Tuesday, September 16, 2008

Fed Funds Spread Signals Crash

Fed Funds Spread Signals Crash

Go To Original

The last time the Fed Funds target rate got this out of line with the effective rate was in 1987, and from a base of over 6% not 2%. On a percentage basis, at three times the target rate the spread is unprecedented. It happened today.

Fed funds jump to 6 pct in mkt, tripling Fed's target

NEW YORK NEW YORK, Sept 15 (Reuters) - Federal funds traded in the U.S. interbank lending market were indicated to have jumped to 6 percent on Monday, tripling the target rate of 2 percent which the Federal Reserve sets.

The move happened even after the Federal Reserve earlier added $20 billion of temporary reserves to the banking system via overnight repurchase agreements.

Early Monday, at around 7:10 a.m. EDT in New York, federal funds had traded at 2.0625 percent. When market inter-bank lending rates shoot up, that often reflects distrust among financial institutions of lending to some other counterparties. Global market participants' risk aversion has surged on Monday as the U.S. banking crisis has escalated, analysts say.
AntiSpin: The Fed tries to manage the economy and inflation by influencing short term interest rates. It does that by buying and selling government bonds in the bond market in what are called "open market operations." They set a target rate, such as 2%, then buy or sell bonds as needed until the effective rate in the bond market matches the target rate objective. Problem is, this process does not always work in times of crisis because the bond markets themselves may be dis-functional, as is the case today.

Really, really dis-functional.

In 1987 during the crash the Fed Funds target rate was 6% but the effective rate jumped more than two times to 16% as banks lost confidence in lending to each other. Today that spread looks benign.

On Friday Sept. 12, the effective funds rate was 2.1 percent, only 10 basis points over the target rate. Now the effective rate is three times the target rate. What it means is that the banks are so distrustful of each other's credit that they do not want to lend to each other. Who can blame them? Lehman Bros. went out of business today (15/09/08) leaving its creditors holding the bag to the tune of $630 billion in defaulted debt.
``If the fed funds rate closes high today, I would be really worried as it would mean that there really is no money out there to be lent,'' said Stan Jonas, who trades interest- rate derivatives at Axiom Management Partners LLC in New York.
- Bloomberg
These episodes usually don't last long. It will be interesting to see what happens next.

Today's mega spread between the Fed target and effective rate has not shown up in the Fed's graph yet today. Look for it tonight or tomorrow.



Americans Should Worry About Bank Deposits if Congress Doesn't Act

Americans Should Worry About Bank Deposits if Congress Doesn't Act

By Aaron Task

Go To Original

With the "financial storm of the century" hitting financial institutions, many Americans are worried about the safety of their bank deposits. While the FDIC insures individual accounts up to $100,000, the reaction to IndyMac's failure this summer -- lines outside retail branches -- shows Americans have limited faith in the Federal Deposit Insurance Corp., which guarantees individual accounts up to $100,000.

Update: "The banking system is safe and sound," Treasury Secretary Hank Paulson declared at a mid-afternoon press conference Monday, seeking to ameliorate such concerns.

"Nothing is more important than the stability and orderliness of our financial markets [and] regulators remain vigilant," Paulson continued. "We're working through a difficult period in our financial markets right now as we work of some of the past excesses, but the American people can remain confident in the soundness and resilience of our financial system."

But Americans are justified to be worried, says Nouriel Roubini, of NYU's Stern School and RGE Monitor, who notes there is already a "slow-motion run on retail banks" occurring nationwide.

That "run" could accelerate as people realize the FDIC fund has about $50 billion to "insure" about $1 trillion in assets at the nation's financial institutions, says Roubini. "They're going to run out of money" unless Congress acts soon to recapitalize the FDIC.

In addition, the recent spike in number of banks on the FDIC's "troubled list" is only through June, meaning even that inflated number understates the problem.

The intent here isn't to add to people's anxieties, but Roubini is one of the few market watchers to correctly predict the severity of this ongoing credit crisis. If nothing else, he says people with accounts exceeding $100,000 in value should spread their money - and the risk - among different firms.

AIG falls 42% in cash scramble

AIG's cash hunt in high gear

Stock of nation's largest insurer plummets after being hit by credit raters. NYS aid comes with strings.

By Tami Luhby

Go To Original

Shares of American International Group tumbled Tuesday as the company scrambled to raise as much as $75 billion to keep itself afloat.

The nation's largest insurer is looking for a lifeline from the Federal Reserve Bank. Though federal officials had indicated they would not bail out AIG, it's unclear if they will maintain that stance as the company falters.

AIG is also counting on Goldman Sachs (GS, Fortune 500) and JPMorgan Chase (JPM, Fortune 500), with the help of the Fed, to cobble together a $70 billion to $75 billion line of credit funded by a consortium of lenders. However, any discussions are very preliminary, a source close to the matter told CNNMoney.com.

NYS aid contingent on overall deal

Meanwhile, more details surfaced on the action New York State took Monday. Regulators will allow Manhattan-based AIG to tap into $20 billion in assets from its subsidiaries only if the company comes up with a comprehensive plan to get the much-needed capital, said a state Insurance Department spokesman.

"It has to be part of the solution to the problem," said spokesman David Neustadt.

New York Gov. David Paterson said Monday that AIG could transfer $20 billion in assets from its subsidiaries to use as collateral for daily operations. In exchange, the parent company would give the subsidiaries less-liquid assets of the same value. He stressed the company is financially sound and that no taxpayer dollars are involved.

Also, the Fed has hired Morgan Stanley (MS, Fortune 500) to examine alternatives for AIG and determine whether the government should help the insurer, a source said.

The Fed and the investment banks declined comment.

The funding became ever more crucial as the insurer was hit Monday night by a series of credit rating downgrades. The cuts could prove deadly to AIG (AIG, Fortune 500) and force it to post more than $13 billion in additional collateral. Shares were down 35% in mid-day trading after falling more than 70% in early morning trading and losing 61% of their value the day before.

Late Monday night, Moody's Investors Service and Standard & Poor's Ratings Services each said they had lowered their ratings. A few hours earlier, Fitch Rating had also downgraded AIG, saying the company's ability to raise cash is "extremely limited" because of its plummeting stock price, widening yields on its debt, and difficult capital market conditions.

The downgrade could force AIG to post $13.3 billion of collateral, Fitch said in a statement, citing AIG's July 31 estimates. Also, the moves will make it more expensive for AIG to issue debt and harder for it to regain the confidence of investors.

AIG did not immediately reply to a request for comment on the late-night downgrades. Earlier Monday, spokesman Nicholas Ashooh told CNNMoney.com the company is "still evaluating alternatives."

Analysts say the company must unveil its restructuring plan soon.

"Management needs to address investor concerns now before the market sell-off becomes a self-fulfilling prophecy," said Rob Haines, analyst at CreditSights.

Global ripples if firm were to fail

If AIG were to fail, the global ripple effects would be unprecedented, said Robert Bolton, managing director at Mendon Capital Advisors Corp. It has $1 trillion in assets and operates in 130 countries.

AIG is a major player in the credit default swaps market, an insurance-like contracts that guarantee against a company defaulting on its debt. Also, it is a huge provider of life insurance, property and casualty insurance and annuities.

"If AIG fails and can't make good on its obligations, forget it," Bolton said. "It's as big a wave as you're going to see."

The grim assessments came after a day in which state and federal officials raced to help the insurer gain access to much needed cash. The company has lost more than $18 billion in the past nine months.

Wall Street had expected AIG to issue a restructuring plan Monday that would address its capital crunch and boost investor confidence. But the company, a component of the benchmark Dow Jones industrial average, remained silent.

Investors punished the stock, sending it down 61% to close at $4.76 on Monday. The company, which has been rocked by the subprime crisis, has seen its stock price fall more than 91% so far this year.

The restructuring plan was expected to include the sale of assets. The ailing company, which had planned to announce a turnaround strategy on Sept. 25, is being forced to accelerate the announcement after investors fled the stock last week.

