The Bankers’ Bailout

I mentioned this yesterday (Inflating Our Way Into Recession), but I thought it was an important enough piece to highlight on its own.

This is an all too vivid an account of what is likely to be an ongoing and expensive venture into irresponsible lending and speculation — all that the taxpayer’s expense.

"Since the onset of the subprime crisis last summer, the White House has repeatedly rejected the notion of a government bailout, either for homeowners facing foreclosure or for the banks and mortgage companies that made the now souring loans. "There’s no bailout with government money, none whatsoever," Treasury Secretary Hank Paulson emphasized. But even as the administration has stuck to its laissez-faire stance in public, behind the scenes a covert bailout has been under way, with a number of public and quasi-public agencies quietly dispensing vast sums to financial institutions saddled with worthless or near worthless mortgage securities. All the while, homeowners at the heart of the problem have been left largely to their own woes. The rescue operation brings to mind John Kenneth Galbraith’s dictum that in the United States, the only respectable form of socialism is socialism for the rich . . .

Then there is the Federal Home Loan Bank system, an obscure institution that President Herbert Hoover set up in 1932 to stimulate mortgage lending. The F.H.L.B., actually 12 government-chartered but privately owned regional banks, exploits its semiofficial status to raise money cheaply in the bond market and lends the proceeds to its membership, including most of the nation’s big banks and investment firms. Since last summer, the F.H.L.B. has been extending low-cost credit at an unprecedented rate—$184 billion in the third quarter alone. Recipients include Citigroup, which owed the F.H.L.B. $98.7 billion at the end of September; Countrywide Financial, which owed $51.1 billion; and Washington Mutual, owing $43.7 billion . . .

As a result of all this government-sanctioned activity, total mortgage lending nationwide actually rose in the third quarter of 2007, according to Richard Iley, an economist at BNP Paribas. However, as he pointed out in a recent research note, simply increasing the volume of business was probably not the only goal. "It is no exaggeration to say that the mortgage market was effectively nationalized" in the third quarter, Iley wrote. "The F.H.L.B. acted as a forgiving lender of the last resort, providing the liquidity to sustain mortgage production while Fannie and Freddie acted as risk intermediaries of last resort with record purchases of mortgages."

Viva laissez faire Capitalism Socialism! 


The Bankers’ Bailout
John Cassidy
Portfolio, March 2008 Issue

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  1. Barry Ritholtz commented on Feb 21

    Private profit, public risk is an an old sad state of affairs.

    Whenever I hear someone on tv spouting their free market ideology, I make a note of it and wait for the next crisis.

    That’s when their inner socialist get freed!

    While the embracement of bailout plans by Cramer, Kudlow, and others reveal their true secret socialism, surprisingly, Art Laffer has remian ed ioidologically pure.

    Go figure.

  2. blam commented on Feb 21

    We have to keep in mind that a number of the crime family soldiers in the current government are old hands at creating, supporting, and bailing out real estate speculators. Expansion of the money supply through fraudulent real estate loans was invented by the puppet masters controlling the reagan “trickle down” experiement.

    Why would we expect the aristocrat government to react differently. The credit markets are locked up because the players know what is likely buried in the back yard but haven’t figured out where or how much. Transparency is like abstinence. Everyone preaches it but no one actually practices it. It would be bad for the markets.

  3. SPECTRE of Deflation commented on Feb 21

    They, da man, make it worse with each attempt at making it better. Here’s another stupid idea that will go down in flames. It is riddled with unintended consequences:

    NEW YORK ( — A plan that would help troubled mortgage borrowers today – and might make lenders whole later on – was unveiled Wednesday in Washington.

    The Office of Thrift Supervision (OTS) is urging the federal savings and loans lenders under its authority to refinance loans by reducing mortgage balances to the current market values of the homes. Thanks to falling home prices, many homeowners are now stuck with mortgages that are actually worth more than the houses themselves.

    But instead of having lenders forgive the difference between the old mortgage and a house’s current resale value, called a short sale, the OTS advises that lenders issue a warrant or “negative amortization certificate” for the difference. If a home regains its market value and is then sold, lenders have first claims to the profits.

    “If a house has a $100,000 mortgage originally,” said Bill Ruberry, a press spokesman for the agency, “and the fair market value is $80,000, there’s $20,000 in negative equity. The lender could refinance for $80,000 and a warrant [for the $20,000 in lost value].”

    If the house later sold for $100,000, the lender would collect the $80,000 mortgage balance plus the $20,000. If the sale realized more than $100,000, the certificate holder might even get interest on top of the $20,000. Any profit beyond that would go to the borrower. The warrants could be publicly traded.
    Home prices still falling

    The hope is that this plan will help prevent foreclosures while minimizing the hit that lenders will take, all without putting any burden on the taxpayers.

