Mike Morgan chronicles the end of the free market

The two most recent posts by f in full:

Saturday, September 6, 2008

Paulson's Grand Scheme

I've received hundreds of phone calls and emails since Friday afternoon. I was going to wait until after hearing what Paulson dumps on us before commenting, but I need to get a short piece out to try to stem the flow of emails and phone calls.

It is anyone's guess what he is going to do. I've heard from contacts around the globe, and everyone seems to be wondering . . . but for the most part, everyone agrees Paulson is going to reward his fraternity Pals from Goldman Sachs and provide guys like Bill Gross and Wilbur Ross with a huge bail out . . . and even bigger profits.

There appears to be two ways of looking at this.

1 - The Dark Side - Paulson is going to provide a bail out that will cost the taxpayers hundreds of billions, but he will do it in pieces and hide the real story until he is long gone. The scheme will be so enriching to his Pals, that the market will rally hundreds of points on Monday, as Paulson's Pals force the market higher to give the world a false sense of security. Paulson does not care about the public, the taxpayer or the how this effects the world. He is simply under too much pressure from his Pals, and guys like Bill Gross who have buried retirement accounts and pension funds in toxic waste. In the end, it will all blow up in our faces, but Paulson will be long gone and the traders reaping the profits on Monday will be selling to the unwitting masses that will be wiped out a year or two down the road. Think 1929 on steroids.

In fact, this group believes Paulson has already cut a deals with John Mack, Vikram Pandit, Bob Steel, Jamie Dimon, Lloyd Blanfein, Bill Gross, John Thain and their counterparts throughout the Goldman Sachs controlled financial world to invest in Fannie and Freddie alongside the Fed. What escapes the public eye, is that eventually these investments fail . . . and the only losers will be the public. Guys like Gross, Mack, Dimon and Paulson's Pals in high positions at the major financial institutions will be long gone when the fall out destroys the American dream, economy and the very fabric of who we are.

2 - The Lighter Side - The alternative thinkers believe the markets will come down hard on Paulson, beginning with the Asian markets and following through to Europe and America. In fact, they believe the markets have been waiting for this for moment. These folks note that Fannie and Freddie were up sharply when the bail out was first announced Friday, but they turned down and fell sharply. Unfortunately, we can't say the same for the financials and the builders, so I am thinking this group is going to come up short. After all, the two groups that should be 50-75% lower, rose sharply on the news. That's where these thinkers start to think twice. The Plunge Protection Team may have been juiced up over the weekend with some foreign thugs, and Paulson might just overwhelm this group as well.

In this group, about half think Paulson will prevail with his PPT on steroids, while the other half believe the markets will react violently on Monday and finish sharply lower . . . even if they don't start out that way. The hard core group that want to see Paulson pummeled, believe it will start ugly and end ugly. Some even believe the markets will be forced to close and Paulson will resign before finishing his term. Since my clients are on the short side of the market, I like this group . . . but I believe Paulson has already indicated he is going to pull a scheme to reward his Pals.

Criminal - That is the only way to describe what we are witnessing. And the criminals get bolder by the day. For Bill Gross to come out with the commentary he has injected this week, is simply outrageous when you consider what he has been saying and doing for years. And for Paulson to have gained so much power, while still making back room deals with his Pals, is sickening. Our politicians basically gave this one man control over the destiny of the United States of America . . . with no back stop to control his bazooka.

Not Just Fannie and Freddie - What the financial world seems to have forgotten, is the problems don't stop with Fannie and Freddie. First of all, this bail out only involves about half of the US mortgages, and it doesn't even come anywhere close to preventing it from happening again. Second, we are witnessing the demise of the free market system, where we are protecting the greedy bastards at the top, but throwing the system and the financial future of everyone else to the wolves. The right thing to do, would have been to follow the money and go after the thieves. Even Cuomo made it clear he was only in it to secure his spot as Governor of New York.
Doing the right thing was never an option. We saw that in July, when instead of locking up his buddies for violating the short selling rules, Paulson decided to test his control over the world's financial masrkets.

Since Paulson will not do the right thing, the next best thing to do would be to let Fannie and Freddie fail along with the banks. Yes, there would be global pain, but it would be a lot less than what we will experience by trying to protect a few thousand greedy bastards like Paulson and his Pals. I want to say something creative right now, but all I can think of is . . . God Save Us.

