Humpty Dumpty Rides The Waves On Wall Street

Humpty Dumpty Sat On a Wall
Humpty Dumpty Had a Great Fall
All the King’s Horses, All The King’s Men
Couldn’t Put Humpty Together Again

November 5, 2007: But they are trying, aren’t they? After the markets went ballistic last summer in the wake of the disclosure of the Subprime “infection/contagion” bankers have been trying to fix this pernicious Humpty Dumpty and restore confidence.

Haven’t they ever?

First there was jaw-boning and tsk-tsking as the captains of finance capital and big bankers finally woke up and warned of the danger, blaming everyone but themselves. Then, the pundits started lecturing, calling for higher standards of transparency, and closing the barn doors after the horses were gone.

Finally, the bailouts began.

The Federal Reserve Bank stepped up to the plate and swung a mighty bat by “injecting” billions to calm the volatility. Soon other central bankers, at their behest, were in the game too with hundreds of billions of their own from Europe, Japan, Australia, and even China.

The result: Not much. Panic percolated. More lending companies “imploded.” (The total is now 179.) It seemed certain that over two million families faced foreclosure and inflation was beginning to raise its ugly head. The dollar was dropping and real well-paying new jobs were not on the horizon.

The next panacea was interest rate cuts. Surely that would do it. With much fanfare and a push from the press, from Jim Cramer ranting on CNBC to more sober heads wagging approval in the mainstream media, first the bank lending rate was cut and then the interest rate. The cut was 50 basis pints, twice what was expected.

Wall Street was ecstatic. The market partied and stocks rallied. The next day, when the hangovers wore off, it dove again.

The subprime menace was still there in the morning. Soon, the banks were forced to review their unbalanced sheets, and, one by one, reported billions in write-downs. Billions! What was clear is that the greed had got them too—they were all stuffing themselves at the trough of predatory lending. They were all complicit.

And in fact, as CNN reports, there is more to come from their binge and purge behavior.

As one blogger summed up: “The ‘Fat Lady’ Has Not Sung Yet.”

First estimate I have seen about losses in Q4 from CNN.Money:

“Banks are likely to mark down another $10 billion of mortgage assets in the fourth quarter, according to one analyst’s estimates. Merrill Lynch and Citigroup are expected to be hit the hardest.

Mayo estimated each bank would write down $4 billion in the fourth quarter. He said Bear Stearns, Morgan Stanley, B of A and Wachovia are also likely to take markdowns. Banks have taken massive hits from risky mortgage securities in the third quarter. Merrill Lynch wrote down $7.9 billion, and Citi took a $2.2 billion markdown due to mortgage-backed securities and credit trading losses.”

His conclusion: “The pain from the subprime wipeout isn’t likely to abate anytime soon.”

Bear in mind, the banks created these problems by lowering their standards and working in collusion with the alchemists at the ratings agencies that turned their junk into gold.

Then, Treasury Secretary Paulson had a revelation: create a private Superfund with $200 Billion. In the end, three big banks could only come up with $75B, but many experts derided it as just PR that cannot cure the crisis. Oops!

Knowing this, what did the Fed do? Cut interest rates again last week supposedly for the last time. And again, there was a one-day rally followed by a major drop.

Nothing changed. In a Detroit paper, Gail MarksJarvis compared the Fed’s action to a “teaspoon of tonic,” explaining:

“The incubation period for economic remedies and problems is often six to 12 months, and the economy could be sickened by more than tumbling home prices and the potential that house-poor consumers might not spend much.”

Bill Fleckenstein of MSNBC went apoplectic calling the cut an “act of desperation,” comparing it to “using an applause meter to run the central bank.” He asked:

“Why in the hell was the central bank easing the federal funds rate with (1) the dollar at a new low, (2) oil at $90, (3) gold at $800, (4) virtually every commodity on the planet going wild and (5), despite government statistics to the contrary, inflation raging?”

Ah yes, statistics. Some new jobs figures were trotted out suggesting a 166,000 new job uptick. Sounded good? Nonfarm payroll employment was said to have risen by 166,000 in October, and the unemployment rate was unchanged at 4.7 percent. Huh… employment rises but unemployment doesn’t?

But a blog called Predicto dissected the numbers, disclosing that the Bureau of Labor Statistics was estimating, not reporting:

“Now, just how much of it was created by the CES Birth-Death Model, which statistically supposes jobs created? Try 103,000 for October. A true skeptic would say 166 thousand new jobs, backing out 103 thousand CES Birth/Death Model estimated, leaves a real gain of 63-thousand, but any port in a storm, right? And the ‘engineers flipping burgers’ report, Table A-12, category U-6 stayed steady at 8.4%. Predictably.

And while the government is telling us on the one hand how good things are, I can help but notice that Chrysler is slicing one job in three, with another 12,000 about to get axed. I’m not expecting this to show up as a noticeable blip on the Mass Layoffs report, though. Statistical series which have been historically noisy have all quieted down. All coincidental, I’m sure.”