    All borrowers are likely to be eligible, according to Jaret Seiberg of the Stanford Group, a policy research company, but the proposal appears to be aimed at those with subprime ARMs, negative amortization mortgages and interest-only mortgage borrowers. They’re the ones most likely to have negative equity.

    The savings and loan industry, which held 31% of mortgage loans last year, saw record losses of $5.24 billion for the fourth quarter of 2007, according to the OTS.
    Can’t pay? Just walk away

    Few details about the plan have been settled, but it would not involve any legislation, nor would it be mandated in any way. Adoption would be on a voluntary basis by the hundreds of thrift institutions in the United States, like Washington Mutual (WASH) and IndyMac Bancorp (IMB).

    Indeed, banks may not want to take this approach in markets where prices have fallen so steeply that it is unlikely they’ll recover any money.

    The plan’s biggest attraction for lenders, according to Seiberg, is that rather than spending $50,000 to foreclose on a home or to write-off the negative amortization in a short-sale, they get a certificate that permits them to share in the up-side, if and when housing markets recover.

    “The plan still needs to be discussed, but it has some attractions,” said Ruberry. “We’re putting it out there and urging our institutions to give it a look.” To top of page

  4. SPECTRE of Deflation commented on Feb 21

    Between the loss of wealth in RE and what the banks/investments houses have lost, even the $184 Billion is peeing on a 5 alarm fire. In the end you can’t force lenders to lend or consumers to borrow. Even WD30 won’t loosen these cogs.

  5. JustinTheSkeptic commented on Feb 21

    So sell it at break-even and let the bank eat the difference, then go buy a cheaper home…lol

  6. ken h commented on Feb 21

    Bailouts are always shadow ops Barry. Always.

    It’s like the satellite shoot down. Oh no, we ot to shoot thissatellite down or someone might get hurt. Some say bullshit and that we were just testing our missle defense system.

  7. Ross commented on Feb 21

    Holy mother, Batman. Why don’t you throw a butchered zebra in front of the pride.

    A hundred years ago and you would be tried for sedition!

    Eh, just go to the comics page and laugh a little. I personally see a whole lot of humour in the current economic malaise.

    Where are the stupid banker jokes?

    This is just a cycle within a cycle. Those who didn’t see it coming are disingenuous or ignorant of history.

    “Mommy, may I have a cookie? NO IT WILL SPOIL YOUR DINNER.” We could use a little more tough love! It’s coming but be careful what you wish for.

  8. charlie commented on Feb 21

    I’ve noticed a lot of borrowing from FHLB on banks quarterly reports. I think most banks have dug themselves into a hole and this is the only thing keeping them from refusing withdrawal requests.

    Even if banks survive the current crisis with massive goverment borrowing, they won’t be able to return to business as usual and with the increased debt load, they’ll struggle to return to profitability.

  9. Russ Wood commented on Feb 21

    Free market economists are no more immune to inconsistency than any other group.

    I generally follow a principle of letting the markets work things out, but I do tend to allow for government bailouts when the original problem was a result of government incompetancy or errors.

    The current crises is primarily a result of abysmal monetary policy, conducted without the slightest oversight by Congress. They caused it, they should play a role in fixing it. Unfortunately, that role has to be small, or we end up in a never ending loop of government incompetence.

  10. SPECTRE of Deflation commented on Feb 21

    Justin, the best part of the piece is they want to make a market for the warrants. Further down the rabbit hole.

  11. gunthestops commented on Feb 21

    Last night I was listening to a great American (Kudlow, the king of crazy town) and I want to assure you that inflation is low, Goldie Locks is on track, and the only problem America has is there is just to many pessimists and bears bringing the economy down. What the hell is wrong with you people, you just don’t understand!!!!

  12. SPECTRE of Deflation commented on Feb 21

    gunthestops, if you are talking about us, [you people] we know all too well what is going on. The talking heads also know what’s happening, but they understand that perception is the name of the game when it comes to the American consumer, it used to be American citizen, but I digress.

  13. E commented on Feb 21

    I noticed this morning that 15 and 30 year fixed mortgage rates are up 40 basis points in the last week.

  14. waiting_ commented on Feb 21

    Can someone explain how it’s a bailout if FHLB was chartered under Hoover and is privately-owned? And I’m not being sarcastic. Are taxpayer dollars really being exploited?

  15. Greg commented on Feb 21

    This is a definitional issue, Barry, and is really simple.

    As constructed, it is not socialism if it benefits capitalists.

    The converse part of this formulation should be clear, and explains a lot about health care.

  16. Tom C commented on Feb 21

    Fiat money and a Federal Reserve fractional reserve system is hardly ‘capitalism’. The criticism here, as is usual, is misdirected. This is a mixed system, not capitalism.

