How can anyone sit back and say “all is well” while watching one government after another take over ownership in part or in full of its financial institutions? How can people honestly think it a good thing for their government to assume control of the very institutions entrusted with the life’s savings of its citizens? Those who have sat back and watched without comment the unprecedented takeover of the wealth of one great country after another need not bother complaining when they soon wake up and find they have no personal wealth remaining.

It is purely delusional thinking at best to think that any lasting good will come from the commandeering of first the mortgage industry, then the investment banks, then the banks and soon many businesses by the government. Dangling financial bailout money like a carrot in front of desperate business owners in return for part of full ownership in their business is pure folly, yet it is happening at breakneck speed.

Who in their right mind would think this whole financial fiasco is not contrived? These things which have happened did not take place by accident. The current credit squeeze did not just happen overnight for no reason at all. This was all a carefully planned and executed endeavor on the part of those who pull the strings of the world’s political and economic power structures to capture and transfer the world’s wealth to themselves.

While the common business owner, mortgage owner and individual highly in debt rejoices in the daily announcements of “free money” to bail them out of mistakes they made though greed or bad judgment; those who are assuming control of the nation’s assets are smiling all the way to their vaults where they will be storing the deeds to the nation’s real estate and ruling jurisdiction over the businesses which produce the wealth.

Ladies and gentlemen, the Illuminati have won. There is no turning back what has happened the past month. The transfer of wealth is nearly complete. Now all that is needed is a period of relative prosperity to promote the mistaken notion that all is well and then the big collapse will strike and suddenly millions of people will lose their homes, their businesses, their bank accounts and stocks. Once this happens, there will be no recourse but to cry for what could and should have been if only…

Sell your stocks, cash in your CDs and buy gold. Sell your expensive house with the sky high mortgage and find a little place to rent or buy to fix up. Liquidate your assets and take the earnings and invest in gold, silver or other tangible commodities whose value is not imaginary but real. Sell your business and concern yourself with being self reliant and self sufficient instead of laboring 20 hours per day to keep the government off your back.

What has happened and is happening before our very eyes is the long anticipated and much denied takeover of America by the big money, new world order elitists who will never be satisfied until they squash the common person and succeed in grabbing everything he has spent a lifetime earning and saving. Anyone so naïve as to think the American government acts on its own in the interest of its citizens welfare obviously has much to learn.

Don’t take my word for it. Invest some time and honestly read about the agenda and grandeur plans those promoting the New World Order have worked from for centuries. This is not merely another conspiracy theory, this is what is happening even as I type this blog post. It is absolutely mind boggling to watch what is taking place under the very noses of an apathetic and brain dead American public.

Can you not see, have you no eyes to behold what is happening? Everything in every realm is cascading at breakneck speed toward governmental control of everything. Sen. Obama is running ahead in the polls based on the mantra of “change”. The change he promotes and is cherished by so many is that of the government taking over everything and then providing for the citizens. Socialism 101.

It is too late to change course and there is little if anything that can be done to alter what is to come. Americans fell for the ploy and not must pay the price for their greed and blindness. As everyone’s retirement accounts dwindle and their homes lose value; there waiting with eager anticipation is the savior and messiah who will ride in on their white horse to bailout the moaning and suffering masses who cannot fix the problem themselves. All hail the power of the government who shall redeem the people from certain destruction.

October 9 2008

The party's over. Yesterday's extraordinary set of Government measures to bolster the banking system will change how the sector operates, firmly closing the door on the era of excess in the financial industry.

After more than a year of telling the banks to put their own houses in order, the authorities were finally forced by tumbling share prices and seizure in the money markets to come to the industry's rescue.

There will be the widely expected industry-wide recapitalisation, with the big seven banks plus Nationwide boosting their safety buffers by about £25bn this year.

But the most important elements were the doubling of the Bank of England's Special Liquidity Scheme to £200bn and the acceptance of a wider range of collateral and – especially – the Government's offer to guarantee up to £250bn of their debt. Lack of liquidity was the biggest concern for the banks and if increasing their capital ratios is the price they have to pay for the Government's largesse then so be it.

The initial £25bn capital boost would take the big eight's average tier one capital ratio from 9.1 to 10.3 per cent, Keefe Bruyette & Woods analysts calculate. All the big lenders have agreed to get their capital ratios up to the required level, but not necessarily by taking the Government's money.

HSBC, Abbey Santander and Standard Chartered all said they were participating, but that they would either raise the money internally or in the market. Barclays is also understood to believe it can raise the money from existing investors by issuing preference shares on the same terms the Government would have demanded.

But whether or not they take the Government's money – paying a reported coupon of 9-12 per cent – the banks will have to hold more capital and will face greater scrutiny of their business risk by the Financial Services Authority, which is throwing its weight around after being caught napping during the boom years.

The Government has not set a common ratio, and instead the FSA will negotiate with – or tell – individual banks about what levels of capital they should hold. They will also have to pay more for the Government's guarantee of their debt if their business models are judged to be risky – another incentive to toe the line.

Is this the socialisation of the banking system? Not really. But the measures will add to existing pressures that will constrain banks' businesses and reshape the sector.

Alex Potter, banking analyst at Collins Stewart, says the Government's drive to improve capital ratios is correct and has echoes of banking regulation under the Bank of England when each bank was given guidance over its capital levels. That system gave way to a free-for-all in recent years where both the level and quality of banks' capital buffers was allowed to slip as lenders lent more and more against their reserves, moved assets off balance sheet and replaced top-notch shareholder equity with new debt instruments.

"The Government is taking more interest in the banking system and is saying if you want access to these funds you will have to run less risky business models. I'm not sure we are going back to a more boring banking system, but we are going to a system that is not going to get any more interesting," Mr Potter says.

Banks used to act simply as middle men between depositors with excess funds and borrowers who wanted to buy houses or invest in their businesses. This "maturity transformation" plays a vital role in the economy by using short-term funding for longer term purposes.

But to boost profitability in what is naturally a mature, slow-growth banking market, Britain's lenders spent the last 10 years gearing up their balance sheets. This meant expanding lending massively and using the booming wholesale markets to offload assets and raise fresh funds. Northern Rock securitised mortgages and used short-term funding to the point where only a quarter of its loans were supported by old-fashioned deposits. Banks with big corporate and markets arms, like Royal Bank of Scotland, expanded in leveraged lending and parcelling up mortgages into structured products that could be sold to investors.

The Government wants to be seen to be bringing the banking industry into line after the years of excess. Shareholders and bosses will be penalised while ordinary taxpayers will be rewarded. The Government said it "will need to take into account dividend policies and executive compensation practices and will require a full commitment to support lending to small businesses and home buyers".

Paul Niven, head of asset allocation at F&C, says the Government intervention was inevitable and welcome in the short term but that the longer-term implications for the sector are less rosy.

"Banks will have to operate within a much tighter framework. What kinds of loans are they going to have to make and to which businesses and on what criteria? Will it be profitable lending? What is the benefit to a lot of these banks that have investment banks which have generated large profits on the back of proprietary trading? Maybe it is not in the taxpayer's interests to have them punting their balance sheets around."

Simon Gleeson, a partner at the law firm Clifford Chance, argues that in the furore over the Government's capitalisation and liquidity plans the market has missed the more important changes lurking in the banking reform Bill, published yesterday. Because retail depositors will take precedent over commercial lenders to a troubled bank, UK banks will have a far higher cost of borrowing in commercial markets.

"What we end up doing is breaking up the industry," Mr Gleeson says. "You will have deposit takers which do little else but take deposits and make personal loans, and separate unregulated or lightly regulated entities which do what used to be called investment banking. The 1980s have been declared a mistake."

The change could threaten the universal banking model in the UK, which is back in fashion in the US after JPMorgan bought Bear Stearns and Merrill Lynch was forced to sell itself to Bank of America. The main British banks that will have to grapple with this problem will be Barclays and Royal Bank of Scotland, which have built up large debt-focused investment banks on top of their core retail banking activities.

