10, the Dow Jones clawed its way back from a 200 point deficit
to a mere 31 point loss after the Federal Reserve injected US$38
billion into the banking system. The Fed had already pumped $24
billion into the system a day earlier after the Dow plummeted
387 points. That brings the Feds total commitment to a whopping
By some estimates,
$326.3 billion has now been added to the G-7 Nations intra-banking
system to prevent a breakdown. That amount will rise considerably
in the weeks ahead as the situation continues to deteriorate.
Some readers may remember that on Tuesday, August 7, the Fed announced
that it was NOT planning to bail out the market.
My, how quickly
So far, economic
pundits and CEOs have applauded the Feds intervention as
a "constructive" way of staving off an impending credit
same "experts" who always sing the praises of unregulated
"free markets" while condemning any government intervention?
banks and fund managers love "free markets" when it
means eliminating the rules that prevent them "gaming the
system". But they dont like it so much when their shabby
Ponzi-rackets start to unravel. Then theyre the first in
line to beg for a bailout.
whats happening right now. The Fed is keeping the stock
market afloat by increasing liquidity at the banks. If it wasnt
for Bernankes billions of dollars of low interest credit
- the banking system and stock market would collapse in a heap.
The Feds "not-so-invisible hand" is the only thing
holding the whole dilapidated system in place.
Is that the
way its supposed to work in a free market system - with
the Fed acting as the nations Economic Central Planner intervening
whenever it suits the interests of its wealthiest constituents?
like a Financial Politburo, doesnt it?
investment banks and fund
managers love "free markets"
when it means eliminating the rules
that prevent them "gaming the system".
But they dont like it so much when
their shabby Ponzi-rackets start
to unravel. Then theyre the first
in line to beg for a bailout.
the "free market" means nothing to the men who run the
system. Its just a public relations scam designed to dupe
investors into plunking their money into a system thats
rigged for the carnivores at the top of the economic food-chain.
really believe that the market-commissars would allow the system
to operate according to the arbitrary swings in investor confidence
and random speculation?
This is THEIR
SYSTEM and they run it THEIR WAY. The only time that changes is
when their twisted schemes go haywire and they need a handout
from the taxpayer. In the present case, they are asking Big Brother
Bernanke to bail them out on trillions of dollars of non-performing
subprime garbage-loans which masquerade as securities in the secondary
market. The Fed has already indicated that it is only-too-willing
good will it do?
are currently holding (roughly) $300 billion in collateralized
debt obligations (CDOs) and another $225 billion in collateralized
loan obligations (CLOs) More than one-half trillion dollars in
debt which is essentially "illiquid" and has no clear
market value. They could be worthless for all we know.
stopped the Fed riding to the rescue, buying up many of these
toxic CDOs and increasing banking reserves so the great fractional
banking con-game can continue unabated. This is what one astute
observer called "alchemy finance".
around the world have opened up the liquidity spigots to avoid
a global credit meltdown. But their efforts are bound to fail.
The banks are sitting on huge losses from assets that they cant
move through the pipeline and which have gobbled up their reserves.
Bloomberg News summed it up like this: "The $2 trillion market
for mortgages not backed by government-sponsored agencies is at
is true of the corporate bond market. As the Wall Street Journal
reported last week:
investment grade corporate bond market HAS GROUND TO A HALT, making
it difficult for companies to access capital and hard for investors
to find a place to put their money to work... The problems in
the primary market could, if they persist, throw a wrench in the
workings of corporate America, making it tougher for companies
to finance, among other things, investments, buyouts and equity
buybacks... For July, corporate bond issuance was down 77 per
cent from June." ("Corporate Bond Market has come to
a Standstill", Wall Street Journal)
banks around the world
have opened up the liquidity spigots
to avoid a global credit meltdown.
But their efforts are bound to fail...
