Saturday, September 20, 2008

Where's Our Bailout?

Where's Our Bailout?

By Isaiah J. Poole

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Almost overlooked in this morning's extraordinary headlines about government intervention to protect the nation's financial system from collapse was the failure of the House of Representatives on Thursday to act [1] on a $50 billion stimulus package for the rest of us.

The legislation would have included $20 billion or so for infrastructure projects, plus additional funding for the food stamp program, the Low-Income Home Energy Assistance Program and state Medicaid subsidies.

This stimulus effort was resisted by the White House and by congressional conservatives, one of whom—House Minority Whip Roy Blunt, R‑Mo.—groused that “bailing out the states on their Medicaid problems or providing $25 billion worth of infrastructure spending are not stimulative and everyone knows that."

"Everyone knows that?" No. What "everyone knows" is that when ordinary people have good jobs—whether they are created by private investment or public investment—they are able to buy the houses, cars and other goods and services that help keep the economy afloat. In particular, a program of spending public dollars on a range of job-producing activities—from fixing roads and bridges to "greening" our public buildings with renewable energy and conservation—would go a long way toward stabilizing the faltering middle class of this country. What "everyone knows," or ought to realize, is that doing nothing to interrupt the falling dominoes of spending cutbacks at the federal, state and local levels is a recipe for continued economic erosion.

President Bush today addressed the nation and called for bipartisan support for a bailout plan for Wall Street. But there was nothing in his speech that answered the question that is probably on the minds of millions of Americans who are struggling on Main Street: "Where's our bailout?"

Even as Sen. John McCain has been forced to backtrack on his repeated assertions that the economy's "fundamentals" are strong, conservatives still seem determined to stand back, arms folded, as the fortunes of working-class families continues to erode.

The misery index, which we're resurrecting [2] to bring home the extent to which ordinary people are struggling in today's economy, has risen. Wednesday, the Labor Department reported a new inflation rate of 5.4 percent for the 12 months ending in August. The unemployment rate for August was 6.1 percent. So the misery index (unemployment plus inflation) is now 11.5 percent—worse than any month since June 1991, more than 17 years ago.

Behind our ad in The New York Times this week on "the dream gone bad" [3] is a fact sheet [4] that spells out the financial pain since 2000: the decline in inflation-adjusted median household income, the increase in the poverty rate, the lost jobs, the growing wealth gap between average workers and CEOs.

This is an even more serious issue in the African-American community, as outlined in a report released Thursday by the Economic Policy Institute. The report, "Reversal of Fortune [5]," concludes that while African Americans as a whole experienced "increasing employment, higher wages and a historic drop in the poverty rate" in the 1990s, since 2000 "wage growth for the median black worker has stagnated, incomes and employment have declined and poverty has increased."

The economic gap between African Americans and the rest of the nation is widening again after showing signs of narrowing in the 1990s. Yet, a serious discussion about closing this gap appears to be off the table, as Bennett College President and economist Julianne Malveaux points out in this interview [6]. In the 1970s, targeted efforts such as the Comprehensive Employment and Training Act were designed to help provide job opportunities that were not being provided by the private sector. Conservatives, hell-bent to implement their trickle-down strategy of tax cuts for the rich—with no strategy for making sure that anything would actually trickle down to communities where joblessness was rampant—used examples of corruption and mismanagement as an excuse to kill the program.

Today, the conservative argument about the economic gap between whites and blacks in America is more or less reduced to "blacks need more education." African American students suffer disproportionately from poor schools. But the EPI study shows that when the economy as a whole works for working people, the African-American community is poised to benefit as well.

The debate we need on the economy [7], not just for the African-American community but for everyone, has to span these issues: investing in our communities so that all of our communities are equipped to prosper, empowering our workers so that they are able to secure good wages and benefits and are not forced into a race to the bottom, and making full employment the central objective of government economic policy.

We, the working people of this country—black, white, yellow and brown—are also too big to fail. We need to see the recovery plan for us.

US government to bail out Wall Street

US government to bail out Wall Street

By Barry Grey
Go To Original

The Bush administration on Friday announced plans for a massive and unprecedented federal bailout of the US banking system. In separate appearances Friday morning, Treasury Secretary Henry Paulson and President Bush announced a series of measures to shore up collapsing financial markets and called on Congress to pass legislation next week to use, in Paulson’s words, “hundreds of billions” of taxpayer dollars to buy virtually worthless mortgage-backed assets that cannot be sold on the market from banks and other financial institutions.

Paulson said he would meet over the weekend with congressional leaders to lay out the details of the government plan.

With this plan, the full cost of the immense debts piled up by the banks will be imposed on the American people. It will shift the banks’ liabilities onto the federal government, sharply increasing government budget deficits and the US debt, a process that can only further erode the creditworthiness of the United States and place a bigger question mark on the value of the US dollar.

In the past week alone, the US Treasury has announced cash injections into the Federal Reserve Board of $200 billion to bolster the sagging balance sheet of the central bank, which has already expended hundreds of billions in loans and subsidies to the major Wall Street banks and put out another $85 billion in the takeover this week of the insurance giant American International Group.

The presidential candidates of both major parties, Republican Senator John McCain and Democratic Senator Barack Obama, quickly signaled their support for the wholesale bailout of the banks and big investors, and prominent congressional Democrats issued assurances that they would obey the demands of Paulson, Federal Reserve Board Chairman Ben Bernanke and Bush and pass the required legislation by the end of next week.

The immediate line-up of both parties and the media behind the bailout plan for Wall Street stands in the starkest contrast to their indifference and inaction in regard to the plight of millions of American working people, who face a rising tide of home foreclosures, layoffs and sinking living standards. When it comes to the social needs of the people, the universal cry from corporate America and the two parties is, “There is no money,” but when the fortunes of the financial elite are threatened, the full power of the government and unlimited resources are marshaled virtually at a moment’s notice.

There was no suggestion in the statements of Bush and Paulson of any relief for the working class—nothing to stop home foreclosures or help those who have already lost their homes. Rather, hundreds of billions—and more likely trillions—of dollars in public funds will be used to prop up the banks.

The resulting bankrupting of the government will be used to justify a brutal assault on what remains of social programs, including Medicaid, Medicare and Social Security, and demand even greater financial “sacrifices” from workers, whether the next administration is headed by Obama or McCain. Nothing could more clearly demonstrate that behind the fa├žade of American democracy there stands a dictatorship of big business.

Paulson made his announcement following a meeting Thursday night, with Bernanke and Securities and Exchange Commission Chairman Christopher Cox also in attendance, along with congressional leaders from both parties. At the meeting, Paulson warned that the US and global financial system was on the brink of collapse and outlined in general terms the plan to set up some form of government agency to take “illiquid” mortgage-backed securities off of the balance sheets of the banks.

News of the plan first broke Thursday afternoon, at a point when a massive injection of liquidity by the Federal Reserve and central banks in Europe, Canada and Japan had failed to unfreeze credit markets that had collapsed over the previous days. The Fed loaned $180 billion to the other central banks and then added another $120 billion in an attempt to get banks to lend to one another and to other companies, under conditions where confidence in the financial markets and major institutions had fallen so sharply that credit markets had ceased to function. But instead of lending the fresh money to other companies, the big banks were hoarding it to protect themselves against possible default.

The breakdown in the world capitalist system—widely acknowledged to be the worst crisis since the 1929 stock market crash and heading toward another Great Depression—came in the wake of the US government takeover of the mortgage giants Fannie Mae and Freddie Mac less than two weeks ago and the collapse this week of Wall Street icons Lehman Brothers and Merrill Lynch, followed on Tuesday by the US takeover of American International Group.

