Sunday, September 28, 2008

Debate Evades Dark Realities

Debate Evades Dark Realities

By Robert Parry

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Perhaps it’s unrealistic to expect a U.S. presidential debate to deal substantively – and honestly – with wrongful actions by the American government, even at the end of George W. Bush’s eight-year reign as one of the planet’s preeminent rogue operatives.

The acceptable political parameters may allow some tactical disagreements (Barack Obama saying the Iraq War “took our eye off the ball”) or even some implied moral criticism (John McCain saying he opposed Bush “on torture of prisoners”).

But there’s no place for a serious discussion of wholesale U.S. war crimes, such as Bush’s decision to launch an aggressive war under false pretenses, the sort of offense that the Nuremberg Tribunal after World War II called the “supreme” international crime.

In a healthy democracy, moderator Jim Lehrer might have been expected to ask Obama and McCain whether President Bush should be shipped off to The Hague for a trial as a war criminal or whether he should be put before American courts to face serious criminal charges, such as violation of anti-torture statutes.

There might be a question, too, about hypocrisy: how can Obama and McCain so righteously condemn Russia for its alleged aggression against Georgia (after Georgia attacked the pro-Russian province of South Ossetia) when the United States has asserted its right not only to invade Iraq (under Bush) but to attack Yugoslavia when it was throttling a separatist movement in Kosovo (as Bill Clinton did)?

Granted, endless double standards have become part of the American political landscape. Many journalists and politicians have avoided criticizing the illegality or immorality of U.S. foreign interventions since 1984 when U.N. Ambassador Jeane Kirkpatrick famously chastised anyone who would “blame America first.”

Since then, questions about American misconduct had to be muted for fear that any criticism would be labeled unpatriotic or disloyal. Mainstream journalists and politicians learned to couch their concerns about U.S. foreign policy as questions about tactics or effectiveness.

Arguably, however, that timidity has contributed to the frequency, brutality and criminality of U.S. military actions. It is hard to explain the Iraq War, for instance, without observing that Bush and his neoconservative advisers were confident they could roll both Congress and the Washington press corps.

Knowing that few people of conscience would dare stand in the way, Bush and the neocons sold the war based on false allegations about WMD and a historically unprecedented claim that the United States had the right to intervene preemptively anywhere in the world if it could foresee some possible future threat to its security.

This so-called Bush Doctrine meant that the United States and its political leadership had stepped beyond the reach of international law. Even as President Bush railed about the need to eliminate “rogue” regimes, he was turning the U.S. into the ultimate “rogue” state.

(Interestingly, ABC News anchor Charles Gibson did ask Alaska Gov. Sarah Palin about the Bush Doctrine in the Republican vice presidential nominee’s first prime-time debate, and she flubbed the answer, seeming not to know that the Bush Doctrine was.)

Not Mentioned

For Lehrer’s part, however, this stunning doctrine was never mentioned in the debate between the two politicians seeking to succeed President Bush. Only implicitly was it clear that McCain supported the notion of intervening aggressively abroad and that Obama was somewhat less eager to send troops on overseas missions.

Though a constitutional law scholar, Obama avoided posing either a moral or legal argument against Bush-style interventionism. Instead, he posited his opposition to the Iraq War on practical grounds.

“Six years ago, I stood up and opposed this war," Obama said, "because I said that not only did we not know how much it was going to cost, what our exit strategy might be, how it would affect our relationships around the world and whether our intelligence was sound but also because we hadn’t finished the job in Afghanistan.

“We hadn’t caught bin Laden. We hadn’t put Al Qaeda to rest. And as a consequence, I thought that it was going to be a distraction.”

Obama also cited the war’s extraordinary cost to the U.S. Treasury (over $600 billion and sure to pass $1 trillion), the blood shed by American soldiers (more than 4,000 dead and 30,000 wounded), and the fact that “Al Qaeda is resurgent” in secure base camps along the Afghan-Pakistani border.

Obama concluded that “we did not use our military wisely in Iraq.”

While there can be little doubt about the accuracy of his points, Obama dodged the larger question of whether the Bush Doctrine was illegal and immoral, nor did he mention the deaths of hundreds of thousands of Iraqis and the unnecessary invasion that turned their country into a living hell.

If Obama had ventured into that territory, he surely would have invited accusations that he was “blaming America first.” Or if he had compared Russian actions in South Ossetia to NATO’s intervention to protect Kosovo, he would have faced charges of “moral equivalence,” a favorite neocon attack line that essentially argues that the United States cannot be held to the same standards as other nations.

So Obama retreated behind a defensive line of what’s practical and what’s not.

McCain’s Counterattack

That opened Obama to McCain’s own practical arguments, that whatever the initial mistakes in Iraq, the real question now is what can be done.

“The next President of the United States is not going to have to address the issue as to whether we went into Iraq or not,” McCain said. “The next President of the United States is going to have to decide how we leave, when we leave, and what we leave behind.”

McCain mocked Obama’s proposal for a withdrawal timetable and insisted that victory was the only acceptable outcome.

Faced with McCain’s flurry of attacks, Obama didn’t even respond by noting that the Iraqi government has been insisting on a withdrawal time frame for American troops and that the White House has generally accepted that idea.

Indeed, the end result of all the U.S. sacrifice in blood and treasure in Iraq might well be the Iraqis saying “thanks, but no thanks” to a continued U.S. presence – or Washington laying bare its imperialist designs by staying regardless of what the Iraqis want.

Obama also chose not to reengage in a debate over whether McCain’s “successful surge” argument is a reality or a myth. Over the past several months, Obama has been pummeled in interview after interview for not completely accepting the current conventional wisdom that the “surge” has worked and that McCain deserves credit.

For instance, on Sept. 7, ABC’s “This Week” host George Stephanopoulos demanded of Obama: “How do you escape the logic that … John McCain was right about the surge,” dispatching an additional 30,000 combat troops to Iraq.

When Obama responded that he couldn’t understand “why people are so focused on what has happened in the last year and a half and not on the previous five,” Stephanopoulos cut him off, saying “Granted, you think you made the right decision about going in, but about the surge?”

Again, this was a case of a limited frame allowed by the major U.S. news media giving McCain a strong advantage. It is now widely accepted in Washington – despite evidence to the contrary – that the “surge” was the singular reason for the drop in Iraq’s violence.

This conventional wisdom has prevailed even though it is challenged by military officials interviewed for Bob Woodward’s new book, The War Within. Some of Woodward’s sources saw the “surge” as more of a secondary factor.

As Woodward writes, “In Washington, conventional wisdom translated these events into a simple view: The surge had worked. But the full story was more complicated. At least three other factors were as important as, or even more important than, the surge.”

Woodward, whose book draws heavily from Pentagon insiders, reported that the Sunni rejection of al-Qaeda extremists in Anbar province (which preceded the surge) and the surprise decision of radical Shiite leader Moqtada al-Sadr to order a unilateral cease-fire by his militia were two important factors.

A third factor, which Woodward argued may have been the most significant, was the use of new highly classified U.S. intelligence tactics that allowed for rapid targeting and killing of insurgent leaders. Woodward agreed to withhold details of these secret techniques from his book so as not to undercut their continuing success.

But there have been previous glimpses of classified U.S. programs that combine high-tech means of identifying insurgents – such as sophisticated biometrics and night-vision-equipped drones – with old-fashioned brutality on the ground, including on-the-spot executions of suspects. [For details, see’s “Bush’s Global Dirty War” and “Iraq’s Laboratory of Repression.”]

