for Training and Development (UNITAR). He’s also taught economics since 1969, heads a Harvard-based economic and financial history group, is a Research Professor at the University of Missouri, and organized the first sovereign-debt fund in 1990 at Scudder, Stevens and Clark.

“All these jobs (except his current professorship) involved analyzing the limited ability of debtor countries to pay—how much could be extracted from them through foreign-currency loans and how much public infrastructure (could) be sold off (through) voluntary virtual foreclosure (under) creditor-dictated rules.”

He advises countries not to borrow in foreign currencies, instead “monetize their own credit for domestic spending and investment.” Iceland broke “the cardinal rule of international finance: never borrow in a foreign currency for credit” that can freely be created at home. “Governments can inflate their way out of domestic debt,” not the foreign kind.

Post-Soviet economies did it the wrong way, now suffer, and recent riots highlight their problems. “Instead of helping them industrialize and become more efficient,” Western bankers loaded them with debt and exploited them—not for manufacturing and infrastructure development, as loans against existing real estate and infrastructure, to suck as much wealth out quickly.

It produced “bubble economies built on debt-financed real estate and stock market inflation,” illusory wealth “bubbles (that) always burst.” The only sustainable financing of imports is through enough exports for a favorable balance of trade.

De-industrialization destroys economies by shrinking them, the result of plunging property valuations, rental income, and exchange rates. Foreign currency mortgage costs exceed property values producing defaults and losses for lenders.

It’s hitting Sweden, Austria and leading creditor states like America and the UK. Real estate, stock market and employment are declining “in a straight line unprecedented even in the Great Depression.” It’s turned neoliberalism into a nightmare.

“Just as individuals can’t live off a credit card forever, neither can nations. As any classical economist knows, societies that only manufacture debt are unsustainable.” Eventually they collapse into bankruptcy just like a business or household. The old saying applies. Things that can’t go on forever, won’t.

No matter. Predator banks want to prolong the game as long as possible, grab all the wealth they can, force debtor nations to sell state enterprises at distressed prices, then get new business by lending to investors who buy them on the cheap. Will it work? Only if targeted countries go along. In the case of Iceland, its very future is at stake.

Sound v. Imprudent Banking

For centuries, banks created credit responsibly—loaning money for sound investments to debtors able to repay with interest. No one imagined a world like today’s with massive defaults occurring globally. In America, one-third of home mortgages are in “Negative Equity;” that is, “the mortgage exceeds the (property’s) market price pledged as collateral.”

US national debt tripled in one year, from $5 - $15 trillion, and according to some economists like John Williams, it’s much higher under GAAP accounting—including unfunded liabilities around $65.5 trillion, an amount exceeding world GDP through FY 2008, meaning America is bankrupt. Williams also puts unemployment at 19.8% by reengineering it to include discouraged and involuntary part-time workers and excluding fictitious birth-death rate ratio inclusions.

Blunt Truths About the “Dismantling of Industrial Capitalism”

Instead of extending credit to construct and grow them, financial oligarchs turned indebted nations into “casinos (through) debt-leveraged gambles,” redistributing wealth upward and creating “debt peonage for most citizens.” Even in America, nearly half the population has no net worth, and the gulf between richest and the rest is unprecedented.

“This is the unfair system that the world’s top creditors would export to Iceland—if they can convince its voters (and leaders) to accept neoliberal debt pyramiding as a way to get rich.” It’s not working throughout post-Soviet states that see it as the road to hell, if public riots are a gauge.

“Better alternatives (are) the only defense” as it’s impossible for “astronomically indebted economies to ‘work their way out of debt.’ ” Trying will “collapse the currency’s exchange rate,” divert huge amounts of revenue and property to creditors, and produce “a new kind of post-capitalist (unjust, unsustainable) non-production/consumpton economy” too gruesome to imagine or tolerate.

Iceland’s financial crisis is the result of lawless predation, an “international (austerity demanding) Ponzi scheme” under rigged market rules imposing public and private “asset stripping” to pay debt. A simple scheme transfers wealth.

Economies and populations are trapped on a “debt treadmill from which there is no escape. (Lenders) pile on credit and let debts grow (through) the ‘magic of compound interest,’ knowing that loans cannot be repaid—except by asset sell-offs.” They’re strip-mined through unending debt service so the parasite keeps feeding on its food source. The idea is to get it all, leaving empty hulks behind, then on to the new victims. It’s “euphemistically dubbed post-industrial wealth creation,” the kind that’s collapsing economies globally and destroying people. Obama is commander-in-chief of the process.

America as Lead Predator

It’s a viciously ugly scheme that’s “trapped other countries into a nightmarish system in which (they’re practically forced) to recycle their excess balance-of-payment dollar inflows back to the US,” mainly as loans to the Treasury.

“When foreign central banks receive dollars for their exports (or asset sales),” their choices are limited. “Congress won’t let them buy important domestic companies or resources,” or get paid with US gold reserves. The alternative is buy Treasuries and mortgage-backed securities like Fannie and Freddie debt.

