It's Official - The PPIP is a Back-Door Bank Bailout on the Backs of Taxpayers

AIG is a laundering operation for the Treasury to funnel money to foreign banks, over $100B so far.

Now this:

Here's what the FDIC is thinking now:

1) Commercial and construction loans will be first in the auction process. The recent analysis that was floating around here indicated that many large banks haven't even begun to mark these assets down. Literally. Lots of them are reporting their assets in these categories as worth par or very close to it.

2) Virtually all of the selling will be from the big banks... more than their respective market share would indicate.

3) Hope you're sitting down for this one: TARP funds will be used to replace any writedowns that will arise from the difference between current marks and the auction price.

So it is official (or soon shall be): the taxpayer will be the bagholder for all toxic assets on the major banks' balance sheets. The notion that destroyed capital (via credit writedowns) can be replaced by borrowed money (TARP funds) also means that the largest banks will be much more levered than before this whole sorry process began.

Imagine the following auction scenario. A pool was marked at $.98, it sells for $.50 at auction. TARP funds $.48 of the unpaid principal balance to make up the capital hit. The private buyer puts up 1/12th of the auction price (FDIC 6:1 leverage, Treasury 50% of capital). So in other words, the private buyer has put up about 2% of the UPB and the bank took a previously disclosed 2% writeoff. Ultimately in this scenario, the taxpayer is taking on something like 96% of the risk.

This is a direct transfer of wealth from the taxpayer to the folks holding on to the lower parts of the capital structure in major banks. It will make the AIG stealth bailout/scam look like a freakin' parking violation.

The Quiet Coup

Finally, the idea is beginning to spread that what is going on with the financial system is just out-and-out thievery. The banksters are lying, playing us for fools, and holding us hostage, threatening Armageddon if we don't bail them out of their own stupidity. This is what 3rd world financial oligarchies, and fascist dictatorships do - they rob the bottom 98% to make the top 2% whole.

http://www.theatlantic.com/doc/200905/imf-advice

Pages 2-4 after the jump.

The Quiet Coup
Simon Johnson, a professor at MIT’s Sloan School of Management
Image credit: Jim Bourg/Reuters/Corbis

One thing you learn rather quickly when working at the International Monetary Fund is that no one is ever very happy to see you. Typically, your “clients” come in only after private capital has abandoned them, after regional trading-bloc partners have been unable to throw a strong enough lifeline, after last-ditch attempts to borrow from powerful friends like China or the European Union have fallen through. You’re never at the top of anyone’s dance card.

The reason, of course, is that the IMF specializes in telling its clients what they don’t want to hear. I should know; I pressed painful changes on many foreign officials during my time there as chief economist in 2007 and 2008. And I felt the effects of IMF pressure, at least indirectly, when I worked with governments in Eastern Europe as they struggled after 1989, and with the private sector in Asia and Latin America during the crises of the late 1990s and early 2000s. Over that time, from every vantage point, I saw firsthand the steady flow of officials—from Ukraine, Russia, Thailand, Indonesia, South Korea, and elsewhere—trudging to the fund when circumstances were dire and all else had failed.

Every crisis is different, of course. Ukraine faced hyperinflation in 1994; Russia desperately needed help when its short-term-debt rollover scheme exploded in the summer of 1998; the Indonesian rupiah plunged in 1997, nearly leveling the corporate economy; that same year, South Korea’s 30-year economic miracle ground to a halt when foreign banks suddenly refused to extend new credit.

But I must tell you, to IMF officials, all of these crises looked depressingly similar. Each country, of course, needed a loan, but more than that, each needed to make big changes so that the loan could really work. Almost always, countries in crisis need to learn to live within their means after a period of excess—exports must be increased, and imports cut—and the goal is to do this without the most horrible of recessions. Naturally, the fund’s economists spend time figuring out the policies—budget, money supply, and the like—that make sense in this context. Yet the economic solution is seldom very hard to work out.

No, the real concern of the fund’s senior staff, and the biggest obstacle to recovery, is almost invariably the politics of countries in crisis.

Typically, these countries are in a desperate economic situation for one simple reason—the powerful elites within them overreached in good times and took too many risks. Emerging-market governments and their private-sector allies commonly form a tight-knit—and, most of the time, genteel—oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders. When a country like Indonesia or South Korea or Russia grows, so do the ambitions of its captains of industry. As masters of their mini-universe, these people make some investments that clearly benefit the broader economy, but they also start making bigger and riskier bets. They reckon—correctly, in most cases—that their political connections will allow them to push onto the government any substantial problems that arise.

