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Posts Tagged ‘hank paulson’

Lehman Brothers One Year After Its Collapse

September 7th, 2009 Comments off

On September 15, 2008 the supposedly safe, perpetually prosperous world of post-industrial capitalism blew itself up when Lehman Brothers filed for Chapter 11 bankruptcy. The iconic Wall Street investment bank was forced into this act of extremis when the collapse of the subprime mortgage market in the United States turned the securitized mortgage backed debt obligations engineered by the wizards on Wall Street into toxic assets, in the process extinguishing most of the storied investment banks in the United States, including Bear Stearns and Merrill Lynch. In those previous cases, Treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke cobbled together a pseudo rescue, whereby these two firms were absorbed by JP Morgan Chase and Bank of America respectively, with massive financial aid and guarantees against bad debt generously provided courtesy of the American taxpayer. However, when Lehman Brothers stood on the precipice, the economic policymakers in Washington were confronted by the issue of moral hazard, and the growing public distaste with the concept of “too big too fail,” the justification previously issued by Paulson and Bernanke to prop up failing Wall Street firms.

The U.S. Treasury and Federal Reserve made a decision to allow Lehman Brothers to fold, assuming its demise would not pose a systemic risk to the global financial system.  Shortly afterwards, AIG was also on the verge of bankruptcy, due solely to the exposure of its Credit Default Swap operation spearheaded from its London office. Treasury Secretary Paulson stated that AIG was so large a factor in the global financial system, its business liquidation could not be allowed to occur, regardless of the subsidies required to keep it afloat. Through the middle of 2009, the U.S. government would inject in excess of $180 billion dollars into AIG.

The calculation made by Bernanke and Paulson that Lehman Brothers was expendable, especially in light of the measures taken to save AIG, Merrill Lynch and Bear Stearns, not to mention Fannie Mae and Freddie Mac, was destined to be proved fatally flawed, and in rapid order. As with so much else about the Fed and Treasury Department in terms of assessing the systemic impact of the collapse of the subprime mortgage market and its related financial derivatives, they badly underestimated the destructive forces that had been unleashed upon the global financial system by the collapse of Lehman Brothers. When Lehman Brothers imploded, its debris virtually froze the entire global interbank lending mechanism, and brought the flow of credit to a virtual standstill.

An immediate consequence of the disintegration of Lehman Brothers was the accelerating rise in the LIBOR and Ted Spreads, reflecting frozen global credit markets saturated with counterparty risk aversion. Money market funds were being depleted at a dangerously rapid pace, and economic indicators across the globe were heading south at a pace that soon became a free fall. The possibility of another Great Depression was openly being talked about, as it became abundantly clear that Lehman Brothers and its derivatives were far more embedded with the global financial system than the supposedly smart men of finance and economics who ran the Treasury and Federal Reserve had led themselves and the public to believe.

The rest was history. Paulson and Bernanke, in a state of panic, compelled a terrorized Congress to borrow $700 billion and hand it over to Treasury, supposedly to buy up toxic assets polluting the balance sheets of the nation’s banks, under the auspices of a program that came to be known as TARP. Once Paulson got his money, he changed direction, choosing to inject the TARP funds directly into the banks, as opposed to buying toxic assets. The Fed engaged in an unprecedented degree of monetary measures, becoming the lender to Wall Street and corporate America of last resort.

The collapse of Lehman Brothers undoubtedly was a major factor in the November 2008 presidential election, which witnessed the historic triumph of Barack Obama. The new president maintained many of the policies put in place by Paulson after the collapse of Lehman Brothers, reappointed Ben Bernanke as Federal Reserve Chairman, and brought in a $787 billion economic stimulus package, also based on borrowed money, to help reverse the worst recession the United States has endured since the Great Depression.

One year after Lehman Brothers disintegrated, the entire world is in the grips of the most severe synchronized global recession since World War II. We are told, however, that things could have been much worse, if the “brilliant” policymakers who had initially misjudged the extent of the economic and financial crisis had not taken such radical steps, all of which have involved an unprecedented level of public debt, and the bailouts generously awarded to the most reckless Wall Street firms. Also, one year afterwards, the extravagant executive bonuses are still being sprinkled on the Wall Street crowd, at levels that rival pre-meltdown levels.

