mick silver
26th November 2008, 19:49
On Friday November 21, the world came within a hair's breadth of the most colossal financial collapse in history according to bankers on the inside of events with whom we have contact. The trigger was the bank which only two years ago was America's largest, Citigroup. The size of the US Government de facto nationalization of the $2 trillion banking institution is an indication of shocks yet to come in other major US and perhaps European banks thought to be 'too big to fail.'
The clumsy way in which US Treasury Secretary Henry Paulson - himself not a banker but a Wall Street 'investment banker', whose experience has been in the quite different world of buying and selling stocks or bonds or underwriting and selling same - has handled the unfolding crisis has been worse than incompetent. It has made a grave situation into a globally alarming one.
'Spitting into the wind'
A case in point is the secretive manner in which Paulson has used the $700 billion in taxpayer funds voted him by a labile Congress in September. Early on, Paulson put $125 billion in the nine largest banks, including $10 billion for his old firm, Goldman Sachs. However, if we compare the value of the equity share that $125 billion bought with the market price of those banks' stock, US taxpayers have paid $125 billion for bank stock that a private investor could have bought for $62.5 billion, according to a detailed analysis from Ron W. Bloom, economist with the US United Steelworkers union, whose members as well as pension fund face devastating losses were GM to fail.
That means half of the public's money was a gift to Paulson's Wall Street cronies. Now, only weeks later, the Treasury is forced to intervene to de facto nationalize Citigroup. It won't be the last.
Paulson demanded, and got from a labile US Congress, Democrat as well as Republican, sole discretion over how and where he can invest the $700 billion, to date with no effective oversight. It amounts to the Treasury Secretary in effect 'spitting into the wind' in terms of resolving the fundamental crisis.
It should be clear to any serious analyst by now that the September decision by Paulson to defer to rigid financial ideology and let the fourth largest US investment bank, Lehman Brothers fail, was the proximate trigger for the present global crisis. Lehman Bros.' surprise collapse triggered the current global crisis of confidence. It was simply not clear to the rest of the banking world which US financial institution bank might be saved and which not, after the Government had earlier saved the far smaller Bear Stearns, while letting the larger, far more strategic Lehman Bros. fail.
Some Citigroup details
The most alarming aspect of the crisis is the fact that we are in an inter-regnum period when the next President has been elected but cannot act on the situation until after January 20, 2009 when he is sworn in.
Consider the details of the latest Citigroup government de facto nationalization (for ideological reasons Paulson and the Bush Administration hysterically avoid admitting they are in the process of nationalizing key banks). Citigroup has more than $2 trillion of assets, dwarfing companies such as American International Group Inc. that got some $150 billion in US taxpayer funds in the past two months. Ironically, only eight weeks before, the Government had designated Citigroup to take over the failing Wachovia Bank. Normally authorities have an ailing bank absorbed by a stronger one. In this instance the opposite seems to have been the case. Now it is clear that the Citigroup was in deeper trouble than Wachovia. In a matter of hours in the week before the US Government nationalization was announced, the stock value of Citibank plunged to $3.77 in New York, giving the company a market value of about $21 billion. The market value of Citigroup stock in December 2006 had been $247 billion. Two days before the bank nationalization the CEO, Vikram Pandit had announced a huge 52,000 job slashing plan. It did nothing to stop the slide.
The scale of the hidden losses of perhaps the twenty largest US banks is so enormous that if not before, the first Presidential decree of President Barack Obama will likely have to be declaration of a US 'Bank Holiday' and the full nationalization of the major banks, taking on the toxic assets and losses until the economy can again function with credit flowing to industry once more.
Citigroup and the government have identified a pool of about $306 billion in troubled assets. Citigroup will absorb the first $29 billion in losses. After that, remaining losses will be split between Citigroup and the government, with the bank absorbing 10% and the government absorbing 90%. The US Treasury Department will use its $700 billion TARP or Troubled Asset Recovery Program bailout fund, to assume up to $5 billion of losses. If necessary, the Government's Federal Deposit Insurance Corporation (FDIC) will bear the next $10 billion of losses. Beyond that, the Federal Reserve will guarantee any additional losses. The measures are without precedent in US financial history. It's by no means certain they will salvage the dollar system.
The situation is so intertwined, with six US major banks holding the vast bulk of worldwide financial derivatives exposure, that the failure of a single major US financial institution could result in losses to the OTC derivatives market of $300-$400 billion, a new IMF working paper finds. What's more, since such a failure would likely cause cascading failures of other institutions. Total global financial system losses could exceed another $1,500 billion according to an IMF study by Singh and Segoviano.