Experts warn the Government's intervention could backfire if it does not secure a similar response from other major global regulators in a new international settlement for the financial system. Giorgio Questa, professor of Finance at Cass Business School, says: "The Government is trying to get political mileage out of using the taxpayer to make good for their mistakes in the last 10 years. They have been abysmal in the conduct of supervision and now they want to interfere again. If England tries to do its own regulation separately from global regulation, it can kiss goodbye to London as a global financial centre."

Bosses' pay to be curtailed

After years of cosying up to the City of London, the Labour Government is clamping down on pay in the banking sector. The Treasury said explicitly yesterday that the authorities would look at banks' pay when deciding whether to support banks with capital injections.

Financial authorities in the US and the UK believe the high pay and bonus culture at banks contributed to the sector's reckless practices by offering massive rewards for short-term profit. Bonuses in the millions for chief executives and traders alike helped turn the stolid industry of banking into a casino of proprietary trading, overstretched balance sheets and warehousing of dodgy securities.

Those practices created massive profits for banks in the boom years but many have now lost all the gains and the wider economy is paying the price. Yet though their companies may have gone to the wall or come close to oblivion, individual bankers have kept the bonuses that rewarded their excess.

Sir Fred Goodwin, the chief executive of Royal Bank of Scotland, earned £4.1m last year, including a bonus for the bank's acquisition of ABN Amro, which the bank now admits it overpaid for. Andy Hornby, the boss of HBOS, earned £1.9m in 2007 but his bank was forced to sell itself to Lloyds TSB last month to avoid going bust.

Lloyds own chief executive, Eric Daniels, was paid £2.4m last year.

The Prime Minister said yesterday that the Financial Services Authority would draw up a code covering executive pay at the banks. The move will formalise measures announced earlier this year when the FSA said it would include pay schemes when assessing the riskiness of a bank's business model.

Watchdogs already exercise control over pay in regulated industries such as the energy sector, Stella Brooks, director at Inbucon, the pay consultant, says. It is easier for those regulators because they control pricing and companies know that excessive pay can be punished with lower prices.

Banks are also more complicated because their chief executive's pay is often vastly outstripped by earnings of top traders or merger advisers. The most high-profile disclosed bonus in the City is that of Bob Diamond, the president and investment banking chief at Barclays. Mr Diamond earned £250,000 in salary last year but was paid a £6.5m cash bonus, with share options taking his total remuneration to £18.5m.

Peter Hahn, a fellow at Cass Business School, argues that changing banks' pay structure to ward against short-term excess is simple. Simply align chief executives' pay more closely to risk and they will do the rest of the work to make sure they get a bonus at the end of the year.

The banks have insisted for years that they operate in international markets and that their chief executives are in constant danger of being poached by US banks for far higher rewards. But that argument is harder to make with banks in the US reporting massive losses and a big backlash against excessive pay and pay-offs for chief executives.

"If banks try to use that argument now, that is when the regulator turns round and says, 'Fine'," Ms Brooks says.

Critics of the Government have said that its claim to be clamping down on City pay is political posturing that will be conveniently forgotten because the country relies on financial services' pay to drive the economy and provide tax revenue. The Centre for Economic and Business Research has forecast that City-type bonuses will fall to £5bn this year, from £8.5bn in 2007. That spells bad news for the UK's finances, which CEBR calculates could have received about £3bn from last year's bonus pool.

Source

It sure doesn't feel like it. Even conservative investments - like ultrashort- term bond funds and a single money market fund - have lost value recently. But rest assured, your cash accounts are still extremely safe. To shore up confidence in money-market mutual funds after a prominent portfolio "broke the buck," the Treasury Department launched an insurance plan to guarantee their value.

What's more, bank money-market accounts and CDs are as protected as ever. While it's certainly hard to tell which banks will eventually survive this financial meltdown, your accounts are FDIC-insured.

Finally, if you're looking for a safe option within your 401(k), consider a stable value fund. These portfolios often invest in a diversified mix of short- to intermediate- term bonds that are backed by different insurers. Plus, they've been yielding around 4% lately.
Is my bank or brokerage going to disappear?

Even with the government stepping in to buy up the crummy mortgage-backed securities that are endangering the health of so many banks and brokers, this relief won't be immediate. It may take weeks for the Treasury Department to put together a team to evaluate these bonds. In the meantime, more banks and brokers could go under or be forced to sell out to healthier firms.

Still, the tally of failed banks is unlikely to come close to the number we saw in the savings and loan crisis. Between 1986 and 1995, 1,043 thrifts went under (though many of them were tiny). So far this year, only 13 banks and savings and loans have failed, according to the Federal Deposit Insurance Corporation. That includes Washington Mutual, the nation's largest S&L, which was shut down before its deposits were sold to J.P. Morgan Chase (JPM, Fortune 500).

Regardless of what the final tally is, it's important to keep in mind that your bank deposits are for the most part safe. Deposits up to $250,000 per person per institution and $500,000 for joint accounts will be protected by the FDIC (The FDIC temporarily raised the limits from $100,000 and $200,000 respectively through December 30, 2009.). Some retirement accounts are covered up to $250,000.

Investment banks and brokerages have also come under pressure. Here too you are mostly protected. Unlike commercial banks, which use your deposits to lend to other customers, brokerages are supposed to segregate your assets from theirs. So if you own 1,000 shares of General Electric and your brokerage collapses, your 1,000 shares of GE should still be there and will most likely be transferred to another broker on your behalf.

If for any reason your failed broker can't locate your securities, up to $500,000 of your assets per account is covered by the Securities Investor Protection Corporation, a nonprofit funded by member firms. With a few exceptions, SIPC limits its safety net to SEC-registered investments. So while your stocks, bonds and mutual funds will be covered, foreign currency, precious metals and commodity futures contracts won't be.

Step 1: Investment Banks purchase the Mortgage loans from Banks/Lenders

Step 2:  Segregate them into different types and rate them.

Step 3: Making these loans as underlying assets, created Derivatives

Step 4: Insure all the Instruments according to the rating, with an insurer

Step 5: The Insurer creates Credit Default Swaps (CDS) and sells it in the market.

Step 6: Investment Bank creates SPV’s (Special Purpose Vehicles) and holds all the unsold/high risky Sub Prime loans with them. These SPV’s will be their sister company, registered in Mauritius or some Island, where no questions are asked, and the parent company will invest its share capital/its clients money in the sister company.

Step 7: What else, every instrument created will be marketed well to the so called sophisticated Hedge funds, HNI’s, Corporate, Pension Funds, and even Banks in every nook and corner of the world, be it UK, Europe, Japan, and why not the conservative Indian Banks… (ICICI, SBI, AXIS bank  ...)

Step8: All these papers a.k.a Sub Prime Mortgage Backed Securities/CDS are to be redeemed when the mortgage payments are received in full from the borrower. (If at all he pays...)

I focused recently on the lax lending standards that helped to create the housing bubble (fueled also by the Fed who kept interest rates too low, too long after 2001).  It was the red meat thrown into the piranha pool.  Let's talk about what the piranhas did with the red meat once they had it. 

Let me mention first that we've nearly been here before when Long-Term Capital Management (LTCM) came close to collapse in September 1998 at the time when Russia had difficult repaying its debt. The Fed rescued the fund and showed that some guys are  just "too-big-to-fail". The Fed wanted to stop possible contagion coming from the failure from spreading to commercial banks.  Studies at the time showed that losses to investment banks during this type of contagion could be huge  (including one done by my Financial Intermediaries Seminar prof).  They noticed that investment banks would be far more vulnerable to losses than depository institutes. This small crisis that most folks probably don't even remember was the canary in the coal mine. 

Meanwhile, the primary mortgage market was coming under the spell of the underwrite-nearly-everything mentality spurred on by Fannie and Freddie. We've mentioned that Fannie and Freddie also imply a government guarantee.  Now, we have a situation where the Fed has shown its readiness to put the tax payer's money behind anything it deems too big to fail. Both actions were like chumming the waters.  Rising house prices were just more blood on the water. It was only time before the piranhas and sharks came to feed.  They were being encouraged to ignore risk and that's not a wise thing to do.