The company is likely to sell its personal insurance and annuities businesses and the aircraft leasing unit, wrote Joshua Shanker, a Citigroup analyst, who believes the company might have to mark down another $30 billion in assets.

"We believe AIG will survive, but we have little indication of how many business lines will ultimately need to be sold and how dilutive to shareholders future capital raising efforts will be," Shanker wrote.

AIG, which already raised $20 billion in fresh capital earlier this year, has been pummeled by three quarters of huge losses and writedowns.

Its troubles stem from its sales of credit default swaps and from its subprime mortgage-backed securities holdings.

AIG has written down the value of the credit default swaps by $14.7 billion, pretax, in the first two quarters of this year, and has had to write down the value of its mortgage-backed securities as the housing market soured.

The insurer could be forced to immediately come up with $18 billion to support its credit swap business if its ratings fall by as little as one notch, wrote John Hall, an analyst at Wachovia.

But the company has many attractive businesses it could sell to raise capital, he said.

This year's results have also included $12.2 billion in pretax writedowns, primarily because of "severe, rapid declines" in certain mortgage-backed securities and other investments.

AIG has struggled all year as the Wall Street credit crunch took its toll.

In June, the company tossed out its chief executive, Martin Sullivan, who had been charged with turning the company around after directors removed longtime CEO Hank Greenberg in 2005. Greenberg was the target of one of then-Attorney General Eliot Spitzer's investigations.

The board named AIG chairman Robert Willumstad, who joined AIG in 2006 after serving as president and chief operating officer of Citigroup (C, Fortune 500), to replace Sullivan as chief executive officer.

So, the President May Kill Anybody He Pleases, Right?

So, the President May Kill Anybody He Pleases, Right?

By Robert Higgs

Go To Original

Among the many cock-and-bull stories set afoot by the Bush administration during the lead-up to its attack on Iraq was the one about the now-infamous drones of death. Later, it became sufficiently clear that this alleged threat had no more substance than the others the administration and the lapdog mainstream media had served up to a credulous public.

Although the ludicrously primitive Iraqi drones had no capacity whatsoever to harm the American public, the lethality of U.S. drones is another matter. Predator drones equipped with Hellfire missiles now provide the U.S. government with a means of flying over territory that U.S. ground troops dare not penetrate, observing activities on the ground, and killing people there with, shall we say, a minimum of due process.

In November 2002, for example, BBC News reported: "America’s Central Intelligence Agency (CIA) carried out an attack in Yemen that killed six suspected members of Osama Bin Laden’s al-Qaeda network, according to US officials. The men died when the jeep they were travelling in was hit by a missile fired from an unmanned CIA plane – believed to be a Predator drone, the US sources said."

U.S. forces have also used the Predator actively in Afghanistan and, most recently, in the Waziristan region of Pakistan. Today, I read an account of a drone attack near the town of Miramshah in North Waziristan that is reported to have "killed at least 14 people and injured 12 others," including "at least six women and children."

In Afghanistan, such aerial attacks, not always by drones, of course, have created a ticklish dilemma for the Karzai government as it pretends to be a real government, rather than the U.S. puppet it actually is. Official protests have become increasingly vociferous, though I have seen no evidence that the U.S. forces intend to change their operations in response.

What an awesome power the president and, with his authorization, his subordinate officers possess: they can kill people at will, including those persons’ wives and children, with no risk whatever of receiving return fire or other retribution. Surely this is the long-sought culmination of the Republican’s quest to establish "law and order."

What leads me to remark on this matter, however, is not its technological nuts and bolts or its connection with master-puppet relations in southwest Asia, but rather the complete insouciance with which the American public greets reports of deaths by drone. I do not exaggerate if I say that the general reaction is "ho-hum." Well, the average American says, that disposes nicely of another "bad guy." The gratuitous murder of the bad guy’s family members, neighbors, and other innocent persons in the vicinity appears to create no blip on the average American’s moral radar screen. Perhaps Americans do not consider Yemenis, Afghanis, and Pakistanis to be real human beings whose right to life we are obliged to respect?

Is death by drone simply another occasion when the president, having labeled a set of actions as a "war," believes and acts as though he has carte blanche to dish out death and destruction willy nilly?

Of course, reports of drone attacks usually refer to militants, Taliban forces, or al Qaeda members. To this information, we might well respond: yeah, who says? If we are content to assume that U.S. intelligence agents, who nearly always get their information from collaborators in the target territories, really know whom they are targeting, then we are certainly easily satisfied. One does not have to make an extensive survey of U.S. government claims about Iraq, Afghanistan, Pakistan, and other places in southwest Asia over the past seven years to see that for the most part the U.S. commanders, from the Commander in Chief on down to the sweatiest noncom on patrol, are either more or less clueless or the biggest liars on the planet. I do not rule out that they are both.

The upshot is that the people who cooperate in getting to the point at which someone pushes the button to send the Hellfire toward its selected target may in fact not know for sure whom they are about the kill, or how many others will be killed along with this ostensible "enemy" or who those others are.

Without launching into a massive geopolitical inquiry, we might well pause from time to time to ask, What are U.S. forces doing in Afghanistan and Pakistan anyhow? Surely they are not there to capture or kill the persons responsible for the crimes of 9/11, because they have already proved beyond all doubt that they are incapable of doing so (as Osama bin Laden’s videos periodically remind us). They are, however, all too capable of diverting their energies from that objective toward unrelated goals, such as attacking and occupying Iraq.

We Americans find ourselves, then, observing with extreme moral disengagement as the president and his subordinates murder persons whose identities remain uncertain along with assorted others whose only crime is being in the same area as the targeted individuals – after all, the Hellfire, which makes a very big blast, can scarcely be described as a surgically precise killing instrument.

Moreover, the president’s use of this remote-control-execution device apparently has no geographical limits, because, as he assures us, the "war on terror" has none. Today, a dirt road in Waziristan; tomorrow, the Santa Monica Freeway. It will be interesting to see, when drone attacks are carried out in this country, whether the American public gives a damn.

Robert Higgs [send him mail] is senior fellow in political economy at the Independent Institute and editor of The Independent Review. He is also a columnist for LewRockwell.com. His most recent book is Neither Liberty Nor Safety: Fear, Ideology, and the Growth of Government. He is also the author of Depression, War, and Cold War: Studies in Political Economy, Resurgence of the Warfare State: The Crisis Since 9/11 and Against Leviathan: Government Power and a Free Society.

Common plastics chemical linked to human diseases

Common plastics chemical linked to human diseases

By Michael Kahn

Go To Original

A study has for the first time linked a common chemical used in everyday products such as plastic drink containers and baby bottles to health problems, specifically heart disease and diabetes.

Until now, environmental and consumer activists who have questioned the safety of bisphenol A, or BPA, have relied on studies showing harm from exposure in laboratory animals.

But British researchers, who published their findings on Tuesday in the Journal of the American Medical Association, analyzed urine and blood samples from 1,455 U.S. adults aged 18 to 74 who were representative of the general population.

Using government health data, they found that the 25 percent of people with the highest levels of bisphenol A in their bodies were more than twice as likely to have heart disease and, or diabetes compared to the 25 percent of with the lowest levels.

"Most of these findings are in keeping with what has been found in animal models," Iain Lang, a researcher at the University of Exeter in Britain who worked on the study, told a news conference.

"This is the first ever study (of this kind) that has been in the general population," Lang said.

Steven Hentges of the American Chemistry Council, a chemical industry group, said the design of the study did not allow for anyone to conclude BPA causes heart disease and diabetes.

"At least from this study, we cannot draw any conclusion that bisphenol A causes any health effect. As noted by the authors, further research will be needed to understand whether these statistical associations have any relevance at all for human health," Hentges said in a telephone interview.

A U.S. Food and Drug Administration panel of outside experts on Tuesday will hear testimony on health effects from BPA as it reviews a draft report it issued last month calling BPA safe.

