Check It Out for Sunday, March 22nd
Check It Out on a sunny Sunday, some excerpts from the following:
Julian Delasanetllis at Asia Times writes about the AIG bonus sideshow serving as a cover for the real problem.
"Everybody likes simplistic, public passion plays of good and evil - where would the Maury Povich tabloid TV show, now the Maury show, be without DNA tests or lie detectors? But the real scandal here is not the $160 million in AIG bonuses - it's the $180 billion in AIG bailouts, and, unfortunately, very little is being discussed about them.
"First Fannie and Freddie went down the tubes, then, in the space of a few hours on a weekend, Merrill Lynch was consumed by Bank of America and then Lehman Brothers went bust. By the end of the month, market capitalism's reigning chief lackeys, George W Bush-appointees Ben Bernanke at the Federal Reserve and Treasury secretary Henry Paulson were begging the US Congress for $700 billion or so - what later became the Troubled Assets Relief Program - of taxpayer money to pull the financial system out of the mess it had created for itself.
"Less noticed at the time was what was happening with the American Insurance Group, or AIG. There, in exchange for stock warrants representing 79.6% of the company's equity, the Federal Reserve Bank agreed to provide AIG with $85 billion; further cash injections by the Fed and Treasury in October, November, and just a few weeks ago put the total amount the government was on the hook for with AIG at $180 billion.
"Last summer (see Jaws close in on Bernanke, Asia Times Online, July 16, 2008), I described how, where once US mortgages were ultimately guaranteed by government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, the mortgage guarantee function during the glory days of this decade's credit boom up to 2007 was mostly performed by something called credit default swaps (CDS), private, unregulated, non-exchange traded derivative instruments that allowed two parties to come together to place bets on the health of a bond, the company that issued it, even the sovereign debt of whole countries.
"What we are gradually learning is just how central CDS became to the great expansion, and now deflation, of the credit bubble. As the securitization craze deepened and expanded, as everything from loans for houses, cars, office buildings and credit cards got rolled up and then sliced off into ever- and ever-larger successive rounds of debt issuance, CDS were always there, providing the participants in this market the false sense of security that whoever was on the other side of the debt security they had just bought or sold could fulfill their commitment to make good on their obligation. In essence, the $62 trillion market in CDS became the enablers of the entire shadow banking system that provided the liquidity for the whole real estate and other asset boom.
"CDS were totally unregulated; one could sell and sell and sell them for premium - as AIG did with CDS on the mortgage-backed securities that came out of the subprime boom - and just hope that the prices of the underlying mortgages, and the real estate that backed them up, held up.
"The issue of who loosed the shadow banking/CDS financial system onto the world is mostly uninvestigated. There was the Commodity Futures Modernization Act of 2000, pushed through the Congress with no debate in either chamber, mostly by Republicans such as Phil Gramm of Texas, and signed into law by president Bill Clinton a month before the end of his term. It removed private party derivatives from regulation by the US Commodity Futures Trading Commission; as applied to CDS, that was what allowed one to hold so many of them without posting a margin.
"On April 28, 2004, the US Securities and Exchange Commission approved a rule that permitted major investment banks to operate with much higher leverage ratios, allowing for up to $40 in loans for each dollar in capital. Explaining his vote for the change, SEC commissioner Rod Campos is heard on the tape of the meeting saying that "I keep my fingers crossed for the future".
"We now see that more in terms of prudent regulation was needed than just what could be provided for by commissioner Campos' digits.
"AIG used to be a pure insurance company. General Electric used to sell good toasters, Sears clothed the backs of Middle America. In one way or the other, all three staid-and-true American commercial names have recently allowed themselves to roll down the road to ruin and turn their companies into hedge funds.
"That, the recent obsession over manipulating leveraged finance instead of actually producing something to be successfully sold in the markets of commerce, is something that aches for a public debate it will never see. (Consider Sears: majesty to hedge fund dust, Asia Times Online, May 14, 2008.)
"Last week, as detailed on this site with W Joseph Stroupe's three-part series (see Dollar crisis in the making Asia Times Online, March 14-18, 2009) and by Olivia Chung's article on Chinese Premier Wen Jiabao's warning to the US to maintain the value of its currency as a matter of national honor, (see Wen puts US honor on the debt line Asia Times Online, March 14, 2009) the message seemed to be being sent as loudly and clearly as possible.. Still, the US stockmarket ran true to form - it ignored Wen's warnings, and continued its recent bounce off the lows.