In the aftermath of these developments, other major US banks had come under immense pressure and were facing bankruptcy, including the investment bank Morgan Stanley and the savings and loan giant Washington Mutual. Both were scrambling to find buyers as their share prices plummeted. The domino effect of falling banks was threatening the biggest US investment bank, Goldman Sachs, headed by Paulson prior to his becoming treasury secretary, whose stock had suffered enormous losses in the course of the week.

The crisis reached the tipping point on Tuesday and Wednesday when major US money market funds announced losses and some were forced to close. This sparked a growing run on the funds, with $78.7 billion withdrawn from the largest funds on Wednesday and, according to one industry estimate, a total of $145.3 billion over a two-day period.

Money market funds are considered the safest form of investment, and tens of millions of Americans have their savings in them. More immediately, from the standpoint of Wall Street, the funds pump money into credit markets by buying short-term IOUs issued by banks and companies, called “commercial paper.” The growing crisis of the money market funds threatened to collapse the commercial paper market, precipitating a chain reaction of defaults and bankruptcies across the economy.

“It’s the ultimate nightmare to have a run on the money markets—that is truly Armageddon—and they’re not going to allow that to happen,” said Paul McCulley at Pacific Investment Management Co.

The Dow Jones Industrial Average had already lost nearly 800 points in the first three trading days of the week, and by Thursday afternoon a rally sparked by the coordinated action of the Fed and other central banks that morning was faltering. At about 3 PM news broke of the government’s plan for a bailout of the banks, the floor of the New York Stock Exchange erupted in cheers, and the market immediately reversed itself and rocketed upward in a frenzy of buying.

In the final hour of trading, the Dow Jones Industrial Average recouped most of Wednesday’s 449-point loss, rising 410.03 points in the biggest percentage gain in almost six years. From its midday low to its late-afternoon high, shortly before the finish, the Dow swung 617 points.

The biggest winners were the financial stocks, including Morgan Stanley and Washington Mutual, which lurched from heavy losses to big gains.

On Friday morning, the government announced a series of immediate measures to bail out the markets, including a temporary ban on short-selling (betting on a fall in prices) of financial stocks and a $50 billion government program to insure money market funds. The Treasury Department also announced that Fannie Mae and Freddie Mac, now under government ownership, would increase their purchases of mortgage-backed securities and the Treasury would directly buy up a larger number of such assets. The Fed added that it would extend low-cost loans to the banks to unfreeze the commercial paper market.

These moves and the statements of Paulson and Bush set off another orgy of buying on the stock exchange, with the Dow closing up 368.75 for the day.

In his statement, Paulson said “comprehensive” action was needed “to address the root cause of our financial system stresses. The underlying weakness in our financial system today is illiquid mortgage assets that have lost value as the housing correction has proceeded.”

This is a lie. The root cause of the crisis is the unbridled parasitism of American capitalism, which over a period of decades has dismantled huge sections of industry in order to reap super profits for the rich by means of financial speculation and fraud, based on a colossal buildup of debt. Now the bill is being passed to the American people.

Bush, flanked by Paulson, Bernanke and Cox, called for a government bailout of Wall Street in the name of “our system of free enterprise.”

“There will be ample opportunity to debate the origins of this problem,” he said. “Now is the time to solve it.”

There will, in fact, be no debate or discussion. Nobody will be held accountable for the greatest financial scandal in world history. There will be no penalties. No one who made tens and hundreds of millions from the plundering of America will be forced to give back a dime.

All of the financial resources of the United States are being placed at the disposal of Wall Street and every American citizen, without being asked, is being given the responsibility for covering the debts of the richest people in the country.

Certainly no debate or resistance will come from the supposed political opposition—the Democratic Party. Speaking Friday in Miami, Obama said he fully supported the bailout plan. “John McCain and I can continue to argue about our different economic agendas for next year, but we should come together now to work on what this country urgently needs this year,” he said.

Obama is no less bound to Wall Street than his Republican opponent. In fact, he has received more campaign money from the financial industry—$22.5 million—than McCain, who has taken in $19.6 million.

Democratic congressional leaders lined up Friday to back the administration plan. New York Senator Charles Schumer, who chairs the Joint Economic Committee, said he was optimistic that Congress could approve the package in a week.

House Financial Services Committee Chairman Barney Frank, Democrat of Massachusetts, said his panel could hold a vote on the package as soon as Wednesday. “They said they would like legislation to do it, and there was virtually unanimous agreement that there would be legislation to do it,” said Frank.

Rep. Nancy Pelosi, the Democratic speaker of the House of Representatives, added, “We hope to move very quickly—time is of the essence.”

All of those involved in pushing through this scheme to funnel the entire wealth of the country into the coffers of the financial elite have direct financial stakes in the outcome. Paulson made hundreds of millions of dollars as chairman of Goldman Sachs. Pelosi reportedly has major investments in American International Group. Many of the congressional leaders of both parties are themselves multi-millionaires and rely on handouts from big business to get elected. They are all ruled by personal interests that reflect the interest of the American ruling class.

The result of the government moves announced Thursday and Friday has already been to not only cover the debts of the super-rich, but to expand their stock portfolios and bank accounts by millions more through the run-up of share prices.

Rescue plan seeks $700B to buy bad mortgages

Rescue plan seeks $700B to buy bad mortgages


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The Bush administration is asking Congress to let the government buy $700 billion in toxic mortgages in the largest financial bailout since the Great Depression, according to a draft of the plan obtained Saturday by The Associated Press.

The plan would give the government broad power to buy the bad debt of any U.S. financial institution for the next two years. It would raise the statutory limit on the national debt from $10.6 trillion to $11.3 trillion to make room for the massive rescue. The proposal does not specify what the government would get in return from financial companies for the federal assistance.

"We're going to work with Congress to get a bill done quickly," President Bush said at the White House. Without discussing details of the plan, he said, "This is a big package because it was a big problem."

The White House and congressional leaders hoped the developing legislation could pass as early as next week.

Administration officials and members of Congress were to negotiate throughout the weekend. The plan is designed to let faltering financial institutions unload their bad debt on the government, and in turn the taxpayer, in a bid to avoid dire economic consequences.

Bush said he worried the financial troubles "could ripple throughout" the economy and affect average citizens. "The risk of doing nothing far outweighs the risk of the package, and over time we're going to get a lot of the money back."

He added, "People are beginning to doubt our system, people were losing confidence and I understand it's important to have confidence in our financial system."

"In my judgment, based upon the advice of a lot of people who know how markets work, this problem wasn't going to be contained to just the financial community," the president said. He said he was concerned about "Main Street" and that what happens on "Wall Street" affects "Main Street."

Democrats are insisting the rescue include mortgage help to let struggling homeowners avoid foreclosures. They also are also considering attaching additional middle-class assistance to the legislation despite a request from Bush to avoid adding controversial items that could delay action. An expansion of jobless benefits was one possibility.

Asked about the chances of adding such items, Bush sidestepped the question, saying only that now was not the time for political posturing. "The cleaner the better," he said about legislation he hopes Congress sends back to him at the White House.

If passed by Congress, the plan would give the treasury secretary broad power to buy and sell the toxic mortgage-related assets without any additional involvement by lawmakers. The proposal, however, would require that the congressional committees with oversight on budget, tax and financial services issues be briefed within three months of the government's first use of the rescue power, and every six months after that.

In a briefing to lawmakers Friday, Paulson and Federal Reserve Chairman Ben Bernanke painted a grave picture of an economy on the edge of a major recession and telling them that action was urgent and imperative.

In a session with House Democrats, they described a plan where the government would in essence set up reverse auctions, putting up money for a class of distressed assets — such as loans that are delinquent but not in default — and financial institutions would compete for how little they would accept for the investments, said Rep. Brad Sherman, D-Calif., who participated in the conference call.

"You give them good cash; they give you the worst of the worst," Sherman said. A critic of the plan, he complained that Bush and his economic advisers were trying to panic lawmakers into rubber-stamping it.

