The Future Is Now Past

I’m glad that someone at Foreign Policy has been paying attention.

From The 10 Worst Predictions for 2008:

1. “Barack Obama is not going to beat Hillary Clinton in a single Democratic primary.” —William Kristol

2. “Bear Stearns is not in trouble.” —Jim Cramer

3. “…only a naval power of the United States’ strength could seriously disrupt oil shipments.” —Dennis Blair and Kenneth Lieberthal

4. “[A]nyone who says we’re in a recession, or heading into one—especially the worst one since the Great Depression—is making up his own private definition of ‘recession.’” —Donald Luskin

5. “For all its flaws, an example to others.” —The Economist on Kenya’s presidential election

6. “Arizona’s maverick senator, John McCain, will end up the country’s next President.” –BusinessWeek

7. “These events have the potential to fundamentally alter matter and destroy our planet.” —Walter Wagner

8. “The possibility of $150-$200 per barrel seems increasingly likely over the next six-24 months.” —Arjun Murti

9. “It starts with the taking over of South Ossetia and Abkhazia, which has already happened. It goes on to the destruction of the Georgian armed forces, which is now happening. The third [development] will probably be the replacement of the elected government, which is pro-Western, with a puppet government, which will probably follow in a week or two.” —Charles Krauthammer

10. “I believe the banking system has been stabilized. No one is asking themselves anymore, is there some major institution that might fail and that we would not be able to do anything about it.” —Henry Paulson

Maybe we should pay less attention to all of these people in the future.

Some of these people I am not familiar with. Some of them, such as William Kristol, Jim Cramer, Charles Krauthammer, Henry Paulson, and even BusinessWeek; I’ve never much cared for. Only arrogant fools think they can predict the future.

Ben Bernanke

From Anatomy of a Meltdown by John Cassidy:

The most serious charge against Bernanke and Paulson is that their response to the crisis has been ad hoc and contradictory: they rescued Bear Stearns but allowed Lehman Brothers to fail; for months, they dismissed the danger from the subprime crisis and then suddenly announced that it was grave enough to justify a huge bailout; they said they needed seven hundred billion dollars to buy up distressed mortgage securities and then, in October, used the money to purchase stock in banks instead. Summing up the widespread frustration with Bernanke, Dean Baker, the co-director of the Center for Economic and Policy Research, a liberal think tank in Washington, told me, “He was behind the curve at every stage of the story. He didn’t see the housing bubble until after it burst. Until as late as this summer, he downplayed all the risks involved. In terms of policy, he has not presented a clear view. On a number of occasions, he has pointed in one direction and then turned around and acted differently.

"Sadly, Wolf"

From Forbes: Paulson is 'worst' treasury secretary in modern times by Peter Lanier:

Forbes magazine President and CEO Steve Forbes called Treasury Secretary Henry Paulson “the worst treasury secretary we’ve had in modern times”, citing, among other things, the government’s handling of the housing crisis.

In an interview with CNN’s Wolf Blitzer on Sunday, Forbes repeatedly called on the treasury secretary to be more straightforward about the money used to bail out mortgage giants Fannie Mae and Freddie Mac.

“Have Henry Paulson do at least one thing right, and that is, have the government explicitly guarantee the debt of Fannie and Freddie,” the financial mogul and former Republican presidential candidate said.

When asked if he has confidence in Paulson, Forbes responded “No, sadly, Wolf. He's about the worst treasury secretary we've had in modern times.”

Maybe The New Guy Will Get A Better Grade

From All the Wrong Policies: Paulson Gets 'F-Minus' from Former Regulator by Aaron Task:

As bad a year as the stock market is having, Treasury Secretary Paulson is having an even worse one, according to William Black, Associate Professor of Economics and Law at the University of Missouri.

The professor, who was counsel to the Federal Home Loan Bank Board during the S&L Crisis and blew the whistle on the "Keating Five" in 1989, says Paulson deserves an "F-minus" for his role in the financial crisis.

He also notes Paulson steered Goldman Sachs into subprime and alt-A mortgage securities before becoming Treasury Secretary in 2006. Goldman began shorting those instruments shortly after Paulson's departure, he notes.

The current crisis is "not a hundred-year flood, that suggests it's an act of God caused by random forces," Black says. "This was one cause by bad policies, the same policies that have caused prior crises."

From Stocks surge on Treasury chief talk by Alexandra Twin:

Stocks rallied Friday, with the Dow industrials bouncing as much as 550 points, after reports surfaced that President-elect Barack Obama will nominate New York Federal Bank president Timothy Geithner as his new Treasury Secretary.