"So Ben Bernanke decided to give America's Chinese and other foreign investors a good swift kick in the keyster as they headed out the door.
"In other words - foreigners, we don't need your money; we'll print our own! That's what's essentially been done with the short end of the Treasury yield curve since the Fed's rescue operations from last September; it was probably only a matter of time before they would attempt the same with longer-term securities.
"The potential drawbacks to this approach are obvious. Does Bernanke really think he can convince foreign investors to make new investments in US government securities by threatening the dollar value of their existing securities? The last thing the recovery effort needs is long-term interest rates in an uncontrolled rise.
"But this collective 5% impoverishment of America drew no notice on Capitol Hill. The House of Representatives, in the very rare mode of considering themselves and acting as servants of the plebeians, overwhelmingly voted to seize the AIG bonuses through confiscatory taxation; to have a similar beneficial effect with the currency markets might require a repeal of the laws of gravity.
"I almost get the impression that, like a child with too many toys and who has become bored with his most recent one, the public is tiring of AIG rage. Will they now turn their focus to an actually important public issue?
"Doubtful.
"Next, on PowerCableNews, we'll have the experts debating President Barack Obama's NCAA basketball picks!"
David Sirota writes in the San Francisco Chronicle about the US government of men, not laws.
"United Steelworkers President Leo Gerard likes to say that Washington policymakers "treat the people who take a shower after work much differently than they treat the people who shower before they go to work." In the 21st century Gilded Age, the blue-collar shower-after-work crowd is given the tough, while the white-collar shower-before-work gang gets the love, and never before this week was that doctrine made so clear.
"Last month, the same government that says it "cannot just abrogate" executives' bonus contracts used its leverage to cancel unions' wage contracts. As the Wall Street Journal reported, federal loans to GM and Chrysler were made contingent on those manufacturers shredding their existing labor pacts and "extract(ing) financial concessions from workers." In other words, our government asks us to believe that it possesses total authority to adjust contracts at car companies it lends to, and yet has zero power to modify contracts at financial firms it owns. This, even though the latter set of covenants might be easily abolished.
Johann Hari at The Independent has an "we told you so" commentary about Israel's recent assault on Gaza.
"For months, the opponents of Operation Cast Lead – the assault on Gaza that killed 1,434 Palestinians – have been told we are "dupes for Islamic fundamentalists", or even anti-Semitic. The defenders of Israel's war claimed you could only believe the reports that Israeli troops were deliberately firing on civilians, scrawling "death to Arabs" on the walls, and trashing olive groves, or using the chemical weapon white phosphorus that burns to the bone, if you were infected with the old European virus of Jew-hatred.
"The Obama administration’s mortgage rescue plan announced in February offers limited help to some individual homeowners at risk of foreclosure, but almost completely overlooks the plight of renters in foreclosed buildings. Families facing eviction are left to fend for themselves, often with little understanding of their legal rights or other options.
"Now the group scans the latest foreclosure listings and goes door to door to alert tenants. They host meetings with people at risk of eviction, provide assistance and advice about negotiating with lenders, and organize demonstrations outside banks. They also work with former owners who hope to renegotiate their loans with the banks and keep renting out their properties.
"Renters are usually the last to learn about a foreclosure. 'Tenants will get a letter from a bank offering them a few hundred dollars if they leave in two weeks, and threatening to evict them within a month if they refuse and give them nothing,' says Meacham. Those who leave usually lose their security deposits and any prepaid rent. 'Most banks depend on people getting scared and leaving. When people resist, especially tenants and former owners, the banks don’t know what to do with that and back off.' "
Julian Delasanetllis at Asia Times writes about the AIG bonus sideshow serving as a cover for the real problem.
"Everybody likes simplistic, public passion plays of good and evil - where would the Maury Povich tabloid TV show, now the Maury show, be without DNA tests or lie detectors? But the real scandal here is not the $160 million in AIG bonuses - it's the $180 billion in AIG bailouts, and, unfortunately, very little is being discussed about them.
"First Fannie and Freddie went down the tubes, then, in the space of a few hours on a weekend, Merrill Lynch was consumed by Bank of America and then Lehman Brothers went bust. By the end of the month, market capitalism's reigning chief lackeys, George W Bush-appointees Ben Bernanke at the Federal Reserve and Treasury secretary Henry Paulson were begging the US Congress for $700 billion or so - what later became the Troubled Assets Relief Program - of taxpayer money to pull the financial system out of the mess it had created for itself.