  17. cinefoz commented on Feb 21

    I’m missing the point here. The Federal Reserve is required by law to maintain the financial health of the banking system. Why are you criticizing that?

    Also, what does anyone have to gain by having the financial system of the United States crumble? Why would you not want them to jump in and help? It would be a world wide disaster if the Fed sat on it’s hands. I mean a real disaster, not one of the fantasy disasters cooked up at gloomster blog sites.

    Dealing with the people who caused the problem is a second problem.

  18. Carmen commented on Feb 21

    Technically, Paulson may still be correct.
    The Home Loan Bank system raises money by issuing bonds guaranteed by all their members and which investors give a preferred status because of an implied government backing. That is, until those FHLB start to fail we are not really seeing tax payer money into this operation. Or is there something I’m missing?

  19. ideogenetic commented on Feb 21

    Hmmm…FHLB’s have no federal income tax.

    [While the Federal Home Loan Banks are not subject to federal income tax, they do pay 20 percent of their net earnings to fund a portion of the interest on the Resolution Funding Corporation (REFCorp) debt, which was issued for the resolution of insolvent savings and loans.]

  20. larry commented on Feb 21

    Ignatius has a column today in WAPO that talks about the banking situation and that illustrates all of the misconceptions. He references that plans for a New Deal type bailout for the banks bur makes no reference to the Fed’s TAF program which is a bailout that is ongoing now. He makes the comment that ordinary people do not understand the problem. I sent him an email saying he at least go one thing right. He is ordinary.

  21. Marcus Aurelius commented on Feb 21

    The Federal Reserve is required by law to maintain the financial health of the banking system. Why are you criticizing that?

    Posted by: cinefoz | Feb 21, 2008 9:07:39 AM


    Yeah, and even though going into Iraq was a stupid, costly mistake, all that we can do, now that we’re there, is to keep throwing good money after bad.

    Apparently, the Fed ignored its legal requirement to maintain the health of the system on the way up. Now that we’re all screwed by their lack of diligence and failure to do their legal duty, it bas become the target of our derision.

    It’s a lesson all children should learn: the time to be sorry for doing something wrong is before you do it. After you do it, you pay the price for your actions.

    The Fed is no different.

    To the wood shed with ’em.

  22. Karl K commented on Feb 21

    cinefoz wrote:
    Also, what does anyone have to gain by having the financial system of the United States crumble?

    Yes indeed. What, exactly?

    I come to this blog to get my healthy dose of bearish pessimism. It is a good corrective. And Barry does link to/discuss good things.

    But I find the psychological attitude of some folks on here troubling. Some are what I would call “financial religious fundamentalists.” For them, what has happened is akin to some sort of original sin, for which we must undergo a horrific expiation to cleanse ourselves.

    It’s like the banking system has to die for our sins. Frankly, it’s creepy.

    Everybody, keep this in mind. The law of unintended consequences is ALWAYS operating. You may want, indeed relish, the prospect of “ooooo, it hurts so good” if all things come crumbling down. You may think that, “yes, now we can rebuild.” You may think that, and actually BELIEVE that this would be a rational conclusion.

    But if you think, say, “nation re-building” in Iraq is a clusterf–k, “credit market re-building” would absolutely pale in comparison in its dislocations, disruptions, and dilemmas.

    You simply do not want to go there.

  23. L’Emmerdeur commented on Feb 21

    I love how all the laissez-faire lemmings think it is perfectly fine for the US government to provide credit subsidies to US banks, but God forbid the French provide subsidies to their farmers (oh, wait, we do that, too).

    Funny thing is, smaller banks that stuck to sound, ethical business practices and don’t have problems have to borrow at increased costs from the market to fund their lending operations while the scumbag banks that caused this mess get a free ride on the US taxpayers’ AAA rating. Those smaller banks are being penalized for having done the right thing.

    Instead of allowing these banks to fail for their indiscretions – you know, free market blah blah blah – and allowing the better, smarter banks to compete and succeed on a level playing field, you folks want the criminals and Ponzis to stay in business and prosper at the expense of those banks who make money the old fashioned way.

    You know, earning it.

    You, ladies and gentlemen, are worse than communists, because at least communists start with ideals about bettering the lot of the common folks as they nationalize and seize everything.

  24. JustinTheSkeptic commented on Feb 21

    Cinefiz, the government should make sure that no one goes hungry, but that is about it. If they would just get out of the way the pain would be great, yes, but the recovery would be even greater. Do you weed your garden? Doesn’t mother nature bring a hurrican in order to get ride of weakly planted trees? All these “fixes” that the government is throwing at the problem are only postponing the inevitable.

  25. Ross commented on Feb 21

    My lil ole country bank is coining money thank you very much. Not MY bank but the one I use…

    Look at the yield curve.

