posted September 18, 2008 11:08 AM              

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WASHINGTON: Another week, another bailout. The United States of America (USA), for long the world’s capitalist preacher and role model, is taking on the characteristics of a United States Socialist Republic (USSR), following Washington’s $85bn takeover of American Insurance Group.

In yet another rescue act, Uncle Sam stepped in on Tuesday to save the insurance company with an $85bn loan, equivalent to half of India’s annual budget, aimed at staving off AIG’s bankruptcy and a possible meltdown of the world financial system.

The intervention meant the US government, in the form of the Treasury Department or the Federal Reserve, will get an 80% stake and effective control of AIG, which until recently was an icon of private-sector capitalism.

The move comes a week after the government had to take charge of two giant mortgage agencies, Fannie Mae and Freddie Mac, and five months after a bailout of Bear Stearns.

Meanwhile, the government let another big investment bank, Lehman Brothers, collapse into bankruptcy, while Merrill Lynch fled to Bank of America in a private sector rescue more typical of the country and its financial ethos.

But the multiple rescue acts by Washington marked a moment of supreme irony for the US, and especially for Republicans, whose mantra of less government and less control hasn’t prevented its wayward financial giants from going to Washington hat in hand.

The administration has responded in an unprecedented manner, in moves reminiscent of nationalization in socialist countries.

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posted September 18, 2008 11:28 AM            

America learns from their mistakes and the ethical republicans and democrats can come out of this phase.

The ingredients are there for the evolution and the people can make the difference if they are psychologically in good spirits.

posted September 18, 2008 11:33 AM            

Majority in the congress and the speaker (second in line for the president) are democrats.

A democrat president and a vp will bring doom and gloom to US economy.

posted September 18, 2008 12:08 PM              

And Jwhop is asking me why I'm afraid ....

posted September 18, 2008 01:30 PM            

Republicans are upset with the White House on two fronts.

First, they say that administration officials haven’t done enough to keep them in the loop on its plans for addressing the crisis.

Second, they don’t much like the plans: Intervening — as the administration has done with Fannie Mae, Freddie Mac and now AIG — doesn’t comport with the GOP’s core belief in the free market.

“There is confidence in [Federal Reserve Chairman Ben] Bernanke, but that reservoir is not limitless,” House Republican Conference Chairman Adam Putnam (R-Fla.) said. “People need to understand what the guiding principles are behind this ad hoc strategy.

“How do you decide that AIG is worthy of a bailout, but Lehman Brothers is not? There has to be some better understanding of that.”

But understanding the “guiding principles” means talking them through, and Putnam said the White House hasn’t done enough of that. “The communication lines are not operating efficiently,” he said.

Although Bernanke and Treasury Secretary Henry Paulson traveled to the Hill on Tuesday evening to brief lawmakers on the AIG bailout, many Republicans said they were caught off guard by the bailout when it was announced a few hours later.

Putnam said the Treasury Department and the Federal Reserve should dispatch an envoy to Capitol Hill to keep members up to speed on the latest developments.

Republicans aren’t the only ones complaining.

Senate Banking Committee Chairman Chris Dodd (D-Conn.) let it be known earlier this week that Paulson had postponed a planned appearance before his committee but still found time to deliver a speech at a think tank on the day he was scheduled to appear.

And Senate Majority Leader Harry Reid (D-Nev.) complained Wednesday that he “hadn’t heard anything about” the AIG bailout until Tuesday night.

“I was disappointed to learn this had been under discussion for days,” Reid said.

Republican frustration runs deeper.

The chairman of the 100-strong conservative Republican Study Committee, Rep. Jeb Hensarling of Texas, said that the administration has stumbled down a road that makes many conservatives uncomfortable.

“It’s time to bail out the taxpayers from bailout mania,” Hensarling said. “Neither the secretary of the Treasury nor the Fed has articulated a clear standard” for who gets bailed out and who doesn’t. “We’ve given a blank check to the secretary of the Treasury.”

Republican Sen. Jim Bunning of Kentucky was more blunt.

“To say I am outraged by this would be an understatement,” Bunning said. “The greed on Wall Street is only exceeded by the stupidity of the Treasury secretary and the chairman of the Federal Reserve.”

Bunning compared the federal government’s interventions with the actions of Venezuelan dictator Hugo Chavez — and not favorably. “The only difference between what the Fed did and what Hugo Chavez is doing in Venezuela is Chavez doesn’t put taxpayer dollars at risk when he takes over companies — he just takes them,” he said.

Another small-government crusader, Sen. Jim DeMint (R-S.C.), complained that “failed government policies” allowed the financial crisis to occur in the first place.