Five investment banks, including Goldman Sachs, approached the SEC with a proposal around 2004.  They sought an exemption for their brokerage units from old depression-era regulations that limited the amount of debt they could incur.  An exemption from this leverage rule would free up a heckuva lot of money to invest in some new-fangled investments:  mortgage-backed securities, credit derivatives, and credit default swaps.  They got permission. Enter the net capital rule that enabled the piranhas and the sharks.  During the next few years, leverage ratios increased until for about every dollars worth of equity held by an investment bank, there was around $30 in debt.

Credit default swaps act like insurance.  They are instruments intended to cover losses to banks and bondholders when companies fail to pay their debts.  Since 2000, the market has boomed from about $900 billion to more than $45.5 trillion.  This about twice the size of the entire U.S. stock market.  The market for credit default swaps as well as the market for mortgage securities were left unregulated.  Many folks have been worried about this market for some time.

The Comptroller of the Currency, a federal bank regulator warned that increased trade in swaps during 2007 was putting a strain on processing systems that were used to handle swaps.  Swaps are essentially what brought down AIG.  Back in the beginning of the year, AIG found that it had incorrectly valued some of the swaps and announced that mistake would cause the company to lose $6.3 billion more than they had estimated before.

Placing correct values on Swaps and Mortgage securities is very difficult.   Big banks, insurance companies and hedge funds are among the financial institutions that trade these derivatives.  CDS tend to be private agreements where buyers of the protection/insurance agrees to pay a premium to the seller over time.  (Much like an insurance policy premium).  The seller pays only if a particular crisis occurs.  These contracts can also be bought and sold.  Because the market is basically unregulated, no one quite knows when the swaps are sold and to whom they are sold.  This can be a problem when the protection is required, say like when the Hurricane Katrina of asset bubbles bursts in the housing market.  Just so you know, the largest players in this market are JP Morgan Chase, Citibank, and Bank of American.  All WAY too big to fail, right?

Enter speculators as this market gets large.  Speculators (read HEDGE FUNDS) have used these instruments to bet on a company or a bank's failure. Funny thing is there is actually more value now out there in the derivatives than there is in the underlying assets.  Remember, this is BEFORE the bubble bursts and brings the asset prices down even further. So credit default swaps are basically default insurance, although they can't be named that.  So what happens when every one needs to make a claim on their insurance and can't exactly locate your contract and it probably resides with some one who is in worse shape than you?  (Ah, let your imaginations run away with you, it's bad.)

So, let's get back to our Pirahanas and Sharks.  They're being encouraged to loosen up those lending standards by Fannie and Freddie AND they can buy insurance too if their bad loans go bad.  How can you lose with a deal like that?  It doesn't appear that you can, does it?  So what do you do?  Continue underwriting loans for folks without income, folks without credit, folks that are even dead. (Yes, dead, I'm not making that up.)

I think you can see that what we have here is the perfect storm.  So let me get back to what this bill doesn't do.  It DOESN'T stop the assets from continuing to go bad, at least in the housing end of things.  It DOESN'T regulate any of the players in this market although the investment banks are now under the jurisdictions of bank holding companies and basically the FED.  It DOESN'T deal with the leverage issue.  It DOESN'T punish any one for lending bad loans even.  No one is getting yelled at for encouraging this -- not Fannie and Freddie, not the FED and not the SEC.  Definitely not the congresscritters that enabled them either, at least not yet.

What we are witnessing is the creation of more TOO BIG TO FAIL critters AND we're giving them more money to lend out and we have inadequate regulation.  It's time to take the chum out of the water, folks!

Today, Friday, October 3, 2008 is a day that should go down in infamy! A true "Black Friday".

That giant sucking sound you here coming from years in the future is at least $800 billion dollars going out of your wallet, bank account, and future earnings as wealthy financial company executives steal it from you once again. It will start now, but it will continue to go one for many years to come as the bailout funds are added to the national debt and slowly added to the snowball rolling downhill at a faster and faster pace straight at each one of us. Why? Because enough of us believed their message of "be afraid, be very afraid."

The truth is that there is plenty of cash to go around to add liquidity to the system, but the financial companies and other funds holders are holding government(s) hostage by hoarding the cash. This puts the lie to idea that this is a true crisis or the type put forward by the financial industry. They just want us to risk our money before they will risk theirs. And, to make matters worse, the government, our elected representatives, blinked. Worse than that, they caved completely. To the overwhelming collective detriment of every U.S. citizen and taxpayer.

What it is...

This corporate bailout/rescue package/corporate charity package and/or fleecing/scare campaign of the poor and middle class will go down, in my opinion, as one of the truly most ugly unethical acts of those in control of the financial apparatus of the world. May we all hold them accountable in the here and now and not just in the by-and-by.

What we need to do...

Vote the crooks out of office and send the crooks in the boardrooms to jail. Investigate those who have been appointed to make sure there is no fraud being committed. It is not their money--unless we authorize them to take it from us--which we just did.

How we got here and where we need to go...

How did we get here? We did not hold out elected representatives accountable to our will instead of lobbyists. We did not make them check the facts instead of believing the cloying wall street beggars. We did not make them be certain to act on sound theory instead of intentionally and professionally inflamed mass hysteria. We did not make sure that when the U.S. House of Representatives voted this down the first time, they knew we wanted it to stay that way. We did not make sure that the U.S. Senate (both Obama and McCain voted for it) got the message clearly enough. We caved. We didn't act swiftly and strongly enough. None of Pelosi, Frank, Reid, Boehner or any of the other representatives in either house of congress understood how this would screw their constituents...they didn't understand because we did not make it clear--or their incentives to defy our wishes were stronger than those to fulfill them.

Ah, and there is the rub. It is both. Both must change.

As in the Byron's book   Testosterone Inc.: Tales of CEOs Gone Wild,  Scientific American found common ground for narcissistic, insane, exscentric  and tyrannic bosses' and politics' behaviour - testosterone.

Is testosterone to blame for the financial crisis?

 If you've been blaming reckless men for the collapse of America's leading investment houses and the plunging markets, you may be on to something. High levels of testosterone are correlated with riskier financial behavior, new research suggests.

Overconfidence has long been noted by historians and political scientists as a major cause of war. However, the origins of such overconfidence, and sources of variation, remain poorly understood. Mounting empirical studies now show that mentally healthy people tend to exhibit psychological biases that encourage optimism, collectively known as ‘positive illusions’. Positive illusions are thought to have been adaptive in our evolutionary past because they served to cope with adversity, harden resolve, or bluff opponents. Today, however, positive illusions may contribute to costly conflicts and wars. Testosterone has been proposed as a proximate mediator of positive illusions, given its role in promoting dominance and challenge behaviour, particularly in men. To date, no studies have attempted to link overconfidence, decisions about war, gender, and testosterone. Here we report that, in experimental wargames: (i) people are overconfident about their expectations of success; (ii) those who are more overconfident are more likely to attack; (iii) overconfidence and attacks are more pronounced among males than females; and (iv) testosterone is related to expectations of success, but not within gender, so its influence on overconfidence cannot be distinguished from any other gender specific factor. Overall, these results constitute the first empirical support of recent theoretical work linking overconfidence and war.

High Testosteron

Narcissists work on a big scale and are drawn to risky decisions. They go for large spending and investment, and love a merger or acquisition. The financial results under their leadership, the study found, are more extreme.

In his later years, Galbraith used the term “innocent fraud” to describe the way the economy had fallen under the sway of corporate managers looking for short-term personal windfalls, rather than shareholders interested in sound long-term business strategies, or governments worried about broader societal interests.

Regulators should have reined in the greedy insiders—we can all see that now. But who was really doing the regulating? With hindsight, we should have been listening to Galbraith when he observed back in 1999:

“[All] but the most doctrinaire accept the need for regulation and legal restraint by the state. But few economists take note of the cooptation by private enterprise of what are commonly deemed to be functions of the state.”

And how exactly did private enterprise co-opt what were properly government regulatory functions? Object lesson: in 2004 the big investment banks succeeded in convincing U.S. authorities to allow them to be subjected to what amounted to voluntary regulation.