Thursday, September 4, 2008

Pasulson - Thief of the Century

History's Greatest Thief - In July when Hank Paulson decided to put an end to naked short selling, he could have simply enforced the rules and sent dozens of traders to jail. But that would have meant sending many of his frat boys to jail. Instead, he decided to give his boys a heads up, and then pull one of the financial world's most successful scams, simply to enrich his friends. He essentially killed the free markets.

End of the Free Market - His excuse was how he wanted to protect the banks being shorted. That's a free market decision. And if people are not following the rules, you throw them in jail. You don't change the rules. Changing the rules was the end of the free market as we know it.

Burning Out of Control - When the wild fires burn through forests, the forests that burn out of control, are the fires where we have not cleaned out the dead wood and brush. This is done in one of two ways. First, we can physically go in and remove it periodically. Second, we can let nature take its course and allow small fires to burn through the brush, doing no damage to the forest. In fact, this makes the forest healthier.

SAME THING FOR BANKS - Yes, absolutely. If we let the free market shut down bad banks, we get rid of the dead wood. If we try to save the bad banks . . . as Paulson and the Fed are doing, we eventually will face a wild fire that we cannot control. It is coming, and the more games Paulson plays, the worse the fire.

Fannie and Freddie are perfect examples. Wachovia, Washington Mutual, Corus, Downey, Vineyard, Regions and hundreds of other banks are also in the dead wood pile. Paulson has been very quiet now for a few weeks. Some say he is trying to hold things together until Election Day. Others say he is scheming with his frat boys to pull off yet another financial coup for his boys . . . at the expense of the American public.

The man is dangerous. He has already proven that, but he also has the magic ring . . . and Bush and the Congress and the Senate are all kissing it.

Bear Stearns - Why was there only one institution willing to step up to the plate? Why did Paulson offer $30B of our money? It wasn't because Bear was too big to fail. We must let the dead wood burn off, no matter how painful it is in the short term. What I am hearing now, is JP Morgan was the bank most exposed to the counter side of Bear Stearn AND many of Paulson's Pals would have been wiped out by letting Bear Stearns fail. Whatever the reason, we should have never bailed out Bear Stearns. That should have been the beginning of the burn off of the dead wood. That might have been the critical point to avoid a complete conflagration.

Markets Will Correct - Despite Paulson's manipulation tricks, the markets will correct. When the markets correct, it will be a violent correction, far worse than the mini-corrections we are seeing roll through the markets now. Paulson will win, because he will line the pockets of all of the big boys on Wall Street. Our pension funds and IRAs will be devastated. Our country will spend 15-25 years recovering. We will recover, but the damage Paulson is doing by allowing the prior corruption of Greenspan and his handlers to continue, will be devastating. In closing, I use the word handlers, because Greenspan was not stupid enough or devious enough to come with his mistakes on his own. And since he is not off in a private jet or lounging on his private island, he probably never realized what Paulson and guys like Paulson running the big institutions were puppeteering Greenspan to do . . . or not do.

The most lucid explanation of Fannie Mae and Freddy Mac I've seen

Another long but revealing post...

Asia Times Online:

Foreign spigot off for US consumers
By Max Fraad Wolff

As US public attention shifts from the Olympics to running mates and the celebrity "news" de jour, the infrastructure beneath your house is termite-infested. Just beneath the nicely painted exterior and behind all the new appliances, doubt is boring through the beams, gnawing at the studs.

Alongside falling prices, rising mortgage rates, stricter credit conditions and general malaise, the structure that supports American home ownership is being condemned by market valuation. Fannie Mae and Freddie Mac have nose dived and been downgraded toward a smaller future - and these are more important names for your future than Joe, Sam, Kathy, Mitt, Meg ...

Fannie Mae was created in the depths of the Great Depression to decrease foreclosure and increase home ownership. In 1968, it was re-chartered as a public company, removed from within official government agency status. Freddie Mac, since its inception in 1970, has financed 50 million homes.

Fannie and Freddie mission statements make clear, they exist to facilitate, ease and cheapen home ownership. They do this by acting as liaisons between international capital markets and mortgage seekers. They borrow at preferential rates - based on the implicit/explicit - assurance of the US government. Borrowed funds are used to buy mortgages and bundles of mortgages. They provide credit guidelines and purchase mortgage issued by banks. This reduces banks' risk and provides banks with more cash, more quickly to make more loans at lower costs. These firms, then, exist to facilitate, ease and accelerate bank lending for home purchase.