Successful Repression

As we’ve reported previously, other brutal factors – that the Washington press corps almost never mentions – help explain the decline in violence:

--Vicious ethnic cleansing has succeeded in separating Sunnis and Shiites to such a degree that there are fewer targets to kill. Several million Iraqis are estimated to be refugees either in neighboring countries or within their own.

--Concrete walls built between Sunni and Shiite areas have made “death-squad” raids more difficult but also have “cantonized” much of Baghdad and other Iraqi cities, making everyday life for Iraqis even more exhausting as they seek food or travel to work.

--During the “surge,” U.S. forces expanded a policy of rounding up so-called “military age males” and locking up tens of thousands in prison.

--Awesome U.S. firepower, concentrated on Iraqi insurgents and civilian bystanders for more than five years, has slaughtered countless thousands of Iraqis and has intimidated many others to look simply to their own survival.

--With the total Iraqi death toll estimated in the hundreds of thousands and many more Iraqis horribly maimed, the society has been deeply traumatized. As tyrants have learned throughout history, at some point violent repression does work.

But this dark side of the “successful surge” is excluded from the U.S. political debate, much like the illegality of Bush’s original invasion.

That blindness to what might be the most important geopolitical question of this era – the presumed Bush Doctrine right of the United States to invade any country of its choosing – has now continued into the presidential debates.

Jim Rogers: 'Welfare for the Rich'

Jim Rogers: 'Welfare for the Rich'

Bailout Can't Hide It - The United States Is Broke

Bailout Can't Hide It - The United States Is Broke

By Chris Powell

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ven leading Republicans in Congress, including presidential nominee Sen. John McCain, recoiled from Treasury Secretary Henry M. Paulson's proposal to take absolute power over $700 billion to be borrowed by the federal government and used to purchase every sort of bad debt without ever having to answer for it - not to the courts, not to regulatory agencies, and only occasionally and incidentally to Congress itself.

The bad-debt bailout would be the biggest government patronage program in history and would amount to declaring martial law over the U.S. financial system and economy. Even if such martial law is necessary, its implementation should be put in democratic hands - a non-partisan agency with full transparency, statutory standards for its purchases, and close accountability to Congress.

All the same, even if it can work - that is, prop up insolvent financial institutions - the Treasury's proposal is still a proclamation of the collapse of the whole U.S. financial system. Even if some financial institutions are saved, the collapse will manifest itself in other ways, probably ways more damaging to the public. For who cares if Goldman Sachs and Morgan Stanley endure if the issuance of $700 billion more in government bonds drives interest rates way up, diverts credit from the private economy, devalues the already sinking dollar, and sends commodity prices soaring again?

In that case the financial class will have won another battle in its long war against the producing class. It will be again as was said about the maneuvers of the Second Bank of the United States two centuries ago: “The bank was saved; only the people were ruined.”

Injecting throughout the world financial system their bogus and unregulated financial instruments, like collateralized debt obligations and credit-default swaps, the big New York financial houses have taken the world economy hostage. The president and Congress should strive to save the hostages, not the kidnappers.

But the president and Congress have participated eagerly with the kidnappers in the total corruption of the financial system.

They have staffed the regulatory agencies largely from Wall Street and then diminished financial regulation.

They have let the financial houses finance presidential and congressional campaigns.

They have watched haplessly as accounting firms and credit-rating agencies engaged in conflict of interest and failed to do their jobs over and over again even as corporate scandal followed corporate scandal.

They have waged mistaken imperial war not with taxes but with huge amounts borrowed from abroad, making the country hostage to foreign nations, including some with hostile interests.

They have approved the government's falsification of inflation data and its surreptitious suppression of the price of gold so that interest rates could be set below the inflation rate, the government and everyone else could borrow more at lower interest, and the public would not become alarmed by monetary debasement.

Now the U.S. government is conjuring into existence via a few computer keystrokes fantastic, virtually inconceivable amounts of money. Unreal as these amounts are, they will be claims on the real goods and services of the country, and, if the rest of the world wants to keep playing along, which is doubtful, claims on the real goods and services of the rest of the world as well.

The purpose of all this will be to save the people who happen to be in charge of the payments system and to save the propertied class generally. But people without many assets, people who don't earn enough to own housing, people who could gain from lower housing prices and lower prices of everything else, are not even in the government's equation.

The country is simply busted. Its financial obligations are unpayable, its asset prices are illusions, and the great undertaking in Washington and New York is to preserve those illusions rather than face reality. If the price of preserving those illusions is $700 billion - and of course it is more likely to run into the trillions - could it really be more expensive to dispense with the illusions now? After all, instead of rescuing financial institutions that disregarded risk, the government just as easily could keep the country going by sending checks to everyone every month - as it already sends Social Security checks to retirees.

But as long as the government keeps paying ransom, the financial class will keep taking the country hostage.

Democrats, Republicans conspire to remove Wall Street bailout from election campaign

Democrats, Republicans conspire to remove Wall Street bailout from election campaign

By Patrick Martin
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Closed-door talks continued throughout the day Friday between congressional Democratic and Republican leaders and the Bush administration, with all sides pledging to reach agreement on terms of a $700 billion bailout package for the US financial system before the Asian stock markets open Monday morning—Sunday afternoon in the US.

Both parties agree on one fundamental principle: The American people will have no say whatsoever in an arrangement that will compel them to pay for the losses of bankers and speculators who created the financial disaster. That is the content of the demand on all sides that “politics” be kept out of the bailout talks.

Democrats were particularly insistent on this question. Democratic presidential candidate Barack Obama said after Thursday’s meeting at the White House blew up in acrimony, “When you inject presidential politics into delicate negotiations, it’s not necessarily as helpful as it needs to be.”

Congressional Democratic leaders followed suit. Senate Majority Leader Harry Reid said, “The insertion of presidential politics has not been helpful.” His deputy, Senator Dick Durbin of Illinois, added, “Bringing the presidential political campaigns to the halls of Congress is not going to make this any easier.”

This is the same argument made by some of the same Democrats in October 2002, when they rushed through a vote authorizing the use of military force against Iraq only weeks before the congressional elections, to avoid having the elections become a referendum on the Bush administration’s drive to war.

If America were a democracy in any meaningful sense of the term, it would be considered obligatory to have a full discussion and debate in the course of an election campaign over plans to raid the federal treasury and mortgage future generations to guarantee the riches of the financial elite.

But if the bailout were on the ballot November 4, the voters would repudiate it overwhelmingly. It is precisely because of this opposition that the conspirators of both parties are seeking to reach an agreement this weekend, preempting the issue and depriving the American public of any say in a decision that will profoundly affect the future course of the country.

Neither party wants to go before the American people with its real program.

The Democratic Party, as the past week’s events have clearly demonstrated, is the servant of Wall Street. Long gone are the days when liberal Democrats postured as opponents of the moneyed interests.

There is virtual unanimity among the Democrats on the need to bail out Wall Street and grant the treasury secretary full authority to deal with the crisis in the credit markets. The Democrats privately welcome the opportunity to implement the plan before the elections, in order to provide an all-purpose excuse for an Obama administration to abandon its campaign promises and implement austerity policies.

The Republicans are equally committed to the defense of the financial aristocracy, but a section of House Republicans has disrupted the deal-making in Washington, at least temporarily, with a demagogic populist campaign against the bailout. While claiming to oppose a taxpayer subsidy to Wall Street, the House Republicans are merely proposing to change the form of the handout. They advocate the elimination of the capital gains tax and massive cuts in corporate taxes as an alternative.