Last week, Christopher Cox, the U.S. Securities and Exchange Commission’s beleaguered chairman, admited the self-supervision scheme was “fundamentally flawed from the beginning," and scrapped the whole innocently fraudulent experiment.

Galbraith saw it coming.

Simply put, investment banks such as Lehman Brothers and Merrill Lynch are not insured by the Federal Deposit Insurance Corporation (FDIC) and are not regulated in the same manner as commercial banks and savings associations. Investment banks primarily operate as advisers and agents for companies wishing to raise capital through issuing more stock or other securities. With the failure or acquisition of an investment bank, the bondholders, stockholders, employees and creditors are the individuals negatively affected.

In contrast, banks and savings associations are focused on taking deposits and making loans to consumers every day. These FDIC-insured institutions have entered this economic downturn from a position of strength. The latest figures from the FDIC indicate that more than 98 percent of the banking industry is well capitalized, which is the government's highest capital category. These same institutions hold more than 99 percent of the industry's assets.

With a bank and savings association, your money is protected and will continue to be available to you. Funds in these financial institutions are insured by the FDIC for up to $100,000 per depositor. You may qualify for more than $100,000 in coverage at one insured bank or savings association if you own deposit accounts in different ownership categories. Moreover, there is up to $250,000 of FDIC insurance coverage available for certain retirement accounts. Choice Bank also has an innovative service called CDARS (Certificate of Deposit Account Registry Service)* where you can be fully insured for up to $50 million! Not one penny of insured savings has ever been lost by a customer of a federally insured institution.

This is just one of the many important nuances being ignored in the news. Remember, any financial decision you make should be based on your specific situation, in consultation with your financial adviser or banker, not on any media report. During challenging times like these, it is important to remain calm, be accurately informed and ask your local bankers any questions you have, to make sure that you are receiving straight answers. Customer or not you can always feel free to call Choice Bank with any questions at (920) 230-1300.

____

*To receive CDARS coverage a depositor must enter into the CDARS Deposit Placement Agreement with Choice Bank. The agreement contains important information and conditions regarding the placement of funds by Choice Bank.

In a vote that shook the government, Wall Street and markets around the world, the House on Monday defeated a $700 billion emergency rescue for the nation's financial system, leaving both parties and the Bush administration struggling to pick up the pieces. The Dow Jones industrials plunged nearly 800 points, the most ever for a single day.

This news blurb certainly caught my attention.  After analysis, it looks like $1.2 trillion in market value is gone because of the plan's rejection. Those most concerned are left scratching their heads, mainly becuase another solution is without precedent (even though, I suppose the $700 billion bailout was too).

Apparently investors are not simply walking away from unknowns--they are moving at break-neck speeds. Although it probably was best for the U.S. to move away from this gigantic risk, you have to wonder what else is coming in this wildly growing financial crisis. 

My mind comes back to some new information I've been given access to...economist Chris Martensen's "Three Beliefs". Watch all of the little mini-lessons, and you'll start to see that most of world's economic woes come from need, not so much greed.  There are too many of us, and we all need the same resources.  It makes me wonder what event or events will ease the pressure.  World-wide tragedy? Perhaps, breakthough technology or a spiritual enlightenment?  Bernanke has a lot to think about, but so do the rest of us.

Let these investment banks FAIL. Let the market then decide the value of those defunct properties, and finally, let WE THE PEOPLE buy them back when they hit bottom.

The government would take care of issuing an appropriate amount of bonds based on stated income on 08 tax returns. They would form an organization to purchase properties and assets as they begin to become available. Participation in the program would be mandatory at one level, but you could opt for increased participation up to a certain percentage of your income.

The bonds would be reach maturity in 5 years. The fund could continue to be run as a low-risk investment vehicle for those that wanted to hang on past 5 years. To help even out the maturity dates, holders should receive a 2% lower tax rate for every year they hold them past 5. So conceivably, if you hold them for 15 or 20 years, you could cash them and be tax exempt on the income.

  You can get the details by reading Shipp's column. Just click on this link.

Very often do people speak or write in a language that it becomes impossible for someone unrelated to the industry to understand a concept, a phenomenon, a process or an event. Sub-prime crisis as they call it as, is arguably one such one. It is too simple to understand the logic but too complex is the entire chain of its operation.

Just forget why Lehman, WaMu, Wachovia is falling. Try answering this question. Who do you think lends you money when you take a home loan? The banker? Yes, you are absolutely mistaken. How would it leave a taste on you, if I would say it is me, a common man who is indeed lending my money to you, when you take a loan from bank? Perplexed?

Now, this is the chain. You apply for a loan to a bank, which tenders you, money. Your bank is in-turn funded by an Investment bank, the big daddy of US economy, for exchange of your loan document. These I banks collates all such loan document from different people and different banks and creates a bond (called Real Estate Investment Trusts -REITS). These bonds are finally issued back to common people like me, who wish to invest in such bonds, which are now called as CDO (Collateralized Debt Obligation) or ABS (Asset Backed Security). So in this vicious cycle, I, your neighbor could possibly end up being your lender, notionally, when you apply for a home loan.

So, why does all these I banks fall off? Now, to put it as mean as possible, if you earn 10,000 Rs per month and pay 5000 Rs as an EMI, it is a prime loan, whereas when your EMI is 9000 Rs on a 10,000 Rs monthly salary, it is a sub-prime loan (relate to the fact that in India we have PLR- 'Prime' lending rate). When the credibility and capacity of the borrower to repay loan decreases, the interest rate on loan increases since the risk is perceived higher by the bank. So, someone with a good credit rating will be offered a prime loan at say 8%, the other person with low credit rating will be offered a sub-prime loan at say 10%. It’s a double whammy for sub-prime borrowers – lower disposable income and higher interest rates. Hence, a small increase in interest rate would shatter sub-prime borrowers capacity to repay and he begins to default on his EMI payments. It all starts here. Non receipt of EMI means your lender banks cannot pay back their EMI to I banks, means the I banks cannot pay back the investors who had invested in their bonds. Now, bank in their helplessness try to sell out the house (Foreclosure) - the distressed property of its borrower to recover their lent out money. But due to adverse market conditions, the inflated market value of the house had dropped like a stone. Hence, the recovered money is at a huge discount to the lent out money. The I banks are at great pressure to pay back investors and the money they have is less – the stage is set up for the closure of business. The entire financial juggernaut comes to a halt as it has done now.

US banking industry thrived on converting a loan into a tradable paper and leveraged too much on it, to the levels that now a house is available at as low as 72,000Rs. Back India, thank that we are still very slow in implementations largely due to our democratic set up that we did not copy US in CDOs and REITs just in the exuberance of consumerism.

• Necessity for a bailout
• Phased funding of bailout
• Paulson plan thumbs down because too much power in one person. Entrust responsibility not just to one person. More oversight/accountability necessary.
• Legislative reform of the financial system in the first quarter of 2009
• Protection for tax payers in the form of warrants/stock/etc. Learn from the Swedes.
• Cap on executive compensation for firms that participate in bailout. If executives balk, let them sink or swim on their own.
• Mortgage relief

Dear Ms. XXX:

Thank you for your letter expressing concern about Congress' consideration of a plan to meet our Nation's credit crisis with financial help from the Federal Government. This is a difficult situation for which there are no perfect solutions, and I would like to share my thoughts and concerns about this issue with you.

On September 19, 2008, Secretary of the Treasury Henry M. Paulson, Jr. announced a legislative proposal to use $700 billion to purchase illiquid mortgage-related assets from ailing financial institutions. Secretary Paulson's three-page proposal was a non-starter, and without critical changes it has no chance of approval from Congress.

This proposal would have given a blank check to an economic czar who would have been empowered to spend it without administrative oversight, legal requirements, or legislative review. Decisions made by the Treasury Secretary would be non-reviewable by any court, agency, or Congress. The proposal also lacked a requirement for regular reports to Congress on the status of the program. This was simply untenable.