Paulson said the new troubled-asset relief program must be large enough to have the necessary impact while protecting taxpayers as much as possible.

"I am convinced that this bold approach will cost American families far less than the alternative — a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion," Paulson said. "The financial security of all Americans ... depends on our ability to restore our financial institutions to a sound footing."

Administration officials hoped the rescue plan could be finalized this weekend, to lend calm to Monday morning's market openings, said Keith Hennessey, the director of the president's economic council. The goal is to have something passed by Congress by the end of next week, when lawmakers recess for the elections.

The Point of No Return

The Point of No Return

By Mike Whitney

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Following another eratic day of trading on the stock market, Treasury Secretary Henry Paulson and Federal Reserve chairman Ben Bernanke convened an emergency meeting of the Senate Banking Committee and other congressional leaders to request fast-track authority for a sweeping plan to buy back illiquid assets and other complex securities from distressed and under-capitalized banks. The turbulence in the financial markets has intensified and there is every indication that the situation will get worse before it gets better. There are a number of signs that the financial system is at the brink of collapse and that Wall Street is headed for a 1929-type crash. Depositors have begun to withdrawal their savings from money market funds alarmed by the gyrations in the market and the daily deluge of bad economic news. According to the Washington Post, funds dropped "by at least $79 billion, or about 2.6 percent" on Wednesday alone. The withdrawals are the equivalent of a slow bank run just at the time when stressed commercial banks need access to cheap capital to finance daily operations and provide loans for a steadily weakening economy. There's also been a surge of panic-buying of US Treasurys which is considered the safest of investments. According to the Wall Street Journal, during Wednesday's market-rout, "investors were willing to pay more for one-month Treasurys than they could expect to get back when the bonds matured. Some investors, in essence, had decided that a small but known loss was better than the uncertainty connected to any other type of investment. That's never happened before." (Wall Street Journal) Also, the VIX, or "fear gauge", has soared to levels not seen since the crisis began in August just over a year ago.

On Tuesday, interbank lending rates spiked upwards causing banks to abruptly stop lending to each other. When banks stop lending to each other, they cannot perform their primary function of transmitting credit to consumers and businesses, and the economy shuts down. That is why the Fed and other members of the western banking cartel made a surprise announcement at 3 AM (EST) Wednesday morning.

From the FED:

"Today, the Bank of Canada, the Bank of England, the European Central Bank (ECB), the Federal Reserve, the Bank of Japan, and the Swiss National Bank are announcing coordinated measures designed to address the continued elevated pressures in U.S. dollar short-term funding markets. These measures, together with other actions taken in the last few days by individual central banks, are designed to improve the liquidity conditions in global financial markets....The Federal Open Market Committee has authorized a $180 billion expansion of its temporary reciprocal currency arrangements (swap lines). This increased capacity will be available to provide dollar funding for both term and overnight liquidity operations by the other central banks."

Before the end of the day, the Fed had quadrupled the amount of dollars (to $247 billion) that central banks around the world could access in an effort to loosen up trading between the banks and resume lending to loan applicants and businesses. According to Bloomberg: "The Fed will spray dollars around the world via swap lines with other central banks. They can then auction them in their own markets." At first, the stock market reacted positively to the Fed's announcement, but by noon the market was 200 points down and losing altitude fast. It took another surprise announcement by the Treasury Dept--of a massive government intervention to remove the bad loans and withering mortgage-backed securities from banks' balance sheets---of to jolt the market out of its funk and send it climbing 410 points higher on the day.

Paulson's emergency session of Congress last night was characterized by lawmakers who attended as "chilling". The situation is much worse than government officials have let on so far. The resurrecting of the Resolution Trust Corporation (RTC) is a desperate attempt to address the banking systems troubles head-on by providing a taxpayer funded clearinghouse for illiquid assets and toxic mortgage-related securities for which there is presently no market. The taxpayer is being asked to pay up to $1 trillion for the speculative excesses of Wall Street investment banks and their fraudulent securities scam. Homeowners who are likely to lose their homes through foreclosure will not benefit from Paulson's RTC. Both presidential candidates have already declared their support for the plan.

According to the New York Times: "Rumors about the Bush administration’s new stance swept through the stock markets Thursday afternoon. By the end of trading, the Dow Jones industrial average shot up 617 points from its low point in mid afternoon, the biggest surge in six years, and ended the day with a gain of 410 points or 3.9 percent."

If ever there was proof of Plunge Protection Team activity; Thursday's market is it. The market was sinking fast at midday even though the Fed just added nearly $250 billion in liquidity to the global system. Investors were buying short-term Treasurys in record numbers, the VIX "fear gauge" was soaring, money markets were collapsing, and the aftershocks from defaulting AIG and Lehmen were still being felt around the world. Were investors really that eager to buy back battered investment bank stocks or was the PPT busy panic-buying up futures and forcing the market upwards 617 points?

Bloomberg News: "Options under consideration (by congress) include establishing an $800 billion fund to purchase so-called failed assets and a separate $400 billion pool at the Federal Deposit Insurance Corp. to insure investors in money-market funds, said two people briefed by congressional staff who spoke on condition of anonymity because the plans may change."

Not a dime of public money is provided for over-extended homeowners trying to stay out of foreclosure. Not one congressman or senator at Thursday's meeting rejected the bailout plan or called for a criminal investigation to establish whether laws were broken in the sale of fraudulent securities which have clogged the global system; pushed banks, hedge funds, insurance companies and homeowners into default, and precipitated the greatest financial crisis in the nation's 230 year history.

Ironically, the very people who created this mess, are the ones who will decide how to resolve it; the Federal Reserve and the US Treasury. Where else, but Washington would such massive failure be rewarded with more power and authority.

The investment giants and the Federal Reserve are entirely responsible for the current meltdown. Currency deregulation brought foreign capital flooding into the equities and bond markets while the real economy suffered. Businesses were off-shored while good paying manufacturing jobs were moved overseas. Wall Street gorged itself on foreign capital while America was transformed into a nation of construction laborers and service industry workers. Now those jobs are vanishing by the millions and unemployment lines are swelling.

The ratings agencies, prevaricating mortgage applicants, and appraisers all played a part, but it's Wall Street that's really to blame. They lobbied to deregulate the system so investment banks could merge with commercial banks and allow the world's biggest risk takers to have unrestricted access to the cheapest capital available; deposits. They even crafted a bogus ideology, "market fundamentalism"; touting trickle-down, free market, Voodoo economics that was entirely designed to further enrich the wealthy and savage the middle class. Earlier this week, former Senator Jack Kemp appeared at a whistle-stop with John McCain in Jacksonville, Florida. Kemp was one of the primary architects of "supply side" economics, the thoroughly discredited Reagan-era doctrine which has led us to our present economic catastrophe. Kemp's theories fit with Milton Friedman's "greed is good" Chicago School mumbo jumbo. Both Friedman and Kemp believe that what is good for the stock market is good for America, ignoring the shocking economic polarization that has divided the nation. Now, more and more people are beginning to see that Friedman was a charlatan who provided ideological cover for obscenely rich financiers and their dodgy investment scams.

Economist and author Henry Liu summed it up brilliantly in a recent article in the Asia Times:

"The collapse of market fundamentalism in economies everywhere is putting the Chicago School theology on trial. Its big lie has been exposed by facts on two levels. The Chicago Boys' claim that helping the rich will also help the poor is not only exposed as not true, it turns out that market fundamentalism hurts not only the poor and the powerless; it hurts everyone, rich and poor, albeit in different ways. When wages are kept low to fight inflation, the low-wage regime causes overcapacity through over investment from excess profit. And monetary easing under such conditions produces hyperinflation that hurts also the rich. The fruits of Friedman test are in - and they are all rotten."

Whatever headwinds the country now faces economically can be directly attributed to the inherently flawed ideology of market fundamentalism.

