Sunday, June 21, 2009

Too Big to Fail Part II

It is now September 2008. Only DAYS after housing giants Freddie Mac and Fannie Mae were nationalized by the government, news broke about dier financial circumstances at Lehman Bros. The bank's stock value plunged 45%.


As mentioned in Part 1, Bush's Treasury Secretary Henry Paulson is a free market Republican. He use to be the CEO of Goldman Sachs, one of the largest investment banks on Wall Street. He went along with (Fed chair) Bernanke's bailout of Bear Stearns in March, and only days earlier bailed out the two largest mortgage investment companies in the world. It goes against his personal philosophy and Paulson was getting a lot of push back from not only the public, but Congressional Republicans who don't like government intervention in private markets. So, even though Lehman Bros. was on the brink of collapse, just as he had warned in March, Paulson decided he was not going to step in.

Paulson contacts the CEO of Lehman Bros, Dick Fuld, and tells him that he better find a buyer for the bank. The sense is that Dick Fuld didn't believe that Paulson would let them go bankrupt... the government stepped in for Bear Stearns several months prior and Lehman Bros was even bigger and more interconnected. Besides, Lehman Bros. didn't want a buyer... they weren't interested in being absorbed by another bank, they wanted government help to sustain themselves as their own entity, so in essence, Dick Fuld called Paulson's bluff.

That same weekend, the Treasury Department called in the heads of all the major banks. They were told, once more, that there would be no more bailouts... someone in the room needed to buy Lehman Bros. So, all the major banks (Wells Fargo, Merrill-Lynch, Bank of America, Goldman Sachs, JP Morgan, Citigroup, Washington Mutual, Wachovia) went over Lehman Bros.' books just like in the earlier case with Bear Stearns. Seeing now that he really wasn't going to get a handout from the government like Bear did, now Dick Fuld is looking for a buyer. But, after going over the books, noone wanted a deal without guarantees similar to what Bernanke gave to JP Morgan when it acquired Bear. But, Paulson was firm, there wasn't going to be intervention.

Paulson felt there would be some pain, but that the markets would survive the bankruptcy of one bank. And seeing how Merrill-Lynch was next in line, once it was clear there would be no buyer for Lehman, Paulson focused on getting a bank to help out Merrill-Lynch. The theory, almost like dominoes, if we can stabilize the closest bank after the fall of Lehman, it would prevent a chain reaction.


Like, Lehman Bros, Merrill-Lynch doesn't want to be absorbed, so they offer Bank of America a 10% stake in the company. BoA isn't interested, they want to buy them outright. Seeing no other offers, and not wanting to go the way of Lehman Bros., Merrill finally acquiesces to Bank of America's terms. On Monday, September 15th, come the announcements of both the Merrill-Bank of America merger as well as the bankruptcy of Lehman Bros. Paulson believes the "positive" news of Merrill-Lynch will keep the markets afloat... he would soon find out how wrong he was. News of a major bank failing caused the markets to completely freeze. Markets are driven by credit. Banks lend to each other... banks lend to businesses... banks lend to individual citizens... and when news of a major bank filing for bankruptcy broke, all lending ceased.
Banks aren't getting the capital and reserve they need. Businesses aren't getting the funding they need. The loans for expansion or survival. No new equipment... no new employees... no new buildings... possibly no new contracts (that you can't fill). Possibly not meeting payroll. People aren't getting loans to open new businesses... no car loans... no mortgages... nothing is being granted. Since very few people and things are able to be bought outright, the majority of financial decisions revolve around some "line of credit." When the credit froze... the entire economy froze. Paulson sees that unlike other sectors of Wall Street, the banking system is truly the life blood of the entire economy. All major bankruptcies will hurt, but most can be compensated for... not too many people thought much when Circuit City filed for bankruptcy. But if your banks are failing, and they supply ALL business sectors with the money that give them the opportunity to do business, then you have a nation that is on the verge...
So, Hank Paulson (seen below) goes to Capital Hill in the dead of night and has this secret meeting with high ranking Congressional officials and tells them that he needs $700 Billion dollars to prevent a second Great Depression.



