Posts Tagged ‘credit default swaps’

U.S. Banks Doomed To Fail

April 22nd, 2009 Comments off
Within days after the legalized accounting fantasy masquerading as first quarter earnings for several of America’s largest banks and financial institutions were released, the markets began to catch on. After several days of a sucker’s rally on Wall Street, the Dow Jones went into retreat as more savvy investors caught on to the charade. That is when Timothy Geithner, U.S. Treasury Secretary, ran to the rescue, ready-made script in hand.
In advance of the so-called “stress test” that is supposed to establish the fiscal health of U.S. banks, Geithner released a sneak preview. “Currently, the vast majority of banks have more capital than they need to be considered well capitalized by their regulators,” boasted Obama’s Treasury Secretary. With Pavlovian instincts, the market bought Timothy Geithner’s fiscal fantasy, at least for a day.

A few weeks before these antics a more sober assessment of America’s banking health was delivered at the National Press Club in Washington by Dr. Martin D. Weiss, the head of Weiss Research, a global investment research firm. Previously, Weiss had accurately forecast the demise of Bear Stearns and the implosion of the U.S. investment-banking sector. However, at the National Press Club he offered a more chilling prediction: 1,568 U.S. banks and thrifts risk failure. Included in that number are several of the largest American banks, including J.P. Morgan Chase, Goldman Sachs, Citigroup, Wells Fargo, Sun Trust Bank and HSBC Bank USA. The numbers and depth of the banking problem highlighted by Dr. Weiss are far larger and much more ominous than has been portrayed by the Federal Reserve, Treasury Department and FDIC. He backed up his dire analysis with documentation and precise mathematical modeling. For example, he refers to the government’s justification for a hideously expensive taxpayer bailout of AIG, based on the firm’s exposure to the fragile investment vehicles known as Credit Default Swaps, or CDS. The policymakers maintain that AIG’s $2 trillion in CDS exposure represented an unacceptable systemic risk, meaning AIG was “too big to fail.” However, Weiss points out that Citigroup alone holds a portfolio of $2.9 trillion in Credit Default Swaps, while J.P. Morgan Chase possesses a staggering $9.2 trillion of these toxic instruments, about five times the exposure that led AIG to demand that the government rescue it, or see the global financial system implode.

The essential point Dr. Weiss made at his press conference is that the degree of exposure U.S. banks have to a variety of toxic assets is beyond what the U.S. government and, by extension, the American taxpayer is financially capable of rescuing. Continued bailouts of insolvent banking institutions will not repair a broken financial order, but may very well cripple the overall economy.

Earlier, NYU economics professor Nouriel Roubini had already gone on record as declaring that much of the U.S. banking sector was functionally insolvent, and that bailing out zombie financial institutions would only replicate the Japanese “lost decade” of the 1990s, when Tokyo’s preference for keeping alive insolvent banks instead of closing them down led to a prolonged L-shaped recession. Roubini and other critics of both Bush and Obama administration policies on bank bailouts have looked to the Swedish model for resolving a profound banking crisis, which involved temporary short-term nationalization, closing down insolvent banks, while those banks that can be salvaged are cleaned up of their toxic assets, recapitalized and then sold back to the private sector. “You have to take them over and you have to split them up into three or four national banks, rather than having a humongous monster that is too big to fail,” Nouriel Roubini has argued.

According to the International Monetary Fund, the global financial and economic crisis has already created more than $4 trillion in credit losses due to toxic assets. If nothing else, the IMF estimate on the scale of the economic and financial disaster thus far should compel the Washington political establishment to face the painful yet necessary truths regarding America’s precarious situation. However, it appears that fantasy is preferred over reality within the corridors of power.

