"End of Wall Street Boom" - Must-read history

[JackRiddler]

From here:

http://www.democraticunderground.com/di ... 89x5213429

Citi is a Saudi-controlled zombie, AIG is a Chinese mortgage derivatives and credit default issuer
Both institutions essentially operated to exploit and crash the American economy.
Mark

Response.

Actually AIG's biggest counterparty is Goldman Sachs.

And I believe Saudis hold less than 10 percent of Citigroup shares. I think you're exaggerating the "nasty foreigners" element.

The big question is not even the Citi and AIG shareholders - chump change, less than 10 billion dollars - but the endless mountains of derivatives written by AIG and Citi management with counterparties all over the place (Goldman, banks, hedgefunds, Europe, Asia, the works). They in turn relied on credit-default swaps to lower their own reserve requirements and bet more elsewhere, and their bets went bad, too. It's a huge cluster fuck of obligations stemming from many bad runs at the casino.

That's what the government has actually been covering - the obligations to counterparties. It's not AIG they're keeping afloat, but the counterparties. Again, the biggest one being friggin' Goldman Sachs, a.k.a. Government Sachs.

And back of it all is the reality that if foreign counterparties end up screwed, they might stop buying T-bills!

All that being said: the system was a fraud, and taxpayers can't possibly cover for this shit forever. All actors in the derivatives system made irresponsible bets. Many engaged in outright fraud and must be punished. The conflicting paper obligations are many times greater than the value of all underlying assets and cannot possibly all be honored.

Let the paper crash! Use the taxpayer funds to set up a new, separate credit system that provides capital for energy and transport conversion and refinancing offers to mortgage holders, etc. (Yes: Print money if you have to, if no one wants the T-bills, but make sure it's going to finance energy and transport conversion.) Write down debts generously all around.

NATIONAL BANK. NEW DEAL.

[JackRiddler]

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London Banks are fallin' down, fallin' down, fallin' down.

Hm, AIG's bust-out division was 600 wolves in London.

Thanks to seemslikeadream...

http://www.independent.co.uk/news/busin ... 39413.html

'Run on UK' sees foreign investors pull $1 trillion out of the City

Banking crisis undermines Britain's reputation as a safe place to hold funds

By Sean O'Grady, Economics correspondent

Saturday, 7 March 2009


A silent $1 trillion "Run on Britain" by foreign investors was revealed yesterday in the latest statistical releases from the Bank of England. The external liabilities of banks operating in the UK – that is monies held in the UK on behalf of foreign investors – fell by $1 trillion (£700bn) between the spring and the end of 2008, representing a huge loss of funds and of confidence in the City of London.


Some $597.5bn was lost to the banks in the last quarter of last year alone, after a modest positive inflow in the summer, but a massive $682.5bn haemorrhaged in the second quarter of 2008 – a record. About 15 per cent of the monies held by foreigners in the UK were withdrawn over the period, leaving about $6 trillion. This is by far the largest withdrawal of foreign funds from the UK in recent decades – about 10 times what might flow out during a "normal" quarter.

The revelation will fuel fears that the UK's reputation as a safe place to hold funds is being fatally compromised by the acute crisis in the banking system and a general trend to financial protectionism internationally. This week, Lloyds became the latest bank to approach the Government for more assistance. A deal was agreed last night for the Government to insure about £260bn of assets in return for a stake of up to 75 per cent in the bank. The slide in sterling – it has shed a quarter of its value since mid-2007 – has been both cause and effect of the run on London, seemingly becoming a self-fulfilling phenomenon. The danger is that the heavy depreciation of the pound could become a rout if confidence completely evaporates.

Colin Ellis, an economist at Daiwa Securities, commented: "The outflow of overseas banks' UK holdings is not surprising – indeed foreign investors in general will still be smarting from the sharp fall in the exchange rate last year, as many UK liabilities are priced in sterling terms. That raises the question of what could possibly tempt overseas investors to return to the UK. Further heavy outflows of funds are probably a given."

The Bank of England said that there had been a large fall in deposits from the United States, Switzerland, offshore centres such as Jersey and the Cayman Islands, and from Russia.

Paranoia that the UK could follow Iceland into effective national insolvency and jibes about "Reykjavik on Thames" will find an unwelcome substantiation in these statistics – which also show that stricken British banks are having to repatriate similar sums back to Britain. This is scant consolation for the authorities, however, as it means the UK and sterling are, like some emerging markets and currencies, suffering from a flight of capital. By contrast some financial centres and currencies – notably the US dollar and the Swiss franc – are enjoying a boost as "safe havens" in a troubled world.

The sudden international trend towards financial deglobalisation and the flight of money to "home" bases has nonetheless been dramatic. The Prime Minister has already warned about this drift to "financial protectionism" – even though UK banks brought back almost $600bn in the last months of 2008, as they attempted to repair fragile balance sheets. Mr Ellis added: "These data are consistent with UK banks reducing their overseas holdings, at the same time as overseas banks scale back their presence in the UK. That is not surprising, given that governments around the world are having to prop up their banking sectors, and in turn demanding that national institutions focus on domestic markets. But it does run the risk of being financial protectionism by the back door."

Investment from the West into developing countries has fallen from the level of about $1 trillion a year seen earlier this decade to about $150bn last year. Economies in eastern Europe such as Hungary and the Baltic republics, some in Asia such as Pakistan and developed nations such as Iceland have been severely hit by the collapse in foreign investment.

Like Iceland, the UK has an unusually large banking sector in relation to her national income, with liabilities four times GDP. Should the UK taxpayer have to assume these debts it will represent, in relation to GDP, about double the national debt the nation bore at the end of the Second World War, a near unsustainable burden.

[antiaristo]

Yes, antiaristo was there first!

NO NO NO NO!

A realtime analysis

Posted: Sat Nov 01, 2008 9:51 am

Published: October 30 2008 23:34 | Last updated: October 30 2008 23:34

With a testable prediction

Post subject: Next Bomb Coming

Worth pointing at because the bomb appears to have arrived.

And also, for those yet to be convinced:

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You Yanks had better do something about this, and quick. Financial Times:

Nothing will be done, anti. Doncha know, it's deliberate? That's why all the pieces are falling, effortlessly, into place...

Glad to see you lurking!

[seemslikeadream]

http://economictimes.indiatimes.com/New ... 243798.cms



MANILA: The global crisis wiped a staggering $50 trillion off the value of financial assets last year including $9.6 trillion of losses in
developing Asia alone, the Asian Development Bank said Monday.

``This is by far the most serious crisis to hit the world economy since the Great Depression,'' said ADB President Haruhiko Kuroda. But he predicted Asia would be ``one of the first regions to emerge from it.''

In a study commissioned by the Manila-based lender on the impact of the financial crisis on emerging economies, it estimated the value of financial assets worldwide, currency, equity and bond markets, to have dropped by $50 trillion in 2008.

It said developing Asia was hit harder, losing the equivalent of just over one year's worth of gross domestic product, than other emerging economies because the region has expanded much more rapidly.

