Page 1 of 2 Change? Yes, it can
By Julian Delasantellis
It was on Monday, September 15, last year that the world financial community,
after sowing the wind of catastrophe by having its leaders fail to agree to
United States government and Federal Reserve demands to save Lehman Brothers,
reaped the whirlwind of their failure, namely, a terrifying financial markets
crash that turned what had been until then a moderate recession into something
much, much worse - the most serious financial crisis since the Great
Depression.
Over on Wall Street, Anne Finucane, a public relations officer for Bank of
America (BoA), certainly had good seats for the unfolding spectacle. BoA that
weekend had engineered an astounding and totally unexpected takeover of Merrill
Lynch in order to get then Treasury secretary Henry Paulson and Federal Reserve
chairman
Ben Bernanke off the bank's back regarding Lehman. Early Monday saw Finucane
setting up a joint press conference with Merrill chief executive John Thain,
and Bank of America CEO Ken Lewis, to announce, as their world collapsed around
them with plunging stock prices and freezing credit markets, the supposed glad
tidings of the union.
But, according to Finucane, ominous tidings preceded the proclamation of the
bans.
"By midmorning ... I could hear this dull thumping, which grew to this
incredible crescendo of jackhammers just as John Thain and Ken Lewis took their
seats. ... those sounds played throughout the entire press conference; that was
the background music for the day."
Had the gods been finally so offended by the hubris of humanity that they were
sending down a thunderous retribution, in the form of flying jackhammers, as
punishment? Or was this just a resumption of the old Wild West custom of having
the condemned able to hear the construction of their gallows prior to execution
of sentence?
In the end, this was a message from neither the gods nor Gary Cooper; it was
just the sound of an adjoining auditorium being renovated. But Finucane was
remarkably prescient when she said that the din was "a perfect metaphor for the
larger economic events of the day". If a god was involved it was not the Greek
gods on Olympus but the Hindu god Shiva, the god of destruction and
transformation, as the old world governing order was, in essence, being wiped
out, and a new order was arising in its place
As darkness fell on the evening of September 11, 2001, America's video pundit
class put its frightened charges to bed with the warning that "nothing will
ever be the same ever again". This was a very reasonable assumption at the
time, for nobody knew if, in the days following, America would see mushroom
clouds over its shopping malls or Osama Bin Laden's head gracing a pike on the
White House fence.
For the couple of days on either side of September 15, 2008, the world
financial system's 9/11, it was obvious that the fall of Lehman and of
insurance company American International Group the next day, would change their
world forever; unlike with the aftermath of the 9/11 terror strikes, one of the
ways that the world would be changed was eminently predictable.
Savers, because they didn't know whether those to whom they were extending
loans would still be there the next day to pay them back, pulled their funds
out of the market, especially the short-term money and commercial paper
markets, and refused to make new lending to prospective borrowers. This problem
was particularly exacerbated by Lehman's central role in the commercial paper
market.
The bankruptcy meant hundreds of billions of commercial paper issued by Lehman
were just about worthless for the holders, who were losing everything; they
couldn't roll over their paper to new borrowers even if they wanted to. Growth
in American loan balances had been accelerating at a rate five times that of
economic growth for most of the decade. When that stopped so abruptly, like a
merry-go-round spinning at 80 kph then suddenly stopping, you knew that lots of
poor, innocent folk were about to be thrown off.
The US economy lost over 2.6 million jobs in 2008, about three-quarters of
those in the last four months of the year, with another 4.3 million jobs lost
through August of this year. With trade finance scarce or non-existent, the
volume of world trade slumped by a record shattering over 40% in the last three
months of 2008. This became the transmission mechanism by which America's virus
was spread all across the world.
With a little bit of luck - actually, with an awful lot of luck - one or two
million of those jobs may be recovered amidst the weak recovery now apparently
under way. But if the worldwide economic and financial calamity that followed,
resulting from a world suddenly being denied the easy credit on which it was
hooked, was eminently predictable, other results of the crisis, especially a
complete metamorphosis of the market's relationship with its masters, the
governments, were not.
