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WASHINGTON – The federal government has devoted $4.7 trillion to help the financial sector through its crisis, a level of assistance equal to about one-third of the overall U.S. economy, a watchdog report said Monday.

Under the worst of circumstances, the report said, the government’s maximum exposure could total nearly $24 trillion, or $80,000 for every American.

The figures are part of a tough new quarterly report to Congress from special inspector general Neil Barofsky, who accuses the Treasury Department of repeatedly failing to adopt recommendations aimed at making one component of the government financial rescue effort more accountable and transparent.

The $4.7 trillion commitment to the industry takes into account about 50 initiatives and programs set up since 2007 by the Bush and Obama administrations as well as by the Federal Reserve. Barofsky oversees one of the initiatives — the $700 billion Troubled Asset Relief Program.

Much of the government assistance is backed by collateral and Barofsky’s $23.7 trillion estimate represents the gross, not net, exposure that the government could face.

Because of declining participation in short-term loan programs and because some infusions of money have been repaid, the maximum amount actually spent has declined to a current outstanding balance of $3 trillion, Barofsky said.

Treasury spokesman Andrew Williams said the actual cash outlay to date of all the programs cited by Barofsky is actually less than $2 trillion and said the maximum exposure estimate “is inflated in a number of ways.”

The agencies and the programs assisting the financial sector include a newly created Federal Housing Finance Agency, increased deposit insurance initiated by the Federal Deposit Insurance Corp., and 18 support programs created by the Fed under the special powers it can deploy to address a systemwide financial crisis.
Story continues below

Banks have cut back on their use of the Fed’s emergency lending program as well as other programs to ease credit stresses. Given that, the Fed has reduced the amount it will lend to financial institutions under two programs and it has decided to let a program to support money market mutual funds to expire as currently scheduled at the end of October.

Barofsky’s $23.7 trillion estimate represents the maximum exposure that the government would face if all eligible applicants requested the maximum assistance at the same time. It does not account for the fees and other costs that some of these programs charge and for the collateral that many of the programs require that participants provide.

For instance, Barofsky assigns $6.8 trillion in potential exposure to the Federal Housing Finance Agency, which oversees mortgage giants Fannie Mae, Freddie Mac and the 12 federal home loan banks. However, losses of that magnitude would require every homeowner with a Fannie or Freddie guaranteed mortgage to default and the value of the homes drop to zero. And Barofsky concedes that the finance agency and Treasury are not entirely liable for Fannie and Freddie losses.

The total also includes $3.35 trillion for a Treasury program, announced in September, to back money market mutual funds. But the Treasury has capped its liability for that program at $50 billion.

“While quantity and quality of the assets backing all of these programs vary, ignoring that side of these programs misrepresents ‘potential exposure’ associated with them,” Treasury’s Williams said.

In his report, Barofsky says Treasury has accepted some of his recommendations for greater accountability, but says the department has not taken steps to require all TARP recipients to report on their actual use of funds. He said Treasury also should report the values of its investments in banks and other financial institutions, disclose the identity of borrowers under a nonrecourse loan program and disclose trading activity under a public-private investment fund.

Barofsky says Treasury’s inaction means taxpayers have not been told what the financial institutions that have received assistance are doing with the money.

Rep. Darrell Issa of California, the top Republican in the House Oversight and Government Reform Committee, said that by not adopting Barofsky’s recommendation, Treasury is contradicting President Barack Obama’s vows to increase government accountability.

“I don’t know how you can justify hiding from the American people how their tax dollars are being spent,” Issa said.

Barofsky’s conclusion is contained in a quarterly report to Congress and in testimony he is prepared to give Tuesday to the Oversight and Government Reform Committee.

“The very credibility of TARP (and thus in large measure its chance of success) depends on whether Treasury will commit, in deed as in word, to operate TARP with the highest degree of transparency possible,” Barofsky said.

AP Economics Writers Jeannine Aversa and Christopher S. Rugaber contributed to this report.

Read more at: http://www.huffingtonpost.com/2009/07/20/bailout-may-cost-237-tril_n_241512.html

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Dylan Ratigan|Oct. 18, 2009, 11:38 AM | 1,090 |17

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How did Goldman, Sachs & Co. — saved a year ago by the US taxpayer — magically make $3 billion in 3 months a year later?
This as the US dollar collapses, unemployment soars and foreclosures hit a record?