In Latin America, losses were estimated at $2.1 trillion. According to the study, the figures provide clear proof of the close connections between markets and economies around the world, leaving few, if any, countries immune to financial or economic fallout. A recovery can only now be envisaged for late 2009 or early 2010, it said.

A sprawling region, developing Asia includes 44 economies from the central Asian republics to China to the Pacific islands. The bank had earlier projected the region's growth to slow to 5.8 percent this year from an estimated 6.9 percent last year.



The worldwide downturn has hit export-driven economies particularly hard. From South Korea to Taiwan to Singapore, exports have plunged by double digits in recent months as American and European consumers spent less on cars and gadgets.

Kuroda said Monday the impact of the crisis could result in a spike in unemployment, slower growth rates and depressed stock markets.

Tight liquidity and credit could also hit small and medium enterprises, while a drop in remittances from overseas workers, which has been fueling domestic consumption in countries like the Philippines and Indonesia, could remove important social safety nets, Kuroda said.

He said the ADB has responded by stepping up access to loans, grants and credit guarantees by several billion dollars from the originally planned $12 billion for 2009.

[bks]

JackRiddler wrote:

A recognition that all this shit was fraudulent from go would do wonders to cut through Gordian knots of all kinds. I think this sequence is possible:
1) List of AIG counterparties published. "Die Offenbarung."
2) Dominoes fall. Outrage.
3) Ratings agencies strung up for taking money to knowingly issue AAA to junk. A few quants are hanged. (This is analogous to how you have to go through Yoo to get to Cheney.)
4) Due to 3, almost everything the financial sector did with derivatives is recognized as fraud all along. my emphasis

Why fraudulent, Jack? Clear as I can see (and you may be seeing much clearer these days, with all the great work you're doing here), CDSs are simply bets on the performance of other kinds of bets - ones that NEVER should have been written, for sure, but to call them fraudulent it would seem we have to produce information that the originals bets were destined to go one way or the other, and that the second-order bets (the CDSs) were made by those with knowledge which way things would go on the originals, and sought to capitalize on it.

If that could be shown, then we have our fraudulent rigged meta-game (of staggeringly enormous proportions, btw). But if those second-order bets were made in the dark, so to speak, we just have capitalist depravity on steroids rather than what normal people will view as fraud.

The outrage is properly directed at the bailout(s) and the lack of disclosure about the course public money is taking through the FIRE sector. Every time SLaD posts something on the economy these days, I feel like murdering someone.

But on the fraud question, please enlighten me. What am I missing?

[nathan28]

But on the fraud question, please enlighten me. What am I missing?

I second that. Most fraud was on the part of people actually signing mortgages, but that means that the loan agents & their employers didn't do their own due diligence and in most instances this is intentional. So you have fraud on one hand and negligence--negligent to the point of conspiracy--on the other. Then you have systematic negligence and moral hazard once you get away from the immediate situation. I'm taking "Demon of Our Own Design" on this unless I see otherwise.

[bks]

nathan28 wrote:

Most fraud was on the part of people actually signing mortgages, but that means that the loan agents & their employers didn't do their own due diligence and in most instances this is intentional. So you have fraud on one hand and negligence--negligent to the point of conspiracy--on the other.

I got that part, and honestly I don't give a shit about the mortgage companies. AFAIAC they gave up their right to any redress of grievance against any particular homeowner when they decided to stop vetting prospective borrowers. Fraud on the part of those who want a mortgage is par for the course, widely tolerated and completely expected, but it's the job of the lender to ultimately say 'no' when they determine that the mortgage is a bad risk. Would you agree, nathan?

What I'd like a clarification on is the supposed fraud on the part of CDS issuers. I don't see that yet.

[JackRiddler]

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bks, nathan28, I shall respond on use of "fraud" term, right after this. First, I have to play Thread Borg and assimilate some new good finds. PLEASE keep scrolling and my answer will magically appear. Thank you.

The Woman Who Could Have Prevented This Financial Mess Was Silenced by Greenspan, Rubin and Summers

A sad tale emerges of willfully arrogant behavior designed to undermine a wise woman's good judgment.



SOUNDING THE ALARM Brooksley E. Born starkly warned of risks in not regulating derivatives. Mr. Greenspan, Robert E. Rubin and Lawrence H. Summers, all pictured on Time in 1999, resisted tighter regulation.

"Break the Glass" was the code-name high-level Treasury Department figures gave the $700 billion bailout; it was to be used only as a last-resort measure. Now millions have been sprayed and damaged by broken glass. But more than a decade ago, a woman you're likely never to have heard of, Brooksley Born, head of the Commodity Futures Trading Commission -- a federal agency that regulates options and futures trading -- was the oracle whose warnings about the dangerous boom in derivatives trading just might have averted the calamitous bust now engulfing the US and global markets. Instead she was met with scorn, condescension and outright anger by former Federal Reserve Chair Alan Greenspan, former Treasury Secretary Robert Rubin and his deputy Lawrence Summers. In fact, Greenspan, the man some affectionately called "The Oracle," spent his political capital cheerleading these disastrous financial instruments.

On Thursday, the New York Times ran a masterful and revealing front page article exposing the culpability of Greenspan, Rubin and Summers for the era of dangerous turbulence we live in. What these "three marketeers" -- as they were called in a 1999 Time magazine cover story -- were adept at was peddling the timebombs at the heart of this complex crisis: exotic and opaque financial instruments known as derivatives -- contracts intended to hedge against risk and whose values are derived from underlying assets. To cut to the quick, Greenspan, Rubin and Summers opposed regulating them. "Proposals to bring even minimalist regulation were basically rebuffed by Greenspan and various people in the Treasury," recalls Alan Blinder, a former Federal Reserve board member and economist at Princeton University, in the Times article.

In 1997, Brooksley Born warned in congressional testimony that unregulated trading in derivatives could "threaten our regulated markets or, indeed, our economy without any federal agency knowing about it." Born called for greater transparency -- disclosure of trades and reserves as a buffer against losses. Instead of heeding this oracle's warnings, Greenspan, Rubin & Summers rushed to silence her. As the Times story reveals, Born's wise warnings "incited fierce opposition" from Greenspan and Rubin who "concluded that merely discussing new rules threatened the derivatives market." Greenspan deployed condescension and told Born she didn't know what she doing and she'd cause a financial crisis. (A senior Commission director who worked with Born suggests that Greenspan and the guys didn't like her independence. " Brooksley was this woman who was not playing tennis with these guys and not having lunch with these guys. There was a little bit of the feeling that this woman was not of Wall Street.")