Tuesday's 449 point bloodbath on Wall Street is the beginning of an unavoidable market crash. Regardless of Paulson's plan, there's more pain on the way. According to Bloomberg: "More than $19 trillion has been wiped off global stock market value since a high on Oct. 31 as the worst U.S. housing recession since the Great Depression and a resulting global credit crisis slowed the world economy." All of the economic indicators point to greater losses. Once the system begins to deleverage, there's nothing anyone can do to stop it. Paulson can place himself in front of a market avalanche if he so chooses, but it won't change the outcome. Market corrections are as inexorable as the force of gravity. That's why equity bubbles cannot be allowed to develop without interest rate intervention. Responsible action by the Central Bank could have prevented the present crisis.

On Wednesday, reported that the net long-term TIC flows came in below the consensus forecast, totaling $6.1 billion in July, while total TIC flows for the month fell to $74.8 billion, according to data released by the U.S. Treasury on Tuesday morning. Economists had been expecting net long-term flows to rise to $55.0 billion compared to the previous month's previously reported figure of $53.4 billion.

$6.1 billion does not begin to meet the requirements of our current account deficit of $700 billion. The dollar is headed for a fall.

On Wednesday, New York Mayor Michael Bloomberg warned that the "next wave" of financial pain may come from overseas if foreign entities stop buying U.S. debt."It's not clear who's going to be buying our debt," said Bloomberg. "It may very well be that the next wave is going to come back and bite us."

The New York Times tells a similar story except this time about Asia:

"Asia’s savings have, in essence, bankrolled American spending for decades (but) Asian interest in American assets is wilting, a trend that seems to have started over the summer...Little-noticed data released by the Treasury Department on Tuesday showed that a sharp shift in international capital movements began in July. Private investors pulled a net $92.9 billion out of the United States, after putting $46.8 billion into American securities in June. ("Asia rethinks American Investments Amid Market Upheaval", Keith Bradsher, New York Times)

Foreign central banks and investors have turned off the spigot. They can see that the US financial system is teetering and that the dollar is weakening. "The perceived risk of U.S. government debt, long held to be absent of any default risk, also climbed to a record yesterday as the government's involvement in bailing out financial markets weighed on its own balance sheet." (Bloomberg News) The "full faith and credit" of the United States government is slipping. US debt will be downgraded. Triple A is no longer guaranteed. America's stock just moved to Level 3 assets. The US is now a subprime economy on life support.

Presently, "there is roughly $6.84 Trillion in bank deposits. $2.60 Trillion of that is uninsured. There is only $53 billion in FDIC insurance to cover $6.84 Trillion in bank deposits. Of the $6.84 Trillion in bank deposits, the total cash on hand at banks is a mere $273.7 Billion." (Mish's Global Economic Trend Analysis)

$273.7 Billion is a paltry sum, insufficient to meet the needs of even a minor run on the banking system. The storm hasn't even touched ground in middle America, and already the system is buckling. 2009 is shaping up to be bleak, indeed.

The battered and over-leveraged US financial system is facing its greatest challenge in the months ahead. The frantic search for capital has already begun, but with predictably disappointing results.

Neither China nor the Saudi princes are buying any more failing investment banks. They'll leave that to the US taxpayer. What started off as a brilliant plan to offload garbage mortgage-backed paper to gullible investors around the world has suddenly backfired and now threatens to bring the entire system crashing down and change the geopolitical power paradigm for the forseeable future.


On Monday night, Senate Majority Leader Harry Reid was briefed on the gravity of the financial situation in a secret meeting with the Treasury Secretary and Federal Reserve Chairman. Reid's remarks are the best summary yet of the troubles that lie just ahead. He said, "We are in new territory, this is a different game...No one knows what to do."

Paulson and Bernanke Stampede Washington - Continue Raid On The Public Purse

Citing Grave Financial Threats, Officials Ready Massive Rescue

Lawmakers Work With Fed, Treasury To Try to Restore The Flow of Money

By Binyamin Appelbaum and Lori Montgomery

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he Bush administration is urgently preparing a massive intervention to revive the U.S. financial system, including a plan to sweep away the unpaid loans that are choking banks and blocking the flow of money to borrowers.

Congressional leaders gave bipartisan support to the administration's efforts after a meeting last night with Treasury Secretary Henry M. Paulson Jr. and Federal Reserve Chairman Ben S. Bernanke.

Paulson and Bernanke presented a "chilling" picture of the state of the financial system, according to a participant in the meeting who spoke on condition of anonymity. Lawmakers were told that the consequences would be grave if they failed to pass legislation by the end of next week. Sen. Harry Reid (D-Nev.) and Rep. Nancy Pelosi (D-Calif.) committed to meeting that deadline.

The plan involves using hundreds of billions of dollars in government funding to buy bad loans, leaving banks with more money and fewer problems, according to two sources familiar with what was said at the meeting.

After the meeting, Paulson told reporters the proposal was "an expeditious solution that is aimed right at the heart of this problem."

Also last night, the Fed was considering offering backing for money-market mutual funds, which have had massive withdrawals in recent days, said a source familiar with the discussions.

And the Securities and Exchange Commission is considering further limits on short-selling, a practice that allows investors to bet on a decline in a company's stock price, according to a person familiar with the matter. Critics of the practice say short sellers are driving down the share prices of financial companies, thereby contributing to their destruction.

The government has already tried three times this month to keep money flowing through the financial system. It took over the two largest providers of funding for mortgage loans, Fannie Mae and Freddie Mac. It created a new source of funding for investment banks. And it took over the insurance giant American International Group.

Now the government is contemplating its broadest -- and perhaps most expensive -- intervention to date.

The urgency has only grown with each successive intervention because the first three tries have not worked. People are withdrawing money from money-market mutual funds. Banks are refusing to lend to one another. Several large financial companies need money to stay in business, including the bank Washington Mutual, which is seeking a buyer.

Regulators and the banking industry are increasingly concerned about customer withdrawals from money-market funds. Crane Data, which tracks the industry, said total deposits in money-market funds fell Wednesday by at least $79 billion, or about 2.6 percent. Financial executives have told government officials in recent conversations that the rising pace of withdrawals is the equivalent of a bank run and that if it continues, it will drain a massive and critical source of funding.

Money-market funds are particularly important because they buy short-term debt, which is used by financial companies and other corporations to finance day-to-day activities.

According to legislative aides, yesterday's meeting was arranged after Pelosi called Paulson's office mid-afternoon to discuss the state of the markets. During that call, Paulson asked to meet with Pelosi, Reid and key lawmakers from the banking committees. That meeting took place at 7 p.m. in Pelosi's office on the second floor of the Capitol.

Paulson and Bernanke did not present lawmakers with a written proposal but are expected to do so by tonight, congressional aides said.

During the meeting, one lawmaker worried aloud that Paulson was asking for "a blank check," according to a participant. There was also a "healthy debate" about whether this action would finally stabilize the markets.

"They couldn't answer yes to that question," the participant said.

Paulson and Bernanke generally have kept Congress at arm's length as they have sought to deal with the financial crisis. Yesterday, however, after meeting with congressional leaders, they exchanged awkward compliments with the lawmakers at a news conference. Lawmakers had been increasingly critical of the Fed and Treasury leaders for failing to consult with Capitol Hill. The administration will need congressional approval to commit taxpayer money to its new plan.

"We'll do this as quickly as we can. We're not talking about a month," said Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, which would probably review the plan before it went to the House floor.

A hearing on the topic that Frank had scheduled for next Wednesday could now become a legislative drafting session, he said.

Also yesterday, Sen. Charles E. Schumer (D-N.Y.), chairman of the Joint Economic Committee, suggested that the government create an entity that would operate much like the Depression-era Reconstruction Finance Corp. -- it would buy "equity and possibly secured debt," providing desperately needed cash to companies while permitting the government to share in any profit.