“Our leaders need to wake up, exercise some real discipline, and push for policies that reduce the failed role of government and reduce taxes on American investment to attract new capital to our markets.”

The Club for Growth, a guiding light for fiscal conservatives, celebrated the weekend’s announcement that Lehman Brothers would be left to die, saying, “Resisting another bailout was a smart move.”

posted September 19, 2008 03:59 PM            

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Wall Street Socialists

by Amy Goodman

The financial crisis gripping the U.S. has the largest banks and insurance companies begging for massive government bailouts. The banking, investment, finance and insurance industries, long the foes of taxation, now need money from working-class taxpayers to stay alive. Taxpayers should be in the driver's seat now. Instead, decisions that will cost people for decades are being made behind closed doors, by the wealthy, by the regulators and by those they have failed to regulate.

Tuesday, the Federal Reserve and the U.S. Treasury Department agreed to a massive, $85-billion bailout of AIG, the insurance giant. This follows the abrupt bankruptcy of Lehman Brothers, the 158-year-old investment bank; the distressed sale of Merrill Lynch to Bank of America; the bailout of both Fannie Mae and Freddie Mac; the collapse of retail bank IndyMac; and the federally guaranteed buyout of Bear Stearns by JPMorgan Chase. AIG was deemed "too big to fail," with 103,000 employees and more than $1 trillion in assets. According to regulators, an unruly collapse could cause global financial turmoil. U.S. taxpayers now own close to 80 percent of AIG, so the orderly sale of AIG will allow the taxpayers to recoup their money, the theory goes.

It's not so easy.

The financial crisis will most likely deepen. More banks and giant financial institutions could collapse. Millions of people bought houses with shady subprime mortgages and have already lost or will soon lose their homes. The financiers packaged these mortgages into complex "mortgage-backed securities" and other derivative investment schemes. Investors went hog-wild, buying these derivatives with more and more borrowed money.

Nomi Prins used to run the European analytics group at Bear Stearns and also worked at Lehman Brothers. "AIG was acting not simply as an insurance company," she told me. "It was acting as a speculative investment bank/hedge fund, as was Bear Stearns, as was Lehman Brothers, as is what will become Bank of America/Merrill Lynch. So you have a situation where it's [the U.S. government] ... taking on the risk of items it cannot even begin to understand."

She went on: "It's about taking on too much leverage and borrowing to take on the risk and borrowing again and borrowing again, 25 to 30 times the amount of capital. ... They had to basically back the borrowing that they were doing. ... There was no transparency to the Fed, to the SEC, to the Treasury, to anyone who would have even bothered to look as to how much of a catastrophe was being created, so that when anything fell, whether it was the subprime mortgage or whether it was a credit complex security, it was all below a pile of immense interlocked, incestuous borrowing, and that's what is bringing down the entire banking system."

As these high-rolling gamblers are losing all their banks' money, it comes to the taxpayer to bail them out. A better use of the money, says Michael Hudson, professor of economics at the University of Missouri, Kansas City, and an economic adviser to Rep. Dennis Kucinich, would be to "save these 4 million homeowners from defaulting and being kicked out of their houses. Now they're going to be kicked out of the houses. The houses will be vacant. The cities are going to [lose] property taxes, they're going to have to cut back local expenditures, local infrastructure. The economy is being sacrificed to pay the gamblers."

Prins elaborated: "You're nationalizing the worst portion of the banking system. ... You're taking on risk you won't be able to understand. So it's even more dangerous." I asked Prins, in light of all this nationalization, to comment on the prospect of nationalizing health care into a single-payer system. She responded, "You could actually put some money into something that pre-empts a problem happening and helps people get health care."

The meltdown is a bipartisan affair. Presidential contenders John McCain and Barack Obama each have received millions of dollars from these very companies that are collapsing and are receiving the corporate welfare. President Clinton and his treasury secretary, Robert Rubin (now an Obama economic adviser), presided over the repeal in 1999 of the Glass-Steagall Act, passed after the 1929 start of the Great Depression to curb speculation that caused that calamity. The repeal was pushed through by former Republican Sen. Phil Gramm, one of McCain's former top advisers. Politicians are too dependent on Wall Street to do anything. The people who vote for them, and whose taxes are being handed over to these failed financiers, need to show their outrage and demand that their leaders truly put "country first" and bring about "change."

Denis Moynihan contributed to this column.

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posted September 20, 2008 02:48 AM              

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Taxpayers should be in the driver's seat now. Instead, decisions that will cost people for decades are being made behind closed doors, by the wealthy, by the regulators and by those they have failed to regulate.