In Russia, for instance, the private sector is now in serious trouble because, over the past five years or so, it borrowed at least $490 billion from global banks and investors on the assumption that the country’s energy sector could support a permanent increase in consumption throughout the economy. As Russia’s oligarchs spent this capital, acquiring other companies and embarking on ambitious investment plans that generated jobs, their importance to the political elite increased. Growing political support meant better access to lucrative contracts, tax breaks, and subsidies. And foreign investors could not have been more pleased; all other things being equal, they prefer to lend money to people who have the implicit backing of their national governments, even if that backing gives off the faint whiff of corruption.

But inevitably, emerging-market oligarchs get carried away; they waste money and build massive business empires on a mountain of debt. Local banks, sometimes pressured by the government, become too willing to extend credit to the elite and to those who depend on them. Overborrowing always ends badly, whether for an individual, a company, or a country. Sooner or later, credit conditions become tighter and no one will lend you money on anything close to affordable terms.

The downward spiral that follows is remarkably steep. Enormous companies teeter on the brink of default, and the local banks that have lent to them collapse. Yesterday’s “public-private partnerships” are relabeled “crony capitalism.” With credit unavailable, economic paralysis ensues, and conditions just get worse and worse. The government is forced to draw down its foreign-currency reserves to pay for imports, service debt, and cover private losses. But these reserves will eventually run out. If the country cannot right itself before that happens, it will default on its sovereign debt and become an economic pariah. The government, in its race to stop the bleeding, will typically need to wipe out some of the national champions—now hemorrhaging cash—and usually restructure a banking system that’s gone badly out of balance. It will, in other words, need to squeeze at least some of its oligarchs.

Squeezing the oligarchs, though, is seldom the strategy of choice among emerging-market governments. Quite the contrary: at the outset of the crisis, the oligarchs are usually among the first to get extra help from the government, such as preferential access to foreign currency, or maybe a nice tax break, or—here’s a classic Kremlin bailout technique—the assumption of private debt obligations by the government. Under duress, generosity toward old friends takes many innovative forms. Meanwhile, needing to squeeze someone, most emerging-market governments look first to ordinary working folk—at least until the riots grow too large.

Eventually, as the oligarchs in Putin’s Russia now realize, some within the elite have to lose out before recovery can begin. It’s a game of musical chairs: there just aren’t enough currency reserves to take care of everyone, and the government cannot afford to take over private-sector debt completely.

So the IMF staff looks into the eyes of the minister of finance and decides whether the government is serious yet. The fund will give even a country like Russia a loan eventually, but first it wants to make sure Prime Minister Putin is ready, willing, and able to be tough on some of his friends. If he is not ready to throw former pals to the wolves, the fund can wait. And when he is ready, the fund is happy to make helpful suggestions—particularly with regard to wresting control of the banking system from the hands of the most incompetent and avaricious “entrepreneurs.”

Of course, Putin’s ex-friends will fight back. They’ll mobilize allies, work the system, and put pressure on other parts of the government to get additional subsidies. In extreme cases, they’ll even try subversion—including calling up their contacts in the American foreign-policy establishment, as the Ukrainians did with some success in the late 1990s.

Many IMF programs “go off track” (a euphemism) precisely because the government can’t stay tough on erstwhile cronies, and the consequences are massive inflation or other disasters. A program “goes back on track” once the government prevails or powerful oligarchs sort out among themselves who will govern—and thus win or lose—under the IMF-supported plan. The real fight in Thailand and Indonesia in 1997 was about which powerful families would lose their banks. In Thailand, it was handled relatively smoothly. In Indonesia, it led to the fall of President Suharto and economic chaos.

From long years of experience, the IMF staff knows its program will succeed—stabilizing the economy and enabling growth—only if at least some of the powerful oligarchs who did so much to create the underlying problems take a hit. This is the problem of all emerging markets.



Becoming a Banana Republic

In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). In each of those cases, global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn’t roll over their debt did, in fact, become unable to pay. This is precisely what drove Lehman Brothers into bankruptcy on September 15, causing all sources of funding to the U.S. financial sector to dry up overnight. Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people.

But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.