The madness over a Detroit GM rescue deal
http://www.321gold.com/editorials/engdahl/engdahl112608.html
The clumsy way in which US Treasury Secretary Henry Paulson - himself not a banker but a Wall Street 'investment banker', whose experience has been in the quite different world of buying and selling stocks or bonds or underwriting and selling same - has handled the unfolding crisis has been worse than incompetent. It has made a grave situation into a globally alarming one.
'Spitting into the wind'
A case in point is the secretive manner in which Paulson has used the $700 billion in taxpayer funds voted him by a labile Congress in September. Early on, Paulson put $125 billion in the nine largest banks, including $10 billion for his old firm, Goldman Sachs. However, if we compare the value of the equity share that $125 billion bought with the market price of those banks' stock, US taxpayers have paid $125 billion for bank stock that a private investor could have bought for $62.5 billion, according to a detailed analysis from Ron W. Bloom, economist with the US United Steelworkers union, whose members as well as pension fund face devastating losses were GM to fail.
That means half of the public's money was a gift to Paulson's Wall Street cronies. Now, only weeks later, the Treasury is forced to intervene to de facto nationalize Citigroup. It won't be the last.
Paulson demanded, and got from a labile US Congress, Democrat as well as Republican, sole discretion over how and where he can invest the $700 billion, to date with no effective oversight. It amounts to the Treasury Secretary in effect 'spitting into the wind' in terms of resolving the fundamental crisis.
It should be clear to any serious analyst by now that the September decision by Paulson to defer to rigid financial ideology and let the fourth largest US investment bank, Lehman Brothers fail, was the proximate trigger for the present global crisis. Lehman Bros.' surprise collapse triggered the current global crisis of confidence. It was simply not clear to the rest of the banking world which US financial institution bank might be saved and which not, after the Government had earlier saved the far smaller Bear Stearns, while letting the larger, far more strategic Lehman Bros. fail.
Some Citigroup details
The most alarming aspect of the crisis is the fact that we are in an inter-regnum period when the next President has been elected but cannot act on the situation until after January 20, 2009 when he is sworn in.
Consider the details of the latest Citigroup government de facto nationalization (for ideological reasons Paulson and the Bush Administration hysterically avoid admitting they are in the process of nationalizing key banks). Citigroup has more than $2 trillion of assets, dwarfing companies such as American International Group Inc. that got some $150 billion in US taxpayer funds in the past two months. Ironically, only eight weeks before, the Government had designated Citigroup to take over the failing Wachovia Bank. Normally authorities have an ailing bank absorbed by a stronger one. In this instance the opposite seems to have been the case. Now it is clear that the Citigroup was in deeper trouble than Wachovia. In a matter of hours in the week before the US Government nationalization was announced, the stock value of Citibank plunged to $3.77 in New York, giving the company a market value of about $21 billion. The market value of Citigroup stock in December 2006 had been $247 billion. Two days before the bank nationalization the CEO, Vikram Pandit had announced a huge 52,000 job slashing plan. It did nothing to stop the slide.
The scale of the hidden losses of perhaps the twenty largest US banks is so enormous that if not before, the first Presidential decree of President Barack Obama will likely have to be declaration of a US 'Bank Holiday' and the full nationalization of the major banks, taking on the toxic assets and losses until the economy can again function with credit flowing to industry once more.
Citigroup and the government have identified a pool of about $306 billion in troubled assets. Citigroup will absorb the first $29 billion in losses. After that, remaining losses will be split between Citigroup and the government, with the bank absorbing 10% and the government absorbing 90%. The US Treasury Department will use its $700 billion TARP or Troubled Asset Recovery Program bailout fund, to assume up to $5 billion of losses. If necessary, the Government's Federal Deposit Insurance Corporation (FDIC) will bear the next $10 billion of losses. Beyond that, the Federal Reserve will guarantee any additional losses. The measures are without precedent in US financial history. It's by no means certain they will salvage the dollar system.
The situation is so intertwined, with six US major banks holding the vast bulk of worldwide financial derivatives exposure, that the failure of a single major US financial institution could result in losses to the OTC derivatives market of $300-$400 billion, a new IMF working paper finds. What's more, since such a failure would likely cause cascading failures of other institutions. Total global financial system losses could exceed another $1,500 billion according to an IMF study by Singh and Segoviano.
The madness over a Detroit GM rescue deal
http://www.321gold.com/editorials/engdahl/engdahl112608.html