Here is the Goldman, Sachs & Co. revenue break down for the past 3 months:

Financial Advisory-M/A: 325 million.
Equity Underwriting: 363 million.
Debt Underwriting: 211 million.
Trading-Principal Investments: 10 billion.

Notice that 10 billion is much bigger than two or three hundred million made from the traditional Wall Street businesses.

That $10 billion is evidence of their magic trick. For we the taxpayer gave Goldman Sachs the following:

10 Billion in TARP
11 Billion from the Fed
30 Billion from the FDIC
13 Billion from AIG

For a grand total of $70 Billion (Goldman along with every other bank and AIG would have been defunct without this money).

Goldman at the apex of the crisis is delivered this money — which they then use to borrow against at $20 or $30 for every $1. Which at 30x equals $2.1 trillion in available capital.

As one of the only banks in the world with money at the time, Goldman Sachs was able to buy billions in distressed assets around the world at record low prices — only to watch $23.7 trillion in US taxpayer money be deployed during the past year to re-inflate the asset’s values that Goldman had purchased with our tax money.

The question is not why did we bail out the banks.

The question is why did we give the banks billions of our money so they could then buy assets by the trillions with our money and they keep the profits?

The answer is Henry Paulson, former Goldman Sachs CEO who ran the US Treasury, and Tim Geithner, current Treasury Secretary who at the time ran the New York Federal Reserve, willingly delivered Goldman Sachs the $70 Billion — with no strings attached.
So what can we do?

1) We must demand the return of those investment gains made with America’s money – it was stolen from us and we can get it back. Demand Claw Backs – and not from the future but from the past – That is where our money is.

2) We must have an exchange for all credit derivatives — the current version is riddled with that let banks avoid transparency by mobbing offshore and prohibiting government regulators from being able to force the use of the exchange by the banks.

Read more at: http://www.huffingtonpost.com/dylan-ratigan/goldman-sachs-black-magic_b_…

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Max Keiser in his prime, discussing whether the crisis is over: “It’d not froth, it’s fraud. This is an incredible case of accounting fraud and the American peasants have got to be the stupidest people in the world today: they don’t mind becoming peasants, they don’t mind living like peasants, and if that’s the case, we should do nothing to step them from sliding into a peasant class.” And this pearl: “The bankers on Wall Street are the equivalent of suicide bombers in other countries. They threaten to blow themselves up and blow up the economy in exchange for huge bailout money.”

Full clip

Part 1:

Part 2:

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Yesterday, we brought you the insurance company that wouldn’t insure a 17-pound infant because he was too heavy. Today, we bring you the investment bank that manages to double its bonuses during the worst recession since the Great Depression.

On Thursday, Goldman Sachs will announce the firm’s bonus payments for 2009. Analysts expect the bonus pool to mushroom to $23 billion — double the bonus pool paid to employees in 2008. Earlier this year, Goldman Sachs said that it had put aside $11.4 billion for bonuses during the first half of the year.

“The absolute size of compensation payouts will rise significantly,” Keith Horowitz, an analyst at Citigroup, wrote in a note to clients two weeks ago, highlighted by Andrew Sorkin in The New York Times‘ dealbook column Tuesday.

How much is $23,000,000,000?

For one thing, it’s enough to send 460,000 full paying students to Harvard University for one year, or 115,000 for four years.

It’s enough to pay the health insurance premium for the average American family ($13,375) 1.7 million times.

It’s enough to upgrade 191 million computers to Windows 7 operating system (priced at $119.99), or to buy 115 million iPhones at $199.99 (provided the recipient was willing to sign a two-year contract).

Or, apparently, it’s enough to reward the employees of Goldman Sachs for a bonanza trading year, at a firm where average employee compensation was recently $622,000 — and likely to be greater this year.

The $23 billion figure could leave some American taxpayers woozy — the US government bailed out Goldman Sachs with a multi-billion payment last year, which the firm has since repaid.