Since this announcement, my offices have received thousands of comments from Californians like you concerned about how this action will affect them. Yet, I believe prudent action must be taken. The bill should include the following principles: a phase-in of funding; oversight, accountability and transparency; a mechanism allowing the Secretary of the Treasury to modify mortgages to prevent additional foreclosures; and a precise cap on executive compensation.

The current credit crisis affects all Americans. If action is not taken to stem the crisis, Americans risk losing their homes, jobs, personal savings, life insurance and more. Banks will cease to lend to businesses and homeowners, and credit will be increasingly difficult to come by for average Americans. I strongly believe that the consequences of failing to act now would be greater than not acting at all.

Attached please find a statement I recently made on the floor of the Senate expressing my feelings on this issue. Please know that I will keep your thoughts in mind as this situation unfolds.

Once again, thank you for writing. If you have any additional questions or concerns, please do not hesitate to contact my Washington, D.C. office at (202) 224-3841. Best regards.

U.S. Senator Dianne Feinstein
Floor Statement on the Economic Rescue Proposal
September 26, 2008

"Mr. President, to date I have received from Californians more than 50,000 calls and letters, the great bulk of them in opposition to any form of meeting this crisis with financial help from the Federal Government. I wanted to come to the floor to very simply state how I see this and some of the principles that I hope will be forthcoming in this draft. Before I do so, I wish to pay particular commendation to Senator Dodd, Senator Schumer, Senator Bennett, and others who have been working so hard on this issue. I have tried to keep in touch -- I am not a negotiator; I am not on the committee -- but California is the biggest State, the largest economic engine, and people are really concerned.

We face the most significant economic crisis in 75 years right now. Swift and comprehensive action is crucial to the overall health of our economy. None of us wants to be in this position, and there are no good options here. Nobody likes the idea of spending massive sums of Government money to rescue major corporations from their bad financial decisions. But no one also should be fooled into thinking this problem only belongs to the banks and that it is a good idea to let them fail. The pain felt by Wall Street one day is felt there, and then 2,3,4 weeks down the pike, it is felt on Main Street.

The turbulence in our financial sector has already resulted in thousands of layoffs in the banking and finance sectors, and that number will skyrocket if there is a full collapse. The shock waves of failure will extend far beyond the banking and finance sectors. A shrinking pool of credit would affect the home loans, credit card limits, auto loans, and insurance policies of average Americans. I am receiving calls from people who tell me they want to buy a house, but they can't get the credit or the mortgage to do so. Why? Because that market of credit is drying up more rapidly one day after the other. It would have a major impact on State and local governments which would lose tens of millions of dollars, if not hundreds of millions of dollars.

Hurricane Ike shut down refineries on the gulf coast 2 weeks ago, and now, today, people are waiting hours in lines for gasoline in the South. Similarly, the collapse of the financial sector would have severe consequences for Americans all across the economic spectrum: for the person who owns the grocery store, the laundry, the bank, the insurance company. Then, if the worst happens, layoffs. And even more than that, somebody shows up for work and finds their business has closed because the owner of that business can't get credit to buy the goods he hopes to sell that week or that month. Wages and employment rates have already fallen even as the cost of basic necessities has skyrocketed. Our Nation is facing the highest unemployment rate in 5 years, at 6.1 percent. Over 605,000 jobs have been lost nationwide this year. My own State of California, a state of 38 million people, has the third highest unemployment rate in the Nation at 7.7 percent. That is 1.4 million people out of work today. One and a half million people -- that is bigger than some States. We have 1.5 million people out of work, and one-half million have had their unemployment insurance expire and have nothing today.

Congress is faced with a situation where we have to act and we have to do two things. We have to provide some reform in the system of regulation and oversight that is supposed to protect our economy. We also have to find a permanent and effective solution to keep liquidity and credit functioning so that markets can recover and make profit. The situation, I believe, is grave, and timely, prudent action is needed.

Just last night, the sixth largest bank in America -- Washington Mutual-- was seized by government regulators and most of its assets will be sold to JPMorgan Chase. This follows on the heels of bankruptcies and takeovers of Bear Stearns, Lehman Brothers, AIG, Fannie Mae, and Freddie Mac. If nothing is done, the crisis will continue to spread and one by one the dominos will fall.

Now, this isn't just about Wall Street. Because we are this credit society, the financial troubles facing major economic institutions will ricochet throughout this Nation and affect everyone. So I believe the need for action is clear. But that doesn't mean Congress should simply be a rubberstamp for an unprecedented and unbridled program.

My constituents by the thousands have made their views clear. I believe they are responding to the original 3-page proposal by the Secretary of the Treasury. It is clear by now that that 3-page proposal is a nonstarter. It is dead on arrival and that is good. Secretary Paulson's proposal asked Congress to write a $700 billion check to an economic czar who would have been empowered to spend it without any administrative oversight, legal requirements, or legislative review. Decisions made by the Treasury Secretary would be nonreviewable by any court or agency, and the fate of our entire economy would be committed to the sole discretion of one man alone -- the man we know today, and the man whom we don't know after January.

Additionally, the lack of governance or oversight in this plan was matched by the lack of a requirement for regular reports to Congress. This proposal stipulated that the economic czar, newly created, would report to Congress after the first three months with reports once every 6 months after that. This was untenable. Six months is an eternity when you are spending billions a week. The Treasury Secretary asked Congress to approve this massive program without delay or interference. It is hard to think of any other time in our history when Congress has been asked for so much money and so much power to be concentrated in the hands of one person. It is a nonstarter.

Yesterday, shortly before we met for the Democratic Policy Committee lunch, we were told there had been a bipartisan agreement on principles of a possible solution, and many of us rejoiced. We know that our Members, both Republican and Democrat, have been working hard to try to produce something that was positive. Then, all of a sudden, it changed. One Presidential candidate parachuted into town which proved to be enormously destructive to the process. Now, negotiations are back on the table, and as I say, we have just received a draft bill of certain principles.

I would like to outline quickly those principles that I think are important. First is a phase-in. No one wants to put $700 billion immediately at the discretion of one person or even a group of a very few people, no matter how bright, how skilled, how informed they might be on banking or finance principles. The funding should come in phases and Congress should have the opportunity to make its voice heard if the program isn't working or needs to be adjusted.

The second point: Oversight, accountability, and governance. The Treasury Secretary should not and must not have unbridled authority to determine winners and losers, essentially choosing which struggling financial institution will survive and which will not. The original plan placed all authority in the hands of this one man, and this is why I say it was DOA -- dead on arrival -- at the Congress. We must assure that controls are in place to watch taxpayer dollars and make sure they are well-spent fixing the problem, and that oversight by a governance committee and the Banking Committees are strong, and that they give the best opportunity for the American people to recover their investment and, yes, even eventually make a profit from that investment. That can be done and it has been done in the past.

I believe that frequent reporting to Congress is critical. Transparency, sunlight on this, is critical. So Congress should receive regular, timely briefings, perhaps weekly for the first quarter, on a program of this magnitude. A proposal should mandate frequent reporting and the public should be ensured of transparency to the maximum extent possible.

I also believe that within the first quarter -- and this, to me, is key -- a comprehensive legislative proposal for reform must be put forward. We must reform those speculative practices that impact price function of markets. We must deal with the unregulated practices that have furthered this crisis. Look. I represent a State that was cost $40 billion in the Enron episode during 1999 and 2000 by speculation, by manipulation, and by fraud. There still is inadequate regulation of energy commodities sold on the futures market. And that is just one point in all of this. We must prevent these things from happening. The only way to do it is to improve the transparency of all markets. No hidden deals. Swaps, in my view, should be ended. The London loophole should be ended.

We have to outline rules for increasing regulation of the mortgage-backed securities market, along with comprehensive oversight of the mortgage industry and lending practices for both prime and subprime lending.

Senator Martinez of Florida and I had a part in the earlier housing bill, which included our legislation entitled the SAFE Mortgage Licensing Act. We found that the market was rife with fraud. We found there was one company that hired hairdressers and others who sold mortgages in their spare time. We found there were unscrupulous mortgage brokers out there unlicensed, preying upon people, walking off with tens of thousands of dollars of cash. This has to end. It has to be controlled. It has to be regulated.

