Greenspan's Bubbles Spur Bankruptcies, Bernancke Bailouts and Bad Business

 

March 30, 2008 -- The second week of March 2008 was truly a week that should go down in the annals of history as a "week of infamy".

This was the week that the politically connected Carlyle Capitol hedge fund defaulted on $16.6 billion of its debt. (Top partners of the Carlyle Group have included Frank Carlucci, George H. Bush, James Baker, and the Bin Laden family). This default came after Carlyle failed to make a margin call of a mere $400 million despite a $21.7 billion dollar portfolio composed primarily of AAA-rated residential mortgage-backed securities. It should be noted that these are the very same kind of securities that are sold to school pension funds and local governments across the world.

The Carlyle default raises the obvious question: How did they default when they had a $21.7 billion gold-plated portfolio?

On Tuesday March 11, immediately on the heels of the Carlyle implosion, the Fed announced what was soon to be described by many on Wall Street as an “innovative” plan. Essentially, the Fed, in concert with other European central banks, offered to swap up to $200 billion in U.S. Treasury securities for other debt, including mortgage securities. This would be accomplished by providing Fed loans to a select group of banks so that those banks’ mortgage-backed junk bonds might be guaranteed.

 

This move enabled threatened banks to swap their questionable debt at nearly full value for U.S. Treasuries – even as the move will in turn reduce the reserves upon which the money supply is based. U.S. Treasury securities are of course backed by U.S. Taxpayers - who will foot the bill should the mortgage securities sour and who must pay the interest on these Treasury securities in any case. A sweet deal for errant lenders but not so sweet for taxpayers or average Joe debt-holder who must depend on sufficient reserves through which money (as credit, or debt) can be created.

 

A mere five days after the announcement of the Fed bailout plan, on Sunday, March 16, the Fed arranged for the now infamous Bear Stearns buyout in secret negotiations with JP Morgan. Bear Stearns has long been one of the nation's primary dealers of Treasury securities, albeit one of the smallest of the investment banks. Notably and although the media reports otherwise, this was actually the second time since the Great Depression that a bailout of a brokerage firm has occurred. The first was Citigroup, which had been bailed out seven months earlier, on August 20, 2007, perhaps providing a “dry run” for what was to come.

Conveniently and while Rome was burning, the public was kept entertained with the Spitzer prostitution scandal. Perhaps it was mere coincidence that Eliot Spitzer, no stranger to partisan politics, was apparently working behind the scenes to resurrect a probe, begun while he was Attorney General, into Larry Silverstein (owner of the World Trade Center brought down on 9-11) and the Carlyle Group. According to one Russian source citing FSB reports then circulating in the Kremlin, the focus of this particular effort just happened to revolve around the Carlyle Group, which was facing insolvency due both to a withdrawal of over $14 billion dollars made by Larry Silverstein and as a result of losses Carlyle suffered due to New York States' troubled $10 billion dollar pension fund.

 

Whether Spitzer's “outing” can be attributed solely or in part to this particular action, it is certainly true that Spitzer, long known as “the sheriff of Wall Street” due to his aggressive and often effective campaign as Attorney General to root out Wall Street crime, provided a very long list of reasons for foes to want to silence him.

Meanwhile, and as late as Tuesday March 11, Bear Stearns – an 85-year-old company that had survived the Great Depression - was publicly denouncing speculation that it was facing liquidity problems. Indeed Bears Stearns had been trading at $170 per share just over a year ago. By Friday's opening it was still trading as high as $54 a share before it began to send out distress signals after announcing that it had entered into negotiations for a "short term loan" from JP Morgan - who would get funds from the New York Fed through the Fed discount window. By the close of trading on Friday, the "free" market had priced Bear Stearns as low as $30 a share.

Then, on a Sunday afternoon when no one - least of all investors - could do a single thing about it, a closer examination of the books mysteriously valued Bear Stearns stock at $2 a share. At the same time the privately owned Fed dropped interest rates charged to banks and provided "special" financing to J.P. Morgan – financing that is ultimately backed by the full faith and credit of the U.S. Government and taxpayers like you and me. This secretly negotiated “arrangement” then allowed JP Morgan to purchase Bear Stearns for $2 a share, resulting in 1000's of Bear Stearns employees losing their jobs and 1000's of investors losing very nearly everything on the deal – a very sweet deal for JP Morgan however.

 

This move made it clear that Ben Bernancke, as new Fed Chair, was caught between the proverbial “rock and a hard place” due to the blowback effects of Greenspan policies and so had begun to employ Depression era tools, soon to be labeled as “innovative”. Whether in the interest of “fairness” or out of sheer desperation, the discount window was opened still wider the very next day, Monday March 17, to all primary brokerage houses, a practice that had previously been restricted to commercial banks.

 

By Monday March 24th, reports surfaced that a “loophole” in the original agreement allowed a renegotiated takeover price of $10 per share for Bear Stearns stock. Still quite a bargain for JP Morgan. Still a sizable loss for Bears Stearns investors and employees. Yet another twist in this unfolding saga came Tuesday, when Michigan Pension Fund Groups announced intentions to challenge the takeover deal. Time will tell who will come out on top, but if history is a guide it will not be folks like you or me.

Interestingly and in yet another coincidence, JP Morgan is a shareholder of the Federal Reserve. Bear Stearns investors - like millions of hapless homeowners - are not.

 

Sadly, what is going on today has some ominous implications for our future. As Bruce Nussbaum wrote in a March 17 Business Week article, “we are now in the process of designing a new global economy. As far as innovations go, this is a biggie. Soon, all the central banks in Europe and Asia will be joining the US Fed in redesigning the global credit system. The International Monetary Fund, usually active only in troubled “Third World” countries, may well come in as well to help the US and the rest of the globe. In a flash, the US appears to be a helpless giant, needing all the help it can get.”

As history has repeatedly shown, it can be a very good thing for the crème de la crème of the financial elite that scandals like those surrounding Enron, World Com, Global Crossing et al (which were among those companies also placed under heavy scrutiny by then New York Attorney General Eliot Spitzer) - together with the current fiasco all too quickly become but a hazy memory for regular folks struggling just to make it through another day.  However, it clearly is NOT a good thing that we, as a society, continue to ignore this rather large, increasingly malodorous elephant in the room.

 

That elephant is the money creation system we, and most of the world, operate under.

Related Articles:

http://www.csmonitor.com/2008/0313/p01s06-usec.html?page=1

 

http://www.businessweek.com/innovate/NussbaumOnDesign/archives/2008/03/jp_morgan_chase.html

http://counterpunch.org/martens03172008.html

http://counterpunch.org/whitney03152008.html

 

http://www.freedomsphoenix.com/Find-Freedom.htm?At=031565&From=News

http://www.gregpalast.com/elliot-spitzer-gets-nailed/#more-1979

 

http://www.freedomsphoenix.com/Find-Freedom.htm?At=031675&From=News

 

http://www.liveleak.com/view?i=d95_1205356590

http://www.globalresearch.ca/index.php?context=va&aid=8330

http://www.wsws.org/articles/2008/mar2008/spit-m12.shtml

 

http://www.nytimes.com/2007/10/12/nyregion/12spitzer.html?_r=1&ref=todayspaper&oref=slogin