The official debate in Washington entirely excludes the most fundamental class question: Who is responsible for the crisis?

Working people did not cause the collapse of the market for mortgage-backed securities, created by Wall Street speculators to generate quick profits through financial manipulation. More than 90 percent of American homeowners are current on their mortgage payments—often at great sacrifice, despite the impact of deepening recession, layoffs, wage-cutting and exorbitant expenses for health care, education and other necessities. Nonetheless, the full burden of the crisis is to be imposed on working people through cuts in social spending and increased taxes that will be required to pay for the bailout.

The class divisions in America were underscored by a second development on Friday. The House of Representatives passed a Democratic-supported economic stimulus bill, providing $61 billion in additional funding for extended unemployment benefits, tax credits for small businesses, food stamps, Medicaid programs and infrastructure projects.

The Senate failed to achieve the 60-vote margin required to bring a similar bill to a vote, falling eight votes short, and President Bush promised a veto should any such legislation gain passage.

The contrast is stark: Unlimited funds are available for Wall Street, but even a comparative pittance for working people and small business is out of the question.

The financial crisis has demonstrated the economic failure of the capitalist system and the bankruptcy of its political structure. There is no way for the interests and concerns of working people to find genuine expression through the two big business parties.

The Democratic Party, long used by the ruling elite as a safety valve for popular grievances, is now completely identified with corporate America and Wall Street. In the current crisis, the Democrats and the Bush administration have formed a united front. One extraordinary scene at the White House on Thursday, widely reported in the press, sums it up.

After House Republicans, backed by the Republican presidential candidate Senator John McCain, raised their objections to the bailout plan, in what Democratic negotiators described as an “ambush,” Treasury Secretary Henry Paulson pleaded with House Speaker Nancy Pelosi not to allow the negotiations to collapse. At one point, he went down on one knee to the Democratic House leader, and when the Democrats pointed out that it was the House Republicans who were responsible for the breakup of the talks, Paulson replied, “I know, I know.”

California: foreclosures and homeless on the rise

California: foreclosures and homeless on the rise

By Rafael Azul
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Stagnating wages, increasing unemployment and rising food and fuel prices are driving a wave of foreclosures in California, forcing hundreds of thousands into destitution. The housing crisis has left many working class families homeless or forced to go to food banks to survive day to day.

Rising unemployment in California is adding to the foreclosure crisis. The July unemployment rate of 7.3 percent, a 12-year record, combined with nearly 2 percent of all residential loans entering into foreclosure across the state (compared to a 1.6 percent nationally), is driving increasing numbers of California working families into homelessness.

According to statistics released September 12 by RealtyTrac, an online seller of foreclosed homes, foreclosure filings increased 12 percent nationally in August 2008 compared to July and were up 27 percent compared to August 2007. In California, foreclosure filings were reported on 101,724 homes in August, 40 percent higher than July and 75 percent higher than August 2007.

Of the 230 cities tracked nationwide by RealtyTrac, eight California cities were among the top 10 metropolitan areas with the highest foreclosure rates in August. In Stockton, 1 in every 50 households received a foreclosure filing during the month. Oakland, California, the state’s eighth-largest city, reported one foreclosure filing for every 60 households and is eighth on the list. Sacramento, California’s capital, is tenth on the list. One in every 130 homes in the state is in foreclosure, the highest proportion in the United States.

According to the Los Angeles Times, only about one third of homeowners on the foreclosure filings list are able to avoid giving up their home to the bank.

Adjusted for inflation, median per capita incomes in California fell from $56,000 in 2000 to $55,000 in 2007, and are expected to drop further in 2008. As income levels stagnate and unemployment rises, the number of homeowners who cannot pay their loans also increases.

While the initial wave of foreclosures mainly involved people who had been drawn into risky sub-prime and negative amortization loans, the new wave includes those with conventional loans. Statistics recently made public by the Mortgage Bankers Association show that foreclosures on adjustable-rate loans to prime borrowers are now growing much faster than subprime foreclosures.

On September 10, the system that administers California’s unemployment compensation announced that it faces a $1.6 billion deficit by the end of 2009 and would need to borrow from Washington. This would be only the second time since the 1930s that the state has been forced to borrow from the federal government. Due to restricted access to unemployment compensation, only about half of the state’s 1.35 million unemployed actually qualify for six months of unemployment benefits (50 percent of their wages while working, with a cap of $450 per week—a paltry sum, given the high cost of living in the state).

California’s homeless population is very different from that of the 1970s and 1980s, when it largely comprised some of the more marginalized sections of the population, including the drug addicted and the mentally ill. Among the newly homeless are former construction workers, real estate loan officers, teachers and others. As in the 1930s, entire layers of the working class are being deprived of the basic right to decent shelter, driven into shelters, food banks and even their own cars.

Fitting in with California’s car-driven society, an alternate form of homelessness, people living in their campers or cars, is increasingly common. In the coastal city of Santa Barbara, where rents are high even by California standards, municipal authorities have made 12 gated parking lots available to those living in their cars, the first such program in the United States.

The California law that prohibits people from sleeping in their cars in public streets and highways is being ignored in other California cities, particularly for those homeless who park their vehicles in municipal park roads or other out-of-the-way areas.

Asia Needs Deal to Prevent Panic Selling of U.S. Debt, Yu Says

Asia Needs Deal to Prevent Panic Selling of U.S. Debt, Yu Says

By Kevin Hamlin

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Japan, China and other holders of U.S. government debt must quickly reach an agreement to prevent panic sales leading to a global financial collapse, said Yu Yongding, a former adviser to the Chinese central bank.

‘‘We are in the same boat, we must cooperate,'' Yu said in an interview in Beijing on Sept. 23. ‘‘If there's no selling in a panicked way, then China willingly can continue to provide our financial support by continuing to hold U.S. assets.''

An agreement is needed so that no nation rushes to sell, ‘‘causing a collapse,'' Yu said. Japan is the biggest owner of U.S. Treasury bills, holding $593 billion, and China is second with $519 billion. Asian countries together hold half of the $2.67 trillion total held by foreign nations.

China, Japan, South Korea and others should meet soon to seal a deal, said Yu, a former academic member of the central bank's monetary policy committee. The talks should involve finance ministers, central bank governors and even national leaders, he said.

‘‘Whether some kind of agreement between them to continue to hold Treasury bills is viable, I'm not sure,'' said James McCormack, head of sovereign ratings at Fitch Ratings Ltd in Hong Kong. ‘‘It would be unusual. If it became apparent that sovereigns in Asia were selling Treasuries the market would take that quite badly, it's something to be avoided.''

The global credit crisis, triggered by a housing slump in the U.S., has saddled financial companies with more than $520 billion in writedowns and losses, collapsing Bear Stearns Cos. and Lehman Brothers Holdings Inc. in the process. Insurer American International Group Inc. and mortgage giants Fannie Mae and Freddie Mac also were rescued by the government.

‘Grave Threats'

U.S. Treasury Secretary Henry Paulson is urging Congress to pass a $700 billion plan to remove devalued assets from the banking system. Federal Reserve Chairman Ben S. Bernanke said Sept. 24 that the U.S. is facing ‘‘grave threats'' to its financial stability.

China's huge holdings of U.S. debt means it must bear a large proportion of the ‘‘burden of sorting things out'' in the U.S., Yu said. China is not in a hurry to dump its U.S. holdings and communication between the two nations every ‘‘couple of days'' is keeping Chinese leaders informed and helping to avoid a potential panic, he added.

