Wall Street Kabbalah

by Kiko Matsing

NY Stock Exchange Wall Street
Power Sellers

And seven was supposed to be a lucky number. Today the US House of Representatives junked the $700B bailout bill that will foot the losses of Wall Street high-rollers with taxpayer money. The markets responded by plummeting 777 points (or 7%) in the Dow Jones Industrial, lower than the first trading day after 9/11, and in the history of the stock market. I must admit feeling a sense of déjà vu this past couple of weeks: it was like watching the WTC towers collapse live all over again, but in slow motion, as financial behemoths–some predating the Civil War–folded, one after another. After Lehman Brothers filed for bankruptcy and Merrill Lynch sold to Bank of America, I started following the story of the US financial market meltdown, and had gotten addicted to morning Cuban coffee and The NY Times.

It is certainly interesting times here in the US, and fascinating to witness how this democratic society grapple with the excesses of capitalism while avoiding the pitfalls of socialism. There is now more than ever heated public discourse on the role of government in private enterprises–from the failure to regulate inventive financial products such as derivatives, to the increasing suspicion of Washington’s bailout plan in the public opinion. Bill Perkins, a venture capitalist from Houston, put out full-page ads in The NY Times featuring cartoons of how Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke, together with President Bush is leading the country to the path of socialism with the plan to buy outright the toxic assets of banks related to distressed mortgages.

The ad features a hand-drawn cartoon of President Bush, Secretary of the Treasury Henry Paulson and Federal Reserve Chariman Ben Bernanke raising a flag in the famous World War II Iwo Jima pose. The flag, however, has a communist sickle symbol and the words “big insurance,” “Detroit Auto” and “Wall St. Banks.” There are tombstones behind the men with the words “private enterprise” and “capital.” A plaque above it all says “The New Communist.” The cartoon was drawn by a Houston-based artist named Dawolu Jabari Anderson. (from Bill Perkins, Bailout Critic, “New Communists” New York Times Ad, Ground Report, 23 Sep 2008)

The New Communists

The public has every right to be suspicious. After all, Paulson, the architect of the bill, who is asking for a staggering amount of public money, will have extraordinary discretionary control over the funds to potentially help his fellow Wall Street suits. News about the CEO of Goldman Sachs, Paulson’s former firm, being the only private concern represented in the meetings that led to the $85B bailout of AIG taints the motives of this Treasury Secretary who spooked everyone after the collapse of Lehman Brothers, and is now railroading a bailout through Congress before leaving office in November.

Although it was not widely known, Goldman, a Wall Street stalwart that had seemed immune to its rivals’ woes, was A.I.G.’s largest trading partner, according to six people close to the insurer who requested anonymity because of confidentiality agreements. A collapse of the insurer threatened to leave a hole of as much as $20 billion in Goldman’s side, several of these people said.

Days later, federal officials, who had let Lehman die and initially balked at tossing a lifeline to A.I.G., ended up bailing out the insurer for $85 billion. (from Behind Insurer’s Crisis, Blind Eye to a Web of Risk, The NY Times, 27 Sep 2008)

And where did Paulson get this ostensibly ‘mystical’, round sum of $700B?

In fact, some of the most basic details, including the $700 billion figure Treasury would use to buy up bad debt, are fuzzy.

“It’s not based on any particular data point,” a Treasury spokeswoman told Forbes.com Tuesday. “We just wanted to choose a really large number.” (from Bad News For The Bailout, Forbes, 23 Sep 2008)

It is no wonder that the American public is skeptical about the bailout plan. It does not need the mad rantings of House Speaker Nancy Pelosi against the Republicans in Congress to drive them from approval of the “bi-partisan” bill. The average American knows when the government and big business is screwing them, and they are writing in droves to their representatives not to give-in to the fear-mongers in Washington. It is thus surprising that the mainstream media portrayed the necessity of passing the bill as a foregone conclusion, i.e. something anyone in his right mind would do, and that the Republicans (and, by the way, 40% of the Democrats!) appeared to be going against what was for the public’s own good.

Mr. McDermott is a liberal Democrat, but his e-mail messages look a lot like the ones that Representative Candice S. Miller, a conservative Republican from Michigan, is receiving. “NO BAILOUT, I am a registered republican,” one constituent wrote. “I will vote and campaign hard against you if we have to subsidize the very people that have sold out MY COUNTRY.”

Senator Barbara Boxer, Democrat of California, has received nearly 17,000 e-mail messages, nearly all opposed to the bailout, her office said. More than 2,000 constituents called Ms. Boxer’s California office on Tuesday alone; just 40 favored the bailout. Her Washington office received 918 calls. Just one supported the rescue plan.

Senator Sherrod Brown, Democrat of Ohio, said he had been getting 2,000 e-mail messages and telephone calls a day, roughly 95 percent opposed. When Senator Bernard Sanders, the Vermont independent who votes with Democrats, posted a petition on his Web site asking Mr. Paulson to require that taxpayers receive an equity stake in the bailed-out companies, more than 20,000 people signed.

“We certainly have never brought in 20,000 names in a day and a half,” Mr. Sanders said, sounding astonished. “For us, that’s off the wall.” (from Constituents Make Their Bailout Views Known, The NY Times, 24 Sep 2008)

The big fear is that the banking crisis would dry up credit which lubricates the American economy from consumer spending to households and small businesses that rely upon loans to operate. The bailout plan was supposed to avert this and keep the economy from going into deep recession and even into depression. Some economists however, like Nouriel Roubini of RGE Monitor, think that purchasing toxic assets is not the best way to recapitalize the financial system, and propose several other ways of doing this.

Whenever there is a systemic banking crisis there is a need to recapitalize the banking/financial system to avoid an excessive and destructive credit contraction. But purchasing toxic/illiquid assets of the financial system is not the most effective and efficient way to recapitalize the banking system. Such recapitalization – via the use of public resources – can occur in a number of alternative ways: purchase of bad assets/loans; government injection of preferred shares; government injection of common shares; government purchase of subordinated debt; government issuance of government bonds to be placed on the banks’ balance sheet; government injection of cash; government credit lines extended to the banks; government assumption of government liabilities. (from Nouriel Roubini, RGE Monitor, 28 Sep 2008)

It makes one wonder why Paulson put out just one option on the table, arm twisting Congress with imminent threats of apocalyptic proportions– “the precipice that we were on and how we had to act quickly and we had to act boldly and we had to act now”, in Pelosi’s grating words–if he is not, effectively, given blanket authority to dispense public funds to his Wall Street coterie.

In Roubini’s words:

[The] Treasury plan is a disgrace: a bailout of reckless bankers, lenders and investors that provides little direct debt relief to borrowers and financially stressed households and that will come at a very high cost to the US taxpayer. And the plan does nothing to resolve the severe stress in money markets and interbank markets that are now close to a systemic meltdown. It is pathetic that Congress did not consult any of the many professional economists that have presented – many on the RGE Monitor Finance blog forum – alternative plans that were more fair and efficient and less costly ways to resolve this crisis. This is again a case of privatizing the gains and socializing the losses; a bailout and socialism for the rich, the well-connected and Wall Street. And it is a scandal that even Congressional Democrats have fallen for this Treasury scam that does little to resolve the debt burden of millions of distressed home owners. (from Nouriel Roubini, RGE Monitor, 28 Sep 2008)

It is interesting to see how the perception that Bush has alienated himself from his party and how his administration through the Treasury is in cahoots with Congressional Democrats in betraying the public trust will play out in the Presidential elections in November.