Icelanders and other nations must remember that America is the world’s largest debtor, and as Adam Smith explained in The Wealth of Nations—“no nation ever repaid its debt,” and he never envisioned one as large as America’s. We grow it by issuing paper for real assets and services. Until other countries demand more than confetti, this “Madoff-Ponzi scheme” will persist: for tiny states like Iceland (population 319,000 as of January 2009), it will persist until nothing is left to hand over.

Today’s road to riches isn’t through capital investment. It’s by “foreclos(ing) at pennies on the dollar and mak(ing) ‘capital gains’ by flipping property onto (central bank-inflated) world financial markets.” In a word, socializing risks, privatizing profits, preying on the weak, and getting “a free lunch” at public expense.

It’s a zero-sum game. One side’s gain is another’s loss, and when it matches America against Iceland, it’s easy exerting pressure, but no certainty it’ll prevail. As a sovereign state, Iceland can choose. More on that below.

Throughout the process, “financialized wealth is extractive, not productive… because loans, stocks and bonds are claims on wealth,” not the kind produced by making things.

This is Iceland’s dilemma. “Homeowners are paying tribute, not in taxes to (an occupier), in interest to (debt pyramid, international creditor) sponsors of “over-financialization,” aiming to strip-mine the country of everything; the way it’s worked in many developing states. “Yet many Icelanders are heading into this future voluntarily” with little understanding of the trap, propelling them toward debt peonage destitution under the guise of an IMF rescuer—like a spider to a fly.

It shouldn’t happen and won’t if countries refuse to be trapped and extricate themselves in time. Iceland is at a crossroads, still able to avoid what ruined Russia, other post-Soviet states, South Africa, and many other nations misjudging America and the IMF as saviors, not world class predators.

“Back to the Future” - A New Age of Neo-feudal Debt Bondage

Conventional banking works by extending credit in the form of interest-bearing loans and seizing collateral only in cases of default. Central banks were created to finance governments and commercial ones to “expand trade, related infrastructure, mining and shipping,” and to develop other forms of business and industry.

More recently, “financial managers persuaded many countries to sell off public enterprises, like their water or energy supplies, mainly to pay debts or cut taxes” for the rich. It’s turned debtor nations into “tollbooth economies in which basic services become a vehicle to extract greater and greater portions of national income and wealth for the benefit of the few.”

It’s the opposite of how classical economists define “free markets.” Today, financial interests control them to extract labor and capital investment-produced surpluses—for themselves under the guise of “economic democracy.” The result “pushed much of the Third World into poverty since the 1960s;” and now the same cancer is heading everywhere.

Financial Warfare As Deadly As By Armies

Today’s financial strategy is “multilateral (with) the IMF (and World Bank) act(ing) as enforcer(s) for global creditors to appropriate the income of real estate, national infrastructure and industry” by masquerading as a helping hand and seducing borrowers to believe it.

Here’s how neo-feudal banking works. It doesn’t create credit for manufacturing: retained earnings and equity do it. It “create(s) credit primarily against (existing) collateral, and by so doing, “extract(s) money from the economy (and) undercuts industrial growth for “short-term speculative gains.”

This hegemony “took thousands of years to achieve,” and it wasn’t easy inducing nations into poverty through “debt pyramiding as good economic strategy.” It’s like prescribing gorging as a way to lose weight or a junk food diet to stay healthy.

Iceland made it worse by “protecting the claims of creditors against debtors,” including most wage-earners. As post-bubble home prices plunged, creditors held their own and even “strengthen(ed) their hand by increasing their take,” thus making a bad situation worse. Its people own a shrinking equity in their homes vis-a-vis bankers having the lion’s share. Its law shifts homeowners to “Negative Equity,” and it works by keeping people in the dark.

But it’s much the same in the US to hide the root cause of today’s crisis—Wall Street/Washington’s engineered housing and debt bubble fraud amounting to financial piracy of the greatest magnitude. In America, Iceland, and elsewhere it’s turned “ownership” societies into “loanship” debt trap ones. Until recently, it was unthinkable to let economies be crippled by interest payments. Now it’s de rigueur through clever manipulation to convince people and nations to go along with their own demise.

For Iceland, its debt burden threatens its national identity and “loss of its future” the way Adam Smith explained—through bankruptcy when it’s too great to repay. “Today, creditors and bondholders care about foreign economies only to the extent that they can charge (enough) interest (to) absorb their entire economic surplus.” Getting it all is today’s credo, and nothing too outlandish is irresponsible. Get in trouble: Socialism comes to the rescue, for bankers, not people or easy targets like Iceland.

Its “ethic is mutual aid and prosperity for all… a highly socialized attitude (yet how tragic that it’s) lead the nation to (buy into) the snake oil (of) debt peonage.” Economic growth never keeps pace with accruing debts that get recycled into greater ones, but end games are the same. “Debts that can’t be paid, won’t be,” while bankers too big to fail get bailed out at the expense of public interests and sound economics. Yet Hudson explains: “Creditor mismanagement is the most important problem that any country should strive to avert.”

Most important is to foster a free and open market of ideas, to extract the best and discard the others. But that’s not how Western societies work, especially banker-run ones. A “free market” for them is “free” of ideas laying bare their snake oil.