"The study, while preliminary with regard to these diseases in humans, should spur U.S. regulatory agencies to follow recent action taken by Canadian regulatory agencies, which have declared BPA a 'toxic chemical' requiring aggressive action to limit human and environmental exposures," Frederick vom Saal of the University of Missouri and John Peterson Myers of the nonprofit U.S.-based Environmental Health Sciences, wrote in a commentary accompanying the study.

BOTTLES TO UTENSILS

BPA is used to make polycarbonate plastic, a clear shatter-resistant material in products ranging from baby and water bottles to plastic eating utensils to sports safety equipment and medical devices.

It also is used to make durable epoxy resins used as the coating in most food and beverage cans and in dental fillings.

People can consume BPA when it leaches out of plastic into liquid such as baby formula, water or food inside a container.

In the study, the team said the chemical is present in more than 90 percent of people, suggesting there is not much that can be done to avoid the chemical of which over 2.2 million tons is produced each year.

The researchers, who will also present their findings at the U.S. FDA session on Tuesday, added it was too early to identify a mechanism through which the chemical may be doing harm.

Animal studies have suggested the chemical may disrupt hormones, especially estrogen.

The researchers also cautioned that these findings are just the first step and more work is needed to determine if the chemical actually is a direct cause of disease.

"Bisphenol A is one of the world's most widely produced and used chemicals, and one of the problems until now is we don't know what has been happening in the general population," said Tamara Galloway, a University of Exeter researcher who worked on the study.

Canada's government in April decided BPA was harmful to infants and toddlers and announced plans to ban some products.

The European Union's top food safety body said in July the amount of BPA found in baby bottles cannot harm human health.

Has the U.S. Invasion of Pakistan Begun?

Has the U.S. Invasion of Pakistan Begun?

Go To Original

As Andrew Bacevich tells us in the latest issue of the Atlantic, there's now a vigorous debate going on in the military about the nature of the "next" American wars and how to prepare for them. However, while military officers argue, that "next war" may already be creeping up on us.

Having, with much hoopla, launched wars in Afghanistan and Iraq, each disastrous in its own way, the Bush administration in its waning months seems intent on a slo-mo launching of a third war in the border regions of Pakistan. Almost every day now news trickles out of intensified American strikes -- by Hellfire-missile armed Predator drones, or even commando raids from helicopters -- in the Pakistani tribal areas along the Afghan border; and there is a drumbeat of threats of more to come. All of this, in turn, is reportedly only "phase one" of a three-phase Bush administration plan in which the American military "gloves" would "come off." Think of this as the green-lighting of a new version of that old Vietnam-era tactic of "hot pursuit" across national borders, or think of it simply as the latest war.

Already Pakistan's sovereignty has functionally been declared of no significance by our President, and so, without a word from Congress, the American war that already stretches from Iraq to Afghanistan is threatening to widen in ways that are potentially incendiary in the extreme. While Pakistani sources report that no significant Taliban or al-Qaeda figures have been killed in the recent series of attacks, anger in Pakistan over the abrogation of national sovereignty and, as in Afghanistan, over civilian casualties is growing.

In Iraq, 146,000 American soldiers seem not to be going anywhere anytime soon, while in Afghanistan another 33,000 embattled American troops (and tens of thousands of NATO troops), suffering their highest casualties since the Taliban fell in 2001, are fighting a spreading insurgency backed by growing anger over foreign occupation. The disintegration seems to be proceeding apace in that country as the Taliban begins to throttle the supply routes leading into the Afghan capital of Kabul, while the governor of a province just died in an IED blast. "President" Hamid Karzai was long ago nicknamed "the mayor of Kabul." Today, that tag seems ever more appropriate as the influence of his corrupt government steadily weakens.

In the meantime, in Pakistan, a new war, no less unpredictable and unpalatable than the last two, develops, as American strikes fan the flames of Pakistani nationalism. Already the Pakistani military may have fired its first warning shots at American troops. Part of the horror here is that much of the present nightmare in Afghanistan and Pakistan can be traced to the sorry U.S. relationship with Pakistan's military and its intelligence services back in the early 1980s. At that time, in its anti-Soviet jihad, the Reagan administration was, in conjunction with the Pakistanis, actively nurturing the forces that the Bush administration is now so intent on fighting. No one knows this story, this record, better than the Pakistani-born journalist and writer Tariq Ali.

As we head into our "next war," most Americans know almost nothing about Pakistan, the sixth most populous country on the planet with 200 million people, and the only Islamic state with nuclear weapons. As the Bush administration commits to playing with fire in that desperately poor land, it's time to learn. Ali, who posts below on the next U.S. war, has just written a new book, The Duel: Pakistan on the Flight Path of American Power -- published today -- that traces the U.S.-Pakistani relationship from the 1950s to late last night. I can tell you that it's both riveting and needed. Check it out. And while you're at it, check Ali out in a two-part video, released by TomDispatch, in which he discusses the history of the tangled U.S.-Pakistani relationship and Barack Obama's Afghan and Pakistani plans. Tom

The American War Moves to Pakistan

Bush's War Widens Dangerously
By Tariq Ali

The decision to make public a presidential order of last July authorizing American strikes inside Pakistan without seeking the approval of the Pakistani government ends a long debate within, and on the periphery of, the Bush administration. Senator Barack Obama, aware of this ongoing debate during his own long battle with Hillary Clinton, tried to outflank her by supporting a policy of U.S. strikes into Pakistan. Senator John McCain and Vice Presidential candidate Sarah Palin have now echoed this view and so it has become, by consensus, official U.S. policy.

Its effects on Pakistan could be catastrophic, creating a severe crisis within the army and in the country at large. The overwhelming majority of Pakistanis are opposed to the U.S. presence in the region, viewing it as the most serious threat to peace.

Why, then, has the U.S. decided to destabilize a crucial ally? Within Pakistan, some analysts argue that this is a carefully coordinated move to weaken the Pakistani state yet further by creating a crisis that extends way beyond the badlands on the frontier with Afghanistan. Its ultimate aim, they claim, would be the extraction of the Pakistani military's nuclear fangs. If this were the case, it would imply that Washington was indeed determined to break up the Pakistani state, since the country would very simply not survive a disaster on that scale.

In my view, however, the expansion of the war relates far more to the Bush administration's disastrous occupation in Afghanistan. It is hardly a secret that the regime of President Hamid Karzai is becoming more isolated with each passing day, as Taliban guerrillas move ever closer to Kabul.

When in doubt, escalate the war is an old imperial motto. The strikes against Pakistan represent -- like the decisions of President Richard Nixon and his National Security Adviser Henry Kissinger to bomb and then invade Cambodia (acts that, in the end, empowered Pol Pot and his monsters) -- a desperate bid to salvage a war that was never good, but has now gone badly wrong.

It is true that those resisting the NATO occupation cross the Pakistan-Afghan border with ease. However, the U.S. has often engaged in quiet negotiations with them. Several feelers have been put out to the Taliban in Pakistan, while U.S. intelligence experts regularly check into the Serena Hotel in Swat to discuss possibilities with Mullah Fazlullah, a local pro-Taliban leader. The same is true inside Afghanistan.

After the U.S. invasion of Afghanistan in 2001, a whole layer of the Taliban's middle-level leadership crossed the border into Pakistan to regroup and plan for what lay ahead. By 2003, their guerrilla factions were starting to harass the occupying forces in Afghanistan and, during 2004, they began to be joined by a new generation of local recruits, by no means all jihadists, who were being radicalized by the occupation itself.

Though, in the world of the Western media, the Taliban has been entirely conflated with al-Qaeda, most of their supporters are, in fact, driven by quite local concerns. If NATO and the U.S. were to leave Afghanistan, their political evolution would most likely parallel that of Pakistan's domesticated Islamists.

The neo-Taliban now control at least twenty Afghan districts in Kandahar, Helmand, and Uruzgan provinces. It is hardly a secret that many officials in these zones are closet supporters of the guerrilla fighters. Though often characterized as a rural jacquerie they have won significant support in southern towns and they even led a Tet-style offensive in Kandahar in 2006. Elsewhere, mullahs who had initially supported President Karzai's allies are now railing against the foreigners and the government in Kabul. For the first time, calls for jihad against the occupation are even being heard in the non-Pashtun northeast border provinces of Takhar and Badakhshan.