    Unless a country banker has a whole lot of construction loans for spec houses, this is the best market they have seen in 4 or 5 years. My banker thinks subprime is choice t-bone.

  26. SPECTRE of Deflation commented on Feb 21

    You ladies and gentlemen, are worse than communists, because at least communists start with ideals about bettering the lot of the common folks as they nationalize and seize everything.

    Posted by: L’Emmerdeur | Feb 21, 2008 9:37:59 AM

    I agree. Who wouldn’t want to wait in line for hours to buy a loaf of bread or a roll of toilet paper? Stupid us for thinking the communists weren’t tickled shitless to live in the depths of depression on a daily basis.

  27. cinefoz commented on Feb 21

    Karl K

    I like your analogy. It rises to the level of ‘Things I wish I said’.

  28. Street Creds commented on Feb 21

    I agree with Spectre. Waiting for a roll of toilet paper in East Germany was as much fun as waiting for a roll in Cuba. Viva la Revolution.

  29. Stuart commented on Feb 21

    “The decline was unexpected”

    that was a comment on this morning’s philly fed index release.

    My comment: No shit. Aren’t the declines ALWAYS unexpected. We need a new crop of analysts and economists. The ones we have are either liars or dumber than shit.

  30. Greg0658 commented on Feb 21

    I think the next president and cabinet need to focus on:
    1> bankruptcy laws that allow trial and error but don’t allow gaming the system for gain
    2> a tax system that allows living comfortably without excess at all class levels
    3> public funded health care to help America compete globally and reduce population stress
    4> energy independence within country borders because without we are screwed

    for the most part these are great times to be a human being (in western cultures) if we can wip global weather change and population care (across the globe)

    tall order for socialist communist capitalist – what label did I forget? free nomadic homelessist

  31. SPECTRE of Deflation commented on Feb 21

    I’m missing the point here. The Federal Reserve is required by law to maintain the financial health of the banking system. Why are you criticizing that?

    Also, what does anyone have to gain by having the financial system of the United States crumble? Why would you not want them to jump in and help? It would be a world wide disaster if the Fed sat on it’s hands. I mean a real disaster, not one of the fantasy disasters cooked up at gloomster blog sites.

    Dealing with the people who caused the problem is a second problem.

    Posted by: cinefoz | Feb 21, 2008 9:07:39 AM

    They are indeed responsible for the things you mention, but the problem is they failed miserably with their mandate. The horses are already out of the barn, yet they now want to try to reverse this tsunami. It’s a day late and more than a few dollars short for the FED I’m afraid. No doubt they are rowing as hard as they can, but they sit at the edge of a cascading waterfall.

  32. Don commented on Feb 21

    Cinefoz and KK,

    I don’t think folks here want the financial system to collapse. I certainly don’t.

    But, the way to prevent collapse is to understand the dangers, and cynicism about what is being said by the government versus what they are doing is understandably and justifiably high.

    The FHLB’s new loan activities represent a government bail-out of the housing market, without question. It is because they, like Fannie Mae and Freddie Mac, have the implied backing of the US government, that they have access to so much money and so cheaply. They (including Fannie and Freddie) are sort of like SIV’s that commercial banks did not carry on their balance sheets. Once the spector of failure arose, almost all banks put the SIV’s back on their balance sheets and stepped in to support them–for the same reason the US government would do the same for FHLB, Freddie and Fannie–to protect its reputation such that the money markets wouldn’t completely shut them out.

    And make no mistake, without FHLB, Freddie and Fannie, we would have seen a complete collapse of the residential mortgage industry in 4th Qtr 07. But to pretend it was not effectively a nationalization of the markets is naive. Of course it was.

    The question now is whether or not it was wise, and that’s a different matter entirely. Between the three quasi-government entities we (the taxpayers) now are back-stopping roughly $2 trillion of debt (in addition, of course, to all the other federal government debt, explicit and otherwise). Once we understand this is the case, then we can decide what, if anything, should be done from here.

  33. SPECTRE of Deflation commented on Feb 21

    Those struggling with foreign policy should look at the big picture. It’s a drop in the bucket when you have 60 Trillion in unfunded liabilities. You can’t see the forest for the trees I’m afraid. It does make it easy with posting, as you can become a broken record.

  34. Stormrunner commented on Feb 21

    >>The law of unintended consequences is ALWAYS operating.

    You can’t be serious!!!

    Catherine Austin Fitts, former H.U.D. Assistant Secretary for Housing-Federal Housing Commissioner, 1989-1990.

    “The supremacy of the central banking-warfare investment model that has ruled our planet for the last 500 years depends on being able to combine the high margin profits of organized crime with the low cost of capital and liquidity that comes with governmental authority and popular faith in the rule of law.

