Seven years ago today religious fanatics rammed hijacked airliners into three buildings on U.S. soil, killing over 3,000 people. George W. Bush told us to "keep shopping".
Fast forward exactly seven years to 2008. Religious fanatics have rammed a third string player onto the Republican’s national ticket and Fannie Mae and Freddie Mac have rammed their snouts into your pocketbook and mine via the U.S. Treasury, with the FDIC’s snuffling snout only weeks behind them.
50,000 jobs were lost in lower Manhattan alone due to the events of 9/11/2001 and the nation plunged into a recession. Today, after seven years of George W. Bush’s miserable economic policies we’re plunging not into recession, but into the Greater Depression, and all of this talk of bailouts will come to naught but suffering for the American people. Manhattan will get hit first and hardest, as it is the center of our soon to be much smaller financial sector ... but, like the tiny bruise left by the removal of a Lyme carrying tick, the suffering is going to spread everywhere.
Let’s have a little farm inventory here; first we’ll count all the lil’ piggies that have lined up at farmer Hank Paulson’s U.S. Treasury Trough & Loan, and then we’ll consider the squealing masses eager to join them.
Bear Stearns
Bear Stearns had two hedge funds implode in August of 2007. They’d taken in a couple billion, borrowed ten times that (leverage) and went gambling in the housing market. When it all let go settlement offers were on the order of $0.05 for each original dollar. The whole global credit market said "Oh, shit!" in unison and lending screeched to a halt.
Fannie Mae and Freddie Mac
A brilliant plan was conceived to restart the credit markets – the Federal Reserve would provide functionally unlimited credit to banks ... but only for a short time. They needed somewhere to dump all the toxic waste on their books, the free money greased the skids to get it moving again, and Fannie and Freddie opened their mouths, closed their eyes, and got a big surprise ... on behalf of the U.S. taxpayers. The so called bailout ... isn’t. It’s been set up as a politically acceptable trickle for the moment, but it’ll turn into a flood over the next four years. It’s been structured to allow the Bush administration to skate away and blame the fallout on ... you guessed it ... President Obama.
As things get steadily worse there are four new piggies lining up at the trough and Congress is certainly going to make room for at least two of them.
The Federal Deposit Insurance Corporation
The FDIC insures 8,500 U.S. banks. Various analysts have indicated that 10% are certain to die and probably another 15% beyond that, numbers which I used when I wrote about the impending death of 2,200 banks. Fannie and Freddie’s preferred stock is on the books of a lot of banks ... and part of their bailout makes that stuff absolutely worthless. When a bank loses a billion in what it counted as a real asset the FDIC compels it to pull back 10x to 20x in lending. The thirty billion
The Pension Benefit Guarantee Corporation
Pension plans are insured just like bank accounts. They pay a premium to the PBGC so that their beneficiaries continue to get paid if the source of the pension collapses. Pension plans hold conservative, AAA rated bonds and such. You know, things like Fannie Mae/Freddie Mac preferred stock, mortgage bonds, and ... starting to get the picture? No one wants to talk about this because it isn’t investors getting burned, it’s pension plan members, and no politician on either side of the aisle wants to touch that.
Ford and General Motors
It’s a Presidential election, Michigan is in play, and these two are both down 20% in sales with more suffering to come as the banking sector implodes. They want $25 billion ... each ... to transition to more fuel efficient cars. This just covers their losses for the last two quarters and for all sorts of reasons bankruptcy is the only way they’re going to emerge as makers of smaller, fuel efficient vehicles for what will be a dramatically reduced national market. That’ll happen on Obama’s watch, too.
Lehman Brothers Bank FSB
Unlike the 8,500 FDIC insured banks Lehman Brothers is an investment bank. No one has a checking or savings account there and there is no explicit government guarantee of their operations. However they probably qualify for the "too big to fail" appellation; Bear Stearns was the fifth largest and they got a U.S. Treasury facilitated bail out, and Lehman Brothers is the fourth largest. This is done because what is going on is a systemic problem – as we saw above with Fannie and Freddie the devaluation of their preferred stock is going to knock down a lot of small to medium sized banks. When Lehman Brothers lets go it may trigger a falling dominoes scenario, as credit default swaps start going off all over the place; lacking the FDIC the investment banks started self insuring on a case by case basis and these things became another type of synthetic security.
Conclusions
Prominently not on the list is Washington Mutual, the country’s largest commercial bank with about half a trillion dollars in insured deposits. Did I mention that the FDIC had only $51 billion available and that was before the Indymac implosion sucked up over 10% of that? WaMu alone will push the lil’ FDIC piggy right up to the trough and equally unwell are Wachovia, Fifth Third Bancorp, and Wells Fargo, each of whom have insured deposits that exceed the FDIC’s paltry $51 billion war chest.
If you go check out the financial news for symbols LEH and WM today you’ll see them spiraling in ... Lehman brothers will probably be gone in a transaction over the weekend and the FDIC might have to seize Washington Mutual as soon as this Friday after close of business. Neither entity will make the election, as they’ve both got third quarter reports that will come out before that.
Ilargi sums it up nicely in the September 9th Debt Rattle:
First, home prices will have to go down to trendline levels; to do so, they will need to lose around 65% of their 2005-6 peak levels. They are down about 20% today, according to Robert Shiller. Because swings of this magnitude are always intensified by sheer momentum, the losses, as I have said 1000 times, will be close to 80%.
Second, the securities, derivatives and other casino toilet paper that reside in the vaults of banks, pension funds, money funds and elsewhere, will have to be exposed to daylight and valued at the market price of the day, not that of 10 years ago or 10 years in the future. This is called mark-to-market, and it gets harder to avoid it, try as they all might.
Until these two conditions have been met, the only result of actions such as the Treasury "rescue" of Fannie and Freddie will be one, and one only: the transfer of public funds, revenue drawn from taxpayers past, present, and future, into private coffers. And no, I do not believe that is an unintended consequence.