"Less noticed at the time was what was happening with the American Insurance Group, or AIG. There, in exchange for stock warrants representing 79.6% of the company's equity, the Federal Reserve Bank agreed to provide AIG with $85 billion; further cash injections by the Fed and Treasury in October, November, and just a few weeks ago put the total amount the government was on the hook for with AIG at $180 billion.
"Last summer (see Jaws close in on Bernanke, Asia Times Online, July 16, 2008), I described how, where once US mortgages were ultimately guaranteed by government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, the mortgage guarantee function during the glory days of this decade's credit boom up to 2007 was mostly performed by something called credit default swaps (CDS), private, unregulated, non-exchange traded derivative instruments that allowed two parties to come together to place bets on the health of a bond, the company that issued it, even the sovereign debt of whole countries.
"What we are gradually learning is just how central CDS became to the great expansion, and now deflation, of the credit bubble. As the securitization craze deepened and expanded, as everything from loans for houses, cars, office buildings and credit cards got rolled up and then sliced off into ever- and ever-larger successive rounds of debt issuance, CDS were always there, providing the participants in this market the false sense of security that whoever was on the other side of the debt security they had just bought or sold could fulfill their commitment to make good on their obligation. In essence, the $62 trillion market in CDS became the enablers of the entire shadow banking system that provided the liquidity for the whole real estate and other asset boom.
"CDS were totally unregulated; one could sell and sell and sell them for premium - as AIG did with CDS on the mortgage-backed securities that came out of the subprime boom - and just hope that the prices of the underlying mortgages, and the real estate that backed them up, held up.
"The issue of who loosed the shadow banking/CDS financial system onto the world is mostly uninvestigated. There was the Commodity Futures Modernization Act of 2000, pushed through the Congress with no debate in either chamber, mostly by Republicans such as Phil Gramm of Texas, and signed into law by president Bill Clinton a month before the end of his term. It removed private party derivatives from regulation by the US Commodity Futures Trading Commission; as applied to CDS, that was what allowed one to hold so many of them without posting a margin.
"On April 28, 2004, the US Securities and Exchange Commission approved a rule that permitted major investment banks to operate with much higher leverage ratios, allowing for up to $40 in loans for each dollar in capital. Explaining his vote for the change, SEC commissioner Rod Campos is heard on the tape of the meeting saying that "I keep my fingers crossed for the future".
"We now see that more in terms of prudent regulation was needed than just what could be provided for by commissioner Campos' digits.
"AIG used to be a pure insurance company. General Electric used to sell good toasters, Sears clothed the backs of Middle America. In one way or the other, all three staid-and-true American commercial names have recently allowed themselves to roll down the road to ruin and turn their companies into hedge funds.
"That, the recent obsession over manipulating leveraged finance instead of actually producing something to be successfully sold in the markets of commerce, is something that aches for a public debate it will never see. (Consider Sears: majesty to hedge fund dust, Asia Times Online, May 14, 2008.)
"Last week, as detailed on this site with W Joseph Stroupe's three-part series (see Dollar crisis in the making Asia Times Online, March 14-18, 2009) and by Olivia Chung's article on Chinese Premier Wen Jiabao's warning to the US to maintain the value of its currency as a matter of national honor, (see Wen puts US honor on the debt line Asia Times Online, March 14, 2009) the message seemed to be being sent as loudly and clearly as possible.. Still, the US stockmarket ran true to form - it ignored Wen's warnings, and continued its recent bounce off the lows.
"So Ben Bernanke decided to give America's Chinese and other foreign investors a good swift kick in the keyster as they headed out the door.
"In other words - foreigners, we don't need your money; we'll print our own! That's what's essentially been done with the short end of the Treasury yield curve since the Fed's rescue operations from last September; it was probably only a matter of time before they would attempt the same with longer-term securities.
"The potential drawbacks to this approach are obvious. Does Bernanke really think he can convince foreign investors to make new investments in US government securities by threatening the dollar value of their existing securities? The last thing the recovery effort needs is long-term interest rates in an uncontrolled rise.
"But this collective 5% impoverishment of America drew no notice on Capitol Hill. The House of Representatives, in the very rare mode of considering themselves and acting as servants of the plebeians, overwhelmingly voted to seize the AIG bonuses through confiscatory taxation; to have a similar beneficial effect with the currency markets might require a repeal of the laws of gravity.