‘‘China is very worried about the safety of its assets,'' he said. ‘‘If you want China to keep calm, you must ensure China that its assets are safe.''

Currency Manipulator

Yu said China is helping the U.S. ‘‘in a very big way'' and added that it should get something in return. The U.S. should avoid labeling it an unfair trader and a currency manipulator and not politicize other issues, he said.

‘‘It is not fair that we are doing this in good faith and are prepared to bear serious consequences and you are still labeling China this and that, accusing China of this and that,'' he said. ‘‘China knows what to do. We don't need your intervention.''

The U.S. financial crisis had taught China a lesson and that was: ‘‘Why are we piling up these IOUs if they may default?'' China's economic expansion strategy, which emphasizes export growth that has led to trade surpluses and the accumulation of $1.81 trillion in foreign-exchange reserves, is the main problem, said Yu.

‘‘Our export-growth strategy has run its natural course,'' he said. ‘‘We should change course.''

China should stop intervening in the foreign currency markets and thus allow rapid appreciation of the yuan, he said. While this would cause pain for exporters, China could ease the transition by using its strong fiscal position to aid those who lose their jobs. It also should stimulate domestic demand to offset lower income from overseas sales.

Without yuan appreciation, China will continue to accumulate foreign reserves, which means further accumulating ‘‘IOUs from the U.S.,'' said Yu. ‘‘This is paper and it may default and it will not increase China's national welfare.''

If China doesn't allow the yuan to appreciate and continues to promote export-led growth it will lead to confrontation with the U.S. and Europe, Yu said.

Scottish bank will get 'billions' in US bail-out of economy

RBS will get 'billions' in US bail-out of economy

Scottish bank benefits if plan gets green light

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The Royal Bank of Scotland is to be one of the biggest beneficiaries of the planned $700 billion bail-out that comes courtesy of the American tax-payer if the US Congress gives the financial rescue package the go-ahead this weekend.

The bank's share of the bail-out will enable RBS to offload billions of dollars of questionable assets.

The bank's shares closed last Friday at 205p, a 71% fall from their pre-credit-crunch peak. However, analysts and investors predict that the shares will rebound sharply when markets open on Monday morning if the bail-out is approved over the weekend.

The Edinburgh-based bank will be able to write off a significant portion of its dodgy assets thanks to the bail-out, also known as into Tarp, the Troubled Asset Relief Programme as a result of the bank's significant presence in the US.

Tarp was the brainchild of US treasury secretary Hank Paulson, who earlier this week got down on his knees and begged Nancy Pelosi, the Democratic House speaker, to rescue his plan to save Wall Street.

The Royal Bank, led by chief executive Sir Fred Goodwin, has had operations in the United States since 1988, when it bought the Rhode Island-based Citizens Bank. It has since bulked up its presence there with a string of acquisitions including those of Connecticut based Greenwich NatWest and Ohio-based Charter One.

This entitles the Scottish bank to entrust billions of dollars of non-performing loans and sub-prime tainted assets to US taxpayers, according to Colin McLean, chief executive of Edinburgh-based SVM Asset Management.

He could not quantify the exact amount of dodgy assets that RBS can offload but said it could amount to "billions". In total, RBS has outstanding loans of $1.5 trillion This will give RBS a significant

UK banks hold £95bn of sour assets that could qualify for US bailout plan

UK banks hold £95bn of sour assets that could qualify for US bailout plan

Miles Costello

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Britain's five leading high street banks have as much as £95.3 billion ($175 billion) of distressed assets on their books that may qualify for the American bailout scheme.

If the British banks tap the rescue fund being set up by the US Treasury and the Federal Reserve to the maximum, they could secure one quarter of the $700 billion being made available. Under the terms of an outline agreement that appeared to have been reached by US policymakers last night, Britain's lenders will be able to use the facility.

However, the prospect that the US Treasury could pay for UK banks' bad assets is likely to infuriate some American politicians and taxpayers, who would foot the bill. As Congress edged closer to agreeing a plan for the central bank to take on lenders' toxic assets, HSBC appeared to be the UK-based bank best placed to benefit.

Combined, the five British lenders hold securities worth $175 billion, which they could transfer to a federally backed Treasury fund. Under the proposed terms of the rescue package, non-US financial institutions must have significant operations in America to qualify.

According to analysts' estimates, and the banks' own recent filings, HSBC has as much as £45 billion in structured mortgage debt and other soured assets sitting on its balance sheet that it might look to exchange with the Fed under the plan. Next are Barclays, with £17.4 billion; Royal Bank of Scotland, with £16.2 billion; and HBOS, the UK's largest mortgage bank, with £13.3 billion, analysts said yesterday. Lloyds TSB, which agreed to buy HBOS for £12.2 billion last week, follows some way behind in its exposure to the troubled mortgage securities, with assets of about £3.4 billion.

The estimates are based on banks' balance-sheet exposure to sub-prime and the better alt-A mortgage securities, as well as leveraged finance, commercial mortgage-backed securities, collateralised debt obligations and monoline insurance as of June 30.

Henry Paulson, the US Treasury Secretary, and Ben Bernanke, the Chairman of the Fed, tabled the proposal, known as the Troubled Asset Relief Programme (Tarp), last week in an effort to stabilise the financial system and free up capital markets.

Alex Potter, a Collins Stewart banks analyst, said: "HSBC, RBS and Barclays would be the clear main beneficiaries if the facility is approved, they are allowed access to it and if they chose to place some of their securities there. If they have a substantial enough presence in the US — HBOS has a limited treasury function, for example — they should be eligible. The question then will be: 'What are the qualifying instruments?'."

A high street bank executive questioned how beneficial Tarp would be to UK lenders. "The key question if it was used would be: 'What kind of haircut do you have to take?'," the banker said. "If you've got $100 million of mortgage-backed securities that have been marked down twice and are on the books at 80 cents in the dollar, it's unlikely that the Fed is going to be offering a better price for them. So you'd hold on."

Stresses in the money markets remained severe. The cost to banks of borrowing from one another for three months in dollars, euros and sterling rose again. Elevated money market rates are increasing the cost of bank borrowing and feeding through to higher mortgage rates. HSBC and Woolwich increased rates on some mortgages by up to 0.35 percentage points.

— While Republicans and Democrats pledged to try to vote through the bailout within days, it became clear that Mr Paulson had been forced to back down .. demands. Banks that benefit from the bailout would have a cap imposed on golden parachute pay deals, but it is not clear if the Treasury would have the right to veto a pay deal for an executive working for a bank outside the US. Washington would also have the right to take equity stakes in those financial institutions. The issue of whether to allow bankruptcy judges to force banks to cut mortgage rates for troubled borrowers was unresolved.

Fed keeps banks afloat by lending $188 billion a day on average

Fed keeps banks afloat as money market crisis deepens

By John Parry and Jamie McGeeever

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U.S. banks and money managers borrowed a record amount from the Federal Reserve in the latest week, nearly $188 billion a day on average, showing the central bank went to extremes to keep the banking system afloat amid the biggest financial crisis since the Great Depression.

The data on borrowing from the Fed closed out another day of high anxiety in global money markets. Key measures of funding stress hit record levels on both sides of the Atlantic as nervous market participants awaited developments from Washington on a $700 billion U.S. financial bailout plan.

Federal Reserve data showed on Thursday the total amount banks borrowed nearly quadrupled the previous record of $47.97 billion per day notched just the week before.