In early 1998, according to the Times story, one of the guys, Larry Summers, called Born to "chastise her for taking steps he said would lead to a financial crisis. But Born kept at it, unwilling to let arrogant men undermine her good judgment. But it got tougher out there. In June 1998, Greenspan, Rubin and the then head of the SEC, Arthur Levitt, Jr., called on Congress "to prevent Ms. Born from acting until more senior regulators developed their own recommendations." (Levitt now says he regrets that decision.) Months later, the huge hedge fund Long Term Capital Management nearly collapsed -- confirming some of Born's warnings. (Bets on derivatives were a key reason.) "Despite that event," the Times reports, " Congress (apparently as a result of Greenspan & Summer's urging, influence-peddling and pressure) "froze" Born's Commissions' regulatory authority. The next year, Born left as head of the Commission. Born did not talk to the Times for their article.

What emerges is a story of reckless, willful and arrogant action and behavior designed to undermine a wise woman's good judgment. The three marketeers' disdain for modest regulation of new and risky financial instruments reveals a faith-based fundamentalist approach to the management of markets and risk. If there is any accountability left in our system, Greenspan, Rubin and Summers should not be telling anyone how to run anything. Instead, Barack Obama might do well to bring back Brooksley Born and promote to his team economists who haven't contributed to the ugly mess we're in...
link

Thanks MinM!

http://tinyurl.com/7csg6r

Obama Regulatory Pick Blocked Influence of Agency He’ll Now Head

by Jake Bernstein, ProPublica - December 19, 2008 9:44 am EST


In the midst of a stream of financial scandals and regulatory failures, President-elect Barack Obama announced the nomination of two key regulators yesterday: Mary Schapiro as the chairman of the Securities and Exchange Commission and Gary Gensler to head the Commodity Futures Trading Commission. The two will be responsible for creating "a 21st century regulatory framework to ensure that a crisis like this can never happen again," said Obama.

The choice of Gensler for that mission is ironic. While in the Clinton administration, the former assistant Treasury secretary helped oppose regulation of the exotic derivatives at the center of the financial crisis.

Gensler was a top negotiator for the White House in discussions with Congress in support of the now-controversial Commodity Modernization Futures Act of 2000. The law largely prevented the SEC and the CFTC from regulating credit default swaps and other complex instruments that would later wreak havoc with financial markets. Gensler also played a prominent role in batting down an effort by the CFTC to regulate these derivatives. More recently, Gensler has led Obama's SEC transition team.

As we detailed a few months ago, in 1998 the then-chairman of the CFTC, Brooksley Born, had proposed that her agency regulate the rapidly growing market in derivatives, which allow investors to bet on the change in value of anything from interest rates to commodity prices. Regulators witnessed the dangers from these financial instruments when Orange County, Calif., declared bankruptcy in 1994 after it lost $1.6 billion in derivative trading.

Nonetheless, Born's efforts were beaten back by top Clinton officials. They argued that if the CFTC had jurisdiction over the market, it could call into question the legality of trillions of dollars in existing trades. Gensler, who helped shape the response to Born's proposal, told ProPublica last October, "There was a legitimate and widely held view that this aggravated the very question of legal certainty."

As the financial mess has unfolded, there has been a growing move in Congress to give the CFTC more power of financial derivatives. Iowa Democratic Sen. Tom Harkin has introduced legislation that would largely undo the Commodity Futures Modernization Act. The House Agriculture Committee has also looked into restoring the CFTC's authority over financial instruments like credit default swaps.

Bush administration Treasury Secretary Hank Paulson has proposed merging the CFTC with the SEC. “It could be that Gary is being brought in to shut it down or it could be a sign, given his prestige and clout that the CFTC is going to play a prominent role in regulatory reform,” said Michael Greenberger, who was the director of the commission’s division of Trading and Markets under Born.

A little more than a decade after Gensler worked to stop Born's vision of a stronger CFTC, it may now fall to him to make it a reality.

We've contacted Gensler and we'll update the post if and when he responds.

Thanks chiggerbit!

http://smashingtelly.com/2009/02/15/bye-bye-dubai

Goodbye Dubai

Short of opening a Radio Shack in an Amish town, Dubai is the world's worst business idea, and there isn't even any oil. Imagine proposing to build Vegas in a place where sex and drugs and rock and roll are an anathema. This is effectively the proposition that created Dubai - it was a stupid idea before the crash, and now it is dangerous.

Dubai threatens to become an instant ruin, an emblematic hybrid of the worst of both the West and the Middle-East and a dangerous totem for those who would mistakenly interpret this as the de facto product of a secular driven culture.

The opening shot of this clip [ <http://www.youtube.com/watch?v=sk9Sbpnkd-4>] shows 200 skyscrapers that were built in the last 5 years. It looks like Manhattan except that it isn't the place that made Mingus or Van Allen or Kerouac or Wolf or Warhol or Reed or Bernstein or any one of the 1001 other cultural icons from Bob Dylan to Dylan Thomas that form the core spirit of what is needed, in the absence of extreme toleration of vice, to infuse such edifices with purpose and create a self-sustaining culture that will prevent them crumbling into the empty desert that surrounds them.

(Hat tip to D. Monroe)
Just read about this Behemoth Mall opening in NJ also: Xanadu! or The Last Shopping Mall?
Fugly!

Thanks SonicG!

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Some partly tangential thoughts were inspired after listening to David Harvey's excellent, very dense and informative lecture on the
ENIGMA OF CAPITAL
http://davidharvey.org/media/Enigma_of_Capital.mp3
which I'm going to listen to at least three times because he covers so much: neoliberalism, a summary of Marxian theory, a long sequence of different types of crises since the 1800s...

For thirty-five years, since the early 1970s strike wave and financial crisis and fiscal crises and discovery of "limits to growth" and "profit squeeze," capital's concern has been to discipline labor.

For now, even with the financial meltdown, they may view this mission as accomplished:
- limits on capital movements removed, until all regions must compete for the same one big pool of ultra-money
- corps from multinationals to unleashed global players
- unions broken by Pinochet, Thatcher, Reagan and their hundred successors in as many countries
- immigration used strategically to undermine labor and divide-and-conquer
- wages held down, fiscal crises allow implementation of austerity measures
- global sourcing, just-in-time
- revival of imperial wars
- launching of successive "culture wars" to debase political discourse
- celebrating the culture of greed, deifying billionaires
- operation dumb-down, no child will be left imagining
- planet wired into single communications nexus, which helps with...
- the big one: integration of post-Deng China into global labor force, followed by Russia, Eastern Europe, India...
- replacement of income through credit = debt peonage
- extending "homeownership" = patsies tied to mortgages don't make noise in the street
- utter triumph and omnipresence of worldwide consumerist entertainment complex
- NAFTA, WTO, ETC.
- did we mention the technological expansion, omnipresence and greater sophistication of the surveillance state?
- eight years of "terror war" and final build-up of derivative assets magnify wealth inequalities to extremes not seen in West since 1920s...

Now labor -- the people -- are disciplined for the purposes of production and consumption. And so it will be, until the unlikely day when things happen like American workers start staging sympathy actions on behalf of Chinese labor strikes. Yeah, right?

So what's the great challenge left to the global robber baron class? The countertrends in Latin America? Backlash from the financial consolidation?