Some statistics illustrate the remarkable current blurring of the demarcation
lines between what is government and what is the private sector. Twenty-six
percent of current US gross domestic product is government spending, the
highest percentage of such since the tremendous control asserted over the
economy in the service of arming the free world and defeating fascism during
World War II.
With the collapse of the credit default swaps model of mortgage insurance,
government mortgage insurance organizations now insure nine out of 10 new
mortgages, much as they did in the country's lush good times that saw the
development of suburbia in the 1950s. If you buy a new car from General Motors,
a life insurance policy from AIG, or a student loan from Citigroup, whether you
realize it or not, and depending on how the equity position was structured,
you're dealing with a company either minority or majority controlled by the
government.
But it is when you double back to banking and finance, where the crisis began,
where you see some trends definitely not going in the right direction.
Helen of Troy may have been the face that launched a thousand ships and burnt
the topless towers of Ilium, but "too big too fail" is the phrase that, when
used, stuffed the fleshy face of government, and, when ignored, burnt the
topless skyscrapers of finance from the fancy executive suites on down.
In its most modern incarnation, "too big too fail" was first applied to the
rescues of Bear Stearns in March 2008, and during that summer, to mortgage
guarantors Fannie Mae and Freddie Mac. Then it was decided to teach Lehman a
lesson by not offering it a bailout; that caused the worst financial
dislocation since, according to the Financial Times, the "blitz" bombing of
London by the Nazis in 1940.
After that, everything was too big to fail and nothing was too small to save.
AIG got $85 billion of federal largesse last September, another handout of cash
in the early spring of this year. Three successive bailout initiatives have
lifted the stock price of Citigroup from 99 cents all the way to $4.50.
The bulk of the aforementioned rescue efforts were undertaken and implemented
under George W Bush's Treasury secretary Henry Paulson, but President Barack
Obama and Paulson' successor, Timothy Geithner, undeniably took up the Bush
intervention baton. In February, when it became clear that many, if not most,
US large banks were technically insolvent, Obama rejected the advice of many
economists, not all of them left-wing or liberal, to cut the Gordian knot of
"too big to fail's" logical inconsistencies by nationalizing the banks.
In late April and early May, with the repeal of mark to market accounting and
the eagerness which the administration used the new, fishy asset-valuation
numbers of mark to model in determining bank valuations, the Obama
administration's strategy became clear. (See
Bankers get a model rush, Asia Times Online, April 9, 2009.) Everything
and anything that the government could do to support banks would be done, even
if the truth became the first and most severely wounded casualties of these
skirmishes.
Many Obama administration critics in the so called "teabag" movement claim that
the government has been too aggressive in taking over private enterprise, but,
in this case, it's not obvious that's what is going on here - most times it
looks like it is the banks that are taking over the government, rather than the
other way around.
During the Vietnam War, and the involuntary conscription that had it fully
staffed with trigger pullers, it was not uncommon to hear stories of young men
undertaking actions to deliberately harm their health, such as standing on hard
concrete floors for days on end to develop flat feet, to gain a medical
deferment from the draft. Here, in contrast to traditional, evolutionary
thought, the young men believed that making themselves unhealthy presented an
evolutionary advantage; namely, that if they could get out of dying in Vietnam,
they would survive long enough to procreate.
The same thing has been going on in the banking system. One of the things
learned from the boom was how much more risk a bigger bank had to take on to
please Wall Street than did a smaller bank. To make a 10% return, a $20 million
bank only had to pull in $2 million, but a $20 billion bank had to pull in $2
billion, and then do the same next quarter, and the one after that. We have now
learned that almost all the rats that carried the black plague of the financial
crisis, all the mortgage-backed securities and collateralized debt obligations
and credit default swaps, were carried on the ships and then spread out of the
five to seven biggest banks and financial institutions of the country.
The Vietnam-era boys learned what they had to do so they could not be drafted;
the banks have learned that they have to be allowed to grow too big to fail.
With the bigger banks now being allowed to chew up their smaller competitors in
order to save the federal government the expense of saving them, the behemoths
are working hard to earn their designations as the privileged class. Sixty
percent of all US customer deposits now reside in the vaults of just four big
banks - Bank of America, JP Morgan/Chase, CItigroup and Wachovia.
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