"This looks like the balance sheet of a central bank that is keeping the financial system on life support," said Michael Feroli, U.S. economist with JPMorgan in New York.

Borrowings by primary dealers via the Primary Dealer Credit Facility, and through another facility created on Sunday for Goldman Sachs (GS.N: Quote, Profile, Research, Stock Buzz), Morgan Stanley (MS.N: Quote, Profile, Research, Stock Buzz) and Merrill Lynch (MER.N: Quote, Profile, Research, Stock Buzz) and their London-based subsidiaries, totaled $105.66 billion as of Wednesday, the Fed said.

The Federal Reserve's lending to U.S. depository institutions and bank holding companies to finance their purchases of high-quality asset-backed commercial paper from money market mutual funds via a new lending facility the Fed announced on September 19, came in at $72.67 billion as of Wednesday.

The Fed designed the loan facility to help money market funds meet huge demands for redemptions from fearful investors over the past week after one U.S. money market mutual fund's value fell below $1 a share, and to foster liquidity in the asset-backed commercial paper markets.

The move followed the U.S. Treasury's action last Friday to set up a temporary guaranty program for the money market mutual fund industry.

Tom Sowanick, chief investment officer at Clearbrook Financial cited "a big increase in borrowings from securities firms which came at a time when the turmoil on Wall Street hit an apex and money market funds came under pressure, so they went to the window to make sure their funds remained stable."

Lending in the "other credit extensions" category to insurer American International Group (AIG.N: Quote, Profile, Research, Stock Buzz) and possibly others was $44.57 billion as of September 24, compared with $28.0 billion as of September 17.

"It is stunning how much you see the Fed extending credit all over the place," Feroli said.

"Every facility got used to a large degree, the ABCP facility, the AIG loan, the Primary Dealer Credit Facility and the good old discount window," he said.

"Everywhere you see huge amounts of reserves being put into the system," Feroli said.


The data showing the huge reliance of financial institutions on the U.S. central bank came on a day of other extremes within the funding markets for banks and companies.

Key measures of U.S. dollar funding strains hit record levels as nervous market participants awaited developments from Washington on a $700 billion U.S. financial bailout plan.

The inter-bank premium for borrowing three-month dollars over anticipated official policy rates, or Overnight Index Swaps, known as the Libor/OIS spread, blew out to 200 basis points, while the cost of borrowing euros and sterling also jumped.

That dollar Libor/OIS spread was around 164 basis points on Wednesday, and around 80 basis points at the start of September.

Yet late in the New York day, market participants' hopes of an imminent passage of the $700 billion government bank bailout dragged some gauges of risk aversion including interest rate swap spreads, back from the brink.

The U.S. commercial paper market also shrank dramatically, marking the biggest weekly contraction in a year, Fed data showed on Thursday, as the escalating global credit crisis shook investors' confidence in all but the safest instruments issued by the U.S. government.

For the week ended September 24, the size of the U.S. commercial paper market, a vital source of short-term funding for daily operations at many companies, shrank by $61.0 billion to $1.702 trillion, the lowest level since early 2006 Federal Reserve data showed.

"The declines add to the urgency for fixes to the credit crisis," wrote Tony Crescenzi, chief bond market strategist with Miller, Tabak & Co. in New York in an email note.

The closely-watched TED spread, meanwhile, was last indicated around 430 basis points on Reuters screens, edging back up toward the near 500 basis points struck last week, the widest in over a quarter of a century.

The three-month sterling Libor/OIS spread, meanwhile, widened to almost 160 basis points, more than doubling since the start of the month.

These spreads are seen as a key indicator of financial market stress and risk aversion, reflecting the true cost of funding for banks and financial instututions. Some 60 percent of corporate lending is tied to London interbank offered rates (Libor), according to Credit Suisse.

Trouble in Banktopia

Trouble in Banktopia

By Mike Whitney

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The financial system is blowing up. Don't listen to the experts; just look at the numbers. Last week, according to Reuters, "U.S. banks borrowed a record amount from the Federal Reserve nearly $188 billion a day on average, showing the central bank went to extremes to keep the banking system afloat amid the biggest financial crisis since the Great Depression." The Fed opened the various "auction facilities" to create the appearance that insolvent banks were thriving businesses, but they are not. They're dead; their liabilities exceed their assets. Now the Fed is desperate because the hundreds of billions of dollars of mortgage-backed securities (MBS) in the banks vaults have bankrupt the entire system and the Fed's balance sheet is ballooning by the day. The market for MBS will not bounce back in the foreseeable future and the banks are unable to roll-over their short term debt. Game over. The Federal Reserve itself is in danger. So, it's on to Plan B; which is to dump all the toxic sludge on the taxpayer before he realizes that the whole system is cratering and his life is about to change forever. It's called the Paulson Plan, a $700 billion boondoggle which has already been disparaged by every economist of merit in the country.

From Reuters:

"Borrowings by primary dealers via the Primary Dealer Credit Facility, and through another facility created on Sunday for Goldman Sachs, Morgan Stanley, and Merrill Lynch, and their London-based subsidiaries, totaled $105.66 billion as of Wednesday, the Fed said."

See what I mean; they're all broke. The Fed's rotating loans are just a way to perpetuate the myth that the banks aren't flat-lining already. Bernanke has tied strings to the various body parts and jerks them every so often to make it look like they're alive. But the Wall Street model is broken and the bailout is pointless.

Last week, there was a digital run on the banks that most people never even heard about; a "real time" crash. An article in the New York Post by Michael Gray gave a blow by blow description of how events unfolded. Here's a clip from Gray's "Almost Armageddon":

"The market was 500 trades away from Armageddon on Thursday...Had the Treasury and Fed not quickly stepped into the fray that morning with a quick $105 billion injection of liquidity, the Dow could have collapsed to the 8,300-level - a 22 percent decline! - while the clang of the opening bell was still echoing around the cavernous exchange floor. According to traders, who spoke on the condition of anonymity, money market funds were inundated with $500 billion in sell orders prior to the opening. The total money-market capitalization was roughly $4 trillion that morning.

The panicked selling was directly linked to the seizing up of the credit markets - including a $52 billion constriction in commercial paper - and the rumors of additional money market funds "breaking the buck," or dropping below $1 net asset value."

The Fed's dramatic $105 billion liquidity injection on Thursday (pre-market) was just enough to keep key institutional accounts from following through on the sell orders and starting a stampede of cash that could have brought large tracts of the US economy to a halt." (New York Post)

Commercial paper is the lubricant that keeps the financial markets functioning. When confidence vanishes (because the stewards of the system in Washington are buffoons), investors withdraw their money, normal business operations become impossible, and the markets collapse. End of story. So, rather than restore the public's confidence by strong leadership and behavior designed to reassure investors; President Bush decided to give a major prime-time speech stating that if Paulson's emergency bailout package was not passed immediately, the nation's economy would vaporize into the ether. Go figure?

Last week, the commercial paper market, (much of which is backed by mortgage-backed securities) shrunk by a whopping $61. billion to $1.702 trillion, the lowest level since early 2006. So, Paulson's bailout will effectively underwrite CP as well as the whole alphabet soup of mortgage-backed derivatives for which there is currently no market. The US taxpayer is not only getting into the plummeting real estate market, he is also backstopping the entire financial system including defaulting car loan securities, waning student loan securities, flailing home equity loan securities and faltering credit card securities. The whole mountainous pile of horsecrap-debt is about to be stacked on the back of the maxed-out taxpayer and the ever-shriveling greenback. Paulson assures us that its a "good deal". Booyah, Hank!