But while Goldman is likely to pay its biggest bonuses ever to employees, the firm pays very little in taxes worldwide. In 2008, the company was said to have paid just $14 million in taxes worldwide, and paid $6 billion in 2007.

The firm’s corporate tax rate? About 1 percent. According a prominent tax lawyer, “They have taken steps to ensure that a lot of their income is earned in lower-tax jurisdictions.”

Sorkin says Goldman’s CEO is trying to hold off criticism by making a big charitable donation.

“Now there’s talk inside Goldman that it is considering making a huge charitable donation — perhaps more than $1 billion — as a way to help deflect the criticism,” Sorkin says. “Such a donation would be a welcome gesture that would no doubt benefit many needy organizations. But it would most likely be seen for what it is: a one-time move to draw attention away from where most of the money is really going. A large charitable donation also raises questions about the company’s fiduciary duty to its shareholders; it could be seen as giving away profits that ostensibly belong to them.”

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Source: Washington Times

Federal Reserve Chairman Ben S. Bernanke and former Treasury Secretary Henry M. Paulson Jr. misled the public about the financial weakness of Bank of America and other early recipients of the government’s $700 billion Wall Street bailout, creating “unrealistic expectations” about the companies and damaging the program’s credibility, according to a report by the program’s independent watchdog.

The federal government last October loaned Bank of America and eight other “healthy” financial institutions a total of $125 billion – the initial payout from the Troubled Asset Relief Program, or TARP – in an attempt to avoid a series of major bank collapses that would push the sputtering economy into a free fall or depression.

The rationale for giving money to stable banks and not failing ones, regulators said, was that such institutions would be better able to lend money and thus unfreeze tight credit markets – a major factor in last year’s Wall Street losses.

But an audit released Monday by TARP Special Inspector General Neil Barofsky says senior government officials and Wall Street regulators, including Mr. Bernanke and Mr. Paulson, had “affirmative concerns” that several of the nine institutions were financially shaky.

“By stating expressly that the ‘healthy’ institutions would be able to increase overall lending, Treasury may have created unrealistic expectations about the institutions’ condition and their ability to increase lending,” the audit says.

“Treasury and the TARP program lost credibility when lending at those institutions did not in fact increase and when subsequent events – the further assistance needed by Citigroup and Bank of America being the most significant examples – demonstrated that at least some of those institutions were not in fact healthy.”

The report makes no recommendations but argues that Treasury, the Federal Reserve and other federal agencies “should take more care in publicly characterizing the nature and objectives of their initiatives.”

Mr. Paulson, in an Oct. 14, 2008, statement announcing the original nine TARP recipients, described them as “healthy institutions” that “have taken this step for the good of the U.S. economy.”

The Federal Reserve and the Federal Deposit Insurance Corp. (FDIC) similarly described the companies in news releases issued the same day.

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Vanity Fair

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Read Full Story

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Overview

There is a headline that has been all over the media ever since September 2008:  “Bank Bailout Will Soak Taxpayers.”  As obviously true as this headline appears to be, it is in fact, dangerously misleading.  Indeed, as we will cover in this article, the idea that taxes will pay for the bailout is ludicrous, an insult to both your intelligence – and your net worth.

Instead, the real source of the bailout monies will not be the taxes you pay, but the value of your savings.  The value of your checking account, the value of your IRA or Keogh, and the value of all your investments are the true source of payment for Wall Street’s reckless mistakes.  When we combine the bailout with the trouble the US was already in, the result could be a 95% reduction in value for all of our savings, retirement and otherwise, as we will illustrate step by step in this article.

There are things you can do.  Actions you can take.  Ways to defend the value of your savings, as we will discuss later.  But before we talk about solutions, first we need to understand why taxes won’t pay for the bailout.  Because it is only when we understand the real danger, that we can take effective action to protect ourselves.

Placing Things In Perspective

Let’s start by placing things in perspective.  This financial crisis has not been happening in isolation.  The United States government was already in an impossible financial situation before this crisis ever hit.

Looking at Social Security and Medicare, when we take a long term perspective, the projected excess of expenditures over taxes is at least $59 trillion according to a fairly well known and accepted study that appeared in USA Today.  This isn’t the total cost – it’s the present value shortfall after taking out projected taxes at current levels.