"The government would get repaid before the others in the financial chain," Schumer said.

If a plan does move forward, Democrats may try to demand concessions from the suddenly humbled industry, Schumer said, including support for a proposal to permit bankruptcy judges to modify mortgages for distressed borrowers. Currently, judges may set new terms for mortgages on second homes but not on primary residences.

That idea is contentious and has been fiercely opposed by the banking industry. Frank said he would instead demand that banks reduce the number of foreclosures.

Still, it's not clear that Democrats would insist on such concessions at the expense of passing the plan quickly.

"The costs of doing nothing are enormous," Frank said. He added that with the recent deterioration in the financial markets, "I think the timetable for something has been greatly sped up."

'The World As We Know It Is Going Down'

'The World As We Know It Is Going Down'

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Panic is the word of the hour on Wall Street. Now even Morgan Stanley is fighting for survival. The commercial bank Wachovia and China's Bank Citic are being discussed as possible rescuers. The crisis has led President Bush to cancel a trip.

The original plan actually called for humor. On Wednesday evening, actress Christy Carlson Romano was supposed to ring the closing bell on the floor of the New York Stock Exchange (NYSE) to mark her debut in the Broadway musical "Avenue Q." She plays two roles on stage -- a romantic kindergarten assistant, and a slutty nightclub singer.

After that day on the floor, the stock traders could have used a bit of comic relief. But it was not to be. Instead of Christy Carlson Romano, a NYSE employee in a joyless gray suit stood on the balcony and silently pressed a button. The bell rang and he disappeared. No waving, no clapping, none of the usual jubilation.

By the end of Wednesday, no one here was in the mood for laughter. The bad news on Wall Street was coming thick and fast. All the US indexes were crashing again after Tuesday's brief and deceptive breather. In its wild, rollercoaster ride, the Dow Jones lost about 450 points, which was almost as much as it lost on Monday, the most catastrophic day on US markets since 2001.

Investors were turning their back to the market in droves and fleeing to safer pastures. The price of gold broke its record for the highest increase in a one-day period.

Panic Is the Word of the Hour

Traders abandoned the NYSE temple visually defeated and immune to the TV crews waiting. The disastrous closing prices were flickering on the ticker above the NYSE entrance: American Express -8.4 percent; Citigroup -10.9 percent; JPMorgan Chase -12.2 percent. American icons, abused like stray dogs. Even Apple took a hit.

"I don't know what else to say," stammered one broker, who was consoling himself with white wine and beer along with some colleagues at an outdoor bar called Beckett's. Ties and jackets were off, but despite the evening breeze, you could still make out the thin film of sweat on his forehead. His words captured the speechlessness of an industry.

Things got worse after the markets closed. Washington Mutual, America's fourth-largest bank, announced that it had started the process of putting itself up for sale. The Wall Street Journal reported that both Wells Fargo and the banking giant Citigroup were interested in taking over the battered American savings bank.

And then came the announcement that would dominate all of Thursday's market activities: Morgan Stanley -- the venerable Wall Street institution and one of the last two US investment banks left standing -- had lost massive amounts and was fighting for survival. Media reports were saying that it was even in talks about a possible bail-out or merger. Rumor had it that possible suitors might include Wachovia or China's Bank Citic.


"Folks," economist Larry Kudlow, a host on the business channel CNBC begged his viewers that evening, "don't give up on this great country!"

End of an Era

In fact, it really does look as if the foundations of US capitalism have shattered. Since 1864, American banking has been split into commercial banks and investment banks. But now that's changing. Bear Stearns, Lehman Brothers, Merrill Lynch -- overnight, some of the biggest names on Wall Street have disappeared into thin air. Goldman Sachs and Morgan Stanley are the only giants left standing. Despite tolerable quarterly results, even they have been hurt by mysterious slumps in prices and -- at least in Morgan Stanley's case -- have prepared themselves for the end.

"Nothing will be like it was before," said James Allroy, a broker who was brooding over his chai latte at a Starbucks on Wall Street. "The world as we know it is going down."

Many are drawing comparisons with the Great Depression, the national trauma that has been the benchmark for everything since. "I think it has the chance to be the worst period of time since 1929," financing legend Donald Trump told CNN. And the Wall Street Journal seconds that opinion, giving one story the title: "Worst Crisis Since '30s, With No End Yet in Sight."

But what's really happening? Experts have so far been unable to agree on any conclusions. Is this the beginning of the end? Or is it just a painful, but normal cycle correcting the excesses of recent years? Does responsibility lie with the ratings agencies, which have been overvaluing financial institutions for a long time? Or did dubious short sellers manipulate stock prices -- after all, they were suspected of having caused the last stock market crisis in July.

The only thing that is certain is that the era of the unbridled free-market economy in the US has passed -- at least for now. The near nationalization of AIG, America's largest insurance company, with an $85 billion cash infusion -- a bill footed by taxpayers -- was a staggering move. The sum is three times as high as the guarantee provided by the Federal Reserve when Bear Stearns was sold to JPMorgan Chase in March.

The most breathtaking aspect about this week's crisis, though, is that the life raft -- which Washington had only previously used to bail out the mortgage giants Fannie Mae and Freddie Mac -- is being handed out by a government whose party usually fights against any form of government intervention. The policy is anchored in its party platform.

"I fear the government has passed the point of no return," financial historian Ron Chernow told the New York Times. "We have the irony of a free-market administration doing things that the most liberal Democratic administration would never have been doing in its wildest dreams."

Bush Cancels Trip

The situation appears to be so serious that George W. Bush cancelled two domestic trips he had planned for Thursday on short notice. Instead, the president will remain in Washington to discuss the "serious challenges confronting US financial markets." He said the president remained focused on "taking action to stabilize and strengthen the markets." Bush had originally planned to travel to events in Florida and Alabama.

So far, the US presidential candidates have made few helpful remarks about the crisis other than the usual slogans. Both are vaguely calling for "regulation" and "reform" -- bland catchphrases almost universally welcomed with applause.

Republican Party presidential candidate John McCain had the most to say. On Monday, he said "the foundation of our economy" was "strong," adding that he opposed a government-led bailout of US insurer AIG. But now he's promising further government steps "to prevent the kind of wild speculation that can put our markets at risk." McCain's explanation for the current crisis: "unbridled corruption and greed."

But Democratic presidential hopeful Barack Obama didn't move past superficialities, either. "We're Americans. We've met tough challenges before and we can again."

What else are they supposed to say? After all, US presidents have very little influence on stockmarkets. And Wall Street is expecting the status quo for the next president. On Wednesday an almost palpable mix of tension and melancholy filled the air above New York's Financial District. The beloved trader bar Bull Run was half empty, and many tables were free at fine-dining establishments like Cipriani, Mangia and Bobby Van's, which are normally booked days in advance.

At the side entrance to Goldman Sachs on Pearl Street, limo chauffeurs sat waiting for their customers, still above in their office towers cowering over the accounts. "If they go under," said Rashid Amal, who works as a chauffeur for a firm called Excelsior, "then I will soon be out of a job, too."

Hey U.S., welcome to the Third World!

Hey U.S., welcome to the Third World!

It's been a quick slide from economic superpower to economic basket case.

By Rosa Brooks

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Dear United States, Welcome to the Third World!

It's not every day that a superpower makes a bid to transform itself into a Third World nation, and we here at the World Bank and the International Monetary Fund want to be among the first to welcome you to the community of states in desperate need of international economic assistance. As you spiral into a catastrophic financial meltdown, we are delighted to respond to your Treasury Department's request that we undertake a joint stability assessment of your financial sector. In these turbulent times, we can provide services ranging from subsidized loans to expert advisors willing to perform an emergency overhaul of your entire government.