Paulson recieves the money and demands all the CEO's of the major US banks come in for another special meeting. He tells them about the TARP (troubled asset relief program) and tells them that they will all take this funding. Believe it or not, some of the banks didn't need or want the money... because it was going to come with strings, and no company wants government interference in their business affairs... but Paulson didn't want the general public to know which banks did and did not have financial problems. The CEO of Wells Fargo tried to refuse to take the funding. The Treasury Secretary threatened any bank that didn't take the money that he would publicly speak ill of that bank, and... well, Bear Stearns and Lehman Bros. started with mere rumors. Wells Fargo relented.
Months later in December 2008, Merrill-Lynch reports its losses totalling $15 Billion, far more than Bank of America anticipated and maybe even enough to bring them down with Merrill. At this point, the merger had not yet been finalized and Bank of America is dealing with losses of its own. Stockholders and the Board are upset with the CEO that this info had been kept from them. CEO Ken Lewis considers invoking what is known as a MAC... material adverse change. That is to say, a business deal could be nixed if change that was unforseeable at the time the agreement was concieved sharply changes the reality surrounding said business venture. Ken Lewis calls Paulson and tells him what he's thinking. So, Paulson demands that Lewis come back to Washington. If Lehman's collapse caused the freeze in September, what would Merrill-Lynch's bankruptcy do to America? They already had an agreement in place. Paulson told Ken Lewis that if he balked, he would leave Bank of America out of the TARP protection altogether.
Lewis and Paulson would finally secretly agree that Bank of America would get an additional $20 Billion in TARP funding as well as (similar to Bernanke's March deal with JP Morgan)... government protection of $100 Billion against some of Merrill-Lynch's "toxic" assets. Stockholders, tax payers... and even Wall Street... they were not made aware of this until another month after the Merrill-Lynch deal was finalized. When the news broke, it wasn't good for Bank of America... between January 15th and January 20th, 2009... during that six day period, the value of BoA stock dropped 45%.
According to the FDIC (click here), last updated as of Friday, June 19th, 2009, there have been 40 bank failures this year, with less than half of 2009 already elapsed. Compare that with 26 bank failures in all of 2008 and only three bank failures in all of 2007... with none in either 2006 or 2005.
Obama has taken office, and we shall see what the new administration will do to combat this issue. President Obama has moved Timothy Geithner from the Federal Reserve to Paulson's old job as the newest Secretary of Treasury. They are working on regulatory legislation to try to prevent this from happening again. Only time will tell what an impact Obama's administration will have on, not only stemming the current crisis, but preventing future crises from emerging. But one thing is certain... with a lot of "toxic" mortgage-based assets out there... at least in the short term, that list of (small) local banks, which are not too big to fail, will continue to rise...

Saturday, June 20, 2009

Too Big to Fail Part I

It started with the burst of the housing bubble... and with it, talks of a possible financial collapse. The end of growth in the real estate markets had been something people relunctantly anticipated for several years. Since the 1950's, when a larger portion of the American people became first time home buyers, mortgages have been a stable backbone of investment by many American banks. If you compare the value of the home to what you actually pay over the life of the mortgage, upwards of 66% of what you pay is pure interest.

We won't get into all of the details on the mortgage side, but short term profits became a priority over proper long term investments and a lot of people were getting homes they couldn't afford. So, you have all of these mortgage backed securities (1000's of mortgages bundled and sold together as one)... which are usually profitable, being sold from one investment company to another. And this helped precipitate the housing collapse... that is to say, mortgages use to be approved based on your ability to pay back the bank giving you the loan. But, I'm more likely to sell someone a home they can not afford, if I know I'll be selling the responsibility of collecting those payments to someone else.



On Monday, March 10th, 2008, the rumors began about the financial strength of Bear Stearns, one of the smallest "major banks" and heavily entrenched with subprime (less than prime/A-rated credit) mortgages. Once rumors emerged, market confidence dwindled and the value of Bear Stearns' stocks began to fall. The CFO calls around to the ground level guys and learns that people believe that Bear Stearns is out of money. Its like a snowball. Once the rumor of a bank not having money is out there, the truth is irrelovent. Everyone wants their money out, and no bank is able to pay all its investors/customers back at the same time.