    Our economy depends on insiders having their cake and eating it too and subsidizing a free lunch by stealing from someone else. This works well when the general population shares in some of the subsidy, grows complacent and does not see the “real deal” on how the system works.

    However, liquidity and governmental authority will erode if the general population becomes aware of how things really work. As this happens, they begin to understand the power of innovative technology and re-engineering of government resources to create greater abundance both for themselves and other people.

    “As this happens, they lose faith in the myth that the current system is fundamentally legitimate. This jeopardizes the financial markets that depend on fraudulent collateral and practices to continue to work. It also jeopardizes the wealth and power of the people who are winning with financial fraud.”

    On November 12, 1999, President Bill Clinton signed into law the Gramm-Leach-Bliley Act, which repealed the Glass-Steagall Act of 1933.

    Provisions of the Glass-Steagall Act were directed at these abuses:

    (1) Banks were investing their own assets in securities with consequent risk to commercial and savings deposits. The concern of Congress to block this evil is clearly stated in the report of the Senate Banking and Currency Committee on an immediate forerunner of the Glass-Steagall Act.
    (2) Unsound loans were made in order to shore up the price of securities or the financial position of companies in which a bank had invested its own assets.
    (3) A commercial bank’s financial interest in the ownership, price, or distribution of securities inevitably tempted bank officials to press their banking customers into investing in securities which the bank itself was under pressure to sell because of its own pecuniary stake in the transaction.

    The Gramm-Leach-Bliley Act, also known as the Gramm-Leach-Bliley Financial Services Modernization Act, Pub. L. No. 106-102, 113 Stat. 1338 (November 12, 1999), is an Act of the United States Congress which repealed the Glass-Steagall Act, opening up competition among banks, securities companies and insurance companies. The Glass-Steagall Act prohibited a bank from offering investment, commercial banking, and insurance services

    History of the engineering steps

    History of the engineering steps

    Just days after the administration (including the Treasury Department) agrees to support the repeal, Treasury Secretary Robert Rubin, the former co-chairman of a major Wall Street investment bank, Goldman Sachs, raises eyebrows by accepting a top job at Citigroup as Weill’s chief lieutenant. The previous year, Weill had called Secretary Rubin to give him advance notice of the upcoming merger announcement. When Weill told Rubin he had some important news, the secretary reportedly quipped, “You’re buying the government?”

    The Future’s So Bright, I Gotta Wear Shades

  35. Stuart commented on Feb 21

    Continuing claims, latest philly fed, treasury supply drowning the credit market and continuing to rise, home prices to fall hard… we’re in deep, deep shit and no where in the election race so far is anyone discussing these issues in any hard and direct manner. No, we’re deeper than in deep shit in fact.

  36. roger commented on Feb 21

    I’m missing the point here. The Federal Reserve is required by law to maintain the financial health of the banking system. Why are you criticizing that?

    The Federal Reserve is not required by law to maintain the health of the stock market. And it is required to fight inflation and unemployment. The Federal Reserve works for the American people, or it shouldn’t work at all.

    It seems to me that the Fed, at the moment, is tossing the American people into the furnace. It is pursuing an interest policy that is going to tax the American people with an extra one to two percent inflation. And it is encouraging the spread of moral hazard in the banking system. It begins with NINA loans to individuals, and now it consists of making NINA loans through the FHLB to banks. One has already blown up – are we to think the other isn’t going to? Are we to think that the government should accept bogus paper from Washington Mutual in return for money that we are not going to see again? Who benefits from this?

    The Fed is obviously way too close to the banking system, at the moment, to regulate it efficiently. In the end, if Fed policy begins to bring about real inflation rates of 7 percent (beyond the massaged numbers and the standard idiocy about the volatility of energy and food), all in a vain attempt to perform a miracle – the miracle of persuading people that worthless bank securities are really backed by something – there’s going to be some radical changes. Good.

  37. Francois commented on Feb 21

    “The Federal Reserve is required by law to maintain the financial health of the banking system. Why are you criticizing that?”

    As a physician, I was required to maintain the health of my patients. That meant PREVENTIVE measures whenever a sign or symptom came to my attention.

    If I had apply ideological blinders to my way of practicing medicine, like Easy-Sleazy Al did as the Fed Chairman, quite a few of my patients would be dead, and I would most likely have lost my license or worse.

    What people are criticizing is the absolutely moronic way the Fed complied with its mandate. They simply turned a blind eye to the numerous alarming signs of a growing problem that festered for a long time until we got a patient in the intensive care unit instead of a patient who changed some aspects of his lifestyle several years ago.

    BTW, where is the law now?
    Where are the penalties for this clear breach of professional duty?
    Why is it that the financial sector has the privilege to screw up time after time with little or no accountability?

    There comes a time (like…now) when the rank and file is sick and tired of this bullshit.

