Paulson Bailout Plan a Historic Swindle

Paulson's Blow Torch
By Msgt Gunny
9-21-8
A wider picture of the planned lender's bailout to be decided next week.

Treasury Secy Hank Paulson said the credit markets are "frozen" and "fragile right now." And, he predicts that unless government intervention prevails, the lending practice will only worsen, and likely create a huge recession, if not a depression.

So, he comes up with his blow torch. In an attempt to "melt" these frozen credit markets, so the public can go back out and get new credit, that business can secure loans to keep its operations running smoothly. In short, putting money back into circulation, thus circumventing a recession, or worse. Yet what he really is doing is propping up private lenders, in an effort to keep what he perceives from major banks crashing, including foreign banks with US interests.

Not much is said about the thousands of much smaller banks, and the grubstake they will receive as part of the blow torch plan. Currently there are about 8,200 US banks and credit unions; many experts predict that number will be cut in half in the coming months as the recession deepens (what recession, you say?) and these lenders go awash with other toxic mortgages and bad debt.

But to do all this, it will cost some $700 billion. Or there-abouts. Perhaps up to $1.5 trillion or more, to be self explained further down in this essay.

Paulson's plan is to purchase toxic mortgages and other derivates from the lenders to enable them to offer better lending. The plan would allow the lenders to move from a mostly insolvent position to being solvent once again, with its bad debts now "off the books."

The plan means the government would use these funds to purchase the bad debts at a "deep discount" and then attempt to sell off the debts through a "reverse auction process."

Only, nobody is giving any rationale about how the government will find buyers for these bad mortgages, most of which are foreclosed homes. So then, the government ends up owning millions of homes, which have to be maintained, insured and taxes paid on them.

Do you see the $700 billion now starting to grow?

Add to this mix, the many Wall Street so-called "experts" which will have to be brought into the Treasury to help administer not only the banker bailouts, but to provide the input in an attempt to smooth out the untold wrinkles of the plan. Likely the very same "creatures" who got us into this mess.

So how does the government actually get rid of these homes? Oh, right, get Congress to recognize it now has a new problem, with millions of homes on its hands (likely to be administered through HUD), and needs legislation NOW allowing FHA insured mortgages to be instituted through the lenders which it has now declared solvent.

After-all, did the PLAN really expect that investors would continue to purchase toxic mortgages and other bad debts about to happen soon? Thus, new legislation and the FHA playing a major role. Maybe a few savvy investors would "cherry pick" some desirable foreclosed mortgages, but for the most part, this would be extremely difficult to sort through millions of properties, unless one had an inside-track with government maintainers of these records, even to know where to look. This opens new doors for possible problems, if not outright curry favoring. It's a brotherhood thing, "doncha know"?

Since the government would now purchase the toxic mortgages "on the cheap" it can then resell them to interested home buyers, at a profit, or so it thinks. Of course, any profit would go back into the Treasury, (after expenses) to keep paying for the wars in Iraq and Afghanistan , with newer military equipment.

Remember, these planned funds are to be borrowed against the American public taxpayer's full faith and accountability to be administered through the Internal Revenue Service (IRS) which collects the taxes, and in turn dolls it back to the Federal Reserve for "interest" repayment on the government loan. And, we are all to believe that a new round of tax increases are not on the horizon? Think again!

Except there's one major hitch. The government will not be "bailing out" corporations, such as GM, Ford, Chrysler, and many other major corporate players already about to implode, which will only result in untold thousands upon thousands of unemployed workers. And when other corporations begin to fail, so it goes for reduced consumer spending, or even ability to pay regular monthly bills. Worst yet, who will be able to qualify to purchase a new mortgage, regardless of the methodology Congress will provide through FHA lending practices? And, what effect will that now have on the banks?

What does this plan do to a recently declared solvent lenders? Why, of course, it causes yet more toxic debt! Is there any other outcome that could be expected? Back to the basics, the lenders are now handling toxic foreclosures once again for those who did get new mortgages. And they are running into trouble again, because there is no new mortgages; thus a lender's freeze. (Oh, the blow-torch again?)

Does the picture now widen? Of course it does. In fact, the picture is that it encircles much like a merry-go-round. And this carousel keeps running around in circles until the electrical plug is pulled, and suddenly grinds to a stop.It could happen sooner, rather than later.

Recessionary? You bet it is! Can it cause an economic disaster? One can only imagine the impact that begins by starting this vicious cycle of events.

While all of this is unfolding, nationwide unemployment is already at 7.5%. The number of existing foreclosures is nothing when compared to those already in pre-foreclosure, who soon will go into full foreclosure status. By a staggering 5 to 1 ratio over current foreclosures, and growing daily.