How did Treasury Secretary Paulson figure out that recapitalizing the banking system would cost $700 billion? Or did he just estimate the amount of money that could be loaded on the back of the Treasury's flatbed truck when it sputters off to shower his buddies at G-Sax with freshly minted greenbacks? The point is, that Paulson's calculations were not assisted by any economists at all, and they cannot be trusted. It is a purely arbitrary, "back of the envelope" type figuring. According to Bloomberg: Swiss investor Marc Faber, known for a long track record of good calls, believes the damage may come to $5 trillion:

"Marc Faber, managing director of Marc Faber Ltd. in Hong Kong, said the U.S. government's rescue package for the financial system may require as much as $5 trillion, seven times the amount Treasury Secretary Henry Paulson has requested....

``The $700 billion is really nothing,'' Faber said in a television interview. ``The treasury is just giving out this figure when the end figure may be $5 trillion.''(Bloomberg News)

Most people who follow these matters would trust Faber's assessment way over Paulson's. In his latest blog entry, economist Nouriel Roubini said that "no professional economist was consulted by Congress or invited to present his/her views at the Congressional hearings on the Treasury rescue plan." Roubini added:

"The Treasury plan is a disgrace: a bailout of reckless bankers, lenders and investors that provides little direct debt relief to borrowers and financially stressed households and that will come at a very high cost to the US taxpayer. And the plan does nothing to resolve the severe stress in money markets and interbank markets that are now close to a systemic meltdown."

Roubini is right on all counts. So far, more than a 190 prominent economists have urged Congress not to pass the $700 bailout bill. There is growing consensus that the so-called "rescue package" does not address the central economic issues and has the potential to make a bad situation even worse.


Financial industry rep. Paulson is the ringleader in a banker's coup the results of which will decide America's economic and political future for years to come. The coup leaders have drained tens of billions of dollars of liquidity from the already-strained banking system to trigger a freeze in interbank lending and hasten a stock market crash. This, they believe, will force Congress to pass Paulson's $770 billion bailout package without further congressional resistance. It's blackmail.

As yet, no one knows whether the coup-backers will succeed and further consolidate their political power via a massive economic shock to the system, but their plan continues to move jauntily forward while the economy follows its inexorable slide to disaster.

The bailout has galvanized grassroots movements which have flooded congressional FAXs and phone lines. Callers are overwhelmingly opposed to any bailout for banks that are buckling under their own toxic mortgage-backed assets. One analyst said that the calls to Congress are 50 percent "No" and 50 percent "Hell, No". There is virtually no popular support for the bill.

From Bloomberg News: "Erik Brynjolfsson, of the Massachusetts Institute of Technology's Sloan School, said his main objection "is the breathtaking amount of unchecked discretion it gives to the Secretary of the Treasury. It is unprecedented in a modern democracy."

"I suspect that part of what we're seeing in the freezing up of lending markets is strategic behavior on the part of big financial players who stand to benefit from the bailout," said David K. Levine, an economist at Washington University in St. Louis, who studies liquidity constraints and game theory." (Mish's Global Economic Trend Analysis)

Brynjolfsson's suspicions are well-founded. "Market Ticker's" Karl Denninger confirms that the Fed has been draining the banking system of liquidity in order to blackmail Congress into passing the new legislation. Here's Denninger:

"The Effective Fed Funds rate has been trading 50 basis points or more below the 2% target for five straight days now, and for the last two days, it has traded 75 basis points under. The IRX is demanding an immediate rate cut. The Slosh has been intentionally drained by over $125 billion in the last week and lowering the water in the swamp exposed one dead body - Washington Mutual - which was immediately raided on a no-notice basis by JP Morgan. Not even WaMu's CEO knew about the raid until it was done....The Fed claims to be an "independent central bank." They are nothing of the kind; they are now acting as an arsonist. The Fed and Treasury have claimed this is a "liquidity crisis"; it is not. It is an insolvency crisis that The Fed, Treasury and the other regulatory organs of our government have intentionally allowed to occur."

Bingo. This is a banker's coup cooked up and facilitated by the deep-money guys who operate stealthily behind the political sideshow. The only time they emerge from their stinkholes is when they're flushed out by a crisis that threatens their continued dominance. Grassroots resistance, spearheaded by Internet bloggers (like Mish, Roubini and Denninger) are demonstrating that they can mobilize tens of thousands of "peasants with pitchforks" and be a factor in political decision making. It also helps to have elected officials, like Senator Richard Shelby, who stand firm on principle and don't faint at the first whiff of grapeshot (like his weak-kneed Democratic counterparts) Shelby has shouldered the full-weight of executive pressure which has descended on him like a Appalachian rockslide. As a result, there's still a slight chance that the bill will have to be shelved and the industry reps will have to go back to Square 1.

Market Ticker has provided charts from the Federal Reserve that prove that Bernanke has withdrawn $125 billion from the banking system in the last 4 days alone to create a crisis situation that will incite credit market mayhem and increase the liklihood of passing the bill. This is coercion of the worst kind.

The country's economic predicament is steadily deteriorating. Orders for manufactured durable goods were off 4.5 percent last month while inventories continued to rise. Unemployment is soaring and the housing crash continues to accelerate. Credit Suisse now expects 10.3 million foreclosures (total) in the next few years. Numbers like that are not accidental, but part of a larger scheme to use monetary policy as a way to shift wealth from one class to another while degrading the nation's overall economic well-being. More alarming, the country's primary creditors are now staging a rebellion that is likely to cut off the flow of capital to US markets sending the dollar plummeting and triggering a deflationary credit collapse. This is from Reuters:

"Chinese regulators have asked domestic banks to stop lending to U.S. financial institutions in the interbank money markets to prevent possible losses during the financial crisis, the South China Morning Post reported Thursday. The China Banking Regulatory Commission's ban on interbank lending of all currencies applied to U.S. banks, but not to lenders from other countries, the report added."

Bloomberg News reports that Dallas Federal Reserve Bank President Richard Fisher has broken with tradition and lambasted the proposed bailout saying that it "would plunge the U.S. government deeper into a fiscal abyss."

From Bloomberg: "The plan by Treasury Secretary Henry Paulson to buy troubled assets from financial institutions would put 'one more straw on the back of the frightfully encumbered camel that is the federal government ledger,' Fisher said today in the text of a speech in New York. 'We are deeply submerged in a vast fiscal chasm.'...The seizures and convulsions we have experienced in the debt and equity markets have been the consequences of a sustained orgy of excess and reckless behavior, not a too-tight monetary policy," Fisher said to the New York University Money Marketeers Club." (Bloomberg)

Surely, the cure for hyperbolic "credit excesses and reckless behavior" cannot be "more of the same." In fact, Paulson's bailout does not even address the core issues which have been obscured by demagoguery and threats. The worthless assets must be written-down, insolvent banks must be allowed to go bust, and the crooks and criminals who engineered this financial blitz on the nation's coffers must be held to account.