There were enough banks requesting their money (inter-bank lending) that by Marth 13th, Bear Stearns didn't have enough reserve capital to open the next day. So, they turned to the Federal Reserve Bank and Timothy Geithner. Geithner wasn't an interventionalist and wanted to let them go under, but while going over their books, he discovers how many different financial institutions Bear Stearns has sold guaranteed insurance on bonds to. They were indebted to too many people to fail. Geithner saw the possibility of "systemic risk"... that is to say, the bankruptcy of Bear Stearns would severely harm many other institutions, not just itself.

Realizing that the fall of Bear Stearns could potentially bring on another Great Depression, Tim Geithner calls his boss and Federal Reserve Chairman Ben Bernanke. But Bernanke knows the Fed cannot lend money directly to an investment bank. So Bernanke (pictured below) bends the rules by striking a deal to lend money directly to JP Morgan Chase, who would then in turn send money to Bear Stearns. To give you a sense of the importance of this deal on the economy, all of this... Bear contacting Geithner, Geithner and the Fed going over Bear Stearns' books, Geithner getting Fed Chairman Bernanke involved, Bernanke contacting JP Morgan, JP Morgan going over the books and finally agreeing to terms with Bernanke... all of this was done after hours Thursday before the start of the business day on Friday.




But, Bernanke's plan backfires... it only spotlights Bear Stearns financial woes. Technically, Bear now had the money, but its all about perception: the fact that this level of intervention was needed singled out Bear Stearns and their stock value plummetted.

This caught the eye of then-Treasury Secretary Henry Paulson. Paulson is a free market Republican who was formerly the CEO of Goldman Sachs. Paulson wasn't a regulator or interventionalist but ultimately, he left that call up to the Fed (Bernanke), but from this point on, Henry Paulson would be involved. On Saturday, March 15th, all of Bear Stearn's former competitors are perusing their books and see far too much debt to want to take on. After working all weekend without getting a deal finalized, Bernanke finally creates an acquisition of Bear Stearns by JP Morgan by guaranteeing $30 Billion against Bear's mortgage backed securities.




At the US Department of Treasury, Henry Paulson was relunctant but went along. He made it quite clear to the other banks that this was not going to happen again. It went against his free market philosophy: the markets punish those who do business poorly and rewards those whom excel. The Bear Stearns stock at this time was hovering around $30 per share and JP Morgan was offering $4. The people within Bear were expecting maybe 20, but Paulson calls over to JP Morgan and tells them to offer $2. Paulson was not in favor of a bailout to begin with, and didn't want to give Bear any rewards. He wanted this bailout to hurt, and again, wanted to send a clear message to all the other banks... there will be no handouts.
But Bear Stearns was not alone, through the summer of 2008, losses for many other financial institutions began to mount. More than a combined trillion dollars in wealth disappeared from our economy over that summer. Then in July 2008 came news of Freddie Mac and Fannie Mae. Originally created by the US government, Freddie and Fannie were the largest private mortgage giants in the world. Everyone owns a piece of Freddie and Fannie... they held $5 TRILLION in mortgages and had lost 60% of their stock value. Again, the fear of systemic risk trumped the philosophy of free markets, Paulson doesn't just give loans to the two, but nationalizes the two mortgage giants... they are now owned by the US government. But, it sent a major shockwave to the financial sector... if Freddie and Fannie could fail... ANYONE could fail.
Only DAYS after bailing out Freddie and Fannie, that fear became a reality with the news of the inevitable collapse of Lehman Bros... a bank larger and even more interconnected than Bear Stearns... and it was clear, it was going to get worse, before it got better.

Tuesday, June 9, 2009

Socialism Doesn't Work

This is coming from a leftist, who vehemently disagrees with all facets of American right wing conservative Republicanism. And I would consider myself (in some cases) more "left" than the American Democratic party, however, socialism is not the answer. To be more specific, PURE socialism, that is to say... socialism in its purist form... does not work. Lenin saw socialism as a bridge from capitalism to communism. So, for Lenin at least, socialism was not a goal in and of itself, but a transitional phase, into the ideal communist nation. I can say, unequivocally... that communism... in all its forms... has never been successful.