Oh, yeah, the planet's burning, all life is dying, a layer of plastic covers a growing Texas-sized sector of the Pacific, a Jamaica-sized ice chunks broke off the Antarctic sheet, a New Jersey-sized dead zone has developed at the mouth of the Mississippi, the fish are going extinct, the deserts are advancing, the rivers are salted and all these catastrophes are multiplied in various ways around the planet, and the capitalist system has absolutely no way to confront this and maintain its permanent-growth imperative or the concentration of wealth by which the robber baron class is defined.

Oops. Maybe this can be fixed by having all media blast out greenwash messages 24/7? I hear Apple has a green battery and Citigroup just told me that everyone's saving energy, it's so cool!
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Hyperinflation is also a relative term...

Anything over 20 percent might earn the tag, though it can also mean a million percent or more.

In a depression hyperinflation won't happen from demand. It might happen from devaluation of the dollar, if things go that way. If this were Argentina or some other country that wasn't a superpower, I think we'd have already been judged insolvent and be trading at 10 dollars to the euro. (Those are the historical precedents I'm thinking of: Mexico, Brazil, Italy, etc., not Germany in the 1920s or Zimbabwe today.)

HOWEVER. Since this is the United States, which gets to denominate its debt in its own currency and which has 800 bases around the world and the capacity to blow everyone up and eats 25 percent of all resources and buys all this junk from everywhere and has its corporations everywhere, historical precedents may not apply in the same way. My feeling is that the point will come when too many dollars have been issued, the total debt is so high and the ability of taxpayers to pay it off in a generation is doubted, and China and Japan and EU stop buying t-bills. For all I know, it could start in a few weeks, or take years yet. (I originally expected it in 2005, so I've predicted 10 out of the last 7 recessions.) At that point, the dollar could be radically devalued, triggering commodity price rises that would lead to hyperinflation (more likely the milder sort of 30 percent).

Please note that the government may decide this is in fact the best way to get out from under the debt! Whether it works to improve the situation is another matter.

Thanks me!

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[ultramegagenius]

the big banks weren't making these bets "in the dark." they watched from the inside as the derivatives market vastly outgrew all other asset classes by orders of magnitude. for every piece of risk that was bet upon, a whole series of further bets were made. we can see that all this did was multiply the fallout of bad bets many fold. the situation we are now in would have been apparent to every institution piling up these bets: they are unpayable! you can throw another few tons of bailout money at these zombies, but the liabilities spawned by their so-called hedging instruments are infinite! that can be called nothing short of fraud, if for no other reason that these instruments were undeniably setting up finance for a nuclear chain-reaction. there was never any chance that the "derivatives time-bomb" would unwind peaceably.

[beeline]

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http://www.bloomberg.com/apps/news?pid=20601087&sid=avjYcESZ4uqs&refer=worldwide


Pandit Says Citigroup Having Best Quarter Since 2007 (Update1)


By Edward Evans

March 10 (Bloomberg) -- Citigroup Inc. Chief Executive Officer Vikram Pandit said his bank is having the best quarter since 2007, when it last posted a profit.

“I am most encouraged with the strength of our business so far in 2009,” Pandit wrote in an internal memorandum obtained today by Bloomberg. “In fact, we are profitable through the first two months of 2009 and are having our best quarter-to-date performance since the third quarter of 2007.” The bank had $19 billion of revenue in January and February before disclosed writedowns, he added.

Citigroup has logged five quarters of losses totaling more than $37.5 billion since it posted a $2.1 billion profit in the third quarter of 2007. Once the world’s biggest bank by market value, it fell below $1 in New York trading last week for the first time as investors lost confidence that the shares can recover after losses and a government rescue.

“I am, like you, disappointed with our current stock price and the broad-based misperceptions about our company and its financial position,” Pandit wrote. The price doesn’t reflect the bank’s capital strength and earnings potential, he added.

The New York-based bank traded at $1.20 in Germany today, 14 percent higher than yesterday’s New York closing price. The stock has tumbled 95 percent in the past year, cutting the bank’s market value to about $5.8 billion, less than Japan’s Nomura Holdings Inc. and Turkey’s Akbank TAS, in which Citigroup owns a 20 percent stake. The bank is the smallest company and the worst- performing stock in the 30-member Dow Jones Industrial Average.

Government Stake

The government’s plan to exchange its preferred stock for common shares will make Citigroup the strongest U.S. bank measured on tangible common equity, Pandit added. The transaction will also make the government Citigroup’s biggest shareholder, with a 36 percent stake.

The U.S. government is examining ways to further stabilize Citigroup if needed, the Wall Street Journal reported today, citing people it didn’t identify. Federal officials called the steps “contingency planning” and aren’t expecting a sudden turn for the worse, the Journal said.

Citigroup’s deposits are “relatively stable,” Pandit said in his memo to employees. The bank has also conducted its own stress tests, using assumptions more pessimistic that the Federal Reserve’s, he added. Citigroup is “confident” about its capital strength. Expenses totaled $8.1 billion in the year through February, less than Citigroup’s target, Pandit said.

The bank was created by the 1998 combination of Citicorp and Travelers Group Inc., which with a value of $85 billion was the largest merger in history at the time. The transaction helped persuade the U.S. government to repeal a Great Depression-era law, the Glass-Steagall Act, that prohibited banks that took consumer deposits from engaging in investment-banking activities.

Last Updated: March 10, 2009 07:17 EDT

[Fat Lady Singing]

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Pandit Says Citigroup Having Best Quarter Since 2007 (Update1)

Yeah, it's because we finally paid our Citibank card off!

[seemslikeadream]

Feds, Brits Probe AIG's London Office on $500B Losses

Ground zero for AIG's spectacular implosion, which has soaked up more federal bailout money than any other entity, appears to have been a small London branch office that may have lost nearly half a trillion dollars in bad deals.

The disastrous deals were built up in a decade and, when the crisis hit, the man who ran the unit for the last eight years retired after making $280 million for himself and leaving with a $1 million-a-month consulting contract.

...

The unit's small group of traders risked nearly half a trillion dollars to insure U.S. mortgages and other debt using complex financial products called credit default swaps, according to recent congressional testimony.

...

For about a decade it went OK," Koenig said. "And then, when the U.S. housing market fell out instead, they suddenly realized they had to come up with a half a trillion dollars and all they had was a couple of million in the bank."

The collapse became so severe that AIG warned the U.S. Treasury Department last month that if it wasn't given more federal aid, its failure "could potentially bankrupt or bring down the entire system."



http://abcnews.go.com/Business/story?id=7045889&page=1




AIG Warned of 'Crisis' if Government Didn't Help
Draft, Obtained by ABC News, Dated Four Days Before Bailout
By MATT JAFFE and NED POTTER
March 9, 2009

An AIG report to the Treasury Department last month warned that if the government didn't come to its rescue again, its collapse would trigger a "chain reaction of enormous proportion" that would "potentially bankrupt or bring down the entire system" and make it impossible for AIG to repay the billions it already owed the U.S. government.