  38. cinefoz commented on Feb 21

    SPECTRE of Deflation said

    No doubt they are rowing as hard as they can, but they sit at the edge of a cascading waterfall.

    reply: I think maybe they’ve turned the motor on and it has enough power to push the boat to a safe place.

    Me, I like simple justice. Send a lot of the primary offenders to jail. Ruin the careers of those you can’t sic the law on. Publicly humiliate everyone who is unable to fight back with lawyers. I mean, go for the nuts and don’t let up. It’s OK by me if some end up in homeless shelters. I’d rather give a buck to a corner wino than provide a little compassion for these people.

    When some psycho tries to make friends and blames someone in the next cubicle, don’t fall for it. Read a wonderful book entitled ‘Snakes In Suits’. It describes the corporate psycho. I suspect that they were responsible for most of the mess. If you don’t want to pay for the book, Google ‘psychopathic personality disorder’, and, as long as you are at it, look up ‘narcissistic personality disorder’.

    Don’t displace the anger you feel for these people towards the Fed.

    But the mess they made still has to be cleaned up. And rules have to be changed to minimize the chance of something similar happening again.

    SIVs are a made to order fraud machine. Why does this kind of off balance sheet financing even exist?

  39. donna commented on Feb 21

    Can we just make a DVD of the next couple of years so that after the laws get past re-regulating all the banks we can just play it the next time they want to be de-regulated?

    It will save a lot of trouble, I think.

  40. cinefoz commented on Feb 21

    I said:

    Don’t displace the anger you feel for these people towards the Fed.


    Greenspan and his ilk excepted. Feel free to go for the nuts.

  41. SPECTRE of Deflation commented on Feb 21

    Here’s another problem for banks who don’t need anymore liquidity strains. They are pumping Anusol in with a grease gun at this point.

    Porsche draws on €10bn pre-crunch loan FT

    Porsche showed it has as much financial opportunism as the bankers who buy its sports cars on Wednesday when it drew down a standing €10bn ($14.7bn) credit line that was about to see time called on its highly favourable terms.

    Like a sharp-eyed arbitrageur, the German sports carmaker has spotted that the huge shifts in risk appetite that have rocked the credit markets since last summer means it can earn more from low-risk investment now than it costs to borrow the money.

    The move could spell trouble for banks, some analysts believe, because they already face significant constraints on their balance sheets and the availability of funding – particularly if many other companies have negotiated similarly easy credit lines.

    “This has to be a worrying thing for the banks involved,” said one London-based analyst.

    “If others are also doing this it will be adding an extra strain to banks balance sheets, on top of which you’d have to ask – does Porsche know what it is doing with the investments its going to make?”


  42. cinefoz commented on Feb 21

    One more thing,

    If you are reading this and you happen to be a corporate psycho, please do what comes naturally and blame someone else. There must be a few others who are also culpable. Be a hero and ruin them. I’ll accept 2nd best here as long as you do a good job. You might even get a raise and a promotion.

  43. Al Greenspan commented on Feb 21

    The answer to all of this is what it has always been…a balanced budget amendment…looking back on the time since Nixon, who I believe had the last truthfully balanced national budget, wouldn’t life be much easier now if we’d had a balanced budget amendment since his presidency…can anyone refute that??

  44. SPECTRE of Deflation commented on Feb 21

    cinefoz, I want them to work this out as badly as you for the sake of our children and grandchildren. I’m just trying to find a path to how we there. So far it’s all dead ends. We get band-aids when we need stitches, otherwise the wound never heals.

  45. Ross commented on Feb 21

    PORSCHE BANK I love it. Always wanted a credit card with a twin turbo on it.

    Me: I need a loan
    Porsche loan officer: What do you drive?

  46. Shane commented on Feb 21

    You’ve really got to study up on your history about the origins of the Federal Reserve System.

    You think the Feds are there to ensure a stable financial system for the U.S.?

    Man . . . it would take a book to explain it . . . in fact there are several good ones, I suggest Murray Rothbard “Monetary History of the US”, among others.

    Today the ones who are the biggest pushers and pimps of the “bailout” packages are the big banks, Citibank, Countrywide, and stock market funds. They are screaming and yelling for bailouts from the government. You think they care about a stable system, hell no . . they don’t want to lose their skin on bad bets they made!

    You think it was any different 100 years ago?? The ones who helped develop the Federal Reserve System were the big banks, J.P. Morgan, Rothschilds, etc. They want a stable financial system as much as they can profit from it and prevent others from entering the market.

    The Fed system is good for the government b/c they can run budget deficits-read keep bread and circuses to the masses (massive entitlement programs)- without having to raise taxes and thus ensuring that they get re-elected. All the while, inflating the money supply — i.e. delayed taxation.

