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Manifesto

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For the past few years, a central mission of this blog has been to focus on Washington’s unending efforts to protect, pamper and bail out the Wall Street megabanks at taxpayer expense.  From Maiden Lane III to TARP and through countless “backdoor bailouts”, the Federal Reserve and the Treasury Department have been pumping money into businesses which should have gone bankrupt in 2008.  Worse yet, President Obama and Attorney General Eric Hold-harmless have expressed no interest in bringing charges against those miscreants responsible for causing the financial crisis.  The Federal Reserve’s latest update to its Survey of Consumer Finances for 2010 revealed that during the period of 2007-2010, the median family net worth declined by a whopping thirty-eight percent.  Despite the massive extent of wealth destruction caused by the financial crisis, our government is doing nothing about it.

I have always been a fan of economist John Hussman of the Hussman Funds, whose Weekly Market Comment essays are frequently referenced on this website.  Professor Hussman’s most recent piece, “The Heart of the Matter” serves as a manifesto of how the financial crisis was caused, why nothing was done about it and why it is happening again both in the United States and in Europe.  Beyond that, Professor Hussman offers some suggestions for remedying this unaddressed and unresolved set of circumstances.  It is difficult to single out a passage to quote because every word of Hussman’s latest Market Comment is precious.  Be sure to read it.  What I present here are some hints as to the significance of this important essay:

The ongoing debate about the economy continues along largely partisan lines, with conservatives arguing that taxes just aren’t low enough, and the economy should be freed of regulations, while liberals argue that the economy needs larger government programs and grand stimulus initiatives.

Lost in this debate is any recognition of the problem that lies at the heart of the matter:  a warped financial system, both in the U.S. and globally, that directs scarce capital to speculative and unproductive uses, and refuses to restructure debt once that debt has gone bad.

Specifically, over the past 15 years, the global financial system – encouraged by misguided policy and short-sighted monetary interventions – has lost its function of directing scarce capital toward projects that enhance the world’s standard of living. Instead, the financial system has been transformed into a self-serving, grotesque casino that misallocates scarce savings, begs for and encourages speculative bubbles, refuses to restructure bad debt, and demands that the most reckless stewards of capital should be rewarded through bailouts that transfer bad debt from private balance sheets to the public balance sheet.

*   *   *

By our analysis, the U.S. economy is presently entering a recession.  Not next year; not later this year; but now.  We expect this to become increasingly evident in the coming months, but through a constant process of denial in which every deterioration is dismissed as transitory, and every positive outlier is celebrated as a resumption of growth.  To a large extent, this downturn is a “boomerang” from the credit crisis we experienced several years ago.  The chain of events is as follows:

Financial deregulation and monetary negligence -> Housing bubble -> Credit crisis marked by failure to restructure bad debt -> Global recession -> Government deficits in U.S. and globally -> Conflict between single currency and disparate fiscal policies in Europe -> Austerity -> European recession and credit strains -> Global recession.

In effect, we’re going into another recession because we never effectively addressed the problems that produced the first one, leaving us unusually vulnerable to aftershocks.  Our economic malaise is the result of a whole chain of bad decisions that have distorted the financial markets in ways that make recurring crisis inevitable.

*   *   *

Every major bank is funded partially by depositors, but those deposits typically represent only about 60% of the funding.  The rest is debt to the bank’s own bondholders, and equity of its stockholders.  When a country like Spain goes in to save a failing bank like Bankia – and does so by buying stock in the bank – the government is putting its citizens in a “first loss” position that protects the bondholders at public expense.  This has been called “nationalization” because Spain now owns most of the stock, but the rescue has no element of restructuring at all.  All of the bank’s liabilities – even to its own bondholders – are protected at public expense.  So in order to defend bank bondholders, Spain is increasing the public debt burden of its own citizens.  This approach is madness, because Spain’s citizens will ultimately suffer the consequences by eventual budget austerity or risk of government debt default.

The way to restructure a bank is to take it into receivership, write down the bad assets, wipe out the stockholders and much of the subordinated debt, and then recapitalize the remaining entity by selling it back into the private market.  Depositors don’t lose a dime.  While the U.S. appropriately restructured General Motors – wiping out stock, renegotiating contracts, and subjecting bondholders to haircuts – the banking system was largely untouched.