Now, there are approximately 111,000,000 households in the United States.  So if we take the total shortfall and we divide it by the number of households, we come up with a shortfall of over half a million dollars per household, and that number is reasonably well accepted these days.

Okay, you’ve probably seen that number before, or something like it.  Now let’s very quickly do a few things you probably haven’t seen before.

Step One:  Below Poverty Line Households

Our first step is to take the 11 million households that are below the poverty line and subtract them out. These households are already not really paying the federal government, they’re getting paid by the federal government on a net basis, so we can’t realistically expect them to come up with any of the money for Medicare or Social Security. When we take them out we’re left with something very close to 100 million households.

Divide $59 trillion by 100 million households and our shares of the shortfall just jumped to $590,000 per household.

Step Two:  Retired Households

Step two is, do we expect retiree households to pay for their own retirement? Because when we say there’s 100 million households, well,  we’ve got quite a few retiree households already, and that number is going to be growing fast over the next 10 to 15 years as an average of 4 million baby boomers retire each year between 2010 and 2029.  So if we look out over the decades ahead as the baby boom retires, and we adjust for the rapidly building number of retiree households who will be the beneficiaries of Social Security and Medicare – who will be receiving benefits rather than paying in – then we’re left with an average of about 79 million households.

The 79 million households could be termed on average the number of households in which the primary source of income is someone who is below retirement age and actively working at a job that keeps them above the poverty line.  In other words the people who can realistically make the economic contribution to pay significant taxes.

Divide 59 trillion by 79 million, and we all have to come up with $747,000 per household.  We’ve now spent an additional $217,000 per household, compared to the USA Today number, but we’re not done yet.

Step 3:  Pensions & Investments

Step three is to say there’s a lot more to the expenses of paying for retirement for the baby boom than just Social Security and Medicare. Legally binding promises for pensions have been made by all levels of state and local government as well as major corporations, which are going to require the cashing out of tremendous amounts of retirement investments. As well as the cashing out of those tens of millions of IRAs and Keogh accounts.  Someone has to come up with money, or more accurately the real goods and services to do so.

So when we add in the cost of cashing out pensions and retirement accounts, we come up with a total figure per able to pay, non-retired household, including Social Security, Medicare, pensions and cashing out retirement investments, of $1,060,000 per household.  (That was a quick derivation of Steps One through Three, much more thorough detail is available through my free mini-course.)

Bailout & Stimulus Cost

Now you might think spending a million dollars per US household in one short article would cover it all, but we’re still not done here, we’ve got a bailout and stimulus to pay for.  How much is that going to cost?

The best answer is that no one knows for sure.  Because the true cost of the bailout is so tightly interwoven with what is going on with the overall economy, as well as with the extremely complex and volatile market of over $400 trillion (still outstanding) in derivative securities contracts that have been entered into by banks around the world.  Since the governments are guaranteeing the banks, that means they are guaranteeing the hundreds of trillions of dollars in derivatives, and we don’t know what that’s going to end up costing.

Some people are saying no problem, we’ll get out of this for $1 or $2 trillion max, and by and large those are the same financial pundits who would have quite confidently assured you two years ago that a crisis like this was categorically impossible, something only a delusional paranoid would believe could happen.

Speaking not as a financial pundit, but as someone who actually structured derivative securities as an investment banker, who wrote a McGraw-Hill book on the subject in 1995, and who later forecast the steps in which the current crisis would unfold with uncommon precision – we’ve been lucky so far.  We’re holding a tenuous line against a wider derivatives disaster that could make 2008 look like a cakewalk, and that line could crumble at any time.

So the cost will likely be somewhere between $1 trillion and global financial collapse, but we do need a guess to work with, and maybe a place to start are the official actions of the United States government.  According to the New York Times the total cost of the bailout including commitments for spending, loans and guarantees is $12.2 trillion, mostly in the form of Federal Reserve commitments.  To that total we need to add in the cost of the stimulus package of approximately 8/10 of $1 trillion so far.

Add bailout and stimulus, and we get a total for official commitments at this time of approximately 13 trillion dollars.