Unquestionably, the demise of Lehman Brothers was a seminal point in global financial and economic history. I do not believe, however, we have witnessed the full consequences of its collapse. I fear that the worst is yet to come.

 

For More Information on “Global Economic Forecast 2010-2015” please go to the homepage of our website, http://www.globaleconomiccrisis.com

Hank Paulson Fleeced the American Taxpayers in Order to Save Them

July 17th, 2009 Comments off

Hank Paulson is deeply empathetic about the American people’s plight; absorbing  intergenerational levels of debt to cover the costs of unbridled greed and recklessness on the part of Wall Street. Thus, while being raked over the coals at a congressional hearing for his role in the near destruction of the global financial system last fall, and the $700 billion TARP Wall Street bailout package he was able to pull through a terrified Congress as the price of avoiding financial Armageddon, the former Treasury Secretary had this to say about the plight of the American people: “The tragedy is they didn’t create the problem. But they would be the ones that would pay the greatest penalty if there was a collapse.”

Paulson’s statement, while superficially sympathetic to the injustice of the collective innocent paying for the sins of the few, is in substance the manifestation of a disdain for the broad masses that borders on contempt. In effect, he is reiterating a posture that has been consistently maintained by the “masters of the universe” since the onset of the global financial and economic crisis; privatize the profits (especially after radical deregulation) but socialize all losses.

Since last fall, trillions of dollars have been added to the U.S. national debt through TARP, fiscal stimulus packages made necessary by the financial collapse, and other forms of direct and indirect government and Federal Reserve aid to the financial sector. All in the name, we are told, of the American people who, it is claimed, would be subjected to even greater debt and future taxation if Wall Street is not bailed out. The old concept of “moral hazard,” still in force when Paulson allowed Lehman Brothers, a competitor  of his former stomping ground Goldman Sachs to die, was swiftly ejected when AIG faced bankruptcy.

Now Goldman Sachs is declaring a record quarterly profit, and arrogantly boasting of the billions of dollars of bonus payments that will be dished out to its employees. What the firm that Paulson used to lead as Chairman won’t divulge is how much of its profit was due to $13 billion it received in payment from the U.S. taxpayer, using AIG as a pass-through for the payment. Neither will this Wall Street entity make public the impact of tens of billions of dollars in low-interest, taxpayer subsidized loans it now has access to, once Hank Paulson and Fed Chairman Ben Bernanke changed the rules, and allowed investment banks such as Goldman Sachs to magically transform themselves into bank holding companies.

If Hank Paulson symbolizes the incestuous relationship between Wall Street and government, his attitude reflects how insignificant the general public has become in the minds of those calling the shots and making the critical policy decisions in the wake of the worst economic crisis to afflict the American people since the Great Depression. But when those who caused the disaster are spared the ravages of the unwashed masses who are now being corralled into ever-growing unemployment lines, and instead are basking in the illumination of near record bonus payments, their callousness can at least be understood.

The question that Hank Paulson and his ilk may ultimately be compelled to answer is why should the American people be eternally grateful for their “noblesse oblige” when it becomes crystal clear to them that they have been dispossessed of much of their future as  the price for  bailing out Wall Street and its  architects of our current economic and financial doom.

 

For More Information on “Global Economic Forecast 2010-2015” please go to the homepage of our website, http://www.globaleconomiccrisis.com 

 

Goldman Sachs, America’s Unofficial Welfare Queen?