*   *   *

If it seems as if the global economy has learned nothing, it is because evidently the global economy has learned nothing.  The right thing to do, again, is to take receivership of insolvent banks and wipe out the stock and subordinated debt, using the borrowed funds to protect depositors in the event that the losses run deep enough to eat through the intervening layers of liabilities (which is doubtful), and otherwise using the borrowed funds to stimulate the economy after the restructuring occurs.  We’re going to keep having crises until global leaders recognize that short of creating hyperinflation (which also subordinates the public, in this case by destroying the value of currency), there is no substitute for debt restructuring.

For some insight as to why the American megabanks were never taken into temporary receivership, it is useful to look back to February of 2010 when Michael Shedlock (a/k/a“Mish”) provided us with a handy summary of the 224-page Quarterly Report from SIGTARP (the Special Investigator General for TARP — Neil Barofsky).  My favorite comment from Mish appeared near the conclusion of his summary:

Clearly TARP was a complete failure, that is assuming the goals of TARP were as stated.

My belief is the benefits of TARP and the entire alphabet soup of lending facilities was not as stated by Bernanke and Geithner, but rather to shift as much responsibility as quickly as possible on to the backs of taxpayers while trumping up nonsensical benefits of doing so.  This was done to bail out the banks at any and all cost to the taxpayers.

Was this a huge conspiracy by the Fed and Treasury to benefit the banks at taxpayer expense?  Of course it was, and the conspiracy is unraveling as documented in this report and as documented in AIG Coverup Conspiracy Unravels.

On January 29 2010, David Reilly wrote an article for Bloomberg BusinessWeek concerning the previous week’s hearing before the House Committee on Oversight and Government Reform.  After quoting from Reilly’s article, Mish made this observation:

Most know I am not a big believer in conspiracies.  I regularly dismiss them.  However, this one was clear from the beginning and like all massive conspiracies, it is now in the light of day.

David Reilly began the Bloomberg Business Week piece this way:

The idea of secret banking cabals that control the country and global economy are a given among conspiracy theorists who stockpile ammo, bottled water and peanut butter.  After this week’s congressional hearing into the bailout of American International Group Inc., you have to wonder if those folks are crazy after all.

Wednesday’s hearing described a secretive group deploying billions of dollars to favored banks, operating with little oversight by the public or elected officials.

That “secretive group” is The Federal Reserve of New York, whose president at the time of the AIG bailout was “Turbo” Tim Geithner.  David Reilly’s disgust at the hearing’s revelations became apparent from the tone of his article:

By pursuing this line of inquiry, the hearing revealed some of the inner workings of the New York Fed and the outsized role it plays in banking.  This insight is especially valuable given that the New York Fed is a quasi-governmental institution that isn’t subject to citizen intrusions such as freedom of information requests, unlike the Federal Reserve.

At least in the Eurozone there is fear that the taxpayers will never submit to enhanced economic austerity measures, which would force the citizenry into an impoverished existence so that their increased tax burden could pay off the debts incurred by irresponsible bankers.  In the United States there is no such concern.  The public is much more compliant.  Whether that will change is anyone’s guess.


 

More Ugly Truth about Deepwater Horizon

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Too many of the news reports concerning the second anniversary of the Deepwater Horizon oil rig blowout are suspiciously similar to the BP commercials featuring testimonials about how the company’s wonderful clean-up job has brought life along the Gulf Coast “back to normal”.  Unfortunately, the ugly truth about life along the Gulf of Corexit has not been thrust before the American public with the same aggressiveness as BP’s public relations propaganda.

Since the catastrophe occurred back in April of 2010, one steady source of unvarnished reports on the matter has been Washington’s Blog.  On April 18 of this year, Washington’s Blog posted this great piece which links to a number of reports documenting the extent of ongoing damage to the Gulf ecosystem.

We are constantly bombarded with propaganda emphasizing how offshore oil rigs create jobs.  What we don’t hear are reports concerning the number of people from the fishing industry who lost their jobs (and their health) as a result of the Deepwater Horizon incident.  Consider this AFP report from last year:

Local chemist Wilma Subra has been helping test people’s blood for volatile solvents, and said levels of benzene among cleanup workers, divers, fishermen and crabbers are as high as 36 times that of the general population.

