Friday, October 10, 2008


As I write, Henry Paulson, Secretary of the Treasury of the United States is, in proposal, suggesting a one-world-government.

Surprise, surprise, surprise!

Mr. Paulson established, only weeks ago, a corporate socialist nation as the future for the US. Now, to keep from exposing the lie of how deep the losses created by the removal of Glass-Steagall 1933, he, and President Bush, are ready to cede decision making processes among all things financial to a world body. Yes, this includes what the US does within its own borders, as well.

Today, and continuing through this Columbus Day Weekend, the G7, and G20, respectively, are meeting to coordinate efforts in attempts to stem the collapse of the global financial system. Mr Paulson has agreed to adhere, and bind the US, to any solutions the group develops.

All of which will be in vain. The banks cannot reasonably trust one another, for the simple fact no one knows who is solvent, and who is bankrupt. Until all financial institutions are forced to declare exactly what is on their balance, and off-balance, sheets, and its exact value, no one will loan anyone a penny, unless they pay dearly for it.

Most of the world blames the US.

For all of it.

I guess it is only right. We have delivered havoc to other countries, wholesale. Our investment banks, once the pride of the global financial world, have created financial instruments, which, at their heart, were nothing more than smoke. These instruments were predicated on the belief that prices could never go down as long as regulation and oversight were made ineffective.

De-regulation, belief in ever-increasing prices, and the idea America could transform herself from manufacturer for the world, to banker of the world, allowed the US to develop hubris and sanctimony unrivaled in the modern era. Those who developed and championed this ideology forgot to add one variable to the equation - greed. Most assuredly it is hard to measure greed, yet should it not be accounted for, since it is quite possibly the most dominant variable?
Evidence I am correct is only a slight read away. Derivatives - do you know what they are? Mark to market versus mark to model - explain that to your children. Level 3 accounting - wish my bank allowed me that privilege. Supply-side economics - only with deficits supported by foreign purchases of our Treasuries. All of these things together created false wealth, at dizzying speeds. The second the wind blew enough to cause one card to quiver, those above it began to fall, until the whole house was in danger.
Now the real power grab begins. Trust this, the big banks that survived the Great Depression already have a blueprint to follow. The Federal Reserve will now rule this country, no matter who you vote for. The most powerful man in the world will, for a short time, be the Chairman of the Federal Reserve. Within twenty years, someone in a similar role in China may well have that honor.

You must understand - The Federal Reserve does not bow to the President, it bows to its shareholders. The CEO's at the heads of the companies that own the most Treasuries held by the Federal Reserve are who every real American should come to know. To not know means your vote is a puff of smoke in a hurricane.

Maybe we like it that way. The world has become a very complicated place. Politics are mere deflections by their very nature in this new world. One against the other, sic et non. The media is now engaged in a desperate fight against and amongst itself. So caught in the fight to represent one side or the other, the voices of sense and reason are drowned amidst the vast ocean, like a person overboard. Should the sole swimmer reach eager ears, sharks, by the hundreds, devour the voice, until even the whimper is only memory.

How much more can you bear? $800+ Trillion in derivatives, all bets, on the performance of an underlying $30 Trillion, that has lost at least 20% in value. So - A minimum of $160 Trillion in losses... and counting. These losses are already gone forever, they cannot come back. Should housing values continue to drop, the losses grow.
There is a solution. All institutions must eliminate level 2 and level 3 accounting. All financial instruments must be marked to market, no exceptions. This will restore confidence on who is solvent, and who is not. This is at the heart of the "liquidity" problem. No one trusts anyone else.
Yes, some firms will be insolvent, maybe quite a few, but the government could then step in to recapitalize them, after their derivatives have been cleared off the books. They would be much smaller, but if they are that smart, they will grow again. As Karl Denninger writes:
"If there is recovery value (in most cases there will be, as we saw with Lehman) then the bondholders get newly-issued equity in ratable proportion to their (former) ownership of the bonds. The existing equity is wiped out. The firm, having no balance sheet debt whatsoever, can then immediately raise capital in the market to recapitalize itself (having a clean balance sheet this is a trivial task)

For those firms that have zero equity remaining, the government can step in and inject capital via a super-senior tranche as necessary to establish a working capital base. Remember, with a 6% Tier 1 capital requirement a little goes a long way - $10 billion injected results in over $160 billion of available gearing! Bingo - the firm is back on its feet. Protect the taxpayer in these transactions by attaching an onerous coupon to the issue so that it will be rapidly repaid (e.g. 3mo LIBOR + 600 bips) and cleared.

The objection to this plan will be that existing equity holders will be wiped out and bondholders will take a haircut.

Well, bond holders are no worse off than if the firm went under. They would get their recovery value anyway, and they still do - its just in the form of equity instead of cash.

As for equity holders, they're wiped out in a bankruptcy too.

The real objection to this is going to come from the executives, who will see their stock options rendered worthless along with their restricted shares. However, they remain in place (if the shareholders will have 'em) and as a consequence can rebuild their equity over time."
Leverage must also be returned to sustainable levels. Bear Stearns, Lehman Brothers, Wamu and others all had borrowing levels that exceeded capital by 30 or more times.
Most of all, these suggestions will not require one dime of taxpayer money be exposed to losses. The bailout last week will end up increasing the Federal deficit by trillions. The bailout does nothing to restore confidence in inter-bank lending as evidenced by action in LIBOR this week, and it does nothing to stop a firm from going under.
Any further actions that do not resolve the underlying issue of who has what losses will be futile. Any money put into action without solving who has what losses will be lost, in entirety.

Should no group stand up and demand that Mr Paulson stop, our great nation will take a step most Americans may not agree with. Unless, you believe a few more dollars, in the very short term, is a fair trade for sovereignty.

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