A draft report, obtained by ABC News, and marked "strictly confidential," said, "the failure of AIG would cause turmoil in the US economy and global markets, and have multiple and potentially catastrophic unforeseen consequences."
http://abcnews.go.com/images/Business/a ... 090309.pdf

A draft of the report, obtained by ABC News, was marked "strictly confidential." It said, "The failure of AIG would cause turmoil in the U.S. economy and global markets and have multiple and potentially catastrophic unforeseen consequences."

The draft was dated Feb. 26. On March 2, the Treasury Department and the Federal Reserve system announced that AIG, which lost $61.7 billion in the fourth quarter of 2008, would receive $30 billion in new government help.


http://abcnews.go.com/Business/story?id=7040420&page=1

[barracuda]

Too big to fail? 5 biggest banks are 'dead men walking'

By Greg Gordon and Kevin G. Hall, McClatchy Newspapers Greg Gordon And Kevin G. Hall, Mcclatchy Newspapers
Mon Mar 9, 5:19 pm ET

WASHINGTON — America's five largest banks, which already have received $145 billion in taxpayer bailout dollars, still face potentially catastrophic losses from exotic investments if economic conditions substantially worsen, their latest financial reports show.

Citibank, Bank of America , HSBC Bank USA , Wells Fargo Bank and J.P. Morgan Chase reported that their "current" net loss risks from derivatives — insurance-like bets tied to a loan or other underlying asset — surged to $587 billion as of Dec. 31 . Buried in end-of-the-year regulatory reports that McClatchy has reviewed, the figures reflect a jump of 49 percent in just 90 days.

The disclosures underscore the challenges that the banks face as they struggle to navigate through a deepening recession in which all types of loan defaults are soaring.

The banks' potentially huge losses, which could be contained if the economy quickly recovers, also shed new light on the hurdles that President Barack Obama's economic team must overcome to save institutions it deems too big to fail.

While the potential loss totals include risks reported by Wachovia Bank , which Wells Fargo agreed to acquire in October, they don't reflect another Pandora's Box: the impact of Bank of America's Jan. 1 acquisition of tottering investment bank Merrill Lynch , a major derivatives dealer.

Federal regulators portray the potential loss figures as worst-case. However, the risks of these off-balance sheet investments, once thought minimal, have risen sharply as the U.S. has fallen into the steepest economic downturn since World War II, and the big banks' share prices have plummeted to unimaginable lows.

With 12.5 million Americans unemployed and consumer spending in a freefall, fears are rising that a spate of corporate bankruptcies could deliver a new, crippling blow to major banks. Because of the trading in derivatives, corporate bankruptcies could cause a chain reaction that deprives the banks of hundreds of billions of dollars in insurance they bought on risky debt or forces them to shell out huge sums to cover debt they guaranteed.

The biggest concerns are the banks' holdings of contracts known as credit-default swaps, which can provide insurance against defaults on loans such as subprime mortgages or guarantee actual payments for borrowers who walk away from their debts.

The banks' credit-default swap holdings, with face values in the trillions of dollars, are "a ticking time bomb, and how bad it gets is going to depend on how bad the economy gets," said Christopher Whalen , a managing director of Institutional Risk Analytics, a company that grades banks on their degree of loss risk from complex investments.

J.P. Morgan is credited with launching the credit-default market and is one of the most sophisticated players. It remains highly profitable, even after acquiring the remains of failed investment banker dealer Bear Stearns , and says it has limited its exposure. The New York -based bank, however, also has received $25 billion in federal bailout money.

Gary Kopff , president of Everest Management and an expert witness in shareholder suits against banks, has scrutinized the big banks' financial reports. He noted that Citibank now lists 60 percent of its $301 billion in potential losses from its wheeling and dealing in derivatives in the highest-risk category, up from 40 percent in early 2007. Citibank is a unit of New York -based Citigroup . In Monday trading on the New York Stock Exchange , Citigroup shares closed at $1.05 .

Berkshire Hathaway Chairman Warren Buffett , a revered financial guru and America's second wealthiest person after Microsoft Chairman Bill Gates , ominously warned that derivatives "are dangerous" in a February letter to his company's shareholders. In it, he confessed that he cost his company hundreds of millions of dollars when he bought a re-insurance company burdened with bad derivatives bets.

These instruments, he wrote, "have made it almost impossible for investors to understand and analyze our largest commercial banks and investment banks . . . When I read the pages of 'disclosure' in (annual reports) of companies that are entangled with these instruments, all I end up knowing is that I don't know what is going on in their portfolios. And then I reach for some aspirin."

Most of the banks declined to comment, but Bank of America spokeswoman Eloise Hale said: "We do not believe our derivative exposure is a threat to the bank's solvency."

While Bank of America advised shareholders that its risks from these instruments are no more $13.5 billion , Wachovia last year similarly said it could overcome major risks. In reporting a $707 million first-quarter loss, Wachovia acknowledged that it faced heavy subprime mortgage risks, but said it was "well positioned" with "strong capital and liquidity." Within months, losses mushroomed and Wachovia submitted to a takeover by Wells Fargo , which soon got $25 billion in federal bailout money.

Trading in credit-default contracts has sparked investor fears because they are bought and sold in a murky, private market that is largely out of the reach of federal regulators. No one, except those holding the instruments, knows who owes what to whom. Not even banks and insurers can accurately calculate their risks.

"I don't trust any numbers on them," said David Wyss , the chief economist for the New York credit-rating agency Standard & Poor's .

The risks of these below-the-radar insurance policies became abundantly clear last September with the collapse of investment banker Lehman Brothers and global insurer American International Group , both major swap dealers. Their insolvencies threatened to zero out the value of billions of dollars in contracts held by banks and others.

Until then, "we assumed everyone makes good on the contracts," said Vincent Reinhart , a former top economist for the Federal Reserve Board .

Lehman's and AIG's failures put in doubt their guarantees on hundred of billions of dollars in contracts and unleashed a global pullback from risk, leading to the current credit crunch.

The government has since committed $182 billion to rescue AIG and, indirectly, investors on the other end of the firm's swap contracts. AIG posted a fourth quarter 2008 loss last week of more than $61 billion , the worst quarterly performance in U.S. corporate history.

The five major banks, which account for more than 95 percent of U.S. banks' trading in this array of complex derivatives, declined to say how much of the AIG bailout money flowed to them to make good on these contracts.

Banking industry officials stress that most of the exotic trades are less risky — such as interest-rate swaps, in which a bank might have tried to limit potential losses by trading the variable rate interest of one loan for the fixed-rate interest of another.

In their annual reports to shareholders, the banks say that parties insuring credit-default swaps or other derivatives are required to post substantial cash collateral.

However, even after subtracting collateralized risks, the banks' collective exposure is "a big, big number" and a matter for concern, said a senior official in a banking regulatory agency, speaking on condition of anonymity because agency policy restricts public comments.