In particular, Wall Street seemed to welcome Obama's reported pick of Geithner, the vice chairman of the Federal Reserve's policy-setting committee. Geithner was the Fed's point person on the rescue of Bear Stearns and AIG.

Break The Bailout

From Break the Bailout:

Take a stand with us as we deliver "Bailout Blowback" to our elected officials who supported this legislation.

Together we'll educate voters about what the bailouts really mean. We'll go door to door, run television and radio ads, hold marches and protests, and make the news.

What an incredible opportunity the bankers and congress have given to us... the outrage of We, the People! Join us, come together with us as a community of Americans demanding accountability, and redirect that impotent outrage into something positive for America. Let's Break the Bailout!

They Don't Have A Clue, Do They?

Clueless. How often can that word be applied to the Bush administration?

From Paulson changes tack on financial rescue by Greg Robb:

Treasury Secretary Henry Paulson laid out details for the next stage of the government's financial-market rescue package Wednesday, announcing that he has shelved the original plan to buy troubled mortgage assets while turning his attention to nonbank financial institutions and consumer finance.

In a broad and deep review of the controversial $700 billion effort, Paulson defended the steps taken to date, but in the same breath said that financial markets remain fragile and that the focus must remain on "recovery and repair."

Alex Merk, president of Palo Alto Calif.-based Merk Investments, a mutual-fund firm, said that market participants were frustrated with Paulson's communication skills and changing tactics.

"He's been flip-flopping on every plan and it doesn't look like he has a plan," Merk said in an interview.

According to Merk, the rescue plan is failing to get banks to lend money, and that holders of mortgage assets who had been hoping to sell to the government at a good price have now seen these hopes dashed.

Earlier Wednesday, federal bank regulators issued a joint statement jawboning banks to start lending money to consumers. But Merk said that there are many factors that are making banks hoard capital.

"They don't trust their own balance sheets, and why lend to consumers when the consumer sector is going down the drain?" he commented.

Bush can’t leave soon enough. Not only is his administration immoral and incompetent, it is totally clueless.

Henry Paulson - Bush Appointee

Political Animal on April 1, 2008:

No surprise there. After all, Paulson created his plan a year ago, well before the current crisis exploded last summer. Far from being a way to rein in banking industry excesses, it was originally a conservative wish list designed to "streamline" the federal bureaucracy and lighten the regulatory burden on Wall Street, which was, um, slowing down the growth of sophisticated new financial instruments that — that, er, were needed to keep the American financial industry in its place as the leader of the world.

But just for once, would it kill the Bush administration to address an actual problem, instead of merely using it as an excuse to jam some long-wished-for piece of money-con flim-flam through Congress?

From 'Paulson's new 'Global Banking Corp.' IPO 2009 by Paul B. Farrell:

1. Opening scene: Paulson and Goldman Sachs, 1974-2006

Harvard M.B.A., 1970. Then a staffer at the Pentagon and with Nixon. Joins Goldman in 1974. CEO in 1999. Paid $38 million in 2005. Federal ethics laws let him sell $484 million in Goldman stock tax-free when he left. Net worth, about $700 million.

And I have to pay taxes every time I sell any stocks, even if it is only a fraction of a share.

From A Loophole For Poor Mr. Paulson by Jessica Holzer:

But don't shed too many tears for Paulson. He has amassed quite a fortune--a roughly $700 million equity stake in Wall Street's premier investment banking house. And soon, he will have the chance to diversify a good chunk of those holdings without paying a dime to the Internal Revenue Service.

By accepting the Treasury post, Paulson is poised to take advantage of a tax loophole that allows government officials to defer capital gains taxes on assets they have to sell to avoid a conflict of interest, as long as the proceeds are reinvested in government securities or a broad array of mutual funds approved by the government within 60 days.

Technically, the tax kicks in once these replacement assets are sold, using the purchase price of the original assets as the cost basis, says Tom Ochsenschlager of the American Institute of Certified Public Accountants. But why sell when you can avoid the tax altogether?

"The idea is never to sell," says Robert Willens, the top tax and accounting analyst at Lehman Brothers. "If you're able to hold onto the replacement assets until your demise, you never have to pay it."

The tax break was designed to ensure that the wealthy are not deterred from taking posts in government because they fear a big tax hit. But it amounts to a significant perk of public office.

