Henry Paulson has lost control
By F William Engdahl
When Henry Paulson agreed to leave his Wall Street job as chairman of
investment bank Goldman Sachs to go to Washington as Treasury secretary in
2006, he demanded extraordinary powers as de facto economic czar. He got
them.
Paulson is also head of the President's Working Group on Financial Markets -
composed of the secretary of the Treasury and the chairmen of the Federal
Reserve Board, the Securities and Exchange Commission and the Commodity Futures
Trading Commission. The working group is the financial world's equivalent of
the Pentagon war room. Paulson, not Fed chairman Ben Bernanke, is the person
running the administration's crisis management. And his recent actions indicate
he has lost control as the snowballing problems from the semi-government
mortgage companies Freddie Mac and Fannie Mae to the collapse of the
multi-trillion dollar market in asset-backed securities (ABS) to the real
economy are compounding into the worst crisis since the 1930s Great Depression.
'The US banking system is sound ...'
In an eerie echo of president Herbert Hoover in 1930 during a presidential
campaign against F D Roosevelt following the stock market crash and collapse of
numerous smaller banks, Paulson recently appeared on national TV to declare
"our banking system is a safe and sound one".
He added that the list of "troubled" banks "is a very manageable situation".
What he did not say was that the US bank deposit insurance fund, the Federal
Deposit Insurance Corporation (FDIC) has a list of problem banks that numbers
90. Not included on that list are banks such as Citigroup, until recently the
largest bank in the world.
The statement is hardly reassuring. The California savings bank, IndyMac Bank,
which was declared insolvent a month ago, was not on the FDIC list a week
before it collapsed. The reality is the crisis created by "securitizing"
millions of home mortgages into new financial instruments and selling the
packages to pension funds and investors is unfolding like a snowball rolling
down the Swiss Alps.
Indication of the lack of control is the statement just weeks ago by Paulson
that "financial institutions must be allowed to fail". That was two weeks
before he went to Congress to ask for "Congressional authority to buy unlimited
stakes in and lend to Fannie Mae and Freddie Mac". As I noted last month (see
The next big wave is breaking, Asia Times Online, July 17, 2008)
mortgage guarantors Fannie Mae and Freddie Mac, two private companies, insured
some US$6 trillion worth of home mortgages, half the entire US mortgage debt.
Paulson defended his request by calling Freddie Mac and Fannie Mae "the only
functioning part of the home loan market".
That comes back to the statement about a "sound banking system". Can we have a
sound banking system where the only functioning part is literally insolvent -
its debts greater than its assets?
It is well known on Wall Street that some of the largest financial institutions
have huge undeclared problems with asset-backed securities they have valued far
above their worth to make their books look better than they are. The names
Citigroup, Lehman Bros, Morgan Stanley, even Paulson's old firm Goldman Sachs
and of course the inventor of subprime mortgage securitization, Merrill Lynch,
all hold a huge percentage of what are called Level Three assets, these being
assets where no-one is willing to buy but the bank declares their worth based
on "fantasy".
In short, the value of those core financial institutions of the US financial
system is massively overvalued compared with their value were they forced to
sell into the open market today. In a sobering aside, readers should not expect
any serious economic remedies for the crisis from a president Barack Obama.
Obama's national campaign finance chairman is Chicago real estate billionaire
Penny Pritzker, who is heir to among other things the Hyatt Hotels. It was
Pritzker together with Merrill Lynch 10 years ago who first developed the model
for securitizing "subprime" real estate, the trigger for the current financial
tsunami crisis.
Already Citigroup has been forced to go to Dubai in the United Arab Emirates
hat in hand and ask for billions in cash - after it announced it would not need
more capital. Now Citigroup has announced plans to sell some $500 billion more
assets to raise funds. "Is Citigroup really solvent?" is the question sober
investors are asking. Similarly, Merrill Lynch raised $6.6 billion from Kuwait
Mizuho, stated it was fine and weeks later had to raise still more capital.
Morgan Stanley sold a 10% share of the company to China International Corp.
The real economy contracting rapidly
Behind the reassuring statements from Paulson and others that the "worst is
over", the reality of the credit collapse since August 2007 is a deepening
economic contraction which I have said several times in this space will surpass
the Great Depression of the 1929-1938 period.
A good friend who is an unemployed homebuilder in a prosperous part of Arizona
just sent me the following list of US department retail store closures. It is
worth noting that over 70% of the US gross domestic product is consumer
spending and that the entire Federal Reserve strategy of then chairman Alan
Greenspan after the March 2000 collapse of the stock market bubble was to bring
US interest rates to their lowest levels since the 1930s to stimulate consumer
spending on credit (that is, debt) to avoid "recession". Note the scale of the
following store closures across America in recent weeks:
Ann Taylor - 117 stores nationwide.
Eddie Bauer to close more stores after closing 27 stores in the first quarter.
Cache, a women's retailer - 20 to 23 stores this year.
Lane Bryant, Fashion Bug, Catherines -150 stores.
Talbots, J Jill - Talbots will close all 78 of its kids and men's stores plus
22 that are a mix of Talbots women's and J Jill.