But they do make wonderful pictures dont they? Such, beautiful propaganda. I dont know if they're just happy to be Russian or if they're trying to flee Stalin's Siberian gulag. There is always this... utopian view of socialism and communism. This ideal paradise away from the "taint" of self-centered capitalism. Where there is no greed... no upper class... no exploitation... no social disparities... there is equality for ALL men. But does that ever pan out? Where has it happened? Where has this "social experiment" worked? Where is this ideal socialist country that have such equal, prosperous and conjovial people in it? Karl Marx wrote an interesting book, but, where is this real life application? Has everyone just done it wrong?

Che Guevara and Fidel Castro had the same "utopian vision" for the future of Cuba. And Im not claiming that each government that preceded these socialist/communist regimes were good or even tolerable... but what has come after? How visionary has Cuba truly become over the last 50 years? More economic prosperity than the 1950's? I must point out, that Che Guevara must have thought that he was going to sell that dream of communism wherever he went... but, for some reason, when he went to Bolivia... they weren't buying. The conditions of oppression (APPEAR to) need to be pretty bad in order for men to entertain the idea of communism, because, people in Bolivia looked around and thought... "lifes not too bad... we'll pass... but thanks for asking." Che could never build up enough willing men for his guerilla war and he was easily overwhelmed then killed by government forces.

And how many Americans get in rafts and try to flee towards Cuba? Why do so many leave Cuba? There is no freedom. Economic or otherwise. There is not enough power in the hands of the people. I'm not for total privatization, but in most cases, privatization of industry is good for the blossoming of a nation's economy. Am I in favor of privatized Healthcare? Not so much. But, there are a lot of industries that should be private... where in a pure socialist nation... they are run or controlled by the state. Profit, in and of itself, is not a bad thing. The problem is profit run amuck. Only when private industry has NO government regulation or oversight, is there a problem. According to President Herbert Hoover...

"You know, the only trouble with capitalism is capitalists; they're too damn greedy."

There are a lot of people who see this economic crisis as an indictment on capitalism. I think it is an indictment on laissez-faire free market capitalism... the idea of the invisible hand... where there is no government interference, and the beast will do what is in its own best interest. That antiquated idea that the market will properly sustain itself. Yes, this latest economic crisis originating in America is an indictment on that "fringe" of (unfettered) capitalism, but, moderately regulated capitalism usually works quite well.

How is that (pure) socialism working in South America? Is Venezeula in the middle of an economic boom right now? Hugo Chavez fixes prices as he sees fit. Unhealthy government control. The 2008 Inflation rate for Venezuela was 31%! That was an 11 year high. Not 71 years... ELEVEN. That is one strong economy. And he's always railing about American capitalism. What is the economic power of people in his nation?

Now, Europe is called socialist, but they're truly a "hybrid." An economic philosophy more closely aligned to the US than Venezuela. Being leftist, I actually like aspects of the European system. I would readily welcome more regulation in the United States. Not to the point that it stifles business and productivity, but had their been more government oversight (not control, but oversight) of banks and housing markets, this current fiasco could have been avoided. I haven't even mentioned government programs that protect the people.

Socialism doesn't do a good job of putting money into the hands of the people. Take some of these government run facilities and create private ownership. Allow wealth among people to grow. True, there will be some level of inequality, but can rampant poverty be better? Any strong economy has a robust middle class... hard to do that when the country owns everything.

Communist doesn't just control economics... it attempts to suppress individualism. Rather unapologetically. Definately in the cases of the USSR, China and Cambodia... they're also anti-religion. All religion. "Take down that picture of baby Jesus and Mary and put up a picture of Stalin! Your devotion should be solely to the betterment of the secular state... she is your mother." This isn't a choice. Lenin railed against the crimes of Czar Nicholas II... Pol Pot fought to free the people from the post-Colonialism monarchy... Mao Zedong fought against the post occupation Nationalists... Kim Il-Sung fought for post WW2 independence...Fidel Castro fought to "liberate" his people from its dictator... but, how liberated did the people of the Soviet Union, Cambodia, China, North Korea and Cuba feel once they lived under communism?