Take the $13 trillion, and divide it by the 79 million households, and we come up with a total of about $165,000 per non-retired, able to pay household. That is a fantastic sum of money and there are good reasons why you never see the government present it in that way, and rarely see the mainstream media do so.  That’s almost enough money to buy a house in many states!

In fact, according to the National Association of Realtors, the median sale price of an existing home in the first quarter of 2009 was $169,000.  So if we look at the cost to the average household of the bailout package, we could have quite literally bought an average American home with each of our shares of the cost.

When we add the cost of each of our non-existent new houses to the trouble we were already in, we come up with the sum of $1,225,000 per non-retired, able to pay household.

Your Personal Reality Check

Now here’s my question for you.  This is an important question, because the answer could change your standard of living for decades.

At what point did you stop believing that you and your family could pay your share?   Was this final $165,000 the straw that broke the camel’s back?  The $60,000?  The $217,000?  Or was it that first half million, the very well accepted half million, that passed your personal ability to pay?

Your answer is vital because once we accept that the average household can’t pay, with not even a remote chance of doing so, then we have to accept that tax increases can’t pay.  Meaning these newspaper headlines about taxpayers paying for the bailout are an insult to your intelligence.

So, does this mean the US is bankrupt?  No.  Long story short, nations that can borrow in their own currency don’t go bankrupt.  Not when they can create trillions of dollars out of thin air at will, Shazaam!, much like the Federal Reserve has been doing ever since the crisis hit.

Covering The Gap

So taxes can’t pay, it’s ludicrous to think they can, and the US doesn’t declare bankruptcy, just how do we cover the gap?

Again, very short version.  Pay in full, but make the dollar worth five cents.  Drops the per household cost for everything from $1.2 million down to about $60,000.  Painful, but manageable over a period of 20-30 years.

The problem is that this solution also drops your savings to a value of 5 cents on the dollar.  Meaning that the $100,000 in savings you have just became effectively worth $5,000.  To cover your entire retirement.

History & Solutions

Historically, a collapse in the value of a currency necessarily forces a major redistribution of wealth, and the segment of the population that is most devastated by this seems to always be the same.  It’s the retirees, and the people close to retirement.  When we look to Germany, when we look to Argentina, when we look to Russia – it is the pensioners who are impoverished more than any other group.

Unfortunately, history is repeatingitself again.  When we look at the headlines about the destruction of retiree investment values, pension assets and so forth, we’re really just seeing the beginning. Because the crisis “solution” that is being chosen, which is creating dollars without the ability to pay for those dollars, essentially represents the annihilation of most of the retirement dreams of the baby boom generation, even if that is not yet recognized.  There is not an even cost that is being born by society as a whole, rather some segments are bearing much more of the burden than others.  If your peer group (particularly Boomers and older) is headed for disproportionate financial devastation, then happenstance is unlikely to offer a personal way out.  Instead, you must instead take quite deliberate actions to change your personal financial position so that wealth is redistributed to you, rather than away from you.

To get out of step with your generation, and have wealth redistributed to you even as your peer group is being devastated by this extraordinary destruction of wealth, you need to start with an essential and irreplaceable step:  education.  You need to gain the knowledge you will need to turn adversity into opportunity.  This will mean looking inflation straight in the eye and saying:  “Inflation, you are likely to play a big role in my personal future, and instead of ignoring you or thoughtlessly flailing away at you – I will study you and your ways.  I will learn the deeply unfair ways in which you redistribute wealth, and the counterintuitive lessons about how some investors will be destroyed by inflation and repeatedly pay taxes for the privilege, even while other investors are claiming real wealth on a tax-free basis.  I will learn to position myself so that you redistribute wealth to me, and the worse the financial devastation you wreak – the more my personal real net worth grows.”

Do you know how to Turn Inflation Into Wealth? To position yourself so that inflation will redistribute real wealth to you, and the higher the rate of inflation – the more your after-inflation net worth grows?  Do you know how to achieve these gains on a long-term and tax-advantaged basis?  Do you know how to potentially triple your after-tax and after-inflation returns through Reversing The Inflation Tax? So that instead of paying real taxes on illusionary income, you are paying illusionary taxes on real increases in net worth?  These are among the many topics covered in the free “Turning Inflation Into Wealth” Mini-Course.  Starting simple, this course delivers a series of 10-15 minute readings, with each reading building on the knowledge and information contained in previous readings.  More information on the course is available at DanielAmerman.com or InflationIntoWealth.com .