So I believe the crisis of 2008 stems from the failure of Federal regulators to rein in this Wild West mentality of those Wall Street executives who led those firms and who thought that nothing was out of bounds. Every quick scheme was worth the time, and worth a try. Congress cannot ignore this as the root cause of the crisis. It was inherent in the subprime marketplace, and it has now spread to the prime mortgage marketplace.

It is also critical that accurate assessments of the value of these illiquid mortgage-related assets be performed to limit the taxpayers' exposure to risk and structure purchases to ensure the greatest possible return on investment.

Taxpayer money must be shielded at all costs from risk to the greatest extent possible.

Reciprocity is not a bad concept if you can carry it out. The Government must not simply act as a repository for risky investments that have gone bad. An economic rescue effort that serves taxpayers well must allow them to benefit from the potential profits of rescued entities. So a model -- and it may well be in these new principles -- must be developed to ensure the taxpayers are not only the first paid back but have an opportunity to share in future profits through warrants and/or stocks.

As to executive compensation limits, simply put, Californians are frosted by the absence of controls on executive compensation. Virtually all of the 50,000 phone calls and letters mentioned this one way or another. There must be limits. I am told that the reason the Treasury Secretary does not want limits on executive compensation is because he believes that an executive then will not bring his company in to partake in any program that is set up. Here is my response to that: We can put that executive on his boat, take that boat out in the ocean, and set it on fire. If that is how he feels, that is what should happen, or his company doesn't come in. But to say that the Federal Government is going to be responsible for tens of millions of dollars of executive salaries, golden parachutes, whether they are a matter of contract right or not, is not acceptable to the average person whose taxpayer dollars are used in this bailout. That is just fact.

The one proposal that was made by one of the Presidential candidates that I agree with is that there should be a limit of $400,000 on executive compensation. If they don't like it, too bad, don't participate in the program. As I have talked with people on Wall Street and otherwise, they don't believe it is true that an executive, if his pay is tailored down, will not bring a company in that needs help. I hope that is true. I believe there should be precise limits set on executive pay.

Finally, as to tangible benefits for Main Street in the form of mortgage relief, there have been more than 500,000 foreclosures in my home State of California so far this year. In the second quarter of this year, foreclosures were up 300 percent over the second quarter of 2007. More than 800,000 are predicted before this year is over.

I have a city in California where one out of every 25 homes is in foreclosure. This is new housing in subdivisions. As you look at it, you will see garage doors kicked in. You will see houses vandalized. You will see the grass and grounds dry. You will see the street sprinkled with "For Sale" signs, and nobody buys because the market has become so depressed.

This crisis has roots in the subprime housing boom that went bust, and it would be unconscionable for us to simply bailout Wall Street while leaving these homeowners to fend for themselves.

Everything I have been told, and I have talked to people in this business, here is what they tell me: It is more cost-effective to renegotiate a subprime loan and keep a family in a house than it is to foreclose and run the risks of what happens to that home on a depressed market as credit is drying up, as vandals loot it, as landscaping dries up, as more homes in the area become foreclosed upon; the way to go is to renegotiate these mortgages with the exiting homeowner wherever possible. I feel very strongly that should be the case.

I don't know what I or any of us will do if we authorize this kind of expenditure and we find down the pike in my State that the rest of the year, 800,000 to 1 million Americans are being thrown out of their homes despite this form of rescue effort. Think of what it means, Mr. President, in your State. You vote for this, any other Senator votes for it, and these foreclosures continue to take place and individual families continue to be thrown out of their homes. It is not a tenable situation.

I hope, if anybody is listening at all, that in the negotiating team, they will make a real effort to mandate in some way that subprime foreclosures be renegotiated, that families, wherever possible, who have an ability to pay, have that ability to pay met with a renegotiated loan. I have done this now in cases with families who were taken advantage of. We called the CEO of the bank, and the bank has seen that the loan was renegotiated, in one case in Los Angeles down to 2 percent. That is better than foreclosing and running the uncertainty of the sale of the asset in a very depressed housing market.

These are my thoughts. Again, it is easy to come to the floor and give your thoughts. It is much more difficult to sit at that negotiating table.

I once again thank those Senators on both sides of the aisle who really understand the nature of this crisis -- that it isn't only Wall Street, that it does involve Main Street, and if there is a serious crash, it will hurt tens of millions of Americans, many of them in irreparable ways. So we must do what we must do, and we must do it prudently and carefully.

I yield the floor. I suggest the absence of quorum."

Sincerely yours,
Dianne Feinstein
United States Senator

Liquidity
There is one cardinal rule when it comes to finance - never use short term funds to fund long term assets. And businesses that have their feet on the ground understand this - the manufacturer, the retailer, the service provider (their primary assets are people, but still). Everyone in fact, except most of the banking and financial sector. Why is the rule so important (although the names are self explanatory, an explanation will do no harm)?

Short term funds - loans - need to be paid back within a short period of time (the normal classification is anything that is payable within one year is "short term" and everything else - "long term"). So you should only use it to create assets that can be liquidized on demand or within a short period of time. Long term funds, on the other hand - whether your own money or money that is borrowed - is repayable or available to you over a significantly longer time frame. So, if an investment has to go into construction of a building, or buying machinery, or doing similar stuff, care needs to be taken that you are not obliged to return the entire money whenever the lender demands it. This requires that you either embark on the project on the strength of your own equity, or on the basis of a long term loan where the lender cannot demand that you pay up the entire money at once - something that cannot be done because all your funds are locked in a long term venture. The asset classification may vary depending on the business, but the classification still exists. And when someone fails to follow the rule, they end up with a "liquidity crisis".

Every business more-or-less understands and follows this rule - that is why they differentiate between fixed assets and current assets; equity and long term funds, and current liabilities. And that is why they have a concept of working capital - the difference between current assets and current liabilities, a difference that is generally positive and which is therefore funded either through equity or through special funding in the form of cash credit facilities from banks. Every finance professional worth his salt knows about it, and the bankers even more so (but only when it comes to their debtors) - they will have a fit if you tell them you have a negative working capital - that you are funding your fixed assets from money payable to creditors or from your cash credit facility.

The problem in such a case does not result from the quality of assets - the business is still solvent, but from a mismatch in the time taken to liquidate an asset and the time when a liability needs to be repaid. It is a kind of asset-liability mismatch - a time-based one.

Banks, however, believe that they are exempt from this rule - that they can use demand deposits and lend the money for 10-20-30-year periods. Consider how your average bank operates. They accept "deposits payable on demand" - whether in the form of balances in a current account, or savings account, or a "fixed deposit" - the interest rate offered decided by the rules that govern each account; and they lend the money to businesses and individuals for long term uses. This is a serious mismatch and a disaster waiting to happen - a consequence of the "fractional reserve system" that banks follow, and the only reason banks can get away with this is because of an implicit government guarantee in the form of support from the Central Bank. If, for example, the Federal Reserve and similar central banks across the world were to be dissolved, modern banking will be history by next weekend. But the Central Bank and so called Deposit Insurance Corporations mask the perpetual liquidity crisis by guaranteeing enough funds in case of a bank run one one hand, and if a bank fails because it has to engage in a fire sale of its assets, guaranteeing a minimum amount that would be paid to every deposit holder. If you want to compare this with something you can relate to, think about the overbooking that hotels and airlines indulge in. The only difference is they don't go bust when the chickens come home to roost - their business model does not depend on a balancing act.

Hence, fractional reserve banking, central banks and deposit insurance corporations are "solutions in search of a problem", and these solutions fail when the problem raises its ugly head. The answer to this is full reserve banking and stripping government of its "monetary policy" making authority. Banks have to keep at hand a sum equivalent to all demand deposits they are liable for. The only money they can lend is that which they receive specifically for such a purpose. This system will raise the cost of banking, but will eliminate the need for central institutions controlling banks. A beneficial effect of this will be the elimination of inflation - a pernicious side-effect of government control on money supply.