These systems just don't work. They never have. People are individuals. We have individual interests. We have individual goals. We have individual desires and aspirations. Socialists dont want to hear it, but a major part of work place productivity is the selfish nature of people. People dont work hard for their country's sake, they work hard to better their own economic status. A person's personal stake matters. His personal interests matter. What he hopes to gain matters.

You never see casual communism. Its always coerced... repressive... forceful. It has to be. Very few people want to be communist, and those that do... its usually theoretical communism. Just something interesting they read in a book or heard a liberal speak about. They want it UNTIL some "dictator" installs it as he sees fit. Its usually just a dictatorship masked in nationalism. What if the leader's view of communism... "the best interest of the state"... differs from yours? Do you have a voice? Is there a protocol to enact change? In what communist nation, which is supposed to be for the people... do you have that ability?

Sometimes... you just have to stand in front of a procession of tanks... in order to be heard...

Saturday, June 6, 2009

Conspiracy Theories

I do not understand conspiracy theories.




Which may (or may not) sound weird, because some people seem to get the idea that I would be a conspiracy guy. I'm not sure where that would come from, outside the fact that I like to question how and why people think the way they do. But, whenever I'm outside the mainstream, my criticism is that the mainstream isn't being logical and rational. I wouldn't then go around believing extravagant stories which can not be substantiated by proof. I just dont see the basis for believing in something, even if I wanted to... if there is no rational tangible evidence. Especially the more grandiose (in scale) conspiracies like the American government being behind 9/11.

Let me only say this about the 9/11 conspiracy theories... and there are different versions... with different people orchestrating events. There are many reasons not to believe, but this is my biggest problem... not a single person leaked this MASSIVE conspiracy? Demolition experts, CIA agents, FBI agents, NSA agents, FAA (Federal Aviation Administration) executives, air traffic control, World Trade Center security, contractors, consultants... anyone inside the Bush administration... THEY ALL KEPT THE SECRET? Everyone? Not one person saw a memo or heard about the plan and thought:

"this is wrong, I need to talk to the New York Times"

So, no... I can not believe in grandiose conspiracies; they require too many people to do what does not seem to come natural... keeping secrets.



Now, I do believe in collusion. I believe most people have their own agendas... I believe people have plots and schemes. And usually not in the best interest of others. History is full of examples. Cigarette executives from all the major companies knew about the ill effects of nicotine years ago and PURPOSEFULLY hid this information from the public. That is a collusion. But to say the leader of the World Bank, the International Monetary Fund, the President of the US, the leader of the European Union and the leader of the United Nations all kiss the ring of the Pope... that is a conspiracy.
Human beings are social creatures and will always cling to groups. Not being one myself, I dont really understand it, but perhaps it gives a person a stronger sense of purpose? Or maybe its a self-esteem boost: "they chose me!" Almost like kids longing to be part of the in crowd. But groups and social organizations dont stop with high school. They permeate college campuses as well as life after organized education... Freemasons, for example. And just like the people within them, groups have objectives and goals. That's not shocking. It would be shocking to find a group that meets regularly and has NO objective.
Just because someone was a member of Skull and Crossbones, at the age of 20, does not mean they are doing anything and everything for a fellow member 35 years later. If its someone who went to school 5 years prior or after, they wouldn't have even known each other. And just like with the 9/11 thing, just show me a memo... and then I will believe.

And thats the point to me... show me the proof. Dont assume. Human history is all about empirical evidence. Being able to prove and understand the world we live in. The cigarette industries collusions have been proven. Im sure there may have been people who always thought there were wrong doings in cigarette companies, but had no basis initially to believe them. But, is that part of the allure of a conspiracy theory? It can't be proven. It takes "keen deduction." You have to be able to see the unseeable. So, on one hand, I think it makes some people feel good... in the sense that, they are able to decipher what others can not. They know a conspiracy (by definition?) wont be provable, so its easy to believe.
"I can't prove it, dolt... I just said they're running a conspiracy. They're good at hiding proof! But they can't fool me"
I also think it allows people to find meaning in things which may have held little meaning before. The world makes more sense, ironically enough. There can be four or five individual situations, which most people would think have nothing to do with one another, and a conspiracy theorists will tie them together. For that type of theorist, it gives a certain level of peace to a ONCE chaotic world.