The procrastination of policymakers in Washington in facing dark reality, and preference to avoid any public takeover of troubled banking institutions while simultaneously subsidizing these financial dead men walking with almost unlimited taxpayer funds, at the same time maintaining the fiction, as Timothy Geithner has just done, that all is basically fine with the “vast majority” of U.S. banks, is to insure the inevitability of a systemic banking collapse in the United States. The conglomeration of reckless, greed-induced banking practices by the oligarchs of finance and inept, reality-denying policymakers is sending much of the American banking sector on a Wagnerian death ride into a financial apocalypse. Many of the U.S. banks are in fact doomed to fail, and no contrived stress test or Geithner speech can alter that outcome. And that isn’t even the worst part. For when mass banking failures occur in the United States and overseas, a global economic depression will be an irreversible outcome.

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AIG To American Taxpayers: Drop Dead

March 17th, 2009 Comments off

AIG and its recklessly greedy and stupid executives are ample proof that modern American capitalism is not an impartial economic system based on rewards for performance, with no guarantees and safety nets for risk takers. Winners take all; losers surrender everything. That was the story we have all been told, but it has been proven time and time again during the Global Economic Crisis that this is a myth. If anything, the reverse is the case. AIG is a textbook study in how communism has infected the boardroom suites of corporate America, with the old-fashioned cold capitalism left for just the dumb middle-class taxpayers. Privatize the obscene profits, but socialize the corporate losses, especially if they are the result of reckless stupidity and massive greed.

Greed and recklessness are certainly at the root cause of the AIG implosion. Though the insurance arm of the company was solvent, a derivatives trading unit of AIG, based in London, came up with the ingenious idea of selling credit default swaps as insurance to banks, Wall Street, pension funds and other investors, public and private. These CDS products were, among other things, insurance against losses on investments in mortgage-backed securities. The AIG geniuses thought they had a whopper of an idea; mortgage-backed securities will never lose money, so therefore the insurance premiums will be an easy cash flow for AIG. Accordingly, since these CDS products will never fail, AIG had no need for a substantial reserve against losses. That was the theory. In practice, we all know what happened with mortgage-backed securities, and AIG’s unique strategy of not maintaining reserves to cover claims.

Unfortunately for the American taxpayers, the Federal Reserve, utilizing its massive powers, deemed that AIG was too big to fail, concluding that its collapse would create systemic risks to the entire global financial system. In essence, the Fed decided that AIG must be propped up at any price, and that decision was made with no input from Congress or the American people. At first, the American people were told that AIG required a “loan” of $85 billion, and that the taxpayers would get their money back-some day- when the “healthy” parts of AIG could be sold for reasonable market value. Now, however, the AIG bailout cost has climbed to $185 billion, and it should be clear to us all that the American taxpayers are not “loaning” their money to AIG. They are funding a flow-through of payments to clients of all kinds of insurance “products” and bets that the brilliant executives at AIG chose to underwrite, with the end nowhere in sight. Not even the Federal Reserve and U.S. Treasury knows what the final bill will be, but it is likely to exceed a half-trillion dollars.

The same brilliant executives at AIG who were the architects of the near-meltdown of the financial world, the acceleration of the Global Economic Crisis and the transformation of their company into a zombie entity, only kept alive by transfusions of taxpayers cash, still think they are entitled to large bonuses for their masterful work. Bonuses beyond their already excessive compensation. With the same temerity they displayed in conceiving of their credit default swaps, the top management of AIG decreed hundreds of millions of dollars in bonus payments be made to the firm’s executives. This included $165 million in bonuses to the derivative traders at the AIG business unit responsible for our current global financial calamity. However, not even the arrogant management of AIG could justify these bonuses as “performance payments.” So, in their typically dexterous mode, they simply did a word substitution and called these bonuses “retention awards.”

Paying $165 million to retain the reckless, incompetent and greedy architects of a major cause of the Global Economic Crisis? It would appear that the AIG executives either think the American taxpayers are utterly dull-witted and stupid, or they simply could not care less.

With corporate leadership of the caliber being displayed at AIG, does anyone still wonder why American capitalism is in trouble?