Contact Information:

Daniel R. Amerman, CFA

Website: http://danielamerman.com/

E-mail:  mail@the-great-retirement-experiment.com

This article contains the ideas and opinions of the author. It is a conceptual exploration of financial and general economic principles. As with any financial discussion of the future, there cannot be any absolute certainty. What this article does not contain is specific investment, legal, tax or any other form of professional advice. If specific advice is needed, it should be sought from an appropriate professional. Any liability, responsibility or warranty for the results of the application of principles contained in the article, website, readings, videos, DVDs, books and related materials, either directly or indirectly, are expressly disclaimed by the author.

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(WashingtonsBlog) – In a post called “Break Up the Big Banks”, Rolfe Winkler provides a nice graphic showing that the too big to fails have gotten bigger:

The big have gotten even bigger since the start of the financial crisis. At the end of 2007, the Big Four banks — Citigroup, JPMorgan Chase, Bank of America and Wells Fargo — held 32 percent of all deposits in FDIC-insured institutions. As of June 30th, it was 39 percent.

In total, they had $3.8 trillion worth of deposits as of June 30th. Compare that figure to the FDIC’s Deposit Insurance Fund, which showed a balance of just $10.4. billion on the same date.

Source: Washingtons Blog

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With housing prices down 30+% on average over the last few years, is Uncle Sam blowing fresh air into the housing balloon and actually creating another housing bubble? I believe that’s exactly what is happening.

If you are scratching your head and think I am off base with my assertion, please navigate this path along our economic landscape with me.

What drove the housing bubble? Cheap rates and undisciplined lending from the private sector. What added to the bubble? The internal ‘hedge fund’ portfolios of Freddie Mac (NYSE:FRE) and Fannie Mae (NYSE:FNM).

What is perpetuating the housing bubble if not creating another mini-bubble of sorts? Cheap rates and undisciplined lending directly from Uncle Sam or supported by Uncle Sam. What is adding to this bubble? Those same internal portfolios at Freddie and Fannie.

What entities within Uncle Sam’s domain are providing the cheap rates and undisciplined lending?

1. The Federal Housing Administration ( FHA-insured loans are packaged into GNMA securities, which have the explicit backing of Uncle Sam)

2. The Federal Reserve’s quantitative easing program in which it has purchased hundreds of billions in mortgage-backed securities with authority to purchase a total of $1 trillion+ in MBS is also blowing fresh air into the balloon.

3. Freddie and Fannie are also supporting the bubble by providing fresh capital via their portfolios.

People may say that Uncle Sam had to provide this capital because the private sector would not. In fact, The Wall Street Journal makes that very assertion this morning in writing, Industry Seeks Fannie, Freddie Overhaul:

Together with the Federal Housing Administration, Fannie and Freddie now purchase or guarantee nearly nine in 10 new mortgages, since private buyers of such loans have been absent amid the housing bust.

I categorically do not accept this assertion. There is more than enough private capital in the system to purchase these mortgages. The issue is that the private capital will only purchase these mortgages at appropriate risk adjusted prices. Freddie, Fannie, the FHA, and the Federal Reserve are stepping ‘through the market’ and subsidizing mortgage rates by at least 50 basis points and, in turn, crowding out private buyers. The WSJ continues:

Fannie and Freddie have taken nearly $96 billion of capital infusions from the U.S. Treasury since last November. The companies have received nearly 10 times that amount in additional support through purchases of debt and mortgage-backed securities by the Treasury and the Federal Reserve.

Who is benefiting from these subsidized rates? New homeowners. Do not think for a second, however, that risks are properly aligned in this current mortgage dynamic.

The continued mispricing of risk will mean our housing market will experience more protracted levels of delinquencies, defaults, and foreclosures than if mortgage rates were higher and real discipline were instituted into the lending process.