The neo-Taliban have said that they will not join any government until "the foreigners" have left their country, which raises the question of the strategic aims of the United States. Is it the case, as NATO Secretary-General Joop Scheffer suggested to an audience at the Brookings Institution earlier this year, that the war in Afghanistan has little to do with spreading good governance in Afghanistan or even destroying the remnants of al-Qaeda? Is it part of a master plan, as outlined by a strategist in NATO Review in the Winter of 2005, to expand the focus of NATO from the Euro-Atlantic zone, because "in the 21st century NATO must become an alliance… designed to project systemic stability beyond its borders"?

As that strategist went on to write:

"The centre of gravity of power on this planet is moving inexorably eastward. As it does, the nature of power itself is changing. The Asia-Pacific region brings much that is dynamic and positive to this world, but as yet the rapid change therein is neither stable nor embedded in stable institutions. Until this is achieved, it is the strategic responsibility of Europeans and North Americans, and the institutions they have built, to lead the way… [S]ecurity effectiveness in such a world is impossible without both legitimacy and capability."

Such a strategy implies a permanent military presence on the borders of both China and Iran. Given that this is unacceptable to most Pakistanis and Afghans, it will only create a state of permanent mayhem in the region, resulting in ever more violence and terror, as well as heightened support for jihadi extremism, which, in turn, will but further stretch an already over-extended empire.

Globalizers often speak as though U.S. hegemony and the spread of capitalism were the same thing. This was certainly the case during the Cold War, but the twin aims of yesteryear now stand in something closer to an inverse relationship. For, in certain ways, it is the very spread of capitalism that is gradually eroding U.S. hegemony in the world. Russian Prime Minister Vladimir Putin's triumph in Georgia was a dramatic signal of this fact. The American push into the Greater Middle East in recent years, designed to demonstrate Washington's primacy over the Eurasian powers, has descended into remarkable chaos, necessitating support from the very powers it was meant to put on notice.

Pakistan's new, indirectly elected President, Asif Zardari, the husband of the assassinated Benazir Bhutto and a Pakistani "godfather" of the first order, indicated his support for U.S. strategy by inviting Afghanistan's Hamid Karzai to attend his inauguration, the only foreign leader to do so. Twinning himself with a discredited satrap in Kabul may have impressed some in Washington, but it only further decreased support for the widower Bhutto in his own country.

The key in Pakistan, as always, is the army. If the already heightened U.S. raids inside the country continue to escalate, the much-vaunted unity of the military High Command might come under real strain. At a meeting of corps commanders in Rawalpindi on September 12th, Pakistani Chief of Staff General Ashfaq Kayani received unanimous support for his relatively mild public denunciation of the recent U.S. strikes inside Pakistan in which he said the country's borders and sovereignty would be defended "at all cost."

Saying, however, that the Army will safeguard the country's sovereignty is different from doing so in practice. This is the heart of the contradiction. Perhaps the attacks will cease on November 4th. Perhaps pigs (with or without lipstick) will fly. What is really required in the region is an American/NATO exit strategy from Afghanistan, which should entail a regional solution involving Pakistan, Iran, India, and Russia. These four states could guarantee a national government and massive social reconstruction in that country. No matter what, NATO and the Americans have failed abysmally.

"We Blew Her to Pieces"

"We Blew Her to Pieces"

Dahr Jamail

Go To Original

Aside from the Iraqi people, nobody knows what the U.S. military is doing in Iraq better than the soldiers themselves. A new book gives readers vivid and detailed accounts of the devastation the U.S. occupation has brought to Iraq, in the soldiers' own words.

"Winter Soldier Iraq and Afghanistan: Eyewitness Accounts of the Occupation," published by Haymarket Books Tuesday, is a gut-wrenching, historic chronicle of what the U.S. military has done to Iraq, as well as its own soldiers.

Authored by Iraq Veterans Against the War (IVAW) and journalist Aaron Glantz, the book is a reader for hearings that took place in Silver Spring, Maryland between Mar. 13-16, 2008 at the National Labour College.

"I remember one woman walking by," said Jason Washburn, a corporal in the U.S. Marines who served three tours in Iraq. "She was carrying a huge bag, and she looked like she was heading toward us, so we lit her up with the Mark 19, which is an automatic grenade launcher, and when the dust settled, we realised that the bag was full of groceries. She had been trying to bring us food and we blew her to pieces."

Washburn testified on a panel that discussed the rules of engagement in Iraq, and how lax they were, even to the point of being virtually non-existent.

"During the course of my three tours, the rules of engagement changed a lot," Washburn's testimony continues. "The higher the threat the more viciously we were permitted and expected to respond."

His emotionally charged testimony, like all of those in the book that covered panels addressing dehumanisation, civilian testimony, sexism in the military, veterans' health care, and the breakdown of the military, raised issues that were repeated again and again by other veterans.

"Something else we were encouraged to do, almost with a wink and nudge, was to carry 'drop weapons', or by my third tour, 'drop shovels'. We would carry these weapons or shovels with us because if we accidentally shot a civilian, we could just toss the weapon on the body, and make them look like an insurgent," Washburn said.

Four days of searing testimony, witnessed by this writer, is consolidated into the book, which makes for a difficult read. One page after another is filled with devastating stories from the soldiers about what is being done in Iraq.

Everything from the taking of "trophy" photos of the dead, to torture and slaughtering of civilians is included.

"We're trying to build a historical record of what continues to happen in this war and what the war is really about," Glantz told IPS.

Hart Viges, a member of the 82nd Airborne Division of the Army who served one year in Iraq, tells of taking orders over the radio.

"One time they said to fire on all taxicabs because the enemy was using them for transportation...One of the snipers replied back, 'Excuse me? Did I hear that right? Fire on all taxicabs?' The lieutenant colonel responded, 'You heard me, trooper, fire on all taxicabs.' After that, the town lit up, with all the units firing on cars. This was my first experience with war, and that kind of set the tone for the rest of the deployment."

Vincent Emanuele, a Marine rifleman who spent a year in the al-Qaim area of Iraq near the Syrian border, told of emptying magazines of bullets into the city without identifying targets, running over corpses with Humvees and stopping to take "trophy" photos of bodies. "An act that took place quite often in Iraq was taking pot shots at cars that drove by," he said. "This was not an isolated incident, and it took place for most of our eight-month deployment."

Kelly Dougherty, the executive director of IVAW, blames the behaviour of soldiers in Iraq on the policies of the U.S. government. "The abuses committed in the occupations, far from being the result of a 'few bad apples' misbehaving, are the result of our government's Middle East policy, which is crafted in the highest spheres of U.S. power," she said.

Knowing this, however, does little to soften the emotional and moral devastation of the accounts.

"You see an individual with a white flag and he does anything but approach you slowly and obey commands, assume it's a trick and kill him," Michael Leduc, a corporal in the Marines who was part of the U.S. attack of Fallujah in November 2004, said were the orders from his battalion JAG officer he received before entering the city.

This is an important book for the public of the United States, in particular, because the Winter Soldier testimonies were not covered by any of the larger media outlets, aside from the Washington Post, which ran a single piece on the event that was buried in the Metro section.

The New York Times, CNN, and network news channels ABC, NBC and CBS ignored it completely.

This is particularly important in light of the fact that, as former Marine Jon Turner stated, "Anytime we did have embedded reporters with us, our actions changed drastically. We never acted the same. We were always on key with everything, did everything by the book."

"To me it's about giving a picture of what war is like," Glantz added, "Because here in the U.S. we have this very sanitised version of what war is. But war is when we have a large group of armed people killing large numbers of other people. And that is the picture that people will get from reading veterans testimony...the true face of war."

Dehumanisation of the soldiers themselves is covered in the book, as it includes testimony of sexism, racism, and the plight of veterans upon their return home as they struggle to obtain care from the Veterans Administration.