Bloomberg News summed it up
like this: "The $2 trillion market
for mortgages not backed
by government-sponsored agencies
is at a standstill".
wheels of commerce have rusted in place. Nothing is moving. Only
the sense of panic continues to grow. Trillions of dollars poisonous
CDOs need to unwind, but the banks cannot put them up for bid
for fear that theyll only get pennies on the dollar. This
is what a slow-motion train-wreck looks like. The Feds cheap
credit wont help either. At best, itll just buy a
little time before the true value of these bonds is established
and trillions of dollars in market capitalization vanish into
cyber-space. Banks, equities, hedge funds, insurance companies
and pension funds are all in line to suffer major losses.
of course, is that the Federal Reserve created this mess by lowering
interest rates to 1 per cent and flushing trillions of dollars
into the economy. That cheap money created a series of lethal
equity-bubbles in housing, credit, stocks and bonds which are
quickly falling to earth. Expanding the money-supply might be
a short-term fix, but its really just throwing more gas
on the fire. Why add hyper-inflation to the long-list of existing
in the stock market is a red herring. We should be paying attention
to the underlying problems which are just now beginning to surface.
The banks have been originating loans and bundling them off to
Wall Street to avoid the normal reserve requirements. Now theyve
been "caught short" and dont have adequate funding
to cover their bets. If the Fed doesnt help out, well
see at least one or two major bank closures.
This is a
story that wont appear in the media. Bank-runs are the beginning
of the end - financial Armageddon.
more bad news, too. If the stock market corrects more than 10
or 15 per cent, the massive overleveraged $1.7 trillion hedge
fund industry will crash-and-burn. This may explain why the stock
market has behaved so erratically recently. There have been numerous
late-day rallies with no good news to support the soaring equities
prices. Is the market being micro-managed behind the scenes to
keep it above a certain level?
think so. Theres been a flood of articles about the activities
of the Plunge Protection Teams in the last two weeks. The
Feds desperate infusions of credit into the banking system
will only reinforce growing suspicions of market manipulation.
volatility in the stock market
is a red herring. We should be
paying attention to the underlying
problems which are just now
beginning to surface. The banks
have been originating loans and
bundling them off to Wall Street
to avoid the normal reserve
requirements. Now theyve been
"caught short" and dont have
adequate funding to cover their bets.
If the Fed doesnt help out,
well see at least one or two major
bank closures. This is a story that
wont appear in the media.
Bank-runs are the beginning
of the end - financial Armageddon.
hedge against adverse moves in the market by purchasing various
types of insurance in the form of derivatives contracts. Derivatives
trading has skyrocketed in the last few years and the "British
Bankers Association estimated last fall that by the end of 2006,
the market for all credit derivatives was $20 trillion and expected
to be $33 trillion by the end of 2008. These relatively new instruments
are about to be put to the test by worsening market conditions.
"Hedge funds may account for as much as 30 per cent of such
credit protection" but that is little solace for the banks
"because hedge funds that are losing money but also selling
credit insurance may not be able to honor their commitments, rendering
the protection worthless." ("Insuring against Credit
Risk can carry risks of its own" Henny Sender, Wall Street
in the form of credit default swaps have created a false sense
of security that may prove to be unfounded. In fact, the Credit
insurance business has probably encouraged lenders to make shakier
and shakier loans believing that they were protected from risk.
But that doesnt appear to be the case. For example, Bear
Stearns tried to soothe investors fears during the collapse
of its two hedge funds by pointing to its derivatives coverage.
executives repeatedly referred to their dependence on hedges,
including credit derivatives, to offset their losses on subprime
mortgages and loans to poorly rated companies, stating that such
hedges would offset losses." (Ibid, H. Sender, Wall Street
We all know
how that story ended up.
have been celebrated as a critical part of the "new architecture
of the financial markets". Now we can see that they are poor-performers
under real-life conditions and liable to trigger an even greater
disaster. If the stock market stumbles, we can expect a major
breakdown in credit insurance-trading with trillions of dollars
in derivatives disappearing overnight.
world of derivatives trading will suddenly explode onto the headlines
of newspapers across the country.
BRUSHFIRE SWEEPS THROUGH THE ECONOMY
from the massive real estate bubble has now infected nearly every
area of the broader market. The swindle which began at the Federal
Reserve - with cheap, low interest credit - has spread through
the entire system and is threatening to wreak financial havoc
across the planet. The Feds multi-billion dollar bailout
will do nothing to contain the brushfire they started or avert
the catastrophe that lies just ahead. Greenspan opened Pandoras
Box and well all have to live with the consequences.
Mike Whitney lives in Washington. He can be reached at [email protected].
Judgment Week On Wall Street