April 14th, 2009 Comments off
Wall Street received the news from Goldman Sachs as though a gift from the gods above. The former investment bank, now deemed a “bank holding company” so as to qualify for Federal bailout money under the TARP program, exceeded the expectations of analysts in reporting first quarter profits of $1.66 billion. This follows the first ever loss for Goldman Sachs in the final quarter of 2008, when the red ink amounted to $2.3 billion. The iconic Wall Street firm also let it be known that it would raise billions of dollars through a stock sale so as to repay the U.S. Treasury the $10 billion in TARP funds that Goldman Sachs had received.
However, when one looks deeper at the details surrounding Goldman Sachs and its interactions with the Federal government as the financial world built by Wall Street began to implode, it appears that an essential component in the survival of this illustrious firm is missing from the most recent quarterly report; specifically, the lifeline to Goldman Sachs that runs through AIG. For it is clear that without that lifeline, there would be no Goldman Sachs.
Back in September, former Goldman Sachs CEO Hank Paulson, now serving as Treasury Secretary in the Bush administration, made two fateful decisions. He decided to let a principal competitor of Goldman Sachs, Lehman Brothers, go bankrupt, resulting in a systemic meltdown that brought the global financial system to the edge of the abyss. Simultaneously, Paulson also decided to save AIG, which he deemed as being “too big to fail.” He and Fed chairman Ben Bernanke immediately provided an $85 billion taxpayer funded loan to AIG; in the months since, that public stake in AIG has increased by another $100 billion. Participating in a crucial meeting involving the Federal Reserve Bank of New York and the U.S. Treasury Department on the fate of AIG was only one CEO of a major Wall Street firm; Lloyd C. Blankfein of Goldman Sachs.
As it turned out, the Treasury and Fed have merely been using AIG as a pass through to funnel tens of billions of dollars in taxpayer money into the coffers of major Wall Street banks and financial institutions. The largest recipient of these payments to AIG counterparties has been Goldman Sachs, which reportedly had received $12.9 billion in Q4 of 2008. Strange coincidence indeed that a former Goldman Sachs CEO serving as U.S. Treasury Secretary “invites” his successor CEO at Goldman Sachs to participate in a meeting that decides to put the U.S. taxpayer on the line for payment to AIG counterparties, in which that same company has been the most significant beneficiary.
Allegations have already surfaced regarding the payments to AIG’s counterparties, and the inspector general for the TARP program, Neil Barofsky, is currently conducting an audit of the payments. The question being raised is why the American taxpayer should be accountable for 100% of the obligations AIG had on insuring the derivative contracts held by firms such as Goldman Sachs. As with the recent controversy over AIG bonuses, the major financial firms maintain that they had a contractual relationship with AIG. Of course, if AIG had been permitted to go bankrupt, as was the case with Lehman Brothers, those Credit Default Swaps would have become worthless. That appears to be the sole rationale for maintaining the zombie existence of AIG on life support; to pay out derivative contracts to firms such as Goldman Sachs.

If Goldman Sachs were not the recipient of AIG pass through money in the last quarter of 2008, it is clear that this firm would be facing the serious prospect of liquidation. It is therefore somewhat odd that after a catastrophic last quarter, the firm can gleefully announce a return to profitability in Q1 of 2009. To set the record straight, Goldman Sachs should come clean on any funds it received from U.S. taxpayers, passed through AIG, in the first quarter of 2009, and provide a precise accounting on how those payments affected their Q1 bottom line. Absent this transparency, Congress should demand full disclosure on any continuing payments to Goldman Sachs through the corporate corpse called AIG. In the final analysis, if it transpires that AIG payments are what is keeping Goldman Sachs alive, then the Obama administration should explain why General Motors and Chrysler should not be wards of the state, while Goldman Sachs is anointed as the nation’s unofficial welfare queen.

 

For More Information on “Global Economic Forecast 2010-2015” please go to the homepage of our website, http://www.globaleconomiccrisis.com 

 

 

 

 

 

 

Why The Global Economic Crisis Will Be Worse Than The Great Depression

January 15th, 2009 Comments off
Eight decades ago the stock market crash of 1929 sparked the Great Depression, an economic crisis without parallel-until now. The 1930s were dark times of economic contraction, only alleviated to a modest degree in the United States by the New Deal of President Franklin D. Roosevelt. It would take the massive public works project known as World War II to bring the Great Depression to a close in the United States. The postwar economic boom in the U.S. ultimately revived the economies of Western Europe and Japan.
Now that the world is engulfed in a global economic crisis of staggering ferocity, does it mean another Great Depression is underway, and will it match the 1930s in its incessant demand destruction? The very bad news is that the Global Economic Crisis will ultimately prove far more devastating that the Great Depression. That is my projection, and I base it on a number of assumptions that appear to be supported by rapidly emerging macroeconomic data.