From Can you trust a Wall Street veteran with a Wall Street bailout? by Kevin G. Hall:

Back then, Bush saw Paulson's Wall Street experience as a plus. "Hank will follow in the footsteps of Alexander Hamilton and other distinguished Treasury secretaries who used their talents and wisdom to strengthen our financial markets and expand the reach of the American Dream," Bush said at the time.

Nothing like the wisdom and foresight of George W. Bush.

Has George W. Bush ever done anything positive for this country?

Bailout Blues

George W. Bush and Henry Paulson and Congress don’t seem like the U.S. Cavalry to me.

From Stock crunch deepens by Aaron Smith:

Stocks were in for a bruising Monday after a deepening financial crisis in Europe heightened worries about a global economic slowdown.

The S&P, Dow and Nasdaq futures - trading that gives an indication of how stocks may move in the early going - were sharply lower about one hour before the open. That followed a broad sell-off around the world on Monday.

Japan's Nikkei index plunged 4.3% to close at a four-year low. European indexes - the Britain's FTSE 100, Germany's Xetra DAX 100 and France's CAC 40 - were down about 5% as investors looked beyond the bailout, focusing instead on Europe's growing crisis.

"It's this fear factor ... continuing to grow," said Peter Cardillo, chief market economist for Avalon Partners. "It's becoming like a cancer which is spreading all over the place."

From U.S. bank failures almost certain to increase in next year:

Here's a safe bet for uncertain times: A lot of banks won't survive the next year of upheaval despite the U.S. government's $700 billion rescue plan to restore order to the financial industry.

The biggest questions are how many will perish and how they will be put out of their misery, whether it's outright closures by regulators scrambling to preserve the dwindling deposit insurance fund or in fire sales made under government pressure.

Congress does what Bush and Paulson want, and things get worse. You guys are doing a heck of a job. Perhaps McCain needs to cancel his campaign, not just postpone it.

Financial Genius

Peter Brimelow takes a look at the 1998 Fed-orchestrated bailout of Long-Term Capital Management hedge fund, and sees some similarities to today.

From Another case of collusion? by Peter Brimelow:

LTCM was the current bailout in microcosm.

I was fascinated by the LTCM bailout. I couldn't figure out why the Fed needed to rescue a relatively small firm. But two excellent books "When Genius Failed" and "Inventing Money," respectively by Roger Lowenstein and Nicholas Dunbar (who really do deserve to be rich and famous) provided a lot of damning detail, albeit without drawing conclusions.

Bottom line: LTCM seems to have been bailed out because it was well-connected. Its connections were significantly to Goldman Sachs, which in turn was extremely well-connected to federal government. Its former CEO, Robert Rubin, was Treasury Secretary at the time.

By an amazing coincidence, another former Goldman CEO, Henry Paulsen, is orchestrating the current bailout.

You can find more information on When Genius Failed here.

Let’s take a look at John Meriwether. After graduating from college he worked as a bond trader at Salomon Brothers. He left Salomon in 1991 after being involved in a Treasury securities trading scandal. He was forced to pay a $50,000 civil penalty. Long-Term Capital Management (a hedge fund) was founded in 1994 by John Meriwether. For some reason his work at Salomon inspired Nobel Prize winners Myron Scholes and Robert C. Merton to join the board of directors of LTCM. They also found investors willing to part with $1,011,060,243. They did very well for awhile. They used highly leveraged positions and derivatives. Sound familiar? Then they tanked. They tanked so badly that the Federal Reserve Bank of New York organized a bailout of $3.625 billion to avoid a wider collapse in the financial markets. Sound familiar?

Are you wondering what became of John Meriwether? Did he go to jail? Was he banned from the financial markets?

John Meriwether runs another hedge fund called JWM Partners, LLC.

What is it they say about a fool and his money?

Are we now bailing out the financial system to keep it afloat so that the same people who got us into this mess can get us into another mess in the future?

For a system filled with accountants, where is the accountability?

ADVERTISEMENT

Organized Theft

From I Dissent: An Essay Against A Government Bailout by Kenneth D. Peterson, Jr.

I will not go softly! There is a terrible, horrible crisis looming we are now told. But the Government will save us if only we will allow the most extravagant intervention into private affairs that this country has ever contemplated. The politicians and the media blare breathless sound bites about fear of collapse, fear of the future, fear of real estate, fear of failure. Have we forgotten that FDR said the only thing we need to fear is fear itself? Have we forgotten that six years ago when there was a similar full court press by the political and media elite to exploit our fears the reality in Iraq did not live up to the hype?