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can u freakin believe it

heres something that had me in shock...and why i started this thread.

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Sometime last year, after the first round of the subprime housing finance crisis had hit Wall Street banks, there was a meeting of central bank chiefs from both the developed and developing economies. Reserve Bank of India governor Venugopal Reddy, too, was present at the meeting. After discussing the potential impact of the collapse of the US housing finance market, the meeting focused on one question: Whether the whole truth in regard to the impending crises should be told at one go or revealed in smaller instalments. It was finally decided that the truth was perhaps too enormous for the global financial and economic systems to be able to digest in one single shot.

{{ i guess if my dad had known he would not have lost a million in futures and another by not investing in a real estste deal that would have him secure for a long time }}

Now just imagine if the collapse of Bear Stearns, Freddie Mac, Fannie Mae, Lehman Brothers, American International Group (AIG) — together with a balance sheet size of well over a trillion dollars (the size of India's GDP) — had occurred in one fell swoop. The global economy might have got shaken to its roots.

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posted September 20, 2008 02:49 AM              

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It was a European central banker who strongly argued that the truth about the sheer fragility of Wall Street biggies must be told in digestible bits. He knew what he was talking about. For, the impact of the Wall Street crisis on European banks is yet to be fully revealed. That part will become known in the weeks to come.

{{ wow more good new awaits us }}

The European central bankers, including Bank of England, are ready with emergency funds to support banks which might be in distress because of their exposure to Lehman Brothers, AIG and so on.

For Reddy, that critical meeting of global central bankers last year became a guiding factor for determining the contours of policy for the financial sector in India. He came back and discussed the matter with the RBI board members. That formed the basis of the RBI's cautious, some argued non-reformist, approach on all fronts — whether it was on allowing foreign hedge funds to invest in Indian equities and real estate, letting greater FDI into the banking sector or discouraging excessive capital inflows through the foreign borrowing route.

Last year was unusual in many ways as net capital inflows into India touched $100 billion, nearly double the inflows of 2006. And mind you, the inflow had occurred in spite of the RBI seeking to actively discourage excessive inflows through both debt and equity route. If the RBI hadn't restrained capital inflows, we might have had an additional $40 to $50 billion.

The short point is that the Wall Street finance capital play, which had clearly lost its link with the real economy, was threatening to do the same for economies like India. If all the hedge fund money, which is in some way or the other driven by the Wall Street biggies like Lehman and Merrill Lynch, had been allowed into the India real estate sector, as also other assets, India too would be sitting on a financial time bomb today. Can you imagine what might have happened in Indian Parliament if real estate prices and banks in India had collapsed in the manner of Wall Street?

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posted September 20, 2008 02:50 AM              

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The most critical factor here, and also commonsensical in many ways, is whether one is maintaining a realistic link between the real economy and the financial one. America allowed finance capital to run away with the ball, leaving the real economy way behind. Perhaps the US had a compulsion to do so. When economies become inherently sluggish, finance capitalism is used as a steroid to add muscle. But that does not always work. It can even become counterproductive.

Excessive finance capital play on Wall Street also led to funds desperately seeking higher returns in commodity speculation, especially after the housing collapse and fall in equity markets. By one estimate, hedge fund investments in oil, metals and other soft commodities went up over four times — from $50 billion to over $200 billion — in a matter of four years from 2003. This led to oil prices hitting stratospheric levels. A US Senate committee has now come down hard on some of the Wall Street luminaries who speculated big time in commodities. Most interestingly, the very collapse of some of the Wall Street biggies has brought succour to oil and commodity importing countries like India. The mayhem on Wall Street in the past few weeks has directly led to a fall in oil and commodity prices. A general fear over Wall Street is causing hedge funds, which may have taken commodity positions through borrowed funds, to rapidly sell and cut losses.

This is called deleveraging in financial parlance. So after getting more and more leveraged over the past few years, Wall Street appears to be in a deleveraging mode. Simply put, this means some of the excesses of pure finance capitalism are being unwound. The poison is being let out of the system. This is very good for emerging economies like India as it will lead to rationalisation of pricing of assets in commodities, equities, real estate and so on.

The Wall Street crisis is largely causing global oil prices to come back to normal levels. Sometimes, a big crisis becomes necessary for saner prices. The collapse of big Wall Street entities also prompts one to wonder whether the price discovery mechanism in any asset class — whether oil, metals, equities or real estate — has become too Wall Street-centric. Given the shift in economic activity towards Asia, shouldn't price discovery also decentralise to some extent?

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