"I almost get the impression that, like a child with too many toys and who has become bored with his most recent one, the public is tiring of AIG rage. Will they now turn their focus to an actually important public issue?
"Doubtful.
"Next, on PowerCableNews, we'll have the experts debating President Barack Obama's NCAA basketball picks!"
David Sirota writes in the San Francisco Chronicle about the US government of men, not laws.
"United Steelworkers President Leo Gerard likes to say that Washington policymakers "treat the people who take a shower after work much differently than they treat the people who shower before they go to work." In the 21st century Gilded Age, the blue-collar shower-after-work crowd is given the tough, while the white-collar shower-before-work gang gets the love, and never before this week was that doctrine made so clear.
"Last month, the same government that says it "cannot just abrogate" executives' bonus contracts used its leverage to cancel unions' wage contracts. As the Wall Street Journal reported, federal loans to GM and Chrysler were made contingent on those manufacturers shredding their existing labor pacts and "extract(ing) financial concessions from workers." In other words, our government asks us to believe that it possesses total authority to adjust contracts at car companies it lends to, and yet has zero power to modify contracts at financial firms it owns. This, even though the latter set of covenants might be easily abolished.
"According to New York Attorney General Andrew Cuomo, these allegedly inviolate AIG agreements promised bonus money the company didn't have and were crafted by executives who knew the firm was collapsing, meaning there is a decent chance these pacts could be invalidated under "fraudulent conveyance" statutes. They also might be canceled via force majeure clauses allowing one party to rescind a pact in the event of extraordinary circumstances - like, perhaps, the collapse of the world economy. (Note: BusinessWeek reports that corporations are already citing the recession as reason to invoke such clauses and nix their business-to-business contracts.)
"But, then, those legal cases require a government that treats AIG's shower-before-work employees with the same firmness that it treats the auto industry's shower-after-work employees, not the government we have - the one that believes "the supreme sanctity of employment contracts applies only to some types of employees but not others," as Salon.com's Glenn Greenwald says.
Johann Hari at The Independent has an "we told you so" commentary about Israel's recent assault on Gaza.
"For months, the opponents of Operation Cast Lead – the assault on Gaza that killed 1,434 Palestinians – have been told we are "dupes for Islamic fundamentalists", or even anti-Semitic. The defenders of Israel's war claimed you could only believe the reports that Israeli troops were deliberately firing on civilians, scrawling "death to Arabs" on the walls, and trashing olive groves, or using the chemical weapon white phosphorus that burns to the bone, if you were infected with the old European virus of Jew-hatred.
"Now the very people who fought that war have confirmed we were simply describing reality. One Israeli Defence Force squad leader says of the orders he was given to target civilians: "I call it murder." As he put it: "In the end the directive was to go into a house, switch on loudspeakers and tell them 'you have five minutes to run away and whoever doesn't will be killed'." In a crowded civilian city, there are all sorts of people who cannot run away: the elderly, the disabled, the pregnant, the terrified. This soldier was told to kill them.
"He is not alone. Anybody who has reported from the Occupied Territories has witnessed a culture of racist contempt for ordinary Palestinian civilians. They are treated as suspects simply for walking around their own home towns, or trying to sell their own produce. This is not a few bad apples: it is endemic to the nature of occupation, blockade and repeated assault."
Daniel Fireside at Dollars & Sense writes about the plight of renters being evicted from foreclosed houses.
"The Obama administration’s mortgage rescue plan announced in February offers limited help to some individual homeowners at risk of foreclosure, but almost completely overlooks the plight of renters in foreclosed buildings. Families facing eviction are left to fend for themselves, often with little understanding of their legal rights or other options.
"Now the group scans the latest foreclosure listings and goes door to door to alert tenants. They host meetings with people at risk of eviction, provide assistance and advice about negotiating with lenders, and organize demonstrations outside banks. They also work with former owners who hope to renegotiate their loans with the banks and keep renting out their properties.
"Renters are usually the last to learn about a foreclosure. 'Tenants will get a letter from a bank offering them a few hundred dollars if they leave in two weeks, and threatening to evict them within a month if they refuse and give them nothing,' says Meacham. Those who leave usually lose their security deposits and any prepaid rent. 'Most banks depend on people getting scared and leaving. When people resist, especially tenants and former owners, the banks don’t know what to do with that and back off.' "
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