In their reports, the banks said that their net current risks and potential future losses from derivatives surpass $1.2 trillion . The potential near-term losses of $587 billion easily exceed the banks' combined $497 billion in so-called "risk-based capital," the assets they hold in reserve for disaster scenarios.

Four of the banks' reserves already have been augmented by taxpayer bailout money, topped by Citibank — $50 billion — and Bank of America — $45 billion , plus a $100 billion loan guarantee.

The banks' quarterly financial reports show that as of Dec. 31 :

— J.P. Morgan had potential current derivatives losses of $241.2 billion , outstripping its $144 billion in reserves, and future exposure of $299 billion .

— Citibank had potential current losses of $140.3 billion , exceeding its $108 billion in reserves, and future losses of $161.2 billion .

— Bank of America reported $80.4 billion in current exposure, below its $122.4 billion reserve, but $218 billion in total exposure.

— HSBC Bank USA had current potential losses of $62 billion , more than triple its reserves, and potential total exposure of $95 billion .

— San Francisco -based Wells Fargo , which agreed to take over Charlotte-based Wachovia in October, reported current potential losses totaling nearly $64 billion , below the banks' combined reserves of $104 billion , but total future risks of about $109 billion .

Kopff, the bank shareholders' expert, said that several of the big banks' risks are so large that they are "dead men walking."

The banks' credit-default portfolios have gotten little scrutiny because they're off-the-books entries that are largely unregulated. However, government officials said in late February that federal examiners would review the top 19 banks' swap exposures in the coming weeks as part of "stress tests" to evaluate the institutions' ability to withstand further deterioration in the economy.

Representatives for Citibank, J.P. Morgan and Wells Fargo declined to comment.

Hale, the Bank of America spokeswoman, said that the bank uses swaps as insurance against its loan portfolio — they "gain value when the loans they are hedging lose value."

She said that Bank of America requires thousands of parties that are guarantors on these insurance-like contracts to post "the most secure collateral — cash and U.S. Treasuries, minimizing risk roughly 35 percent." The collateral is adjusted daily.

Bank of America's report of an $80.4 billion exposure doesn't count the collateral and "also assumes the default of each of the thousands of counterparty customers, which isn't likely," Hale said. Counterparties are the investors on the other side of the deal, often other banks or investment banks.

In response to questions from McClatchy , HSBC spokesman Neil Brazil said that the bank closely manages its derivatives contracts "to ensure that credit risks are assessed accurately, approved properly (and) monitored regularly."

[JackRiddler]

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Once in a while even ABC News is good for a revelation, which I shall headline as follows:

How AIG Extorted Another $30 Billion from the Government (on behalf of Counterparties?)

The Star Trek (tm) Version

http://abcnews.go.com/print?id=7040420

AIG Warned of 'Crisis' if Government Didn't Help
Draft, Obtained by ABC News, Dated Four Days Before Bailout

By MATT JAFFE and NED POTTER

March 9, 2009 —

An AIG report to the Treasury Department last month warned that if the government didn't come to its rescue again, its collapse would trigger a "chain reaction of enormous proportion" that would "potentially bankrupt or bring down the entire system" and make it impossible for AIG to repay the billions it already owed the U.S. government.

Four days later, AIG was given $30 billion in federal aid on top of the $130 billion it had already received.

(Read the AIG Report to the Treasury Department here.)

A draft of the report, obtained by ABC News, was marked "strictly confidential." It said, "The failure of AIG would cause turmoil in the U.S. economy and global markets and have multiple and potentially catastrophic unforeseen consequences."

The draft was dated Feb. 26. On March 2, the Treasury Department and the Federal Reserve system announced that AIG, which lost $61.7 billion in the fourth quarter of 2008, would receive $30 billion in new government help.

AIG warns in its report of the "systemic risk" that a potential collapse posed. It describes a "systemic risk" as one that "could potentially bankrupt or bring down the entire system or market."

The company said, "What happens to AIG has the potential to trigger a cascading set of further failures, which cannot be stopped except by extraordinary means."

"The inability of AIG to immediately secure additional assistance from the Federal Reserve and the Department of the Treasury threatens not only AIG's sales process, but also consumer and business confidence around the world," it said.

The report referred to the unexpected downward economic spiral after the Fed allowed Lehman Brothers, the giant investment bank, to collapse last fall. AIG said the damage to credit market would "dwarf the Lehman fallout."

Yeah, we'd live in paradise if not for original sin, which has been pinpointed to the moment when poor Lehman was abandoned in September 2008.

The Treasury Department told ABC News it would have no comment on the report, and the White House referred questions to the Treasury Department.

Sounds like the kind of paradox that would make a Star Trek robot blow a fuse in confusion. Alternatively, a good reason for 100,000 higher primates to march on Washington. Which are we?

Late today, AIG released a more recent version of the draft, dated March 6. The language in it was substantially the same as in the copy obtained earlier by ABC News.

The company points out in the report that it operates in 140 countries and is the largest insurer in the Mideast, Southeast Asia, Hong Kong, the Philippines, Thailand and Japan. It argues that its failure would create a "crisis of confidence" worldwide.

Fed Feared AIG's Ripple Effect

The struggling insurance behemoth also describes itself as the largest retirement-services provider for the American education and health-care systems in the United States.

AIG warned the Treasury Department that it was even more crucial for it to be rescued in February than it was late last year when the Bush administration came to its aid with tens of billions of dollars.

"Permitting AIG to fail would be even more serious today than in September, especially in view of the support of the U.S. government," the report said. "Public confidence in financial institutions is at a nadir and it is questionable whether the economy could tolerate another shock to the system that a failure of AIG would produce."

The company warns, in its presentation, that the effects of a failure would spread far beyond its core insurance business. It says the value of the U.S. dollar would suffer on international markets; that bond markets would be placed under additional stress; that money-market funds might be forced to reduce their returns to investors; and that Boeing, the nation's largest maker of airliners, might be forced to make new layoffs if AIG's plane-leasing operation closed down

Harvard economist Kenneth Rogoff told ABC News that the federal government will have to "continue propping up AIG until they've got a plan for the financial sector because for a lot of the big financial institutions, if AIG goes under they're going to lose a lot of money."

Current plans include an invasion of Xaton 9 to seize their invaluable dilithium crystal reserves, and/or bucking up and asking the Romulans to renegotiate terms on the loan.

"They have trades with AIG where they're just going to lose their shirt and then the financial institutions are going to come to Washington," Rogoff said. "We need a complete plan."

Not everyone was convinced.

Flat earthers.

"Whenever you hear the phrase 'systemic risk,' it's shorthand for 'we're really in trouble and need money,'" said Barry Ritholtz, director for Equity Research for Fusion IQ and author of "Bailout Nation." "I'm very skeptical of what's called systemic risk."

Ritholtz acknowledged that it's extremely difficult to determine what "potentially" could happen, but said it "certainly smells like scare tactics."

"If it just takes scare tactics to squeeze a billion dollars out of you, they'll use scare tactics," he said.