The carnage from Greenspan's low interest rate, "easy money" binge is now visible everywhere. Inflated home and stock values are crashing as the gas continues to escape from the massive equity bubble. The FDIC will have to be recapitalized--perhaps, $500 billion--to account for the anticipated loss of deposits from failing banks caught in the cross-hairs of asset-deflation and steadily contracting credit. Recession is coming, but economic collapse can still be avoided if Paulson's misguided plan is abandoned and corrective action is taken to put the country on solid financial footing. Market Ticker lays out framework for a workable solution to the crisis, but they must be acted on swiftly to rebuild confidence that major systemic changes are underway:

1--Force all off-balance sheet "assets" back onto the balance sheet, and force the valuation models and identification of individual assets out of Level 3 and into 10Qs and 10Ks. Do it now. (Editor: In other words, no more Enron-type accounting mumbo-jumbo and no more allowing the banks assign their own "values" to dodgy assets)

2--Force all OTC derivatives onto a regulated exchange similar to that used by listed options in the equity markets. This permanently defuses the derivatives time bomb. Give market participants 90 days; any that are not listed in 90 days are declared void; let the participants sue each other if they can't prove capital adequacy.(Ed: If trading derivatives contracts can damage the "regulated" system, than that trading must take place under strict government regulations)

3--Force leverage by all institutions to no more than 12:1. The SEC intentionally dropped broker/dealer leverage limits in 2004; prior to that date 12:1 was the limit. Every firm that has failed had double or more the leverage of that former 12:1 limit. Enact this with a six month time limit and require 1/6th of the excess taken down monthly. (Ed: The collapse in the "structured finance" model is mainly due to too much leverage. For example, Fannie Mae and Freddie Mac had $80 of debt for every $1 dollar od capital reserves when they were taken into government conservatorship)

If there's going to be a bailout, let's get it right. Paulson's $700 billion bill does nothing to fix the deep structural problems in the financial markets; it merely pushes the day of reckoning a little further into the future while shifting the burden of payment for toxic assets onto the taxpayer. It's a real turkey. The entire system needs transformational change so that the activities of Wall Street mesh with the broader objectives of the society it's supposed to serve. Paulson's business-model is busted; it does no one any good to try to glue it back together.

S.E.C. Concedes Oversight Flaws Fueled Collapse

S.E.C. Concedes Oversight Flaws Fueled Collapse

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The chairman of the Securities and Exchange Commission, a longtime proponent of deregulation, acknowledged on Friday that failures in a voluntary supervision program for Wall Street’s largest investment banks had contributed to the global financial crisis, and he abruptly shut the program down.

The S.E.C.’s oversight responsibilities will largely shift to the Federal Reserve, though the commission will continue to oversee the brokerage units of investment banks.

Also Friday, the S.E.C.’s inspector general released a report strongly criticizing the agency’s performance in monitoring Bear Stearns before it collapsed in March. Christopher Cox, the commission chairman, said he agreed that the oversight program was “fundamentally flawed from the beginning.”

“The last six months have made it abundantly clear that voluntary regulation does not work,” he said in a statement. The program “was fundamentally flawed from the beginning, because investment banks could opt in or out of supervision voluntarily. The fact that investment bank holding companies could withdraw from this voluntary supervision at their discretion diminished the perceived mandate” of the program, and “weakened its effectiveness,” he added.

Mr. Cox and other regulators, including Ben S. Bernanke, the Federal Reserve chairman, and Henry M. Paulson Jr., the Treasury secretary, have acknowledged general regulatory failures over the last year. Mr. Cox’s statement on Friday, however, went beyond that by blaming a specific program for the financial crisis — and then ending it.

On one level, the commission’s decision to end the regulatory program was somewhat academic, because the five biggest independent Wall Street firms have all disappeared.

The Fed and Treasury Department forced Bear Stearns into a merger with JPMorgan Chase in March. And in the last month, Lehman Brothers went into bankruptcy, Merrill Lynch was acquired by Bank of America, and Morgan Stanley and Goldman Sachs changed their corporate structures to become bank holding companies, which the Federal Reserve regulates.

But the retreat on investment bank supervision is a heavy blow to a once-proud agency whose influence over Wall Street has steadily eroded as the financial crisis has exploded over the last year.

Because it is a relatively small agency, the S.E.C. tries to extend its reach over the vast financial services industry by relying heavily on self-regulation by stock exchanges, mutual funds, brokerage firms and publicly traded corporations.

The program Mr. Cox abolished was unanimously approved in 2004 by the commission under his predecessor, William H. Donaldson. Known by the clumsy title of “consolidated supervised entities,” the program allowed the S.E.C. to monitor the parent companies of major Wall Street firms, even though technically the agency had authority over only the firms’ brokerage firm components.

The commission created the program after heavy lobbying for the plan from all five big investment banks. At the time, Mr. Paulson was the head of Goldman Sachs. He left two years later to become the Treasury secretary and has been the architect of the administration’s bailout plan.

The investment banks favored the S.E.C. as their umbrella regulator because that let them avoid regulation of their fast-growing European operations by the European Union.

Facing the worst financial crisis since the Great Depression, Mr. Cox has begun in recent weeks to call for greater government involvement in the markets. He has imposed restraints on short-sellers, market speculators who borrow stock and then sell it in the hope that it will decline. On Tuesday, he asked Congress for the first time to regulate the market for credit-default swaps, financial instruments that insure the holder against losses from declines in bonds and other types of securities.

The commission will continue to be the primary regulator of the companies’ broker-dealer units, and it will work with the Fed to supervise holding companies even though the Fed is expected to take the lead role.

The Fed had already begun regulating Wall Street firms that borrowed money under a new Fed lending program, and the S.E.C. had entered into an agreement under which its examiners worked jointly with Fed examiners, an arrangement that is expected to continue.

The S.E.C. will still have primary responsibility for regulating securities brokers and dealers.

The announcement was the latest illustration of how the market turmoil was rapidly changing the regulatory landscape. In the coming months, Congress will consider overhauls to the regulatory structure, but the markets and the regulators are already transforming it in response to events.

Still, the inspector general’s report made a series of recommendations for the commission and the Federal Reserve that could ultimately reshape how the nation’s largest financial institutions are regulated. The report recommended, for instance, that the commission and the Fed consider tighter limits on borrowing by the companies to reduce their heavy debt loads and risky investing practices.

The report found that the S.E.C. division that oversees trading and markets had failed to update the rules of the program and was “not fulfilling its obligations.” It said that nearly one-third of the firms under supervision had failed to file the required documents. And it found that the division had not adequately reviewed many of the filings made by other firms.

The division’s “failure to carry out the purpose and goals of the broker-dealer risk assessment program hinders the commission’s ability to foresee or respond to weaknesses in the financial markets,” the report said.

The S.E.C. approved the consolidated supervised entities program in 2004 after several important developments in Congress and in Europe.

In 1999, the lawmakers adopted the Gramm-Leach-Bliley Act, which broke down the Depression-era restrictions between investment banks and commercial banks. As part of a political compromise, the law gave the commission the authority to regulate the securities and brokerage operations of the investment banks, but not their holding companies.

In 2002, the European Union threatened to impose its own rules on the foreign subsidiaries of the American investment banks. But there was a loophole: if the American companies were subject to the same kind of oversight as their European counterparts, then they would not be subject to the European rules. The loophole would require the commission to figure out a way to supervise the holding companies of the investment banks.

In 2004, at the urging of the investment banks, the commission adopted a voluntary program. In exchange for the relaxation of capital requirements by the commission, the banks agreed to submit to supervision of their holding companies by the agency.

Confidence in US Banks Nosedives after Washington Mutual Collapse

Confidence in US Banks Nosedives after Washington Mutual h1Collapse

JP Morgan's buyout of leading lender causes high street anxiety to reach panic levels

By Andrew Clark

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The failure of the Seattle-based bank Washington Mutual undermined confidence in a fresh clutch of US household names today, as investors digested the implications of the biggest collapse of a high-street bank on record.