Want Evidence of this?

Some call this the "coming tsunami" that lurks in the shadows. Most have no clue as to the impact setting in the background already in pre-foreclosure status. A perfect example of this coming storm can be found at Realtytrac.com.

At that site, anyone can simply click on any zip code, then click on "maps" and get a startling revelation of just how many pre-foreclosures (blue flags) there are showing street by street, against a backdrop of already foreclosed homes (black flags), and see the ratios awaiting, for themselves.

Take a look at some of the hardest hit areas in California , Nevada , Florida and Michigan , as prime examples of just what is lurking in pre-foreclosures. The numbers are literally staggering. Take a real close look, and see if those blue flags doesn't give you the creepies of what is about to implode.

In case you may wonder just why these pre-foreclosures have not yet been determined to a foreclosed status, is largely due to the fact that the Circuit Courts are literally swamped with legal filings, and most do not even have the staff on hand to accommodate the daily filings, let alone more judges to handle the surge. That's the back log! And everyday the filings increase, as homeowners, unable to make that mortgage payment, walk away from their homes. Tent cities are springing up everywhere in the nation, not just "tent city" in California. Apartment complexes are raising the rent to make a better profit due to the surge in new apartment seekers. People are literally sleeping in cars, trucks, motor homes, travel trailers, by the thousands, anywhere they can. And by bailing out the major bankers, this will solve the problem? Or merely exacerbate it?

Back to Paulson and his blow torch. The question is will his plan work as he "hopes" it will, or will there be a further meltdown that would be unimaginable?

As the government leaders continue wrangling through the details over the weekend, it seems nobody is talking about any economic repercussions that could come from overseas investors, mainly China , among a dozen more. Moreover, little is mentioned anywhere about the American outrage that is going on at this very moment.

After-all, we all have to remember that most of our current debt owed to the FED, now some $9.4 trillion, is being covered by foreign investors, again China holding the lion's share, who, at any point, could change the course of economic events overnight. Already an article coming out of China news media strongly suggests it's country re-examine its financial position with the United States. And its not pretty.

The Treasury is broke, and the borrowing continues. Congress is likely to up the national debt to $11.5 trillion by next week. This unfathomable amount will likely never be repaid, not even in the next three generations.

Start thinking about the coming credit card and auto loan defaults, already on the horizon, and about to burst. And ask yourself, if Paulson's blow torch plan will really work, or if its just a small flicker from a match.

Have a nice weekend.

MSgt Gunny

USA

http://rense.com/general83/pls.htm
--
Though human noses have an impressive 5 million olfactory cells with which to smell, sheepdogs have 220 million, enabling them to smell 44 times better than men.

I don't have time to read it now but I suspect he has something worth reading...

http://www.counterpunch.org/whitney09202008.html

Weekend Edition
September 20 / 21, 2008

Full-Spectrum Breakdown
Grasping at Straws
By MIKE WHITNEY

On Friday morning, Senator Christopher Dodd, the head of the Senate Banking
Committee, was interviewed on ABC's "Good Morning America." Dodd revealed
that just hours earlier at an emergency meeting convened by Secretary of the
Treasury Henry Paulson and Federal Reserve chairman Ben Bernanke, lawmakers
were told that "We're literally maybe days away from a complete meltdown of
our financial system." Dodd added somberly, that in his three decades of
serving in public office, he had "never heard language like this."

The system is at the breaking point, and despite Wall Street's elation from
the proposed $1 trillion dollar bailout to remove toxic mortgage-backed debt
from banks balance sheets, the market is still correcting in what has become
a vicious downward cycle. This cycle will persist until the bad debts are
accounted for and written off for or until the exhausted dollar-system
collapses altogether. Either way, the volatility and violent dislocations
will continue for the foreseeable future.

Most people don't understand what happened on Thursday, but the build-up of
bad news on the Lehman default and the $85 billion government takeover of
AIG, triggered a run on the money markets and a freeze in interbank lending.
The overnight LIBOR rate (London Interbank Offered Rate) more than doubled
to 6.44 per cent. Bank of America reported overnight borrowing rates in
excess of 6 per cent. Longer-term LIBOR rates also rose sharply. On
Wednesday, jittery investors removed their money from money markets and
flooded short-term US Treasurys for the assurance of a government guarantee
on their savings even though interest rates had turned negative which means
that their balance would actually shrink at the date of maturity. This is
unprecedented, but it does help to illustrate how raw fear can drive the
market.

The TED spread (the TED Spread measures market stress by revealing the
reluctance of banks to lend to each other) widened and the credit markets
froze in place. Borrowing three-month dollars on the interbank market and
the U.S. Treasury's three-month borrowing costs widened five full percentage
points. That's huge. The banking system shut down.