There is much testimony on the dehumanisation of the Iraqi people as well. Brian Casler, a corporal in the Marines, spoke to some of this that he witnessed during the invasion of Iraq.

"But on these convoys, I saw marines defecate into MRE bags or urinate in bottles and throw them at children on the side of the road," he stated.

Numerous accounts from soldiers include the prevalence of degrading terms for Iraqis, such as "hajis," "towel-heads" and "sand-niggers".

Scott Ewing, who served in Iraq from 2005-2006, admitted on one panel that units intentionally gave candy to Iraqi children for reasons other than "winning hearts and minds".

"There was also another motive," Ewing said, "If the kids were around our vehicles, the bad guys wouldn't attack. We used the kids as human shields."

Glantz admits that it would be difficult for the average U.S. citizen to read the book, and believes it is important to keep in mind while doing so what it took for the veterans to give this historic testimony.

"They could have been heroes, but what they are doing here is even more heroic -- which is telling the truth," Glantz told IPS. "They didn't have to come forward. They chose to come forward."

The U.S. Financial System in Serious Trouble

The U.S. Financial System in Serious Trouble

by Prof. Rodrigue Tremblay

Go To Original

“… a bailout of GSE (Fannie and Freddie) bondholders would be perhaps the greatest taxpayer rip-off in American history. It is bad economics and you can be sure it is terrible politics.”Matt Kibbe, President of Freedom Works

"The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists." Ernest Hemingway (1899-1961), (September 1932)

[After the Bear Stearns bailout] "As more firms lost access to funding, the vicious circle of forced selling, increased volatility, ... and margin calls that was already well advanced at the time would likely have intensified. The broader economy could hardly have remained immune from such severe financial disruptions." Ben Bernanke, Fed Chairman (March 2008)


In August 2007, at the very beginning of the subprime financial crisis in the U.S., and referring to the alchemy-like practice of creating artificial financial instruments, such as mortgage-backed securities (MBSs), here is what I wrote:

“Like all 'Ponzi schemes', such pyramidings of debts with no liquid assets behind them are bound to implode sooner or later.” I also wrote about the Fed's intervention in such cases, that “it alleviates the 'liquidity crisis', for sure, but this does nothing to cure the underlying 'solvency crisis' of institutions holding large chunks of non-performing mortgage-based assets. Sooner or later, such low-valued derivatives will have to be written off, and this will necessarily lead to an erosion of these institutions' capital base. Bankruptcies of the most leveraged and imprudent institutions are to be expected.”

In fact, such bankruptcies of over-leveraged financial institutions become unavoidable. For a while, forced mergers between banks, initiated by the Fed or the Treasury, can soften the blow. But after a while, outright bankruptcies cannot be avoided and balance sheets have to be balanced.

What is the cause of this financial mess?

Last month, I provided a short answer:

“At the center of current financial problems is the failure to adapt standard financial regulation to new financial institutions, such as broker-investment banks, off-shore based hedge funds and large derivatives markets that remain, for the most part, outside of the traditional authority of regulators. However, when things go wrong, as they did with Bear Stearns last March, their demise threatens to destabilize the entire financial system and handy government bailouts are quickly called in.”

Today I say that this major crisis has to be placed at the very feet of the Washington establishment. This is a politico-financial establishment that has pushed to the limits its ideology of deregulation of financial markets and stretched the working of unregulated corporate market capitalism to the breaking point. Now, the system is imploding under our very eyes and financial institutions are falling like dominos. As I wrote last August, and repeated in April of this year, the U.S. financial problem is not one of liquidity, (there is plenty of liquidity provided by the Fed when banks and brokers can borrow at will newly printed dollars from the Fed’s discount window) but one of solvency, weak balance sheets, risky assets and debt liquidation. That's a horse of a different color.

Over the last twenty-five years, beginning with the Reagan administration and culminating with the current Bush-Cheney administration, the Washington establishment dismantled piece by piece the system of protection that had been built since the 1930's economic depression and removed nearly all government regulations that could stand in the way of greed and gouging on the part of unscrupulous market operators.

And that's where the rubber hits the road. Short of bankruptcies is the nationalization of the over-leveraged banks by the government. And the Bush-Cheney administration took a big step in that direction when it came to the rescue of the two largest mortgage financing institutions, Fannie Mae (Federal National Mortgage Association: FNM) and Freddie Mac, (Federal Home Loan Mortgage Corporation: FRE) which were close to being insolvent. This step was initiated after foreign central banks (in China, Japan, Europe, the Middle East and Russia) threatened to stop buying U.S. bonds and debentures issued by the two shaky financial institutions.

But the Bush-Cheney administration, while providing public money to keep the two lenders in operation, stopped short of nationalizing them. Indeed, the U.S. government committed to invest as much as $200 billion in preferred stock and extend credit through 2009, to keep the two mortgage lenders solvent and operating.

But instead of taking them over by placing them into administrative receivership, in order to change their business model, as they should have done since the government is now guaranteeing their outstanding debts, (more than $5 trillion US) the U.S. government chose rather to keep the appearance that these were still two privately run banks and only appointed a legal conservator for Fannie Mae and Freddie Mac. Even when they bail out what can be called two Government sponsored enterprises (GSEs), their market ideology prevents them from doing the right thing.

After years of irresponsible public deregulation and private mismanagement and irresponsible, pyramiding risk taking, the American financial system is now in serious trouble, and it may draw the U.S. economy further down with it in the months and years to come.

In the coming weeks, however, as other American financial institutions teeter on the brink of bankruptcy, the U.S. government will have to consider creating a Bank Resolution Trust under the model of the 1989 Resolution Trust Corp. which took over the savings and loans banks that were then in financial difficulties. For example, as recently as February 16 of this year, the British government did not hesitate to nationalize the Northern Rock bank and rescued this large British bank with about £55 billion ($107 billion) in public loans and guarantees. Sooner or later, the American government will have to do the same, in order to stabilize the financial system, because the financial problems in the U.S. are systemic and much more serious than elsewhere.

By the same token, maybe the U.S. government should correct an anomaly of the 20th Century, that is the semi-private status of its central bank. Indeed, the American Federal Reserve, is a semi-public and semi-private central bank organization that is as much responsible to large private banks as it is to the U.S. government and the population. This creates an unhealthy conflict of interests that is not fair to the American public. Indeed, the American practice of privatizing profits and socializing losses would be considered unacceptable in most other democracies.

What we are witnessing these days in the U.S. is a massive wealth transfer from taxpayers, savers and retirees to banks, their creditors and their managers. On the one hand, the Fed has pushed real interest rates deep into negative territory to help troubled banks, and, on the other hand, the American taxpayers have foot the bill for bailing out very large financial institutions.

I wonder what the two presidential camps, the Obama and the McCain camps, have to say about that! They both want to increase the federal deficit and add significantly to the already high national debt.

Rodrigue Tremblay is professor emeritus of economics at the University of Montreal and can be reached at rodrigue.tremblay@yahoo.com

He is the author of the book 'The New American Empire'

Visit his blog site at:
www.thenewamericanempire.com/blog.

Wall Street crisis is culmination of 28 years of deregulation

Wall Street crisis is culmination of 28 years of deregulation

David Lightman

Go To Original

No one cog in the federal government's machine of financial regulation let down the country by failing to prevent the latest shakeout on Wall Street. The entire system did.

"They just haven't done a particularly good job," said James Barth, a senior finance fellow at the Milken Institute, a nonpartisan research group based in Los Angeles.

Kathleen Day, a spokeswoman for the Center for Responsible Lending, a consumer-oriented research group, explained the regulatory lapses more starkly: "The job of regulators is that when the party's in full swing, make sure the partygoers drink responsibly," she said. "Instead, they let everyone drink as much as they wanted and then handed them the car keys."

Analysts and politicians are raising serious questions about the nation's financial regulatory system, which dates to the New Deal era.