As you know, some outside intervention in your economy is overdue. Last week -- even before Wall Street's latest collapse -- 13 former finance ministers convened at the University of Virginia and agreed that you must fix your "broken financial system." Australia's Peter Costello noted that lately you've been "exporting instability" in world markets, and Yashwant Sinha, former finance minister of India, concluded, "The time has come. The U.S. should accept some monitoring by the IMF."

We hope you won't feel embarrassed as we assess the stability of your economy and suggest needed changes. Remember, many other countries have been in your shoes. We've bailed out the economies of Argentina, Brazil, Indonesia and South Korea. But whether our work is in Sudan, Bangladesh or now the United States, our experts are committed to intervening in national economies with care and sensitivity.

We thus want to acknowledge the progress you have made in your evolution from economic superpower to economic basket case. Normally, such a process might take 100 years or more. With your oscillation between free-market extremism and nationalization of private companies, however, you have successfully achieved, in a few short years, many of the key hallmarks of Third World economies.

Your policies of irresponsible government deregulation in critical sectors allowed you to rapidly develop an energy crisis, a housing crisis, a credit crisis and a financial market crisis, all at once, and accompanied (and partly caused) by impressive levels of corruption and speculation. Meanwhile, those of your political leaders charged with oversight were either napping or in bed with corporate lobbyists.

Take John McCain, your Republican presidential nominee, whose senior staff includes half a dozen prominent former lobbyists. As he recently put it, "I was chairman of the [Senate] Commerce Committee that oversights every part of the economy." No question about it: Your leaders' failure to notice the damage done by irresponsible deregulation was indeed an oversight of epic proportions.

Now you are facing the consequences. Income inequality has increased, as the rich have gotten windfalls while the middle class has seen incomes stagnate. Fewer and fewer of your citizens have access to affordable housing, healthcare or security in retirement. Even life expectancy has dropped. And when your economic woes went from chronic to acute, you responded -- like so many Third World states have -- with an extensive program of nationalizing private companies and assets. Your mortgage giants Fannie Mae and Freddie Mac are now state owned and controlled, and this week your reinsurance giant AIG was effectively nationalized, with the Federal Reserve Board seizing an 80% equity stake in the flailing company.

Some might deride this as socialism. But desperate times call for desperate measures.

Admittedly, your transition to Third World status is far from over, and it won't be painless. At first, for instance, you may find it hard to get used to the shantytowns that will replace the exurban sprawl of McMansions that helped fuel the real estate speculation bubble. But in time, such shantytowns will simply become part of the landscape. Similarly, as unemployment rates continue to rise, you will initially struggle to find a use for the expanding pool of angry, jobless young men. But you will gradually realize that you can recruit them to fight in a ceaseless round of armed conflicts, a solution that has been utilized by many other Third World states before you. Indeed, with your wars in Iraq and Afghanistan, you are off to an excellent start.

Perhaps this letter comes as a surprise to you, and you feel you're not fully ready to join the Third World. Don't let this feeling concern you. Though you may never have realized it, you've been preparing for this moment for years.

The Party's Over By

The Party's Over

By Patrick J. Buchanan

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The Crash of 2008, which is now wiping out trillions of dollars of our people's wealth, is, like the Crash of 1929, likely to mark the end of one era and the onset of another.

The new era will see a more sober and much diminished America. The "Omnipower" and "Indispensable Nation" we heard about in all the hubris and braggadocio following our Cold War victory is history.

Seizing on the crisis, the left says we are witnessing the failure of market economics, a failure of conservatism.

This is nonsense. What we are witnessing is the collapse of Gordon Gecko ("Greed Is Good!") capitalism. What we are witnessing is what happens to a prodigal nation that ignores history, and forgets and abandons the philosophy and principles that made it great.

A true conservative cherishes prudence and believes in fiscal responsibility, balanced budgets and a self-reliant republic. He believes in saving for retirement and a rainy day, in deferred gratification, in not buying on credit what you cannot afford, in living within your means.

Is that really what got Wall Street and us into this mess — that we followed too religiously the gospel of Robert Taft and Russell Kirk?

"Government must save us!" cries the left, as ever. Yet, who got us into this mess if not the government — the Fed with its easy money, Bush with his profligate spending, and Congress and the SEC by liberating Wall Street and failing to step in and stop the drunken orgy?

For years, we Americans have spent more than we earned. We save nothing. Credit card debt, consumer debt, auto debt, mortgage debt, corporate debt — all are at record levels. And with pensions and savings being wiped out, much of that debt will never be repaid.

Our standard of living is inevitably going to fall. For foreigners will not forever buy our bonds or lend us more money if they rightly fear that they will be paid back, if at all, in cheaper dollars.

We are going to have to learn to live again without our means.

The party's over

Up through World War II, we followed the Hamiltonian idea that America must remain economically independent of the world in order to remain politically independent.

But this generation decided that was yesterday's bromide and we must march bravely forward into a Global Economy, where we all depend on one another. American companies morphed into "global companies" and moved plants and factories to Mexico, Asia, China and India, and we began buying more cheaply from abroad what we used to make at home: shoes, clothes, bikes, cars, radios, TVs, planes, computers.

As the trade deficits began inexorably to rise to 6 percent of GDP, we began vast borrowing from abroad to continue buying from abroad.

At home, propelled by tax cuts, war in Iraq and an explosion in social spending, surpluses vanished and deficits reappeared and began to rise. The dollar began to sink, and gold began to soar.

Yet, still, the promises of the politicians come. Barack Obama will give us national health insurance and tax cuts for all but that 2 percent of the nation that already carries 50 percent of the federal income tax load.

John McCain is going to cut taxes, expand the military, move NATO into Georgia and Ukraine, confront Russia and force Iran to stop enriching uranium or "bomb, bomb, bomb," with Joe Lieberman as wartime consigliere.

Who are we kidding?

What we are witnessing today is how empires end.

The Last Superpower is unable to defend its borders, protect its currency, win its wars or balance its budget. Medicare and Social Security are headed for the cliff with unfunded liabilities in the tens of trillions of dollars.

What we are witnessing today is nothing less than a Katrina-like failure of government, of our political class, and of democracy itself, casting a cloud over the viability and longevity of the system.

Notice who is managing the crisis. Not our elected leaders. Nancy Pelosi says she had nothing to do with it. Congress is paralyzed and heading home. President Bush is nowhere to be seen.

Hank Paulson of Goldman Sachs and Ben Bernanke of the Fed chose to bail out Bear Sterns but let Lehman go under. They decided to nationalize Fannie and Freddie at a cost to taxpayers of hundreds of billions, putting the U.S. government behind $5 trillion in mortgages. They decided to buy AIG with $85 billion rather than see the insurance giant sink beneath the waves.

An unelected financial elite is now entrusted with the assignment of getting us out of a disaster into which an unelected financial elite plunged the nation. We are just spectators.

What the Greatest Generation handed down to us — the richest, most powerful, most self-sufficient republic in history, with the highest standard of living any nation had ever achieved — the baby boomers, oblivious and self-indulgent to the end, have frittered away.

Tab for Government Rescues Rises to $900 Billion

Tab for Government Rescues Rises to $900 Billion

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The U.S. Federal Reserve stepped in to rescue insurance giant American International Group from bankruptcy with an $85 billion loan on Tuesday, the latest in a series of bailouts and loans for the financial and housing sectors.

The action brings the total tab for government rescues and special loan facilities this year to more than $900 billion. Following are details of actions and amounts:

- $200 billion for Fannie Mae and Freddie Mac . The Treasury will inject up to $100 billion into each institution by purchasing preferred stock to shore up their capital as needed. The deal puts the two housing finance firms under government control.

- $300 billion for the Federal Housing Administration to refinance failing mortgage into new, reduced-principal loans with a federal guarantee, passed as part of a broad housing rescue bill.