The report, sources say, was submitted to federal regulators. A source who asked not to be identified said he believed Treasury Secretary Timothy Geithner saw the report before the AIG bailout, but the Treasury Department could not confirm that.

Geithner said he was concerned about ripple effects from an AIG failure when he testified to Congress on March 4.

"Millions of Americans here and around the world depend on AIG for insurance policies and a range of different types of savings products," he continued. "So the judgment your government made in that context was, and I think it was the right judgment, that the effect on confidence would have been very dramatic, I think more dramatic than even in the case with the failure of a major investment bank."

"It would be much better for us and for you if we had another alternative to this path that would contain the damage to the economy as a whole, but that alternative does not exist," Geithner concluded.

Copyright © 2009 ABC News Internet Ventures

Download the

AIG Extortion Memorandum

Here
http://abcnews.go.com/images/Business/a ... 090309.pdf

Page 20:

An AIG failure would likely result in the immediate seizure of certain
insurance businesses of AIG by domestic and foreign regulators.
– The seizure by one regulator in a given region (e.g., Asia) would almost
certainly have a domino effect and lead to the seizure of insurance businesses in multiple jurisdictions across the region
– Once these assets were effectively nationalized they would be out of the reach of the U.S.
– Given the substantial “footprint” of AIG’s insurance presence in these regions, the consequence of a seizure would significantly impair, if not cripple, the entire insurance industry within certain regions
– Even if there is not an immediate seizure of the insurance businesses, there will be significant policy cancellations which will likely lead to seizures

 Seizure of foreign assets could lead to:
– Loss of assets to repay the Federal Reserve
– Collapse of AIG’s public debt
– Loss of value of the U.S.Treasury’s Preferred Shares

Page 17:

 An AIG failure could have similar or worse consequences on the global financial markets as that of the Lehman bankruptcy. Similarities include:
– The large size of their derivatives books: AIG Financial Products Corp. (AIGFP) has approximately $1.6 trillion in notional derivatives exposures
• Unwinding of the portfolio in an AIG failure would likely cause enormous downward pressure on valuations across a wide range of associated asset classes
– The large number of counterparties involved in a wind-down of the derivatives books.
• Counterparties include top banks, sovereign wealth funds, money managers and hedge funds
• Total client base: more than 1,500 major corporations, governments, and institutional investors would be affected

 Widespread impact of ratings downgrades
• Certain AIGFP contracts include a ratings downgrade as an “event of default;” all AIGFP contracts include bankruptcy as an “event of default,” providing a termination right to each counterparty
• Downward pressure on values of underlying assets resulting from terminations of and
the calls pursuant to the underlying and associated contracts

 Spotlight: U.S. Municipal Market
– 2nd largest holder of U.S. municipal bonds: AIG’s commercial insurance (AIGCI) business has more than $70 billion of invested assets, 73% in U.S. municipal bonds. A forced sale of AIGCI’s investment portfolio would significantly stress the U.S. municipal bond market.

Deliver or I will close your libraries.

Page 8:

A failure of AIG would have a devastating impact on the U.S. and global economy.

The economic effects may include:
• Potential unemployment for a large portion of the 116,000 employees, including 50,000 employees in all 50 states and the District of Columbia (generating annual U.S. salaries totaling $3.5 billion)
• Adverse impact on AIG’s 74 million customers worldwide, including 30 million U.S. customers in its general insurance, life insurance and retirement services, and financial services businesses
• The immediate damage to credit markets worldwide from an AIG failure would dwarf the Lehman fallout. Possible outcomes for which the Treasury would need to be prepared to respond:
• Fall in the foreign exchange value of the dollar
• Increase in Treasury borrowing costs
• Doubts about the ability of the U.S. to support its banking system.

Page 4:

The systemic risk is principally centered in the “life insurance” business because it is this subsector that has the greatest variety of investments and obligations that are subject to loss of value of the underlying investments.
 The life insurance industry employs approximately 2.3 million people in the U.S. who sell individual and group policies. There are over $19 trillion of face value “life” policies in force in the U.S. and 375 million policies.

It goes on and on. Huge and mostly genuine consequences to the failure of the real insurance side of the beast (remember that organizational chart of AIG a couple of pages back?), which on the whole is solvent. But that vast structure is strapped to a suicide bomb: the derivatives betting wing of just 600 yuppie commandos in London, who took on 1.6 trillion dollars in uncollateralized liabilities on behalf of their fellow pirates: sovereign funds being the *best* of the lot; secretive hedge funds hiding behind six levels of corporate ownership; European banks who used CDSes as a replacement for actual reserves on their books. And if you could unravel it, for sure the CDS counterparties provided a host of sophisticated kickbacks and hidden favors to the AIG traders selling CDS.

And now the suicide bomb can't be separated from the insurance business without causing all the dominoes to fall, culminating with the counterparties' nations seizing AIG assets and boycotting T-bills.

Khaaaaaaan!

You know, I can't help seeing a measure of justice in this. China worked cheap by the capitalist rules to give surplus production to America in exchange for air dollars, and faithfully gave those right back to the US Treasury, in effect paying for the attack on Iraq. For now, they're among those getting payback, using AIG as a suction device through which a bit of the Treasury gets plundered back, in the game that America (the Congress, Wall Street and the Pentagon) invented.

STILL, there ought to be a LAW!

I can't believe it's legal for a legit insurance company (I know, already a contradiction in terms) to simultaneously have an investment banking division speculating on the world derivatives casino. That's just crazy. I can't believe no one made that illegal.

Oh.

DING!@!

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[JackRiddler]

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And now, as promised,

@ bks, nathan28 RE: FRAUD.

the big banks weren't making these bets "in the dark." they watched from the inside as the derivatives market vastly outgrew all other asset classes by orders of magnitude. for every piece of risk that was bet upon, a whole series of further bets were made. we can see that all this did was multiply the fallout of bad bets many fold. the situation we are now in would have been apparent to every institution piling up these bets: they are unpayable! you can throw another few tons of bailout money at these zombies, but the liabilities spawned by their so-called hedging instruments are infinite! that can be called nothing short of fraud, if for no other reason that these instruments were undeniably setting up finance for a nuclear chain-reaction. there was never any chance that the "derivatives time-bomb" would unwind peaceably.

Yup. Thanks!

(But now I'll find a wordier way to say the same.)

First, let's distinguish between:
- systemic fraud
- tantamount-to-criminal-fraud but legal under the fucked-up rules, and
- fraud actionable as individual crime under the law.

What ultramegagenius describes in the quote is the systemic fraud, which the individuals practicing its separate parts could clearly see.

When AIG sells CDS contracts notionally valued at a cumulative total hundreds of times the value of the underlying "assets," this is systemic fraud. And they know it. They're promising to pay when they know they will never, ever be able to pay, if the triggering events specified in the contracts they're making with hundreds of counterparties should happen. And so AIG like the other CDS pimps declares those events impossible, on the provably insane proposition that houses are money trees that grow to the stratosphere for all time. By 2006, no one in the game could have believed this any more, though of course they will claim they did. (Or they don't remember.)