On Monday, one Wall Street bank, Lehman Brothers, filed for bankruptcy protection and another, Merrill Lynch, sought comfort by selling itself to Bank of America for $50 billion. Earlier this year, the government helped enable the sale of faltering investment bank Bear Stearns to J.P. Morgan Chase, and more recently took over mortgage giants Fannie Mae and Freddie Mac.

Such troubles were supposed to have been prevented, or at least mitigated, by regulatory systems that the nation began to put in place after the banking system collapsed at the start of the Great Depression.

Many banks at the time were badly wounded by their personal and financial ties to securities trading. The 1933 Glass-Steagall Act, and later the 1956 Bank Holding Company Act, mandated the separation of banks, insurance companies and securities firms.

Those and many other federal laws stabilized the banking and securities markets, but by the 1970s, a stumbling U.S. economy led to a change in America's political-economic values. Ronald Reagan led a movement that came to power in 1980 proclaiming faith in free markets and mistrust of government. That conservative philosophy has dominated America for the past 28 years.

Even after taxpayers had to rescue deregulated savings and loans, or S&Ls, with a $200 billion bailout in the late 1980s, the push to loosen regulation paused only briefly.

In 1999, President Clinton signed the Financial Services Modernization Act, which tore down Glass-Steagall's reforms by removing the walls separating banks, securities firms and insurers.

Under President Clinton and his successor, the government became eager to promote home ownership. Interest rates were low, the market grew for loans to borrowers with weak credit and private-sector mortgage bonds boomed. About 38 percent of those bonds were backed by subprime loans. They are at the root of today's financial crisis.

A generation ago, banks, credit unions and S&Ls issued home mortgages that they retained on their books as an asset. The lenders had a stake in receiving full repayment of the loans from creditworthy borrowers.

But in recent years, mortgages began to be sold to firms that cobbled the loans together to create mortgage-backed securities, or mortgage bonds. Loans to the least creditworthy borrowers carried the highest risk but gave the highest returns, so banks and other institutional investors bought loads of them. Except no one was policing the creditworthiness of the borrowers.

The process helped more people buy homes, and a booming mortgage-bond market, led by investment banks, was in full swing by 2005.

When borrowers who had secured loans with adjustable interest rates, however, found their rates going up, many were unable to pay. That meant that holders of bonds backed by these mortgages were stuck with securities worth much less than their face value — or nothing at all. That created a solvency crisis for the banks that loaded up on them — and virtually all of them had.

Some regulatory agencies issued warnings, but credit-rating agencies still said that the bonds — and the banks that issued and bought them — were safe. It turns out, of course, that many were not.

"There was a view that the secondary market excesses could be prevented by the broader application of risk-evaluation models by the investment firms," said Barry Bosworth, senior fellow in economic studies at the Brookings Institution, a Washington think tank. "In fact, risk evaluation is more of an art than a science, and the (private-sector) institutions fooled themselves," said Bosworth, a former adviser to President Jimmy Carter.

With Congress eager to expand home-ownership, regulators felt pressure to deal lightly with mortgage loans to low-income households, and virtually no one proposed national regulation of non-bank lenders or mortgage brokers.

Had regulators questioned sub-prime lending, they would have been harshly criticized, said Edward Kane, a professor of finance at Boston College.

"Imagine what congressional committees would have said," Kane said. "They would have asked about affordable housing. It was a no-win situation for regulators,"

Warning signs began to appear. At least nine federal agencies oversee some part of the mortgage market, and from 2004 to 2007, at least three had issued warnings about risky loans.

Still, none was willing to end the financial revelry.

"It was another example of an asset bubble that appears periodically. An economy will disregard risk, and when people see another investor making money by investing in an asset, others will throw caution to the wind," explained Nicolas Bollen, professor in finance at Vanderbilt University's Owen Graduate School of Management in Nashville, Tenn.

In such an environment, said Day, of the Center for Responsible Lending: "No one wanted to kill the goose that laid the golden egg."

The next big bang is private equity

The next big bang is private equity

Go To Original

"LADIES and gentleman, there is absolutely no cause for alarm. Oxygen masks will be lowered as we head into a gentle nosedive. Please assume crash positions."

The tone from the cockpit may be soothing but it is fooling no one as the US Federal Reserve desperately scrambles to shore up the Western world's financial capital.

Wall Street is in crisis, undoubtedly the worst in history, as one tarnished giant after another topples. The real problem, though, is no one can tell where it will end.

The only certainty is that Lehman Brothers, one of the architects of the real-estate madness that gripped the US until a year ago, will not be the last to fall. And real estate is just one leg of the problem. There's also a looming US personal credit crisis and a potential corporate debacle on a scale never seen before once the big private equity takeovers of the past few years come unstuck.

Apart from Lehman Brothers, yesterday's casualty list included Merrill Lynch, which was rescued by Bank of America, and American Insurance Group, which called for a $US40 billion ($48 billion) Government handout.

American taxpayers, who were forced to pick up a tab of $US29 billion from the Bear Stearns bail-out a couple of months ago, are now facing a world of pain.

A week ago, the US Government was forced to rescue the country's two giant mortgage backers, Fannie Mae and Freddie Mac, after years of profligate spending and wild punts that enriched the hierarchy but did little to achieve what they were actually supposed to do: make housing more affordable.

Between them, they stand behind $US6 trillion in housing loans, which Capitol Hill correctly figured had the potential to wreak havoc on an already ravaged US economy.

A substantial portion of those housing loans - and the debt instruments and derivatives written on the back of them - were cutely classified as "subprime". That's just a nice word for crap.

So what does all this mean for Australia? Well, continuing stockmarket turbulence for a start, with a direction that is mostly south. Then there will be a bunch of bankrupt local councils and charities that stupidly bought dud real-estate investments from Lehman Brothers here.

Longer term, if these latest developments further slow the global economy Australia will not just sail blithely through the turmoil on China's back.

But there is one bright point in this otherwise tale of gloom and doom. There has been plenty of criticism about the way our banks operate, including by this columnist. But the big four largely have shunned the high-octane, high-risk debt instruments that have brought the global financial system to its knees.

Goldman Profit Slumps 70%

Goldman Net Drops 70% as Merger Advice, Trading Slow

By Christine Harper

Go To Original

Goldman Sachs Group Inc., the largest of the two remaining independent U.S. securities firms, said third-quarter profit fell a record 70 percent as revenue from advising corporations and trading stocks declined.

Net income was $845 million, or $1.81 a share in the three months ended Aug. 29, compared with $2.85 billion, or $6.13, a year earlier. Goldman dropped 5 percent in New York as credit- rating downgrades of American International Group Inc. raised concern strains on the financial system are spreading.

After setting Wall Street profit records in 2006 and 2007, Chief Executive Officer Lloyd Blankfein is grappling with market convulsions that drove Merrill Lynch & Co. and Bear Stearns Cos. into emergency sales and Lehman Brothers Holdings Inc. into bankruptcy. Shares of New York-based Goldman slumped 12 percent yesterday and its senior notes dropped to a record low on concern no investment bank, even the most profitable, was safe.

‘‘The business is just not happening and therefore Goldman can't take advantage of what doesn't exist,'' Ladenburg Thalmann & Co. analyst Richard Bove said in a Bloomberg Television interview. ‘‘This is still 50 percent to 60 percent below what the company had been earning a couple years ago. The quarter is really terrible in many respects.''

Goldman's profit drop was the steepest in its nine years as a public company.

The shares declined $7.17 to $128.33 in composite trading on the New York Stock Exchange at 10:20 a.m. Morgan Stanley, the second-biggest U.S. securities firm, fell 12 percent.

Record Decline

While Goldman has suffered a fraction of the writedowns on fixed-income assets that New York-based competitors Citigroup Inc. and Merrill have taken, its shares have dropped 40 percent this year as markets tumbled and fees from securities underwriting and providing merger advice dried up.

Analysts including David Trone at Fox-Pitt Kelton Cochran Caronia Waller have said the credit crisis shows independent securities firms such as Goldman should consider merging with a bank, to provide a more stable source of funding.