- $4 billion in grants to local communities to help them buy and repair homes abandoned due to mortgage foreclosures.

- $85 billion loan for AIG , which would give the Federal government a 79.9 percent stake and avoid a bankruptcy filing for the embattled insurer. AIG management will be dismissed.

- At least $87 billion in repayments to JPMorgan Chase for providing financing to underpin trades with units of bankrupt investment bank Lehman Brothers . U.S. Treasury Secretary Henry Paulson said over the weekend he was adamant that public funds not be used to rescue the firm.

- $29 billion in financing for JPMorgan Chase's government-brokered buyout of Bear Stearns in March. The Fed agreed to take $30 billion in questionable Bear assets as collateral, making JPMorgan liable for the first $1 billion in losses, while agreeing to shoulder any further losses.

- At least $200 billion of currently outstanding loans to banks issued through the Fed's Term Auction Facility, which was recently expanded to allow for longer loans of 84 days alongside the previous 28-day credits.

For AIG, $85 billion might not be enough

For AIG, $85 billion might not be enough

By Dan Wilchins

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American International Group's deal with the government is a bankruptcy liquidation in all but name, and the $85 billion it has borrowed may not be enough extra money to pay off all its obligations, particularly in its derivatives books.

AIG had $971.7 billion of liabilities at the end of June, but a subsidiary also has about $447 billion of credit derivatives on its books. That compares with a little more than $1 trillion of assets.

There is a real question mark around the credit derivatives. The $447 billion is the amount of principal the company has protected, but how that translates to actual losses is difficult to forecast without detail about the real risk.

But even if AIG does not ultimately make payouts on the credit default contracts, it could have to post more collateral and write down the derivatives as markets gyrate. Financial companies have continually underestimated their potential risk during the credit crisis, and this time may not be different.

"There is substantial risk in that credit derivatives book," said Sean Egan, co-founder of rating agency Egan-Jones Rating Co. AIG declined to comment.

The government has a major role in AIG's operations now -- it essentially named a new chief executive, Edward Liddy, and owns nearly 80 percent of the company's stock.

But the government is widely expected to sell off AIG's assets to get its money back, rather than aggressively pursue new business, because the United States' main priority is to get its money back, rather than to maximize profit for shareholders, experts said.

"I can't imagine they'll be in business creation mode," said Dan Alpert, a banker at Westwood Capital in New York.

Customers, meanwhile, are likely to try to reduce their business with AIG. Worried clients in Singapore thronged the office of an AIG unit earlier this week to try to redeem their policies. Press reports said the same happened elsewhere in Asia, one of AIG's most important markets.

"To say that confidence has been shaken is an understatement. In the insurance business, trust is of the utmost importance," said Walter Todd, portfolio manager at Greenwood Capital Associates in Greenwood, South Carolina.

In other words, AIG can't grow out of its problems, and will in fact likely be forced to shrink. But selling off assets to meet obligations is difficult when most other financial institutions around the world are reducing the assets, depressing valuations.

When it's all said and done, AIG might not have enough assets to meet its obligations, which is why the company's corporate bonds are trading at less than 50 cents on the dollar, analysts said.

"Attorneys will spend the next five years sorting through this mess," said Egan-Jones' Egan.

Confessions of a sub-prime mortgage baron

Confessions of a sub-prime mortgage baron

The former loan company boss now sees himself as little better than a mid-rank drug dealer

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As a sub-prime mortgage lender, Richard Bitner has not done too badly. He lives in a huge mock Tudor house in a wooded suburb on the edge of Dallas, complete with miniature turrets, an oversize fireplace and wood-panelling. But he is a little bit, shall we say, tortured.

Bitner was co-founder and president of Kellner Mortgage Investments, a firm which specialised in providing high-risk loans of the sort that triggered America's mortgage meltdown and credit crunch. Now out of the game, he compares himself to a drug dealer, acknowledging that his trade has achieved pariah status in the public eye.

"I almost look at the mortgage industry kind of like the drug trade. Wall Street and the investment banks are the Bolivian drug lords," he says. "You look at this and you go: What were we doing? Who doesn't want the feeling of euphoria? Who doesn't like to get money?"

He continues: "Wall Street, the drug lords, were creating this product. Lenders and brokers are the street dealers who were largely making it available based on a consumer desire; a want for it."

A trim, bearded 41-year-old with a small medallion on a chain around his neck, Bitner has lifted the lid on the mortgage industry's excesses in a book called Confessions of a Subprime Lender which is packed with tales of crooked brokers, deceitful customers, avaricious Wall Street banks and all too obliging credit rating agencies. Thanks to appearances on television discussion shows across the US, he is becoming the human face of a loathed industry.

He reckons his firm, which peaked with 65 employees, put him at the level of a mid-ranking narcotics fiend: "I'm probably the guy who is in the city distributing it to all the people on the corners, and it is ultimately going to the consumer - the wholesaler."

Across the US, an estimated 2.5 million people are in danger of losing their homes to foreclosure this year as a result of the sub-prime mortgage crisis. Bitner's description of day-to-day business at Kellner is an eye-watering glimpse of the industry's slide into anarchy.

His company was in effect a middle man, taking applications from independent brokers and providing them with loans funded by big finance houses, then selling the finished articles on to Wall Street for securitisation.

Bitner bankrolled Kellner's creation by persuading his parents to mortgage their house in 2000 and he stayed in the game for five years, watching the types of loans on offer from financial institutions get steadily riskier.

Dishonesty became endemic in loan applications. By the end, Bitner reckons that 70% of submissions to the company from brokers were deceptive. Properties, supposedly objectively appraised, were spectacularly overvalued. He estimates that half of loans were on homes over-egged by up to 10%, a quarter had prices exaggerated by 11% to 20% and the rest were "so overvalued they defied all logic".


"The industry lost its mind," says Bitner. "It went from borderline stupid to downright insane." The notion of "acceptable risk" simply went out of the window: "I watched the margins compress in the industry and I realised no one was providing for the risks."

In his book, Bitner recounts a seemingly endless list of tricks used by brokers to push dubious loans. Many simply withheld information, such as the fact that a homebuyer was getting an additional loan to pay for a deposit or that a couple, buying on the basis of joint income, were actually planning to divorce. Others would manipulate figures by knocking up ersatz payslips using desktop publishing programs.

"I don't want to say I became desensitised to it, but it gets to a point that you feel like you can't trust anybody," says Bitner. "I've always operated from the perspective that I'll give anyone the benefit of the doubt until they prove me wrong, but I've gotten to a point in business where I've become a little more jaded."

Members of the public were urged to stick to one broker rather than shopping around because each broker would check their credit record, and, through the sheer fact of being officially checked, fragile credit scores often fall. In one case, Bitner recalls that a loan came across his desk for a single family residence, depicted in a blurred long-distance photo. On closer inspection, it turned out to be part of a multi-occupancy office park.

The industry was barely regulated: in Texas, mortgage salespeople had to be sponsored by a registered broker. Bitner describes how 250 different loan officers were attached to a single one-man office measuring about 1 square metre, with licences pinned to every surface.

"There was a tremendous amount of ignorance. The entire industry - brokers and lenders - are largely looking to the guidelines that are being brought to us from up above, from Wall Street, to say this is an acceptable level of risk," he says.

Fast-talking, articulate and animated, Bitner blames the fragmented nature of mortgage lending for the industry's dramatic fall to earth. Like a drug ring, he says a hierarchical structure allowed players to continue passing on risk at a faster and faster pace, without anybody pausing for thought.

"It used to be one bank that did everything [on a loan]: underwrote it, securitised, wrote on it, foreclosed on it," he says. "Securitisation allowed us to break it up into so many components where nobody in the chain really had a strong, vested, monetary interest in how that bond performed over time except for the bondholders."