Fannie and Freddie form a central hub between lenders and investors. After they buy American mortgages, they bundle sell and guarantee repayment. This transforms mortgages into investments for banks, corporations and governments all over the world. Your home mortgage, bundled with many other folks' mortgages, is sold, repackaged and assured by Fannie and Freddie. This reduces risk and assures global savings flow in to support American purchases of homes. International investment is the foundation on which our home ownership was built.

Well over US$1 trillion of our mortgages have been sold to foreign investors this way in the recent past. As you sit down and read this, your mortgage may well be "owned" by a firm, individual or central bank thousands of miles away. This relationship is neither healthy nor sustainable in its present form. Rising defaults, falling dollars and the sheer size of past borrowing are turning people off to American mortgages. The foundation below our houses is shifting.

What we are witnessing is the breakdown of the link between middle-class America and the global financial markets it has over-tapped across the last several decades. Fannie and Freddie were the support infrastructure connecting houses to capital market access. They have been caught with weak financials, swollen balance sheets and escalating default, just like the home owners they assist. The size of their retained mortgage portfolios is truly gigantic.

The extent of the firms' guarantee commitments is global in scope. Sixty-six global central banks buy loans bundled and or backed with Freddie Mac and Fannie Mae involvement. As of June 30, 2007 foreign entities and individuals held over $1.4 trillion in securities of US agencies such as Freddie and Fannie.

Fannie Mae's June 2008 statement declares a gross mortgage portfolio of $750 billion and guarantees of mortgage backed securities and loans of $2.6 trillion. Freddie Mac's June statement details a retained portfolio balance of $792 billion and a total mortgage portfolio balance of $2.2 trillion. These two giants have retained interest in over $1.5 trillion and guaranteed over $4.5 trillion in mortgages, mortgage backed securities and loans. There are $11 trillion in outstanding mortgage liabilities in the US.

The US housing market continues to melt down with dire consequence. In the seven years from 2001 through late 2007, household real estate value increased by $8.873 trillion to $22.495 trillion. It has since fallen by $426 billion. Many claim we are at or a near a bottom. These claims should be viewed with extreme weariness. The housing downturn is not over and it will take a while after it is over to judge the damage.

The search for parallels with today yields little. The closest one finds is the interesting decline in home ownership across the period 1905-1920 followed by a surging rise across the '20s and then collapse across the 1930s. Fannie was born of this collapse, the ideology of The New Deal and sense that government-driven market interventions could broaden home ownership in America. This was a success. Home ownership did grow spectacularly across the period from 1938-2007. It is falling now as Fannie and Freddie flounder.

In 1940, US home ownership stood just below 44%. At the start of 2008 68% of Americans owned their home. Over the decades, Fannie and Freddie changed, middle-class America changed and the global financial realm underwent several revolutions. The last and most transformative revolution involved the rise of securitization and integration of global financial markets.

Securitization involves transforming assets and promises of future payment into financial products for sale to investors. International financial integration tears down the walls between national banking systems and allows savings, loans and payments to be gathered and transferred across international boundaries.

A world of wealth poured into US real estate through securitization and deregulation. This flow was channeled and molded by the actions of Fannie Mae and Freddie Mac. The decline of these firms will have dramatic and long-lasting implications for home mortgage finance. This will impact the price of American homes, the cost and ease of borrowing for home ownership.

Housing prices have further to fall and global savings will likely never be lent to American consumers at recent percentage levels. Across the past few years America has been borrowing over 50% of the world's internationally available savings. The diminishing role of Fannie and Freddie will impact more people, for far longer than presidential running-mate selections. Policy makers and managements in Fannie and Freddie are stuck. Today's consumer strength, their missions and international financial realities no longer align.

We face a housing finance future different from the recent past. Fannie and Freddie will not be able to function in the same way, or to the same extent. The debates about and plans for these firms will touch millions of families through housing prices, finance terms and cost. Fannie and Freddie are much more important than Joe, Sam, Kathy, Mitt, Meg ...

Max Fraad Wolff is a doctoral candidate in economics at the University of Massachusetts, Amherst, and editor of the website GlobalMacroScope.

(Copyright 2008 Max Fraad Wolff.)