Chief Financial Officer David Viniar said the company isn't interested in doing a deal with a bank, though he'd never rule out the possibility entirely.

‘‘Right now we think our business model works because our business works,'' Viniar said in an interview. ‘‘Our performance speaks for itself and will continue to speak for itself.''

Analysts surveyed by Bloomberg estimated earnings of $1.71 a share. Goldman has beaten analysts' estimates for 13 straight quarters.

Return on Equity

Return on equity, a measure of how effectively the firm reinvests earnings, fell to 7.7 percent from 20.4 percent in the second quarter.

Revenue dropped 51 percent from a year ago to $6.04 billion. Fixed-income, currencies and commodities, the company's biggest source of revenue, generated $1.6 billion, down 67 percent. The firm took $275 million in writedowns on leveraged loans and related hedges, $500 million on residential mortgages and securities and $325 million on commercial mortgages and securities.

Viniar said on a conference call with reporters that the firm had reduced its leveraged loan positions to about $8 billion. He said access to market liquidity remains ‘‘robust.''

Equities trading revenue fell 50 percent to $1.56 billion and revenue from investment banking, which includes providing merger advice and underwriting stock and bond sales, dropped 40 percent to $1.29 billion.

‘Very Weak Results'

The equities division was affected by a drop in stock prices, less trading by clients and ‘‘very weak results'' from the firm's proprietary traders, Goldman said. Derivative revenue from equities was also lower.

The principal investments group, which includes the company's stake in Industrial & Commercial Bank of China Ltd., produced a $453 million loss, compared with a gain of $211 million a year earlier. ICBC dropped 17 percent in Hong Kong trading during Goldman's fiscal third quarter. Goldman owns about 5 percent of the company, although about two-thirds of its holding is on behalf of clients.

Asset-management revenue fell 6 percent from a year ago to $1.13 billion, partly because the third quarter in 2008 had one fewer week than in 2007, the company said. Assets under management declined $32 billion, of which $25 billion was because the market fell and $7 billion was because clients pulled their money out of Goldman's funds.

Goldman's Tier 1 ratio was 11.6 percent, up from 10.8 percent in the second quarter. So-called Level 3 assets, including those to which the firm says it has no economic exposure, totaled $68 billion, or 6 percent of total assets. Level 3 assets are the ones that are hardest to value.

Lehman's Results

Lehman last week reported the biggest loss in its 158-year history, and its share price plunged 74 percent as management led by CEO Richard Fuld raced to find a buyer. Negotiations over the weekend at the New York Federal Reserve's downtown Manhattan headquarters failed to assuage the concerns of potential buyers and the company filed for bankruptcy protection yesterday.

Lehman's predicament made it clear to Merrill CEO John Thain that his firm's survival could be in jeopardy if he didn't find a buyer soon. Merrill, expected to post its fifth-straight quarterly deficit next month, agreed to be acquired by Charlotte, North Carolina-based Bank of America Corp. in an all- stock deal valued at about $50 billion.

Merrill considered selling a minority stake to Goldman before agreeing to the Bank of America deal, the Wall Street Journal reported today, citing people familiar with the matter.

AIG Loans

AIG, the biggest U.S. insurer by assets, had its ratings cut yesterday, raising speculation the company needs to find more cash to post collateral. The insurer is trying to arrange loans from Goldman and JPMorgan Chase & Co., according to two people familiar with the situation.

‘‘Our exposure to AIG is not material,'' Lucas van Praag, a spokesman at Goldman in New York, said in an interview. ‘‘We have always managed our exposure to single names extremely conservatively. That was the case with Bear and Lehman.''

Viniar, the CFO, declined to comment on possible financial transactions between Goldman and AIG.

Morgan Stanley is scheduled to report third-quarter earnings tomorrow. The firm may post a 44 percent drop in net income to $866 million, according to the average estimate of 10 analysts surveyed by Bloomberg.

Goldman and Morgan Stanley need to show investors that they've learned from the errors made by Merrill, Lehman and Bear Stearns by selling off some of their holdings of complex, hard- to-trade assets.

‘‘I would hope they have taken the last few months as an adequate caution to clarify their positions and reduce some of their exposures,'' said John Gutfreund, president of Gutfreund & Co. and the former CEO of Salomon Brothers, in a Bloomberg Television interview yesterday.

10 Banks Form $70B Fund to Stave Off Crash

10 Banks Form $70B Fund to Stave Off Crash

Go To Original

Ten of the world's largest banks have formed a massive liquidity fund to mitigate the effects of the Lehman Brothers meltdown, reports the Financial Times. All the investment banks will be able to borrow up to a third of the $70 billion fund in order to reduce volatility and stay in business while Lehman is being wound down. They will also be able to borrow from the Fed under newly relaxed terms.

Henry Paulson said that the coordinated public and private measures would "be critical to facilitating liquid, smooth functioning markets and addressing potential concerns in the credit markets." But American authorities admitted that the aggressive moves would only reduce turbulence slightly, and that Wall Street is in for a very bumpy few days.

More US corporate bailouts on the way

More US corporate bailouts on the way

By Barry Grey
Go To Original

The US government, brushing aside its constant invocations of “private enterprise,” has dispensed hundreds of billions of dollars in cheap loans to prop up the banks. Last March, the Federal Reserve Board paid JP Morgan Chase $29 billion to take over the investment bank Bear Stearns when Bear was on the verge of declaring bankruptcy.

Only a week ago, the US Treasury committed at least $200 billion in taxpayer funds in the government takeover of Fannie Mae and Freddie Mac—a move that makes the government responsible for the two companies’ combined $5.3 trillion in mortgage liabilities.

The claims that the government, in allowing Lehman Brothers to collapse, has “drawn the line” on further taxpayer bailouts of failing corporations are false. The government decided to let Lehman fail, in part, to conserve the dwindling funds at the disposal of the Federal Reserve and calibrate hand-outs from the Treasury—which faces record budget and trade deficits and a soaring national debt—to be used to rescue more strategic companies.

The Fed has reportedly agreed to widen its bailout of Wall Street by accepting, in return for low-cost loans to both commercial and investment banks, even more dubious forms of collateral, including shares of stock whose value has collapsed and mortgage-backed securities that can be sold on the market only for pennies on the dollar.

There are growing calls on Wall Street and in the financial press for the government to directly buy the near-worthless subprime mortgage-backed securities and other collapsing credit instruments that are undermining the balance sheets of major financial companies. With the government takeover of Fannie Mae and Freddie Mac—which was sanctioned in advance by the Democratic Congress—the legal and structural framework is in place for this wholesale government bailout of the banking system.

The Wall Street crisis and the failure of American capitalism

The Wall Street crisis and the failure of American capitalism

By Barry Grey
Go To Original

The end of Lehman Brothers and Merrill Lynch, two of the largest Wall Street investment banks, one week after the government takeover of the mortgage finance giants Fannie Mae and Freddie Mac, marks a new stage in the convulsive crisis of American capitalism.

On Monday, global markets fell sharply in a sign of mounting panic and doubt over the stability of the entire US banking system. Throughout Europe stock markets plunged by as much as 4 percent.

The fall on Wall Street was even steeper, with the Dow Jones Industrial Average losing 504 points, or 4.42 percent. There is every indication that the sell-off will intensify, with the full implications of the collapse of the two Wall Street banks as yet far from clear.

The immediate concern is the fate of American International Group (AIG), the world’s largest insurance company, and Washington Mutual, the largest savings and loan bank in the US, both of which are teetering on bankruptcy.

The sudden demise of Lehman Brothers and Merrill Lynch has removed a huge amount of liquidity from the economy, as paper values built up over decades of speculation come crashing down. This is capital that is needed to finance business operations, and its elimination will inevitably depress economic activity, fueling unemployment and recession, further undermining home prices and consumer spending, and further weakening the balance sheets of already financially shaken banks.

A sea change is unfolding in the US and world economy that portends a catastrophe of dimensions not seen since the Great Depression of the 1930s.