“Most societies throughout history provide(d) credit… without oligarchy.” Today it’s the opposite. Predatory finance erased centuries of reform and did it at warp speed. As a result, our freedom is threatened and very close to being lost.

What’s needed is a return to “basics and a call for transparent statistics,” socially progressive ideas “of a just society free of economic privilege, free of prices in excess of socially necessary costs of production and of rentier income and wealth without effort,” earned “in their sleep,” not through their labor.

It means wealth should be based on “what one creates—not land and natural resources, or monopoly privileges to extract income via control of roads, the right to create money, and other natural monopolies.” Reform depends on purging this privilege. “The way to do it is to treat banking like transportation and broadcasting, as a public utility,” not something privatized for “rentiers (to) tax society” for what rightfully belongs to everyone.

In the hands of predators, progressive reforms are impossible as financial giants “preserve their special privileges by law, minimizing taxes on themselves by shifting the burden onto labor and industry.”

Financialization:

• “raise(s) the cost of living (and) doing business;”
• frees bankers’ “major customers—mortgage borrowers—from taxation to leave (maximum) surplus (for) interest;”
• collects public sector revenue “by capitalizing it into interest charges” and inflating housing, other real estate, and other business prices;
• “shift(s) taxes onto labor and industry, thereby raising prices and undermining the competitive power of financialized economies.”

This is predation, the very opposite of “classical free market policy.” Keynes concluded his General Theory by calling for “euthanasia of the rentier.” His followers advocate banking as a public utility “to steer debt creation to fund growth in the means of production, not economic overhead by inflating property bubbles.” None of that’s in sight. Maybe someday after the inevitable demise of the current system that will eventually crumble under its own weight.

Lessons for Iceland and Other Nations

Iceland “is under financial attack from outside as well as within—by foreigners supported by a domestic banking class. To succeed (they need) to convince the population that all debt is productive, and that the economy benefits to the extent that its net worth rises (that is, make its asset values appear greater than its debt).”

The fact is that prices don’t fall, “and if they do, debts should (remain), even (at the expense of) negative equity.” Icelanders are being manipulated to believe they have “no alternative but to pay debts that a few insiders accumulated—ones that accrue interest when (they’re) unpaid.” In fact, demanded debt amounts exceed what the country can pay, but the strategy is to conceal this as long as possible “to proceed with the foreclosure and voluntary pre-bankruptcy sell-off of national assets to pay” predators.

What’s true for Iceland, holds everywhere Wall Street and the IMF target, and here’s the scheme:

• shrink economies;
• shift wealth and property upwards to a financial oligarchy; and
• price “labor and industry out of world markets as a result of the heavy financial charges built into (the) pricing system.”

Iceland is a “model test case for economic justice.” Hopefully it will “confront reality sooner than later” and not get trapped into perpetual debt bondage by succumbing to global creditor pressure or seduction. What benefits them, harms people, and everyone needs to know it. Bankers “aim (for) a return to ‘normalcy,’ defined as new exponential (debt volume) growth” producing more destructive bubbles like the last ones.

Iceland must reject Wall Street’s medicine or perish, and the same holds elsewhere, including in America. Bankers, not nations or people, should take the pain. Hudson asks:

“How can Iceland (or Hungary, Latvia, Ukraine, or many other nations) pay its debts without bankrupting itself, (in Iceland’s case) abandoning its social democracy and polarizing its (people) between a tiny creditor oligarchy and” everyone else? They’re threatened by “a new ruling class that will control (their) destiny for the next century” or beyond. It’s their choice to reject it and stay free.

Their “foreign currency loans should be denominated in domestic currency at written-down (and de-indexed) interest rates, or repudiated outright.” The guiding principle should be to annul debts taken out under (destructive and extractive) terms benefitting creditors at the expense of their prey.

They aim to dominate societies—“above all… to maximize the power of debt over labor. The worse the economy does, the stronger” they get. It’s a vicious cycle “recipe for economic suicide (from perpetual) debt peonage.”

Iceland can be a test case model against it. It comes down to whether it will back its people or, like America, surrender to financial predators. It’s much the same globally, the result of the greatest ever economic crisis opportunity for plunder. The perpetrators love it. It’s high time they got their comeuppance.

"Imagine tiny Iceland taking the lead and fighting back against what another former high-level Wall Street and government insider warns," said Catherine Austin Fitts, Assistant Secretary of Housing and Federal Housing Commissioner under GHW Bush.

In her latest quarterly review, Fitts predicts that “Obama will do more to help bankers achieve centralized control and one world government than any (previous) US politician.” In less than three months in office, he’s shown bankers they can count on him—to the tune of trillions of dollars, further open-ended checkbook amounts on request, and global “diplomatic” pressure on targeted nations to surrender. It’s for public rage, tiny Iceland, and other over-indebted nations to demand “no more.” Hopefully enough of them have backbone to do it.

Iceland: Microcosm of What's Coming?
Worldwide Depression: Review of Global Markets
This is No Recession: It’s a Planned Demolition

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