Real analysis and understanding on this crucial issue is missing, like the 50 Million “Missing Americans” profiled by Bill Moyers who described a vast class of Americans who are suffering in our economy but are rarely in the news.

Author Katherine Newman explains:

“The missing class are families that are above the poverty line, but well below the middle class. So they earn about $20,000 to $40,000 a year for a family of four. The federal poverty line is $20,000. They have multiple jobs. Both as individuals and in their households. They often have to press their children into the labor market and pool that money so that their households can maintain themselves above the poverty line…They work every hour that exists. And sometimes that means they’re not around very much for their children. Because they can’t stay above the poverty line unless they put in many, many hours.”

Many of these “missing” were the people targeted by the predatory lenders.

So far, in the markets and for millions, there’s no way out. Manipulated information and illusion drives policy at home as in Iraq. We won’t see what we think it is not in our interest to see, and we can’t report what we don’t see.

And the circle of denial is closed.

– News Dissector Danny Schechter directed the film “In Debt We Trust” (Indebtwetrust.com) and has written “Squeezed,” a new book on the market madness. Comments to dissector@mediachannel.org.

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Thought U.S. readers may want to read today’s blog on a UK website (www.aworldtowin.net) - since the subprime fall-out has reached our shores - British families have contributed £1,000 ($1,500) per household in our government’s bail-out of Northern Rock bank.

Citigroup’s ‘assets’ bonfire

When the world’s largest bank has to ask its chief executive and chairman to go because up to $11 billion of its assets are actually not worth the paper they are printed on, you know that the global financial crisis has entered deeper into the unknown. Citigroup, whose nominal assets – and nominal is the operative word here – are larger than the annual value of the British economy’s output, parted company with Chuck Prince on a Sunday night of all things. Citigroup’s announced losses relate to just one portion of the bank’s business – the sub-prime housing market. This is a bank which grew its assets – primarily its lending – by an astonishing 48% per cent over the past 21 months. Now questions are being asked about the real worth of all these “assets”.

Prince’s departure came hot on the heels of the resignation of Merrill Lynch’s Stan O’Neal, who was in charge of the investment bank as it ran up losses of $8 billion on mortgage-related debt. These gigantic losses stem from the banks’ involvement in what is euphemistically termed the sub-prime market in the United States where people with no income, no jobs and no assets – Ninjas – were encouraged to take out a mortgage on the basis of rising house prices.

Many of these mortgages were sold by unscrupulous and little regulated mortgage brokers, who received handsome commissions for selling expensive and unsuitable products. Then mortgage companies sold the debts on as securities packaged into “collateralised debt obligations” (CDOs). These were then traded around the world as if they were totally-secure government bonds and ended up in the hands of Citigroup and Merill Lynch, as well as European banks in Germany, France and the UK (where Barclays is rumoured to be in difficulties).

The trouble is, the bottom has fallen out of the US sub-prime market. There have already been 1.7 million foreclosure proceedings in the US in the first eight months of 2007, and up to 2 million families are expected to lose their homes over the next two years, according to estimates by the US Congress’s joint economic committee. In Cleveland, Ohio, an industrial city on the banks of Lake Erie, one in ten homes in the city is now vacant because of repossessions. The company making the most foreclosures in Cleveland is Deutsche Bank Trust.

While the German bank has loads of properties on its books that no one wants to buy, Citigroup and institutions around the world are left holding worthless CDOs – worthless because they can’t sell them on as the market for CDOs has seized up as part of the credit crunch. Or as Citigroup’s statement said, its securitised mortgage-backed debt obligations “are not subject to valuation based on observable market transactions”. Overall, there are over $1 trillion worth of sub-prime mortgage-backed securities outstanding throughout the world.

Just in case you thought the global financial system was in melt-down, you can be reassured by the soothing words of Alistair Darling, the British chancellor. He appeared on radio just after dawn today to tell us that concerns should be kept “in perspective” because British banks had “very strong balance sheets”. Yet the failed Northern Rock bank has already used up £23 billion in government-backed loans – which the state will never get back. Darling added: “We have a strong economy, its momentum will carry us through.” That’s alright then, except that the UK economy’s growth is largely founded on an unprecedented rise in house prices combined with easy credit. One million people are estimated to use their credit cards to pay their mortgages. This can’t go on, and Darling knows it. The crisis at Citigroup is the latest twist in the unravelling of financial system rooted in fantasy, whose collapse will take the productive economy down with it. On bonfire night in Britain, bankers are piling up assets for putting on the fire.

Paul Feldman, editor
www.aworldtowin.net
November 5, 2007

This crisis was also caused by the Republican Congress changing the bankruptcy laws to protect the large credit card companies. People had to take second mortgages to pay off credit card debt because they could no longer write it off in Chapter 7, keeping their house and car. I just hope we dont drag down the entire world’s econmy with our folly.

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