Gap Inc - 85 stores.
Foot Locker - 140 stores.
Wickes Furniture is closing all of its stores after filing for bankruptcy
protection.
Levitz, a furniture retailer - 76 in December.
Zales, Piercing Pagoda - 82 stores by July 31 followed by another 23.
Disney Store owner has the right to close 98 stores.
Home Depot - 15 outlets, affecting 1,300 employees. It is the first time the
world's largest home improvement store chain has closed a flagship store.
CompUSA - company closed.
Macy's - 9.
Movie Gallery, a video rental company - to close 400 of 3,500 Movie Gallery and
Hollywood Video stores in addition to 520 closed last autumn.
Pacific Sunwear - 153 Demo stores closing.
Pep Boys, an auto parts supplier - 33.
Sprint Nextel - 125, with 4,000 employees affected, following 5,000 layoffs
last year.
J C Penney, Lowe's and Office Depot - scaling back.
Ethan Allen Interiors - 12 of 300 stores.
Wilsons the Leather Experts - 158.
Bombay Company - all 384 of its US-based stores.
KB Toys - 356 stores as part of its bankruptcy reorganization.
Dillard's - another six stores this year.
For anyone familiar with American shopping malls and retailing, this represents
a staggering part of the daily economic life of the nation, from furniture
stores to clothing to video rentals to leather. The process has only begun and
neither major party presidential candidate has dared to mention this
on-the-ground economic reality because they evidently have no solutions to
offer that would not jeopardize their campaign finances.
Obama is tied to not only Pritzker but also to Omaha billionaire Warren Buffett
and George Soros. McCain depends on the traditional money contributions of the
Republican Party, which demands permanent tax reform for highest-income earners
and a pro-bank laissez faire treatment of millions of homeowners facing
home foreclosure and asset seizure by banks.
Banks across the country have severely cut back on loans, fearful of bad debts.
That has aggravated the consumer collapse documented above. Hundreds of
thousands of real estate brokers, small and large bankers, furniture workers
and salespeople, and construction workers are unable to find work. Jobs are
being cut wholesale and those working are often on reduced hours. Car sales in
June plunged by 28% for Ford, 18% for General Motors and even 21% for Toyota,
which will mean more layoffs in coming weeks. This will be the next wave of
unemployment.
The economic reality is not reflected in official US Commerce Department or
Labor Department statistics. There the data is constantly being "revised" to
hide the grim reality in an election year.
Economist John Williams of California has meticulously tracked such "data
revisions" for more than 25 years and found the manipulation of reality so
alarming that he founded an independent subscriber service titled
Shadow Government Statistics, where he makes best estimate calculations
of the reality, not the official mythology.
By Williams' calculations, the US economy first entered recession, defined as
two consecutive quarters of negative GDP growth, at the end of 2006. Ever
since, the recession has deepened, dramatically so in the past 12 months.
Little known is the fact that the Labor Department also publishes six different
unemployment statistics from U1, U2 through to U6, this last being the most
comprehensive. The reported "official unemployment" is the very narrowly
defined U3, which stands at 5.5%. However, as Williams notes, U6 is the real
measure and that officially shows 9.7% unemployed. His calculations put the
figure at 13.7% actually unemployed and seeking work.
A personal account
The unemployed homebuilder from Arizona I mentioned above recently sent me the
following personal note on the situation.
Here is how it looks to
people like me: Real estate dealings fueled the economy in most areas of the
country for the past decade or more. We've been in a market downturn for three
years. We have seen the cost of doing business increase for builders, along
with a big drop in buyers as everyone tightens their belts, or can't sell
existing homes. Many employers have gone under ending thousands of jobs. If
they have a job people are worried about losing it. Driving long distances to
work is not possible with gasoline costs double that of 2006. There has been a
40% drop in most peoples' home equity worth. Many people are "underwater" on
their homes, meaning they owe more than the market price is worth today. So
many under-employed don't show up in government unemployed statistics. Self
employed like me never get counted. Today, nobody is building. Unsold home
inventories are triple that of 2003. Banks no longer give easy credit for home
buyers. Many realtors I know have gone two years without selling a home. Empty
storefronts are becoming common. In many areas unemployment among construction
trades people is 50% or more. Tens of thousands of illegal Mexicans who did
most of the manual labor have returned to Mexico to find work. What now? Well,
I do handyman projects of all sorts, big or small and make about 70-90% of what
it takes to survive with a family of a wife and three young children. My
savings make up the rest. That can't go on for too much longer. We went from
affluent and comfortable to nervous and broke with diminished opportunities in
just three years. We used to be the middle class.
To be
continued ...
F William Engdahl is author of A Century of War: Anglo-American
Oil Politics and the New World Order (Pluto Press) and Seeds of
Destruction: The Hidden Agenda of Genetic Manipulation (www.globalresearch.ca).
He is working on a new book, Power of Money: The Rise and Decline of
the American Century, from which this has been adapted. He may be reached
through his website, www.engdahl.oilgeopoitics.net.
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