    The Federal Reserve System was anything but a stable financial system, it was designed by and implemented to ensure that those who had wealth could keep it and those who had power could keep it.

    In the history of the US the the vast majority of the economic times were when an excess amount of paper money was created to finance some massive expense. Look at the greenback (civil war), continental (rev. war)

    Amschel Rothschild said “Let me issue and control a nation’s money, and I care not who writes the laws.”

    People complain about this war or that war . . . I guarantee that if we had a stable financial system-where the gov. couldn’t inflate at will- there would be a hell of lot less wars. Why . . . well gosh before too long after the start of a war congress would have to pass massive taxation or war bonds to pay for it. If it wasn’t a justified war people won’t part with their money and thus the gov. couldn’t wage war. They would only be able to wag war with the vast majority of the country decided to fund it with their dollars. With the system we have now . . . the vast majority of the people don’t even have to approve it . . .just sell the war to get it started and fuiste (spanish for it’s gone).

    True capitalism is allowing one to take risks and to either profit or lose from those risks without the government stealing from the profits or stealing from the loses. True capitalism teaches personal responsibility and consequences (good or bad) for each action.

    The Fed system is hardly capitalism. In fact the longer we have this system, the further down the road of fascism we go . . . not Nazi fascism but corporate fascism.

    Corporate fascism . . . designed to protect the big corporations that are “too big to fail” all the while creating new laws which impede new companies from entering the market and challenging the big guys.

    Money and power, it all comes down to money and power . . . who gains from the system and who gets to stay in power b/c of it.

    I personally am really worried, very few people, companies, banks, public, government, etc. want to take personal responsibility for their actions. They all want to take the glory when things are going well but fail to take the pain when things suck. It’s all about passing the buck.

    Never get to the root of the housing problem (too much credit, loose standards) instead give handouts to stupid people and stupid banks.

    For those who want a handout, I got news for you. LIFE IS F***G HARD!!! DEAL WITH IT!!

    Show me a man who has taken his lumps, beaten down, broken, bruised, on the verge of death, who rose above and survived on his own without a bailout . . . and I’ll show you the true indominable human spirit. I’ll show you someone who has truly conquered this world and the fear that it presents, and a man who can NEVER be BEATEN.

    Right now we are a nation of wimps. God help us.

  47. Ritchie commented on Feb 21

    cinefoz: “Also, what does anyone have to gain by having the financial system of the United States crumble?”

    When Tony Soprano and his “business partners” set out to “buy” a business, they are not all that concerned about the family or community that might crumble as a result of their “purchase” (robbing and dismemberment for Soprano Inc’s benefit) of that enterprise.

    Likewise, somebody, somewhere, might see some advantage to having the US financial system crumble. Not unlike how some “organizations” somewhere see a profit that can be made by selling nuclear weapons technology. The blowback, for somebody, somewhere, might be a downer, but hey, fellas (good and bad), gotta eat.

  48. Stormrunner commented on Feb 21

    >>>SIVs are a made to order fraud machine. Why does this kind of off balance sheet financing even exist?

    They exist because they were engineered to exist in colusion with the FED and Regulatory bodies as I indicated in my earlier post. This is no accident these are the same people that brought you the S&L Crisis, Enron and Now the “X” crisis as it keeps morphing from subprime to just about everything.

    Predatory lending was widely understood to present a looming national crisis. This threat was so clear that as New York attorney general, I joined with colleagues in the other 49 states in attempting to fill the void left by the federal government. Individually, and together, state attorneys general of both parties brought litigation or entered into settlements with many subprime lenders that were engaged in predatory lending practices. Several state legislatures, including New York’s, enacted laws aimed at curbing such practices.

    What did the Bush administration do in response? Did it reverse course and decide to take action to halt this burgeoning scourge? As Americans are now painfully aware, with hundreds of thousands of homeowners facing foreclosure and our markets reeling, the answer is a resounding no.

    Not only did the Bush administration do nothing to protect consumers, it embarked on an aggressive and unprecedented campaign to prevent states from protecting their residents from the very problems to which the federal government was turning a blind eye.

    Let me explain: The administration accomplished this feat through an obscure federal agency called the Office of the Comptroller of the Currency (OCC). The OCC has been in existence since the Civil War. Its mission is to ensure the fiscal soundness of national banks. For 140 years, the OCC examined the books of national banks to make sure they were balanced, an important but uncontroversial function. But a few years ago, for the first time in its history, the OCC was used as a tool against consumers.

    In 2003, during the height of the predatory lending crisis, the OCC invoked a clause from the 1863 National Bank Act to issue formal opinions preempting all state predatory lending laws, thereby rendering them inoperative. The OCC also promulgated new rules that prevented states from enforcing any of their own consumer protection laws against national banks. The federal government’s actions were so egregious and so unprecedented that all 50 state attorneys general, and all 50 state banking superintendents, actively fought the new rules.