“As the event progresses we are seeing more and more people who are desperately ill,” she said.

“Clearly it is showing that this is ongoing exposure,” Subra said, noting that pathways include contact with the skin, eating contaminated seafood or breathing polluted air.

“We have been asking the federal agencies to please provide medical care from physicians who are trained in toxic exposure.”

She said she has received no response.

The most devastating exposé on the Deepwater Horizon disaster came from Greg Palast, who wrote a two-part report for EcoWatch.  A British investigative television program – Dispatches – sent Palast into Baku, Azerbaijan, with a cameraman to investigate a whistleblower’s report that in September of 2008, a BP off-shore rig in the Caspian Sea suffered a nearly identical blow-out to the Deepwater Horizon incident.  BP concealed the true cause and extent of the Caspian Sea event from the U.S. regulators and Congress.  From Part One:

The witness, whose story is backed up by rig workers who were evacuated from BP’s Caspian platform, said that had BP revealed the full story as required by industry practice, the eleven Gulf of Mexico workers “could have had a chance” of survival.  But BP’s insistence on using methods proven faulty sealed their fate.

One cause of the blow-outs was the same in both cases:  the use of a money-saving technique – plugging holes with “quick-dry” cement.

By hiding the disastrous failure of its penny-pinching cement process in 2008, BP was able to continue to use the dangerous methods in the Gulf of Mexico – causing the worst oil spill in U.S. history.  April 20 marks the second anniversary of the Gulf oil disaster.

There were several failures in common to the two incidents identified by the eyewitness.  He is an industry insider whose identity and expertise we have confirmed.  His name and that of other witnesses we contacted must be withheld for their safety.

The failures revolve around the use of “quick-dry” cement, the uselessness of blow-out preventers, “mayhem” in evacuation procedures and an atmosphere of fear which prevents workers from blowing the whistle on safety problems.

In Part Two of the report, Greg Palast revealed that one of the classified cables leaked by Private Bradley Manning through WikiLeaks.org to The Guardian was a briefing from the U.S. Embassy in Azerbaijan to the State Department in Washington.  The cable summarized information obtained from Bill Schrader, President of BP-Azerbaijan, about the cause and extent of the 2008 blowout.  The collusion of the State Department in this cover-up became an important aspect of Palast’s report:

From other sources, we discovered the cement which failed had been mixed with nitrogen as a way to speed up drying, a risky process that was repeated on the Deepwater Horizon.

Robert F. Kennedy Jr., president of Waterkeeper Alliance and senior attorney for Natural Resources Defense Council, calls the concealment of this information, “criminal.  We have laws that make it illegal to hide this.”

The cables also reveal that BP’s oil-company partners knew about the blow-out but they too concealed the information from Congress, regulators and the Securities Exchange Commission.  BP’s major U.S. partners in the Caspian Sea drilling operation were Chevron and Exxon.

*   *   *

Kennedy’s particular concern goes to the connivance of the State Department, then headed by Secretary of State Condoleezza Rice, in the cover-up and deception.  Chevron, noted Kennedy, named an oil tanker after Rice who had served on the oil company’s board of directors.  “BP felt comfortable – and Chevron and Exxon – in informing the Bush State Department, which was run by Condoleezza Rice,” he said, “and they felt comfortable that that wasn’t going to come out.”

The U.S. Securities Exchange Commission requires companies to report “material” events.  BP filed a “20-F” report in 2009 stating, “a subsurface gas release occurred below the Central Azeri platform,” suggesting a naturally occurring crack in the seafloor, not a blow-out.  This contradicted the statements of three eyewitnesses and the secret statement of BP’s Azerbaijan President in then WikiLeaks cable.

“The three big actors, Chevron, Exxon and BP all concealed this from the American public,” concludes Kennedy.  “This is a criminal activity.”

At this point, anyone who believes that Condoleezza Rice could be chosen as Mitt Romney’s running mate is headed for a big disappointment.

With the passing of time, the Deepwater Horizon story isn’t getting any better.  It just keeps getting worse.


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