Credit
Credit is a much simpler concept. When a prospective borrower meets a lender, in a free market, the lender will lend only if he is reasonably sure that he will get his money back. If the borrower defaults, the lender loses his money. And interest is the reward that the lender gets in return for taking this risk. So the whole system will work as long as people keep paying up the loans that they borrowed, and the scale of operations of banks and companies help them absorb the few losses that are inevitable when lending is done on a large scale.

The problem appears when lenders don't pay attention to the risk profile of their borrower, either because of their increased risk appetite, or because they are forced by government to grant loans so that people can buy homes. Even in this case, when multiple defaults occur in a particular category of borrowers, as long as the loans are present on the books of the original lender, it is the one who would take the hit, and in a worst case scenario, it would go bankrupt.

The Current Crisis
In the present "credit crisis", banks and other financial institutions threw caution to the winds, put their loans in a single basket and sold the basket in pieces to other companies who piled up even more complex financial instruments on top of them and sold them to another series of buyers. A pyramid was built on a fragile foundation, and the foundation collapsed when people who were granted loans way above their repayment abilities started defaulting. The shock wave was felt throughout the system and most banks and credit rating agencies realized that they had no idea of what they were holding and how to measure its risk or value-

ONE of the fastest-growing and most lucrative businesses on Wall Street in the past decade has been in derivatives — a sector that boomed after the near collapse of Long-Term Capital.

It is a stealth market that relies on trades conducted by phone between Wall Street dealer desks, away from open securities exchanges. How much changes hands or who holds what is ultimately unknown to analysts, investors and regulators.

Credit rating agencies, which banks paid to grade some of the new products, slapped high ratings on many of them, despite having only a loose familiarity with the quality of the assets behind these instruments.

Even the people running Wall Street firms didn’t really understand what they were buying and selling, says Byron Wien, a 40-year veteran of the stock market who is now the chief investment strategist of Pequot Capital, a hedge fund.

“These are ordinary folks who know a spreadsheet, but they are not steeped in the sophistication of these kind of models,” Mr. Wien says. “You put a lot of equations in front of them with little Greek letters on their sides, and they won’t know what they’re looking at.”

Mr. Blinder, the former Fed vice chairman, holds a doctorate in economics from M.I.T. but says he has only a “modest understanding” of complex derivatives. “I know the basic understanding of how they work,” he said, “but if you presented me with one and asked me to put a market value on it, I’d be guessing.”

Such uncertainty led some to single out derivatives for greater scrutiny and caution. Most famous, perhaps, was Warren E. Buffett, the legendary investor and chairman of Berkshire Hathaway, who in 2003 said derivatives were potential “weapons of mass destruction.”

And the market for these financial instruments vanished overnight leaving financial jargon like "mark-to-market" meaningless. As a reader of The Telegraph points out - "You can't mark to a market that doesn't exist."

Most companies would have suffered losses but could still make it through if they did not suffer from a "liquidity crisis", like AIG found out - even while being solvent - just - it had no money available to pay off creditors who demanded additional collateral. When Bear Stearns was being rescued in March 2008, this is what I said-

If the subprime mortgage crisis, and the Federal Reserve coming in with a huge bailout package for affected banks was bad idea, the Bear Stearns distress sale, underwritten by the Federal Reserve is worse. Conventional wisdom, and most pink papers, favors bailouts so that the overall banking system remains unscathed by such crises. But the fact of the matter is, bailouts fix the symptoms, not the cause. The main problem hardcore capitalists and libertarians (at least I do) have with bailouts is that those responsible for the mess don’t pay a financial price. If the tax payer has to pay for the financial jugglery done by employees of investment and commercial banks, and if the only thing that prevents people from losing their trust in banks is the backing of the government in the guise of the infallible Federal Reserve with an infinite credit rating, then a private banking sector makes no sense. In that case, nationalizing all banks should be the way to go.

There is a hint of sarcasm if you read a bit further, but my position is clear, and I stand by it. The crisis is a result of persistent government interference in the market, and the market failing to understand risk. And hence shareholders, bond holders, everyone who has invested in companies that took bad decisions should pay the penalty and take a hit. If they are not willing to do that, then the answer is not a bailout but a 100 % nationalization of the entire US banking and insurance sector. If companies don't appreciate the free market but seek handouts on every available opportunity, socialism is what they deserve. And Bush can learn valuable lessons from Indira Gandhi on this one.

Maybe the Masters of the Universe? You know, the oh-so-smarter-than-you investment bankers. They're certainly paid more for their wisdom than you or I. A first year, just out of college, investment banker gets around $125,000 - $150,000. And, we all know how much top-of-the-line investment bankers make - just look at Henry Paulson. In 2005, as CEO and Chairman of Goldman-Sachs, it is reported he made $30 million.

Maybe Paulson knows a thing or two: "There's no way to stabilize the markets other than through government intervention." Did he really say that?

Ah, but Paulson started out not wanting any strings attached. No equity stakes. No dividends. No limits on CEO compensation. Otherwise, the banks won't play. Which begs the question: if they really need the bailout/loan/subsidy, then why wouldn't they agree to those terms? Could they really turn down the government's offer and watch the financial system go down the gurgler? Put aside the moral outrage that would be targeted at them (let alone the odd stone projectile or two), but wouldn't that substantially eat further into their reserves and profitability. Doesn't sound like a wise decision, either on behalf of their stockholders or their own future.

I continue to ponder the details. Like, where does the money come from? Is the Treasury going to print more money? That leads to inflation, which makes everything more expensive for everyone. A sure recipe to a major recession. Or, is the Treasury going to borrow more and raise our already dangerously high debt level? That will drive down the dollar, making imports more expensive and weakening the status and stature of American business overseas. (Not forgetting that it would probably be foreign sovereign wealth that would finance the debt!)

And, I ponder where the money will actually go. I suspect it will be the big banks (getting bigger by the day) that gets the lion's share. They're the ones who made all the dodgy investments (or have bought out the guys who did). They're the ones who were able to package them into indescribably complex securities. And, they're the ones that probably need it least - they're big enough to cope with the losses and ride out the slump. Small banks, on the other hand, are more at risk. But, small banks (with some notable exceptions) never had the wherewithal to make those dodgy loans. So, are we rewarding the wrong guys? Who need it least?

Maybe that small-guy investor, Warren Buffett, has it right. When a bank needs liquidity, you either loan it to them at good terms or you get preferred stock. With a 10% annual dividend, even if the price of the shares fall in market value. Using that as a model, the country's $700 billion should earn us a cool $7 billion. Guaranteed.

Does McCain understand that? Obama? I'll be watching the debate, hoping to find out.

HOW BANKING, and the world has changed. Up until recently, when banks did quaint things like making money, the Wall Street mantra was: "Be like Goldman Sachs". Investment banks often peered enviously at the risk taking prowess that generated huge profits for Goldman Sachs. Hardly is that the case today. In a surge of reduced financial capitalism and record financial institutions either filing under Chapter 11 for bankruptcy, or having been taken over, the imperative today is more, "Be less like Goldman Sachs".

Of the five independent investment banks trading as separate entities at the start of 2008, only Goldman Sachs and Morgan Stanley remain. Doubts about the sustainability of the remaining model are rife, particularly after the demise and collapse of Lehman Brothers. Many financial analysts simply ask whether the two remaining investment banks, still operating as autonomous units, have the ability to survive on their own. Spreads on either banks credit-default swaps, which protects against the risk of default, have soared in recent weeks as investors and the world digest the implications of what is happening within the US economy.

Universal banks, which attempt to adjoin investment and deposit taking banks, are in the ascendancy. Bear Stearns and Merrill Lynch, for example, found shelter and safe-haven in the arms of the two big universal banks, JP Morgan Chase and the Bank of America. Barclays, a British universal, is attempting to purchase piecemeal fragments of the collapsed Lehman Brothers.

In Britain, too, Lloyds TSB - a bank well-known for its depositor's accounts funding - quenched the financial market last week when it proposed to merge with HBOS, a bank that has been highly exposed in recent months to the volatility of the mortgage market. HBOS sought safe-haven with a financial institution that does business directly opposite to its own. Deposit funding clearly has its advantages.