He reserves his greatest ire for credit rating agencies that continued to attach high marks to packages of high-risk mortgages until the mortgage market had begun to collapse in 2007. "The rating agencies were supposed to be the independent arbitrators, the umpires. But the only referee in this entire match is largely dysfunctional; it might as well have been sitting on the sidelines drinking a fifth of gin and tonic."

As a sub-prime lender, Bitner accepts that he was far from blameless. He was, at times, knowingly marketing unrealistic loans. Bitner viewed one common product, providing 95% finance to people with ultra-low credit scores, as "absurd". But he defends the principle of sub-prime lending and maintains that in his five years he did more good than harm.


"My job felt amazingly gratifying. I don't think I've ever felt as gratified in work that I did. You are seeing loans that are performing. You are seeing people who would not otherwise qualify."

Yes, he admits, things ran badly out of control and everybody - from consumers to brokers, lenders, banks and the Federal Reserve - shares responsibility. But he insists that underlying intentions were sound: "There's something very empowering about this business. It's helping those people who are trying to achieve the dream of home ownership. Or, forget about the dream, they're just trying to get their family into a house. Why is that such a bad thing, if we can manage the risk?"


Age 41

Education Katella high school in Anaheim, California; Northern Arizona University; masters degree in communication from Cornell University

Employment Worked for mortgage, insurance and finance companies including EquityLink Financial, GE Capital and GMAC Residential Funding before co-founding sub-prime lender Kellner Mortgage Investments in 2000; left in 2005 and now works for an online news provider, HousingWire

Family Married with two sons

Hobbies Scuba diving; supporting the Dallas Cowboys football team

Army Takes To US Streets

Brigade homeland tours start Oct. 1

3rd Infantry’s 1st BCT trains for a new dwell-time mission. Helping ‘people at home’ may become a permanent part of the active Army

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The 3rd Infantry Division’s 1st Brigade Combat Team has spent 35 of the last 60 months in Iraq patrolling in full battle rattle, helping restore essential services and escorting supply convoys.

Now they’re training for the same mission — with a twist — at home.

Beginning Oct. 1 for 12 months, the 1st BCT will be under the day-to-day control of U.S. Army North, the Army service component of Northern Command, as an on-call federal response force for natural or manmade emergencies and disasters, including terrorist attacks.

It is not the first time an active-duty unit has been tapped to help at home. In August 2005, for example, when Hurricane Katrina unleashed hell in Mississippi and Louisiana, several active-duty units were pulled from various posts and mobilized to those areas.

But this new mission marks the first time an active unit has been given a dedicated assignment to NorthCom, a joint command established in 2002 to provide command and control for federal homeland defense efforts and coordinate defense support of civil authorities.

After 1st BCT finishes its dwell-time mission, expectations are that another, as yet unnamed, active-duty brigade will take over and that the mission will be a permanent one.

“Right now, the response force requirement will be an enduring mission. How the [Defense Department] chooses to source that and whether or not they continue to assign them to NorthCom, that could change in the future,” said Army Col. Louis Vogler, chief of NorthCom future operations. “Now, the plan is to assign a force every year.”

The command is at Peterson Air Force Base in Colorado Springs, Colo., but the soldiers with 1st BCT, who returned in April after 15 months in Iraq, will operate out of their home post at Fort Stewart, Ga., where they’ll be able to go to school, spend time with their families and train for their new homeland mission as well as the counterinsurgency mission in the war zones.

Stop-loss will not be in effect, so soldiers will be able to leave the Army or move to new assignments during the mission, and the operational tempo will be variable.

Don’t look for any extra time off, though. The at-home mission does not take the place of scheduled combat-zone deployments and will take place during the so-called dwell time a unit gets to reset and regenerate after a deployment.

The 1st of the 3rd is still scheduled to deploy to either Iraq or Afghanistan in early 2010, which means the soldiers will have been home a minimum of 20 months by the time they ship out.

In the meantime, they’ll learn new skills, use some of the ones they acquired in the war zone and more than likely will not be shot at while doing any of it.

They may be called upon to help with civil unrest and crowd control or to deal with potentially horrific scenarios such as massive poisoning and chaos in response to a chemical, biological, radiological, nuclear or high-yield explosive, or CBRNE, attack.

Training for homeland scenarios has already begun at Fort Stewart and includes specialty tasks such as knowing how to use the “jaws of life” to extract a person from a mangled vehicle; extra medical training for a CBRNE incident; and working with U.S. Forestry Service experts on how to go in with chainsaws and cut and clear trees to clear a road or area.

The 1st BCT’s soldiers also will learn how to use “the first ever nonlethal package that the Army has fielded,” 1st BCT commander Col. Roger Cloutier said, referring to crowd and traffic control equipment and nonlethal weapons designed to subdue unruly or dangerous individuals without killing them.

“It’s a new modular package of nonlethal capabilities that they’re fielding. They’ve been using pieces of it in Iraq, but this is the first time that these modules were consolidated and this package fielded, and because of this mission we’re undertaking we were the first to get it.”

The package includes equipment to stand up a hasty road block; spike strips for slowing, stopping or controlling traffic; shields and batons; and, beanbag bullets.

“I was the first guy in the brigade to get Tasered,” said Cloutier, describing the experience as “your worst muscle cramp ever — times 10 throughout your whole body.

“I’m not a small guy, I weigh 230 pounds ... it put me on my knees in seconds.”

The brigade will not change its name, but the force will be known for the next year as a CBRNE Consequence Management Response Force, or CCMRF (pronounced “sea-smurf”).

“I can’t think of a more noble mission than this,” said Cloutier, who took command in July. “We’ve been all over the world during this time of conflict, but now our mission is to take care of citizens at home ... and depending on where an event occurred, you’re going home to take care of your home town, your loved ones.”

While soldiers’ combat training is applicable, he said, some nuances don’t apply.

“If we go in, we’re going in to help American citizens on American soil, to save lives, provide critical life support, help clear debris, restore normalcy and support whatever local agencies need us to do, so it’s kind of a different role,” said Cloutier, who, as the division operations officer on the last rotation, learned of the homeland mission a few months ago while they were still in Iraq.

Some brigade elements will be on call around the clock, during which time they’ll do their regular marksmanship, gunnery and other deployment training. That’s because the unit will continue to train and reset for the next deployment, even as it serves in its CCMRF mission.

Should personnel be needed at an earthquake in California, for example, all or part of the brigade could be scrambled there, depending on the extent of the need and the specialties involved.

Other branches included

The active Army’s new dwell-time mission is part of a NorthCom and DOD response package.

Active-duty soldiers will be part of a force that includes elements from other military branches and dedicated National Guard Weapons of Mass Destruction-Civil Support Teams.

A final mission rehearsal exercise is scheduled for mid-September at Fort Stewart and will be run by Joint Task Force Civil Support, a unit based out of Fort Monroe, Va., that will coordinate and evaluate the interservice event.

In addition to 1st BCT, other Army units will take part in the two-week training exercise, including elements of the 1st Medical Brigade out of Fort Hood, Texas, and the 82nd Combat Aviation Brigade from Fort Bragg, N.C.

There also will be Air Force engineer and medical units, the Marine Corps Chemical, Biological Initial Reaction Force, a Navy weather team and members of the Defense Logistics Agency and the Defense Threat Reduction Agency.

One of the things Vogler said they’ll be looking at is communications capabilities between the services.

“It is a concern, and we’re trying to check that and one of the ways we do that is by having these sorts of exercises. Leading up to this, we are going to rehearse and set up some of the communications systems to make sure we have interoperability,” he said.

“I don’t know what America’s overall plan is — I just know that 24 hours a day, seven days a week, there are soldiers, sailors, airmen and Marines that are standing by to come and help if they’re called,” Cloutier said. “It makes me feel good as an American to know that my country has dedicated a force to come in and help the people at home.”