In fact, unless our country accepts a fully socialized mortgage finance system, mortgage rates will have to move higher to reflect private sector pricing. Risks and returns will then be properly aligned and the bubble will deflate.

Graph: WSJ

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A year after the bankruptcy of Lehman Brothers on September 15, 2008, questions still swirl around its collapse. Lawrence MacDonald, whose book A Colossal Failure of Common Sense came out in July 2009, maintains that the bank was not in substantially worse shape than other major Wall Street banks. He says Lehman was just “put to sleep. They put the pillow over the face of Lehman Brothers and they put her to sleep.” The question is, why?

The Lehman bankruptcy is widely considered to be the watershed event that changed the rules of the game for those Wall Street banks considered “too big to fail.” The bankruptcy option was ruled out once and for all. The taxpayers would have to keep throwing money at the banks, no matter how corrupt, ill-managed or undeserving. As Dean Baker noted in April 2009:

“Geithner has supposedly ruled out the bankruptcy option because when he, along with Henry Paulson and Ben Bernanke, tried letting Lehman Brothers go under last fall, it didn’t turn out very well. Of course, it is not necessary to go the route of an uncontrolled bankruptcy that Geithner and Co. pursued with Lehman. . . . [But] the Geithner crew insists that there are no alternatives to his plan; we have to just keep giving hundreds of billions of dollars to the banks . . . , further enriching the bankers who wrecked the economy.”

Although Lehman Brothers filed for bankruptcy on Monday, September 15, 2008, it was actually “bombed” on September 11, when the biggest one-day drop in its stock and highest trading volume occurred before bankruptcy. Lehman CEO Richard Fuld maintained that the 158 year old bank was brought down by unsubstantiated rumors and illegal naked short selling. Although short selling (selling shares you don’t own) is legal, the short seller is required to have shares lined up to borrow and replace to cover the sale. Failure to buy the shares back in the next three trading days is called a “fail to deliver.” Christopher Cox, who was chairman of the Securities and Exchange Commission in 2008, said in a July 2009 article that naked short selling “can allow manipulators to force prices down far lower than would be possible in legitimate short-selling conditions.” By September 11, 2008, according to the SEC, as many as 32.8 million Lehman shares had been sold and not delivered – a 57-fold increase over the peak of the prior year. For a very large company like Lehman, with plenty of “float” (available shares for trading), this unprecedented number was highly suspicious and warranted serious investigation. But the SEC, which was criticized for failing to follow up even on tips that Bernie Madoff’s business was a ponzi scheme, has yet to announce the results of any investigation.

More Questions

Other questions about the Lehman collapse are raised in David Wessel’s July 2009 book In Fed We Trust. Why was Bear Stearns saved from bankruptcy but Lehman Brothers was not? How could the decision makers not realize the dire consequences of letting Lehman go down?

One possible explanation is that they actually thought the bank would be bought out at the last minute, just as Bear Stearns was. In both cases, the parties worked feverishly over the weekend after the stock’s collapse to try to negotiate a deal. For Bear Stearns, the negotiations succeeded, with the help of the New York Federal Reserve, which provided the loan used by JPMorgan Chase to complete the deal. With Lehman, however, the interested buyer was British, and the help that was needed was from the UK Chancellor of the Exchequer, Alistair Darling. The weekend after the September 11 stock collapse, intense negotiations were pursued with Barclays Bank, which was prepared to underwrite Lehman’s debts; but it needed a waiver from British regulators of a rule requiring shareholder approval. Negotiations continued until the market was getting ready to open in Japan on Sunday, but UK Chancellor of the Exchequer Alistair Darling would not give the necessary waiver. He said something to the effect that he did not want to infect Britain with America’s cancer. The sentiment was understandable, but the question was, why did he wait until it was too late for the Treasury or the Federal Reserve to move in with other arrangements?

The issue takes on more significance in light of the fact that Chancellor Darling played a similar role in another 9-11 collapse the previous year. On September 11, 2007, frantic customers were lining up outside Northern Rock, the UK’s fifth largest mortgage lender, in the first British bank run in 141 years. The bank’s shares plunged 31% in a single day. Like the collapse of Lehman Brothers in the U.S., the bankruptcy of Northern Rock changed the rules of the game. Britain’s major banks too would now be saved at any cost, in order to avoid the loss of customer confidence, panic and bank runs that could precipitate a 1929-style market crash.