Britain's financial sector was radically overhauled in 1986, in what was dubbed the Big Bang. For many, the savage, unplanned reconfiguration of Wall Street might yet be described as the "Big Implosion". After the humbling of the US mortgage market and its largest insurer, AIG, the "bulge-bracket" brokerage model has collapsed in on itself. Humiliating for the shame-ridden erstwhile masters of the universe, the new force in global finance is now the government.

Aversion and antipathy to regulation of universal banking has also eased. Although, the 1933 Glass-Steagall Act, which separated investment from commercial banks, was repealed in 1999, the universal model is still viewed with a degree of suspicion in America. Among measures announced this month by the Federal Reserve, the US government temporarily suspended rules restricting the amount of money that banks can lend to their affiliates. The difficulty, though, is whether such ‘trading' will get into further trouble, the effects of which would ripple through the entire balance-sheet. Even so, the suspension, and the dramatic reshaping of Wall Street, represents the final repeal of Glass-Steagall.

ADAPT AND THRIVE

Goldman Sachs and Morgan Stanley, the last remaining investment banks, were forced to seek sanctuary by converting into bank-holding companies after the collapse of Lehman Brothers turned into a full-scale run on the financial industry. Though neither appears financially unstable, financial markets could no longer stomach any potential combination of illiquid assets or skittish wholesale liabilities.

By reverting and performing the role of holding banks, both will now start to horde large amounts of cash deposits, a means by which stability will provide surety for funding in the future. Signing-up strong partners will also help in this process. Goldman Sachs, for example, coaxed $5 billion from Warren Buffet. This endorsement and ‘partnership' helped Goldman to raise a further $5 billion in a share-offering the next day.

Warren Buffet is seen as an investing legend. He describes Goldman Sachs as "exceptional". However, the key question hanging over Goldman is whether it can adapt and thrive. As a bank it certainly faces more intrusive supervision from the Federal Reserve, tougher capital requirements and will likely have restrictions placed on its investing activities.

Universal banks, such as the Bank of America, argue that their consolidated balance sheets, wide ranging in activities, give them an edge in trying times because of diversity and specialisation in different markets. In an argument that is gaining credibility it has been suggested that the golden times enjoyed by investment banks during the period 2003-06 was an "aberration", fuelled by a global liquidity glut big enough to hide a multitude of risk-taking sins.

Private-equity firms and hedge funds spy on opportunity. The buyout capitalists received some good news this week, when the Federal Reserve relaxed its rules on their ownership of banks. The barons are keen to seek-out the investment banks "talent": hedge funds will be particularly keen to get their hands on cutting-edge risk-takers who fret that new regulation will clip their wings. How true that has become.

Power may shift in two other directions: either abroad or, to a lesser extent, to boutique investment banks. Mitsubishi, for example, is not the only foreign bank making a move. After a brief excursion in the bankruptcy courts, Barclays has taken over some of Lehman's American operations.

But, is all lost for the former investment banks? Prima Facie, they may not have to cut leverage by as much as first thought. Though their overall leverage ratios are high, their risk-adjusted capital ratios under the Basel 2 rules are still much stronger than those of most commercial banks.

Besides, there are certainly some advantages in becoming a bank now. Vast swathes of regional lenders are expected to fail in the coming months. Specifically, Goldman Sachs and Morgan Stanley should be able to amass and acquire deposits on the cheap, without the headache that would normally accompany a merger with a big commercial bank. They will also seek in picking-up assets from the government's giant loan-buying entity when that process eventually gets moving. Sharp, distressed-debt investors like Goldman and Morgan will look to capitalise their positions.

The accent for the time being, given the acute stress within the financial markets, will be more on survival than grabbing opportunities. Banks continue to treat each other with suspicion within the interbank loan markets.

WITH THE GOVERNMENT stepping-in with guarantees after catastrophic runs on the money markets, the implications for banks are still yet to be felt. "Prime money funds", which are important buyers of corporate debt, remain under pressure and are pulling out of anything deemed risky. This is a huge problem for banks because money funds hold up to $1.3 trillion of their short-term debt; as the funds retreat, the banks will be forced to turn to longer-term, and more expensive, funding markets.

At some stage financial markets will stabilise. Wall Street will probably start to wonder whether it is better or worse-off without its standalone investment banks. Arguably, it could create a vacuum. As brokers, regulated lightly by the Securities and Exchange Commission, they were free to place large sums of capital to work, providing market liquidity, making markets and assuming risk. As banks, though, they may find the Federal Reserve takes a more restrictive view. In terms of prudence, it is probably wise that they do given such an appalling lack of confidence within the markets following irresponsible banking practices.

© Mark Dowe 2008: all rights protected

Reference(s) & attribution:

• This journal is adapted from an article published by the Economist, entitled: "The loneliness of the independent Wall Street bank", dated September 16, 2008, and

• "What the death of the investment bank means for Wall Street", Economist, dated September 24, 2008.

Glad to get confirmation that my years as a financial analyst weren't for notta. A few days ago, I wondered aloud whether it would be feasible and helpful to create a federal entity with oversight for home loan refinancing, an entity modeled on federal student loans program. Well...


James K. Galbraith, the author of The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too and the son of renowned economist John Kenneth Galbraith, questions whether the bailout is necessary and proposes a new Home Owners Loan Corp., which would rewrite mortgages, manage rental conversions and decide when vacant, degraded properties should be demolished.

All five big investment banks have disappeared or morphed into regular banks. Is this bailout still necessary?

The point of the bailout is to buy assets that are illiquid but not worthless. But regular banks hold assets like that all the time. They're called "loans."

With banks, runs occur only when depositors panic, because they fear the loan book is bad. Deposit insurance takes care of that. So why not eliminate the pointless $100,000 cap on federal deposit insurance and go take inventory? If a bank is solvent, money market funds would flow in, eliminating the need to insure those separately. If it isn't, the FDIC has the bridge bank facility to take care of that.

Next, put half a trillion dollars into the Federal Deposit Insurance Corp. fund -- a cosmetic gesture -- and as much money into that agency and the FBI as is needed for examiners, auditors and investigators. Keep $200 billion or more in reserve, so the Treasury can recapitalize banks by buying preferred shares if necessary -- as Warren Buffett did this week with Goldman Sachs. Review the situation in three months, when Congress comes back. Hedge funds should be left on their own. You can't save everyone, and those investors aren't poor.

With this solution, the systemic financial threat should go away. Does that mean the economy would quickly recover? No. Sadly, it does not. Two vast economic problems will confront the next president immediately. First, the underlying housing crisis: There are too many houses out there, too many vacant or unsold, too many homeowners underwater. Credit will not start to flow, as some suggest, simply because the crisis is contained. There have to be borrowers, and there has to be collateral. There won't be enough.

In Texas, recovery from the 1980s oil bust took seven years and the pull of strong national economic growth. The present slump is national, and it can't be cured that way. But it could be resolved in three years, rather than 10, by a new Home Owners Loan Corp., which would rewrite mortgages, manage rental conversions and decide when vacant, degraded properties should be demolished. Set it up like a draft board in each community, under federal guidelines, and get to work...

- James K. Galbraith - A Bailout We Don't Need - washingtonpost.com

For a review of Galbraith's book by The Journal of Economic Issues, go to the Economist's View, a blog by Mark Thoma, Professor of Economics at the University of Oregon. More information on Galbraith's book can be found at:

• Global Investment Watch
• Mefeedia Podcast - The Predator State: How Conservatives Abandoned The Free Market And Why Liberals Should Too - Posted using ShareThis

Hedge funds thrived on the use of debt. Find a stock that's doing well in a bull market, borrow money to buy it, reap outsized returns when it rises, and keep 20 percent of the returns. Investment banks eager for stock-trading commissions were keen to provide the liquidity. Today, not so much. Hedge funds were willing to use leverage in part because they hedged; they sold stocks short to protect themselves from being wiped out if the market moved down. But as part of an effort to protect the CEOs of financial institutions from their fellow BSDs at hedge funds, the Securities and Exchange Commission this week issued an order banning the short selling of several hundred financial stocks. As a result, many hedge funds are pulling in their horns and running for safety.