I think, for a different type of conspiracy theorists, the conspiracy absolves this person for any responsibility in his or her world. There is nothing he can do, so he wont even worry about it. There's a dark figure with a special ring somewhere, and he's calling all the shots. Everyone who tries to fight the system... or tries to keep up with events, they're just wasting their time... because this guy... who runs the Illuminati, he's calling all the shots.

Whereas, if there is no conspiracy, that person would feel guilty for not being "aware" of whats going on in society. But, since the game is fixed, he'll take that as solace, and choose not to be apart of it.

"Democrat, Republican... they're all working for the same guy in Rome."

And you can't discuss or debate with a conspiracy theorists, because his belief is not based on facts. The burden of proof is ironically on you. You have to prove to him, what he hasn't proved to you... is wrong.

"Disprove what I assume!"

Sorry conspiracy theory guy, my mindset is anathetical to your beliefs... we may be social creatures, but I have no interest in joining your social club.

Monday, June 1, 2009

Sri Lanka: Forgotten War

A story that has been... at best, underreported, and at worst, totally ignored... the civil war and violence in Sri Lanka. Where is Sri Lanka? Sri Lanka is a small island off the Southeastern coast of India.





I dont know how many people know this, but, like several sad, historically violent clashes between competing ethnic groups... this story has its roots in European colonialism. Israeli, Indian and Rwandan violence come to mind off the top of my head, without even searching. Im sure I can name many more... but in the 1800's... the "powers" of Europe were still competing and attempting to expand their empires. Catholicism and Spanish originate from Europe, not South America. They were brought there... *cough* *cough* by the barrel of a gun *cough* *cough... but when you think of spanish, you think of Latin (Roman) America.

The British Empire was the biggest and arguably the most successful. Here is a map of the British Empire in the 1920's... they would directly dominate most of these nations until the end of World War 2, where the urgency of rebuilding England took precedent over controlling those colonies. To this day, some are part of the "commonwealth" but, we wont get into that.



Here is how "British India" looked... more or less... for about a century. For the 100 years before the end of World War 2... the nations that would later come to be known as India, Pakistan, Bangladesh, Burma (Myanmar) and Sri Lanka were all British India.



After Sri Lankan independence in 1948, (like most former colonies?) various political and ethnic groups started vying for power. The majority Sinhalese and the minority Tamils. The Sinhalese are believe to be Northern Indians who migrated to the island 2500 years prior in the 5th century. They are mostly Buddhist (some Christian) and speak an Indu-European language. The minority Tamils are mostly Hindu, originating from and speaking the same language as Southern India.
As is sadly the reocurring case with this world, the majority began to persecute the rights of the minority group. I wont go into too many details over the various (as I see it) "crimes"... however, the Ceylon Citizenship Act of 1948 had to be one of the most blatant. For this new country, citizenship would not be provided to people of Indian origin. There were many laws that the Tamil minority percieved as being passed at their expense and is often the case, when young (mainly) men feel they have no economic future they either go towards crime or militancy, and in this case the latter.
So, the Tamils have actually been fighting a civil war with the Sri Lankan government for about a quarter century. The war has finally been declared over by the Sri Lankan government within the last two weeks, but, at what price? What has not been reported on... the casualties. (click here) Reuters reports that the New York Times reports that (leaked) confidential UN documents showing that about 1,000 people died every day from late April until May 19th. The Tamil guerillas tried to hide themselves in densely populated Tamil civilian areas and the Sri Lankans are accused of bombing those areas indiscriminately.
Now, I am NO friend to Israeli policy, but can you imagine if 20,000 Palestinians were killed in a one month span? There would be protests all over Europe (not in America) and rightfully so. Why no outrage in Sri Lanka? The sad truth is that all human life is not equal. It should be, but
some deaths... are not news worthy. You have to go "search" for that truth.
The media will instead, choose to show the (almost) EXACT same 10-minute news feed about a missing airplane carrying 200 people off the coast of South America for several days while 20,000 people die silently in a part of the world that is of no consequence to the rest of us.