Washington Mutual, which was bought by JP Morgan after being seized by the US authorities late yesterday, had a stockpile of controversial "option ARM" mortgages which allow borrowers multiple options in setting the level of their own repayments.

These flexible loans, which were popular at the height of the housing boom, have proven to be huge liabilities for banks, and other firms known to hold them saw their stock prices plummet today.

Wachovia, a national chain with 3,000 branches and assets of $812bn (£441bn), saw its shares dive by 21% during early trading in New York, while National City Corporation, a regional bank based in Ohio, suffered a sell-off which pushed its stock down by 27%.

Details emerged of the extent of a run on the assets of Washington Mutual, known as WaMu, in the days leading up to its demise. The Office of Thrift Supervision said customers withdrew $16.7bn of deposits in 10 days, beginning on September 15 - the day Lehman Brothers declared itself bankrupt, sparking a crisis of confidence in the broader banking system.

Sheila Bair, chairman of the Federal Deposit Insurance Corporation, said the outflow alarmed WaMu's creditors, who became increasingly reluctant to extend funds. "Those who were willing to lend to them were no longer willing to do so," she said.

The FDIC reassured customers that all their money was safe. But it was clear that JP Morgan's offer to buy the Seattle bank's assets was a profound relief to regulators as America's insurance fund for banking deposits would have struggled to meet the bill - potentially requiring taxpayers to pick up any shortfall.

"We were fortunate - this is huge," said Bair. "We've protected taxpayers, we've protected depositors and we've protected the deposit insurance fund."

Last month, the FDIC said it had a "watch list" of 117 potentially troubled banks, holding a total of $78bn in assets. Bair said the list, which is updated quarterly, was growing as the financial crisis deepened.

WaMu's senior executives were caught on the hop when their firm was seized by the Office of Thrift Supervision. At the moment of the seizure, much of WaMu's leadership team was on a plane from New York to Seattle.

The bank's failure could generate a fresh outbreak of fury over executive compensation. WaMu's chief executive, Alan Fishman, joined the bank only three weeks ago from a rival, Sovereign Bank. He received a $7.5m signing-on bonus and could be eligible for $11.6m in severance pay.

WaMu has its roots in a savings association created to help Seattle residents rebuild after the city suffered a catastrophic fire in 1889. The bank has 2,239 branches across the US and employs 43,000 people. It is widely known for its television jingles which celebrate the bank's nickname, WaMu, with chants of "woo-hoo". In Seattle, there was gloom about the firm's demise.

"It's devastating" Steve Leahy, chairman of the city's chamber of commerce, told the Seattle Post-Intelligencer newspaper. "They've been here since the Seattle fire. The suddenness of all this, it's just taking our breath away."

JP Morgan's decision to ride to WaMu's rescue was the second time this year that it has snapped up the assets of a troubled rival. Aided by a Federal Reserve guarantee, JP Morgan bought Bear Stearns when it was on the brink of bankruptcy in March.

Financial historians pointed to a proud history at JP Morgan of acting to avert crisis. The bank's founder, John Pierpont Morgan, was credited with bringing together Wall Street bankers to come up with a rescue package to prop up failing finance houses at the height of a stockmarket panic in 1907. The bill was substantially lower in those days - federal authorities contributed $35m, compared to the $700bn industry-wide bail-out package under negotiation this week.

As the banking crisis continues to develop, recriminations are underway at regulatory authorities. The Securities and Exchange Commission was accused of performing only "sporadic and random" oversight of Wall Street broker-dealers in a report sent to Congress by its own inspector general today.

The report, which focuses on the demise of Bear Stearns, said the SEC's oversight arm was "not fulfilling its obligations" in reviewing the accounts of Wall Street's top financial institutions, hindering the ability to foresee weaknesses in the markets.

With All Eyes on the Bailout, House Passes Trillion-Dollar Defense Bill

With All Eyes on the Bailout, House Passes Trillion-Dollar Defense Bill

By Joshua Holland

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On Wednesday, the House passed a mammoth defense bill by a 392-39 vote. It's expected to clear the Senate with little difficulty next week.

It was part of a trillion-dollar stop-gap measure to keep programs running through next March, allowing lawmakers to skip town without passing a final budget. The Associated Press reports, "The legislation came together in a remarkably secret process that concentrated decision-making power in the hands of a few lawmakers."

In keeping with the tradition of recent years, Bush held a gun to his own head and threatened to pull the trigger if his demands weren't met. According to the AP, "To earn President Bush's signature rather than a veto, House and Senate negotiators dropped several provisions he opposed. They include a ban on private interrogators in U.S. military detention facilities and what would have amounted to congressional veto power over a security pact with Iraq."

In other words, Congress also maintained recent tradition, swearing not to give Bush a blank check and then whipping out their pens and signing a blank check.

The number that the House sent to the Senate for "defense" -- $612 billion for the coming year -- is eye-popping. Imagine a stack of 612,000 million-dollar bills. Quite a pile.

That number's a sham, however. The budget calls for $68.6 billion for the occupations of Iraq and Afghanistan in 2009. War costs this year totaled $182 billion, according to the Federation of American Scientists.

The House passed the Brobdingnagian spending measure 11 months after George W. Bush vetoed a bill -- one passed with a lot of bipartisan support -- that would have added $7 billion measly dollars per year to the State Children's Health Insurance Program, covering 4 million more uninsured children. You'd be hard-pressed to find a clearer sign of national psychosis.

Here's what "defense" spending looks like in the era of Bush's "War on Terror," according to official figures:

Click for larger version
(click for larger version)

But that's just the cash to feed the gaping maw of the Department of Defense. Throw in a bit more than $50 billion for Homeland Security, around $20 billion for the nuclear arsenal in the Department of Energy's budget, about $10 billion for the Coast Guard, a similar number for foreign "security assistance" and maybe another $125 billion -- according to one estimate -- in other defense-related programs scattered throughout the federal budget.

Bush also requested $91 billion for the Department of Veterans Affairs in 2009, up from $72 billion just three years ago. A generation of damaged young men and women are going to cost more and more as the years go by -- many post-traumatic injuries, for example, don't manifest themselves for 10 or more years after people get out of combat. In 2000, nine years after the first Gulf War, 56 percent of those who had served in that conflict were receiving disability payments.

But wait, as they say on late-night infomercials, there's more!

All of this only finances our current military adventures. We're still paying for Korea and Vietnam and Grenada and Panama and the first Gulf War and Somalia and the Balkans and on and on. Estimates of just how much of our national debt payments are from past military spending vary wildly. Economist Robert Higgs calculated it like this:

I added up all past deficits (minus surpluses) since 1916 (when the debt was nearly zero), prorated according to each year's ratio of narrowly defined national security spending--military, veterans, and international affairs--to total federal spending, expressing everything in dollars of constant purchasing power. This sum is equal to 91.2 percent of the value of the national debt held by the public at the end of 2006. Therefore, I attribute that same percentage of the government's net interest outlays in that year to past debt-financed defense spending.

In 2006, he came up with a figure of $206.7 billion for interest payments on past militarism. Add it all up, and we're talking about at least a trillion dollars in military and homeland security spending. If there were a million-dollar bill, you'd have to stack a million of them to reach a trillion dollars.

Of course, very little of this is "defense." This is empire spending, pure and simple ...


What's that? You want health care, education, affordable housing, 21st-century infrastructure?

Sorry, we've got other priorities.