The American consumer has been the driver of the global economic expansion that impacted the Eurozone, the BRIC countries (Brazil, Russia, India and China), Southeast Asia and Japan and emerging markets. The capacity of Americans to consume was not based on intrinsic productivity but rather on debt from overseas creditors, further lubricated by irrationally loose monetary policies enacted by the U.S. Federal Reserve. The American consumer has been leveraged to a level that is unsustainable, and that bubble has burst.

The first symptoms were manifested in the sub-prime mortgage meltdown. A complex architecture of financial engineering exported toxic securitized paper investments based on these non-performing sub-prime loans. The result has been the virtual destruction of the financial world as we knew it, with the extinction of many of the largest American investment houses, some of which had been in existence for more than a century, having weathered the Great Depression.

While the financial world and now sovereign governments are currently inundated with the consequences inflicted by the sub-prime meltdown, which have cost trillions of dollars, much worse is about to be set loose on the global house of financial cards. There are other asset bubbles that will be popping with lethal force.

While sub-prime mortgages continue to devastate the American housing market, near-prime and prime mortgages are about to get hammered, as the over-leveraged American consumer becomes financially debilitated by rapidly rising unemployment rates, restricted access to credit and collapsing value of their retirement funds and household equity. Car loan delinquencies and credit card defaults will also accelerate, while consumer spending in the United States plummets, leading to the next asset bubble: commercial real estate. Retail trade declines will bring about a horde of commercial bankruptcies and foreclosures, creating vast square footage of vacant offices and storefronts. Shopping malls will become deserted, leading to unpaid commercial mortgages that will rival the sub-prime disaster in intensity.

An American Government that is already consumed with mountains of debt may promise to bail out every American consumer and business, however this is just not possible in the real world. Yet, this is the course the incoming Obama administration seems determined to follow. And leading the charge will be Tim Geithner, Barack Obama’s nominee to succeed Hank Paulson as Treasury Secretary.

Paulson of the $700 billion TARP debacle, preceded by his numerous wrong assumptions about the direction of the U.S. and global economy, was clearly a disastrous Treasury Secretary for coping with the onset of the Global Economic Crisis. However, will Geithner be an improvement? A revelation just released raises disturbing doubts. It has now been disclosed that the man President-elect Obama wants to entrust the Treasury Department to, at a time of the gravest economic crisis, failed to pay $34,000 in back taxes. Failure to pay $34,000 in back taxes? This is the genius supposed to run the Treasury Department, which supervises the IRS, and strategize our way out the current global economic disaster? This leads to another signpost on the road to global economic catastrophe. When excellence in leadership is essential for coping with the Global Economic Crisis, throughout the world the political establishment is represented by mediocrities. Mister Thirty-Four-Thousand in back taxes is a metaphor for this failure by the global political elites to identify and select the most competent professionals to confront the world’s most chronic economic disaster.

When one aggregates the cumulative affects of the asset bubbles about to burst with incendiary destructiveness, factoring in mediocre decision makers, the case for a crisis as bad as the Great Depression is solidified. There remains another element that will make it much worse.

In the 1930s the world was not as financially interconnected as it is today. Globalization has massively increased the vulnerability of the world’s financial and economic system. To take one example, a corrupt stock or bond trader in Singapore or Paris can, by manipulating his computer, gamble away billions of dollars of his company’s assets, undiscovered until calamity has struck. Every day trillions of dollars is transacted at the speed of light, much of it unregulated, particularly with those mysterious entities known as hedge funds. The derivative products they have engineered have accrued to the stratospheric level of hundreds of trillions of dollars, unmonitored by any governmental authority. In essence, a vast global financial superstructure has been erected on a foundation of quicksand as fragile as the worst of the sub-prime securities. As the global economy sinks, hedge funds will begin to deleverage and liquidate, in effect multiplying the already catastrophic global economic downturn. The result: global economic Armageddon.

The Great Depression led to the most destructive war in the history of human civilization. Will the Global Economic Crisis so disrupt social stability and international relations that an even more terrible global conflict erupts? It may be that however calamitous the financial impact of the Global Economic Crisis becomes, it will be the inevitable geopolitical consequences that will exceed our worst nightmares.

 

 

For More Information on “Global Economic Forecast 2010-2015” please go to the homepage of our website, http://www.globaleconomiccrisis.com