Top investment bankers and government officials like to lay the blame for the current crisis on the lowering of U.S. interest rates after the dotcom bust or, even better—in a “buck stops somewhere else” sort of way—on the flow of savings out of China. Some on the right like to complain about Fannie Mae or Freddie Mac, or even about longer-standing efforts to promote broader homeownership. And, of course, it is axiomatic to everyone that the regulators responsible for “safety and soundness” were fast asleep at the wheel.

But these various policies—lightweight regulation, cheap money, the unwritten Chinese-American economic alliance, the promotion of homeownership—had something in common. Even though some are traditionally associated with Democrats and some with Republicans, they all benefited the financial sector. Policy changes that might have forestalled the crisis but would have limited the financial sector’s profits—such as Brooksley Born’s now-famous attempts to regulate credit-default swaps at the Commodity Futures Trading Commission, in 1998—were ignored or swept aside.

The financial industry has not always enjoyed such favored treatment. But for the past 25 years or so, finance has boomed, becoming ever more powerful. The boom began with the Reagan years, and it only gained strength with the deregulatory policies of the Clinton and George W. Bush administrations. Several other factors helped fuel the financial industry’s ascent. Paul Volcker’s monetary policy in the 1980s, and the increased volatility in interest rates that accompanied it, made bond trading much more lucrative. The invention of securitization, interest-rate swaps, and credit-default swaps greatly increased the volume of transactions that bankers could make money on. And an aging and increasingly wealthy population invested more and more money in securities, helped by the invention of the IRA and the 401(k) plan. Together, these developments vastly increased the profit opportunities in financial services.

Click the chart above for a larger view




Not surprisingly, Wall Street ran with these opportunities. From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent. Pay rose just as dramatically. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007.

The great wealth that the financial sector created and concentrated gave bankers enormous political weight—a weight not seen in the U.S. since the era of J.P. Morgan (the man). In that period, the banking panic of 1907 could be stopped only by coordination among private-sector bankers: no government entity was able to offer an effective response. But that first age of banking oligarchs came to an end with the passage of significant banking regulation in response to the Great Depression; the reemergence of an American financial oligarchy is quite recent.

The Federal Reserve Unleashed?

Many think that the FOMC and the Fed are unaudited and free agents.

Not true, as this exchange reveals.

The Fed is legally accountable to NOBODY

Incorrect. Congress can remove Bernanke if they so chose.

They are not even required to let Congress audit their activities.

This is a falsehood. The FOMC and FR are audited every year and publish figures on a weekly basis. It is the specific names and identities of the recipients of discount window loans and the trillions in bailouts from the Fed in exchange for bogus MBS paper that they will not divulge. If Congress wanted to they could force Bernanke and Geithner to give us the list.

It's called contempt of Congress, and they can jail 'em if needed.

If a quasi-government agency can distribute trillions to well-connected insiders in a matter of months without any kind of oversight or accountability...

What are all those hearings with Ben and Tim and Hank? Opacity? They are accountable - we just won't hold them accountable. We re-elected everyone who voted for the 1st Stimulus Bill, and we get what we deserve. Congress won't be adult, so we are screwed.

...what is the point in even talking about the deficit? You could cut everything 50% across the board and balance the budget immediately, plunging the country into a deep depression in the process, and the result of your fiscal austerity would simply be that Ben's bankster friends would buy up all the assets in the USA at fire-sale prices with trillions lent them by the Fed.

We are going to get a Super Depression anyhow, and all those bankers who looted in cahoots with Paulson and Bernanke are, indeed, going to buy up all the assets at fire-sale prices with the trillions we lent them. The only way to stop them is via violent revolution. But how to know they aren't someone who saved in good times to buy in bad? That's the rub.

The Super Depression will happen. It is mathematically inevitable.

Cut everything by 50%. Defense, health care, everything.
Then work out what you can keep going with the money you have.

If these keeps up we will be forced to do this when the money runs out. Without deficit financing, we will have to revert the budget to tax revenues - ~1.25T.

This will occur in a very short time frame. A few weeks at most when it begins, who knows when that will be. We will have to cut immediately, no choice. Then the riots begin. Your Grandmother's SSi check will either bounce, not arrive, or be reduced -45%.

For defense, this would mean and end to being the world's policeman, and a military tasked to defend the USA from likely threats(rather than being capable of fighting a global war on two fronts).

Yep, and when we do this and revert to 1-3 carrier battle groups piracy and other issues will explode. Regional bullies will return. Who do you think prevents global piracy? How do you think our Navy practices?

If you maintain a strong tactical and strategic nuclear force, you shouldn't need a large conventional force to deter any hypothetical invasion of US soil.