When Moody's and S&P and Co. are paid by AIG and Co. to put the AAA on both AIG and the junk mortgage securities on which the CDS bets are based, this is closer to individual, actionable fraud. They are the weak point in the criminal conspiracy, with a role analogous to that of Yoo providing the bogus cover to Cheney for what he was already doing.

When AIG or other traders sold CDS contracts to counterparties and then equated these to interest payments and used them to clone mortgage securities and sold these to other investors, that rates as at least tantamount-to-criminal-fraud but legal under the fucked-up rules.

If AIG traders were engaging in sweet deals and kickbacks and whatnot with the counterparties to whom they were selling CDS contracts, they were engaging in individual, actionable fraud. Getting at this kind of detail would follow after the end of the AIG bailout (bust-out) operation. And it will end -- the government is not going to bail them or rather the counterparties out for the full sum. And then the toppling of the ratings agencies.

I'm guessing the government at some point is going to have to throw up its hands and announce it will back AIG's insurance side and have to renegotiate AIG's CDS obligations with the counterparties individually. What regulators in Asia do then is an open question.

Meanwhile, the counterparties are getting the last Treasury plunder in.

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MORE THOUGHTS FROM MY DU THREAD
http://www.democraticunderground.com/di ... 89x5213429

We essentially agree about the nature of the problem and solutions

There's a difference in how much stress I put on the extra-territorial control of the key institutions involved in the crash. Goldman may have been the largest [AIG] counter-party, but here's a list of the other big banks, and MOST are non-U.S.:

(Source: WSJ research):
Goldman Sachs
Deutsche Bank
Merrill Lynch
Société Générale
Calyon
Barclays
Rabobank
Danske
HSBC
Royal Bank of Scotland
Banco Santander
Morgan Stanley
Wachovia
Bank of America
Lloyds Banking Group

http://johnbatchelorshow.com/jb/2009/03/aig-conspiracy

It's not just the European banks - AIG and HSBC are Hong Kong (Chinese) investment vehicles. This payoff of foreign Credit Default Swaps holders is extortion money to prevent a run on the Dollar by way of a threatened huge sell-off of treasuries, moneymarket funds, and other Dollar-denominated holdings.

We're in a position where our foreign debt is so huge that China and a half dozen other big sovereign wealth funds could destroy the US currency and economy. Of course, they would destroy themselves in the process. It's the private jackals, the hedge funds, that worry me more. Some sharp operator with a big stash of options and insiders knowledge of the secondary markets for treasuries and currency could engineer another ruinous fail in the Repo market, setting off a Sum of All Fears type economic war, and think they could come out owning the world.
Mark

I see what you're saying but "foreign" actually means "global"...
and it's a system that the US government (steered by a banking lobby) very much imposed on the world.

Seriously, I think this nuance matters: to speak of "extortion" by one side for expecting their contractual payments, when it has so manifestly been a mutual system for decades, with the advantage to the US, skews the truth.

Who's been posing threats to everyone over everything?

Anyway, it looks like we agree rougly on the necessary measures. Unless we can come up with another planet as collateral (and sadly we cannot rule that out as an idea our imperial planners would like to implement, so beware sudden calls to new wars), AIG's counterparties cannot be paid at face value and that's just reality. Gamblers lost.

In other words, "let it crash" isn't even the half of it: it has crashed. Stop pretending it hasn't and use the tax money US is giving away to bankers and their counterparties to instead create new public-sector banking entities unburdened by debt and dedicated to the necessary energy, transport and economic conversion to a sustainable system. And if there's a shortfall in T-bills as a result, cover it with crisp new dollar notes and be conciliatory as hell to the foreign nations in offering a new common way forward for the world, a way that is no longer this high finance capitalist scam.

Invite the other governments to join in the game because we all need a new game.

There's a difference in how much stress I put on the extra-territorial control of the key institutions involved in the crash. Goldman may have been the largest counter-party, but here's a list of the other big banks, and MOST are non-U.S.:

As one might expect after 30 years of huge US trade and federal deficits. We receive the world's production surplus, we give them dollars, and US offers them T-bills (to pay for US wars). And they play by the rules of this game. And at the same time the USG and US economists demand they adopt all ways American, and many of them do. And then Wall Street comes along with all these exotic derivatives fraudulently labeled AAA, and they buy that crap because they're greedy suckers and anyway, they have to do something with all the dollars they have. And that crap is contracts, including the insane sums of CDS bets by third-parties. And then these obligations come due when the system finally contracts (because, o deadly miracle, housing prices don't go up forever!).

The CDS contracts should have never been issued, of course, and that's whose fault? Ultimately the lack of regulation, which goes back to the (mainly US) banking lobby takeover of Congress and the Executive and SEC. And also the ratings agencies for having given the AAA imprimatur, central to the scam.

And at the same time all of this is being steered by players in a class that is global (not "foreign").

It's not just the European banks - AIG and HSBC are Hong Kong (Chinese) investment vehicles. This payoff of foreign Credit Default Swaps holders is extortion money to prevent a run on the Dollar by way of a threatened huge sell-off of treasuries, moneymarket funds, and other Dollar-denominated holdings.

Actually, that works both ways. I more than quibble with this language. The extortion is being practiced by the richest few against the populations of all of these countries. The CDS buyers were aggressively recruited by the CDS issuers. The issuers (like AIG) were well aware they were writing CDS contracts with notional payoffs in the trillions on underlying assets in the low billions. And the buyers were also aware of it, but kept buying, and used CDS contracts as hedges to circumvent reserve requirements. See what I mean, when it's total wild west, you can't call that "extortion."

CDS holders' nations are just asking for their due under the rules that Washington and Wall Street established, although this is IMPOSSIBLE. And they're the ones who also fear extortion, since a dollar devaluation cuts into THEIR savings.

Dollar devaluation may be the only way out of the US debt.

We're in a position where our foreign debt is so huge that China and a half dozen other big sovereign wealth funds could destroy the US currency and economy. Of course, they would destroy themselves in the process.

Right. Or they could convert their own dollar holdings to a new BRIC-EU basket currency, and who could blame them?

It's the private jackals, the hedge funds, that worry me more. Some sharp operator with a big stash of options and insiders knowledge of the secondary markets for treasuries and currency could engineer another ruinous fail in the Repo market, setting off a Sum of All Fears type economic war, and think they could come out owning the world.

Understand what you're saying but seriously: It's the situation in Washington and other capitals that should worry, the political obeisance to banks, because that's where the difference can be made. Politicians need to learn very fast or be replaced, and we don't have a non-banking party to vote for. (You want frightening? The Republicans are sooner or later going to pretend they are the anti-banking party, because that's all they have left. What if they can ride that back into power?)

Or what if the consensus of the parties becomes that this situation calls for a nice little hot war where whatever them foreigners seize can be seized back?

I happen to think that era is over, by the way, but you never know.

Is it time yet for Obama's "international test" that Biden predicted?

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