The political classes of both parties said that in the face of this unimaginable crisis they would take the weekend – imagine that, a whole weekend! – to create a Solution. The Solution must now be implemented immediately before we can even fully understand what it is. This is a classic “rush to judgment” so that we may not notice that the Solution aims to destroy the fundamental ideals of individual freedom, accountability and responsibility that our nation’s Constitution was meant to defend.

I dissent and ask that you communicate your own dissent.

Our financial situation has two issues: Liquidity and Solvency. If a bank lends money to someone and the person defaults and the collateral is not worth the outstanding loan we can call this a “bad loan.” Who should suffer the loss? Should we make the renter who lives next door absorb the loss? Should we make the shareholders of a bank that made good loans suffer the loss? This seems ridiculous! To suggest, as do our earnest politicians, that all the citizens of the United States should suffer the loss is literally nonsense. The one who must suffer the loss is the one who made the loan. Anything else is organized theft. If the bank did not inquire as to whether the borrower could repay the loan, or if it did not require an adequate equity cushion, then it must be responsible for such “stupid loans”. The same goes for those who bought those loans and thereby became the lender. The result of enough such loans should be insolvency. Moreover, a lender that leverages itself 30 to 1 and then pleads for a bailout when values fall 4% does not define a national emergency and should not be taken seriously.

Read the rest here.

What Exactly Did They Do?

Whatever investment banks do, (or did) it must not be that important. None of the big ones are around anymore. How will we ever live without them?

From In switch to banks, brokers eye thinner profits by Alistar Barr:

In less than a year, the five largest U.S. brokerage firms -- Bear Stearns, Lehman Brothers, Merrill Lynch, Goldman Sachs and Morgan Stanley -- have, in turn, collapsed, been acquired by a larger commercial bank or decided to become a bank.

I think that all they used to do was steal people's money. Let’s remember that the person supposed to be fixing all of this used to be the head of Goldman Sachs. I’ll leave it to you to put two and two together.

I'm considering calling George W. Bush "Fagin" from now on.

Update:
Think Progress has this on the “fixer.”

Think Progress has this on “Fagin.”

Update:
From Salon Radio: Notre Dame finance professor Richard Sheehan by Glenn Greenwald:

University of Notre Dame Professor of Finance Richard Sheehan has been one of the most incisive economist-critics of the Paulson plan since it was unveiled, and he's my guest today on Salon Radio. We discuss the ways in which the key fear-mongering claims of Paulson have been both misleading and exaggerated; the reasons the bailout plan won't work even if the best case scenario occurs; where and how the Federal Government will get $700 billion to fund it; and the role Paulson himself has played in the events that have caused this crisis. From Professor Sheehan in the interview:

Unfortunately, Mr. Paulson was among those that were creating the problem, rather than warning about the problem. In his role as CEO of Goldman Sachs, Goldman -- under his watch -- created a whole lot of CDOs [collateralized debt obligations] that now are under the heading of "toxic waste." So it's amusing in a twisted way to look at him now as the one who is going to save us from imminent financial collapse, when it was at least in part brought on by the actions of Goldman, in terms of being so liberal in their willingness to create new and improved CDOs.

Henry Paulson Proposes Big Changes

Henry M. Paulson is the United States Treasury Secretary and a member of the International Monetary Fund Board of Governors. He previously served as the Chairman and Chief Executive Officer of Goldman Sachs, one of the world's largest and most successful investment banks. Paulson was nominated by U.S. President George W. Bush to succeed John Snow as the Treasury Secretary.

Why do we continue to pick from the same old basket of rotten fruit? Can you say “conflict of interest?” The old adages “consider the source” and "the fox guarding the henhouse" come to mind when I hear of news like this: Sweeping Changes in Paulson Plan.

U.S. Treasury Secretary Henry Paulson plans Monday to call for sweeping structural changes in the way the government monitors financial markets, capping a broad review aimed at revamping a system of regulatory oversight built piecemeal since the Civil War.

If even only some of the changes get made, they would represent a major reworking of the U.S. regulatory system for finance. Such an outcome would likely take years and would also require major compromises from an increasingly partisan Congress.

Opposition is already emerging from critics who feel the document nods too far toward deregulation. The revamp process began early last year before the credit crunch and was initially aimed at improving American competitiveness. As such, it's a hybrid that both adds new rules to deal with recent financial woes but also simplifies old structures in a way that favors some in the finance industry.