    But the unanimous opposition of the 50 states did not deter, or even slow, the Bush administration in its goal of protecting the banks. In fact, when my office opened an investigation of possible discrimination in mortgage lending by a number of banks, the OCC filed a federal lawsuit to stop the investigation.

  49. waiting_ commented on Feb 21

    Thanks, Carmen. I think you are right…though if the banks fail…

  50. Radio Left commented on Feb 21

    Mikes Blog Roundup

    Crooks and Liars

    PERRspectives Blog: The NY Times was sitting on the McCain/lobbyist story when it endors…

  51. Pat G. commented on Feb 21

    Ah….more liquidity injections, has the smell of inflation sprinkled all over it!

  52. Big E commented on Feb 21

    To pile on to this recurring theme: No, I don’t want the banking system to collapse. But I do want to know what’s going on. Why all the secrecy? What are they doing behind the scenes?

    Why the TAF? There’s a perfectly acceptable method for banks to get capital via the discount window. But they don’t want to do that because that’s public. Why don’t they want people to know they’re going to the discount window? It’s all the fucking secrecy that bothers me.

    The fact that banks can’t or won’t go to the discount window, and the FHLB is shoveling money out the backdoor tells me there’s something REALLY wrong.

    It’s like a compulsive gambler trying to hide the fact that he’s lost his family’s life savings by moving money around. The sooner it’s out in the open (no matter how bad the news is), the quicker he can work on getting himself out of the hole.

  53. Citizen NOT consumer commented on Feb 21

    Hi all,

    I’m new here, but I like what I see! I just read a fascinating article at Harper’s last night that opened my eyes to what has been going on in this sorry country for some time now. You folks seem pretty well informed, but I think the article is well worth a read.

    The Next Bubble:
    Priming the markets for tomorrow’s big crash

    BY Eric Janszen

    I’m not going to attempt to summarize it because it covers too much ground for a brief summary to do it justice. But since you mentioned the “subprime crisis,” I’ll include this as a teaser:

    The U.S. mortgage crisis has been labeled a “subprime mortgage crisis,” but subprime mortgages were only a sideshow that appeared late, as the housing-bubble credit machine ran out of creditworthy borrowers.

    Now, if we only had a party that represented US and not the Plutocrats!

    Keep up the fight.

    Citizen NOT consumer

  54. PFT commented on Feb 21

    The Chicago Boys first experiment with laissez faire Capitalism, otherwise known as neoliberal economics was in Chile, after we put our puppet General Pinochet in power. By 1982 the banks failed, poverty was over 50%, and there were riots in the street. Pinochet then nationalized the banks and some other important industries that had been privatized, and things turned around. Yet Chile is still touted as one of the miracles of neoliberal economics, mainly because of the turnaround after Pinochet unprivatized key industries.

    The same misery is being forced on the Iraqis.

    Free markets work when you have competition.
    When you have monopolies (like branded pharmaceuticals) or controlling oligopolies like banking/finance/insurance, agribusiness, energy, then what you have is a system that legalizes the stealing from the poor by the rich by artificially high prices.

    Free trade is the other myth. It is a good thing when the country is at full employment, which we are not anywhere near
    (those jobs which do not provide a living wage should not be counted). When we are not, it is national suicide for the citizens, although still a good thing for our multi-nationals who now see themselves as global citizens (globalization), and not loyal to the homeland.

    We have went from a social welfare state to a corporate welfare state (when Laissez faire capitalism fails and they need to be bailed out) which still maintains a diminished social welfare system for the dumb, lazy or unfortunate and the old. The middle class however has been gang banged and nickel and dimed to death, paying for social welfare, corporate welfare, and our corporate army whose primary mission is to secure resources and market access for our corporations.

    The middle class, whats left of it, is now being left behind, owning nothing but debt at usurious interest rates. Why usurious? The money loaned was money created out of thin air, the banks gave up nothing, there was no consideration.

    Laissez faire capitalism and free trade globalization is a Big Fraud meant to benefit the Multi-Nationals at the expense of labour. It has worked just as planned.

  55. SteveInChicago commented on Feb 24

    I, for one, really don’t see a problem with the warrants, as long as they expire once the property is sold to a new, legitimate buyer (with safeguards in place to prevent fraud.)

    It seems like offering a homeowner a way to make a payment that they can afford while preserving a means of recovering some of that loss is only fair.

    That said, I am still renting while I wait for prices to drop to what I deem reasonable (5-10 percent over the cost of renting in the City of Chicago.) But I would NEVER buy a home with one of these warrants on it if they are transferable to a new owner.

  56. MarkD commented on Feb 24

    good article on way to help out home owners by Alan Blinder in todays NYT

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