What does it mean? It means the Federal Reserve has lost control of the
system. The market is driving interest rates now, and the market is
terrified. End of story.

When the Fed announced its emergency program to dump $180 billion into the
global banking system, short term Libor retreated slightly but long-term
rates have remained stubbornly high. The noose continues to tighten. These
rates are pinned to 6 million US mortgages which will be resetting in the
next few years. That's more bad news for the housing industry.

The entire system is deleveraging with the ferocity of a Force-5 gale
touching down in the Gulf, and yet, Henry Paulson has decided that the
prudent thing to do is build levees around the system with paper dollars.
Naturally, many people who understand the power of market-corrections are
skeptical. It won't work. Libor is pushing rates upwards--that's the "true"
cost of money. The Fed Funds rate (2 per cent) is supported by infusions of
paper dollars into the banking system to keep interest rates artificially
low. Now the extreme pace of deleveraging has the Fed on the ropes.
Trillions of dollars of credit is being sucked into a black hole which is
raising the price of money. It's out of Bernanke's control. He needs to step
out of the way and let prices fall or the dollar system will vanish in a
deflationary vacuum.

The problems cannot be resolved by shifting the debts of the banks onto the
taxpayer. That's an illusion. By adding another $1 or $2 trillion dollars to
the National Debt, Paulson is just ensuring that interest rates will go up,
real estate will crash, unemployment will soar, and foreign central banks
will abandon the dollar. In truth, there is no fix for a deleveraging market
anymore than there is a fix for gravity. The belief that massive debts and
insolvency can be erased by increasing liquidity just shows a fundamental
misunderstanding of economics. That's why Henry Paulson is the worst
possible person to be orchestrating the so called rescue project. Paulson
comes from a business culture which rewards deception, personal
acquisitiveness, and extreme risk-taking. Paulson is to finance capitalism
what Rumsfeld is to military strategy. His leadership, and the congress'
pathetic abdication of responsibility, assures disaster. Besides, why should
the taxpayers be happy that the stocks of Morgan Stanley, Washington Mutual
and Goldman Sachs surged on the news that there would be a government
bailout yesterday? These banks are essentially bankrupt and their business
models are broken. Keeping insolvent banks on life support is not a rescue
plan; it's insanity.

No one has any idea of the magnitude of the deleveraging ahead or the size
of the debts that will have to be written down. That's because 30 years of
deregulation has allowed a parallel financial system to arise in which over
$500 trillion dollars in derivatives are traded without any government
supervision or accounting. These counterparty transactions are interwoven
throughout the entire "regulated" system in a way that poses a clear and
present danger to the broader economy. It's a mess. For example, there are
an estimated $62 trillion of Credit Default Swaps (CDS) alone, which are
basically insurance policies for defaulting bonds. AIG was as heavily
involved in CDS as they were in regulated insurance products. So why would
AIG sell CDS rather than conventional insurance?

Because, just like the banks, AIG could maximize its profits by minimizing
its capital cushion. In other words, it didn't really have the capital to
pay off claims when its CDS contracts began to blow up. If it had been
properly regulated, then government regulators would have made sure that it
was sufficiently capitalized with adequate reserves to pay off claims in a
down-market. Now taxpayers will pay for the lawless system which men like
"industry rep" Henry Paulson put in place. That's deregulation in a
nutshell; a system that allows Wall Street banksters to create credit out of
thin air and then run weeping to Congress when their swindles backfire.

Inflating the currency, printing more money, and increasing the deficits
won't help. The bad debts have to be accounted for and liquidated. The
Paulson strategy is to create another ocean of red ink while refusing to
face the underlying problem head-on. This just further exacerbates the
consumer-led recession which economists know is already setting in
everywhere across the country. Demand is down and consumer spending is off
due to falling home equity, job losses, and tighter lending standards at the
banks. The broader economy does not need the added downward pressure from
higher taxes, bigger deficits, or inflation. Paulson's plan is a band-aid
approach to a sucking chest wound. The debts are enormous and the pain will
be substantial, but the problem cannot be resolved by crushing the middle
class or destroying the currency.

The malfunctioning of the markets and the freeze-over in the banking system
are the outcome of a massive credit unwind instigated by trillions of
dollars of low interest credit from the Federal Reserve which was magnified
many times over via complex derivatives contracts and extreme leveraging by
speculative investment bankers. This has generated the biggest equity bubble
in history. That bubble is now set for a "hard-landing" which is the
predictable result of an unsupervised marketplace where individual players
are allowed to create as much credit as they choose.

Mike Whitney lives in Washington state. He can be reached at
fergiewhitney@msn.com