The fall of icons of American capitalism such as 158-year-old Lehman Brothers and 94-year-old Merrill Lynch can only lead to the further discrediting of the “free market” ideology of the US ruling elite, as well as its political and economic system. The spectacle of giants of capitalism drowning in debt piled up over decades of reckless speculation must inevitably discredit the social class—the American capitalist class—which is responsible for the debacle.

The bromides that have been uttered by the official spokesmen for the government, the media, Wall Street and the political parties over the past year of mounting financial crisis have lost all credibility. The assurances that the latest government bailout will stabilize the situation, that the US banking system is “fundamentally sound,” that the housing and credit markets are about to “turn the corner,” etc., reassure no one.

On Monday, President Bush mouthed such phrases in a brief White House appearance. Treasury Secretary Henry Paulson at a White House press conference evaded questions about who was responsible for the financial disaster and instead declared that he was “focused on the future.”

The presidential candidates, Republican John McCain and Democrat Barack Obama, made perfunctory statements that were remarkable only for their brevity and vacuity. What is widely acknowledged, even in ruling class circles, as the greatest financial crisis since the Great Depression is unfolding in the midst of a presidential election. But it barely rates a mention by either the Republican or Democratic candidate.

Both parties and their candidates tip toe around a financial scandal of world historic proportions because they are equally implicated. They are both bound hand and foot to Wall Street and single-mindedly dedicated to the defense of American capitalism.

McCain issued a statement demanding “reform” in Washington and on Wall Street and pledging to bring “accountability” to Wall Street. This from a multi-millionaire whose campaign is being run by a bevy of lobbyists for Wall Street and other sections of big business.

His Democratic counterpart, Barack Obama, issued a predictably mealy-mouthed statement complaining that “too many folks in Washington and on Wall Street weren’t minding the store.” While attempting to pin the blame for the crisis entirely on the Bush administration—ignoring the “free market,” deregulatory policies of Democrats Jimmy Carter and Bill Clinton—he offered a mutual amnesty between himself and McCain, saying, “I certainly don’t fault Senator McCain for these problems...”

These events are signposts in the historic failure of American and world capitalism. For the working class, they mean a rapid growth of unemployment, poverty, homelessness and social misery. The government, Wall Street and both political parties will seek to place the burden for the consequences of their own greed and incompetence squarely on the backs of working people.

The collapse is devastating ever wider layers of the population, including those who have worked on Wall Street and received some of the financial benefits of the speculative boom. Some 26,000 Lehman employees are not only out of a job, with few prospects of finding similar employment elsewhere, but as owners of 25 percent of the company’s stock they have lost a combined $10 billion, wiping out their savings and retirement funds.

Tens of thousands of employees at Merrill Lynch and Bank of America will lose their jobs in the merger of the two firms, adding to the 110,000 jobs slashed in the US financial services industry over the past year.

The broader implications of the mounting financial crisis were signaled by Hewlett-Packard’s announcement Monday that it was cutting 25,000 jobs.

Many of those who precipitated this economic disaster, on the other hand, will profit handsomely from the debris they have left behind. Hedge funds and other short-sellers, who bet on the collapse of corporations, are even now speculating furiously on the demise of the remaining Wall Street firms, Morgan Stanley and Goldman Sachs, as well as big commercial banks such as Bank of America.

William Gross of the nation’s largest bond fund, Pimco, took in $1.7 billion last week by betting on—and publicly agitating for—a government takeover of Fannie Mae and Freddie Mac.

The emergency talks over the weekend, involving the heads of the major commercial and investment banks and led by Treasury Secretary Paulson and top Federal Reserve officials, centered on rescuing Merrill Lynch and orchestrating an orderly liquidation of Lehman. Under pressure from Paulson and the Fed, Merrill agreed to sell itself to Bank of America, the largest consumer commercial bank in the US.

At the same time, there were frantic negotiations over the fate of AIG, which faces bankruptcy unless it can raise tens of billions of dollars in capital. When US markets opened Monday, AIG was asking for emergency loans from the Fed to stave off collapse.

A failure of AIG threatens to bring down the entire credit system both in the US and internationally, because the company holds a large stake in the multi-trillion-dollar, unregulated market in so-called “credit default swaps.” AIG has sold CDS contracts to banks, hedge funds and big investors all over the world, under which it guarantees the mortgage-backed debt of a wide range of companies in the event that they default. If AIG should go under, the value of the debt which it insures would fall to an unknown level, destabilizing the credit markets and threatening a chain reaction of defaults and bankruptcies.

The events of the past two weeks demonstrate that the American financial aristocracy is plunging the entire country into bankruptcy. These events are themselves climatic moments in a protracted process.

For three decades, the “free market” has been elevated to the status of a secular religion in the US, with the capitalist market as its god and socialism as its devil. This period, under both Republican and Democratic administrations, has seen the wholesale dismantling of the productive base of the US economy, at the cost of millions of jobs and the living standards of the American working class.

In the name of the supposed infallibility of the market, the operations of big business have been deregulated, removing all legal restraints on corporate profit-making and fueling the accumulation of ever more obscene levels of wealth in the hands of a financial oligarchy. A vast process of social plunder has occurred, in which the wealth of the country has been redistributed from the bottom to the very top.

The scrapping of huge sections of industry and the immense growth of social inequality are the hallmarks of the historic decline of American capitalism. At the heart of this decay is the separation of the process of personal enrichment of the ruling elite from the material process of production.

The United States has become the world leader not in manufacturing technology or industrial power, but in financial speculation and parasitism. As Floyd Norris, the economics columnist of the New York Times, put it on Friday, “During recent years, Lehman—along with many competitors—went on a borrowing binge to buy assets with as little money down as possible.”

By its very nature, the parasitism of American capitalism has generated corruption and criminality on an unprecedented scale. Wall Street CEOs have awarded themselves tens of millions and even billions in compensation, in an utterly irrational and socially destructive squandering of social resources for the benefit of private greed.

At the end of 2007, for example, the Lehman board awarded CEO Richard S. Fuld a compensation package worth more than $40 million. According to Reda Associates, he can expect to collect $63.3 million if he is terminated. In 2004, he paid $13.75 million for an ocean-front home in Jupiter Island, Florida, adding to his other properties, including a home in Sun Valley, Idaho.

Joe Gregory, a former president of Lehman, used to travel to work in a helicopter. He recently put his 9,500-square-foot ocean-front home in Bridgehampton, New York on the market for $32.5 million.

The Financial Times recently reported that compensation for major executives of the seven largest US banks totaled $95 billion over the past three years, even as the banks recorded $500 billion in losses.

The question of precisely who and what is to blame for the greatest economic disaster in more than three quarters of a century is something that will not and cannot be raised by any section of the political or media establishment.

Since the eruption of the current crisis, there have no been serious congressional hearings, no public investigations, no attempt to hold anyone accountable. Massive government interventions into the supposedly sacrosanct precincts of the “free market,” for the purpose of bailing out giant Wall Street firms, including the biggest government takeover of corporate entities in US history, have been carried out without any public debate or significant opposition from either political party. This, while millions of Americans are losing their homes and their jobs as a result of predatory corporate practices!

Certain conclusions must be drawn from the crisis of the American economic and political system. There is no solution within the framework of the profit system. What is needed is a socialist program that places the needs of the people before the profits and personal fortunes of the ruling elite.

The entire financial system must be taken out of private hands and nationalized in the form of a public utility under the democratic control of the working class, with provisions taken to safeguard the holdings of small depositors and share-holders. It must be subordinated to the social needs of the people and dedicated to developing and expanding the productive forces in order to eliminate poverty and unemployment and vastly improve the living standards and cultural level of the entire population.

Those who are responsible for the economic catastrophe must be called to account. Criminal investigations should be undertaken with appropriate sanctions for those who have plundered the social wealth. A full public accounting should be made of the hundreds of billions that have been diverted to private bank accounts through fraud and criminality. Such gains should be seized and used for the public good.