No, but our freighters will be hijacked coming and going, held ransom, pirates, tribute to regional powers, efc. Outside of US territorial waters you won't be safe, and the high seas will not be safe as they have been the past 70 years.

Good Article on the Dollar Backed by Worthless Paper

All good collateral, including Treasury's, has been pledged.

Looks Like We Finally Pissed off the Rest of the World

This will end badly.

By Gleb Bryanski

MOSCOW, March 19 (Reuters) - China and other emerging nations back Russia's call for a discussion on how to replace the dollar as the world's primary reserve currency, a senior Russian government source said on Thursday. Russia has proposed the creation of a new reserve currency, to be issued by international financial institutions, among other measures in the text of its proposals to the April G20 summit published last Monday.

If we get kicked off reserve currency status then people will look at our economy just like the IMF looks at anyone else's. That Debt/GDP ratio will not sit well. They will look at our books like they look at Argentina's or Mexico's, conclude that we are broke, and immediately begin to sell the dollar. The dollar index (DX)will go to 20. Then we WILL end up like Argentina.

Survive The Depression Best Case - Part II

If Ben Bernanke does this - buy the long end to $300B - and he does it some more (It is this "more" that is the mystery. At what point of purchases of Treasury's will this cause The No Mas Moment?), eventually what happens is The Nightmare Scenario. The entire world U.S.A. Sovereign debt market sells into Ben Bernanke's bids, he buys up most T's causing a crash in value of those he doesn't hold. He thus buys up more, repeat until Ben Bernanke has increased the FOMC H.4.1 by $6,000B - all existing outstanding T's. When this Ouroboros Moment is over, there will be no further deficit spending because The Federal Reserve cannot arbitrage itself. Ben Bernanke can spend more than he sells to himself, but that would require blatant, naked, printing that would immediately show up on the Fed b/s. He wants to buy up $3,000B of Treasury's, but only has $1,500B. He increases the FOMC H.4.1 balance sheet. But this will last for a few days at most as everyone dumps the dollar in response. Just like they did this afternoon.

When that moment of cornering the market occurs, at that instant the U.S. Government will need to shrink to tax revenues. As in a fortnight. As in the budget goes from $4,000B to $1,500B in two weeks time. Then we get the annihilation of Social Security, Medicare, Medicaid, the evaporation of the rest of the budget, and a Post-Soviet style collapse of our military budget to 50% or less.

The 'crash' will take 2 or 3 news cycles as the info spreads by email, social networking, blogs, forums, Internet and text message. The MSM will be clueless and useless up to and until rioting breaks out, and even then they simply won't be able to "Get It". We will end up just like Iceland. 72 hours and we will be well-done.

At first the rest of the world will rejoice in the collapse of our military. Then the regional troublemakers will rise up, and the critics will rue the day they ever spoke poorly of the USA.

I don't want this. None of you do. But if Ben Bernanke continues, if he REALLY buys $300B of the long end and stops with the "Credible Threat of..." and actually DOES IT...well, we will be on our way.

It will only be a matter of 'when', not 'if'.

Ka-Boom! Survive the Depression now BEST CASE!!!

Well Ben Bernanke finally did it. In today's FOMC release the committee said:

To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months.

Game Over.

It is only a matter of time before Bernanke becomes the only market for Treasury and GSE products. Once he puts the bid out in to the market you get what happened with the BOE today - 7 offers to sell for each one bid to buy. IOW, when the .Gov becomes the only buyer, or a buyer willing to purchase ANY asset class at above market rates, everyone stampedes for the door to sell first and get the money and put it to a better use.

This goes far beyond a Super-Depression. This nonsense will end up destroying - and I mean that in every sense of the word - the U.S. economy and Political System.

And you thought that being out of work and worrying about a Depression were the worst of your worries?

No Escape

Downturn. Recession. Economic Contraction. My favorite: Drecession.

Depression.

53% of polled Americans think it somewhat likely or very likely that over the next few years, that the United States will enter a 1930s like Depression. This from a poll at Rasmussen, conducted last week.

19% Very likely
34% Somewhat likely
32% Not very likely
7% Not at all likely
7% Not sure

Not looking very optimistic, is it?

If such a large percentage of Americans think A Greater Depression, The Greatest Depression, The Super-Depression˜, is on its way, what is that going to do to their attitudes about spending, saving, consuming, buying homes, autos and other goods?