With Northern Rock, as with Lehman Brothers, Alistair Darling could have saved the day but backed down. Northern Rock had a willing buyer, Lloyds TSB; but the buyer needed a loan from the Bank of England, which the Bank’s Governor, Mervyn King, had denied. Darling was advised by his staff to overrule the Governor and grant the loan, but this would have cost political capital for UK Prime Minister Gordon Brown, who had been widely lauded for giving the Bank of England its independence in 1997.

Brown is criticized domestically for precipitating the financial crisis with errors made as Chancellor of the Exchequer before he became Prime Minister. Critics maintain the British Treasury has abdicated its responsibility as the financial overseer of the British economy to the Bank of England, which in many ways controls the government, because its advice is always followed regarding the British budget. The whole scenario suggests that the much-vaunted virtues of an independent central bank are overblown. Some economists, including Milton Friedman and Ben Bernanke, blame poor policymaking by an independent Federal Reserve for bringing on the Great Depression of the 1930s.

Shock Therapy?

According to Representative Paul Kanjorski, speaking on C-SPAN in January 2009, the collapse of Lehman Brothers precipitated a $550 billion run on the money market funds on Thursday, September 18. This was the dire news that Treasury Secretary Henry Paulson presented to Congress behind closed doors, prompting Congressional approval of Paulson’s $700 billion bank bailout despite deep misgivings. It was the sort of “shock therapy” discussed by Naomi Klein in her book The Shock Doctrine, in which a major crisis prompts hasty emergency action involving the relinquishment of rights or funds that would otherwise be difficult to pry loose from the citizenry.

Like the “bombing” of Lehman stock on September 11, the $550 billion money market run was suspicious. The stock market had plunged when Lehman filed for bankruptcy on September 15, but it actually went up on September 16. Why did the money market wait until September 18 to collapse? A report by the Joint Economic Committee pointed to the fact that the $62 billion Reserve Primary Fund had “broken the buck” (fallen below a stable $1 per share) due to its Lehman investments; but that had occurred on September 15, and the fund had suspended redemptions for the following week. What dire reversal happened on September 17? According to the SEC, it was another record day for illegal naked short selling. Failed trades climbed to 49.7 million – 23% of Lehman trades.

The Larger Question Is Why?

All of this suggests that Lehman Brothers did not just fall over the brink but was pushed. Judge James Peck, who presided in the bankruptcy proceedings, said “Lehman Brothers became a victim, in effect the only true icon to fall in a tsunami that has befallen the credit markets.”

If Lehman was indeed sacrificed, who pushed it and to what end? Some critics point to Henry Paulson and his cronies at Goldman Sachs, Lehman’s arch rival. Goldman certainly came out on top after Lehman’s demise, but there are other possibilities as well, involving more global players. The month after Lehman collapsed, Gordon Brown and the EU leaders called for using the financial crisis as an opportunity to radically enhance the regulatory power of global institutions. Brown spoke of “a new global financial order,” echoing the “new world order” referred to by globalist banker David Rockefeller when he said in 1994:

“We are on the verge of a global transformation. All we need is the right major crisis and the nations will accept the new world order.”

Richard Haas, President of the U.S. Council on Foreign Relations, wrote in 2006:

“Globalisation . . . implies that sovereignty is not only becoming weaker in reality, but that it needs to become weaker.”

Sovereignty is one of these cherished rights that nations will give up only with “the right major crisis.” Gordon Brown put it like this:

“Sometimes it takes a crisis for people to agree that what is obvious and should have been done years ago, can no longer be postponed. . . . We must create a new international financial architecture for the global age.”

In April 2009, Gordon Brown and Alistair Darling hosted the G20 summit in London, which focused on the financial crisis. A global currency issue was approved, and an international Financial Stability Board was agreed to as global regulator, to be based in the controversial Bank for International Settlements in Basel, Switzerland. The international bankers who caused the financial crisis are indeed capitalizing on it, consolidating their power in “a new global financial order” that gives them top-down global control. Just some food for thought as September 11 rolls around again.

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