Page 1 of 2 Government takeover to a T
By Julian Delasantellis
The 1990 gangster movie Goodfellas was a hit with movie critics and
aficionados of the genre; it had plenty of blood and guts and mafia "hits", but
it was also mostly a true story of the desire of a young gangster (played by
Ray Liotta) to move to the top of an Italian American criminal gang in America,
a desire being thwarted by the fact he wasn't Italian American.
In one famous scene, the gang is in one of their private haunts, playing cards.
One, Tommy, (Joe Pesci) is dissatisfied with the slow pace with which his drink
order is being filled by the young mafia functionary, Spider (Michael
Imperioli, who would go on to reach the pinnacle of gangster role fame as
Christopher Moltisanti in The Sopranos) attending the game.
Tommy, never the cool, collected type, takes out his small
revolver, and waves it around in an attempt to spur Spider's attentions and
efforts. The gun goes off, Spider is shot in the foot.
The next week, Spider is back, with a huge bandage on his wounded foot. Tommy
is disrespecting him again, but now Spider has had enough and he suggests that
Tommy perform a grammatically impossible copulation with himself. The other
gang members are amused at the braggadocio, not Tommy. He fixes Spider with an
ice-cold stare, then kills him by pumping five bullets into to him with a big
.45 caliber cannon.
I wonder. When Goldman Sachs president Lloyd Blankfein settles in for a
friendly card game after his day's work of ruling the world's markets and
finances, if one of his flunkies is none too quick on the uptake, will
Blankfein blow this youngster away, just like poor Spider?
"Spider, go get me another [1945 Chateau Mouton-Rothschild Jeroboam/AIG credit
default swap/poached killer vampire squid]."
"Yes, sir," replies Spider, who probably did not think this would be his life's
work after following up on his fellowship with the Clinton Global Initiative
with a summa cum laude medical degree from Johns Hopkins, then a
similarly ranked law degree from Stanford, then a top of the class MBA from
Harvard.
But what if this is not brought fast enough for Blankfein's tastes. Just how
far will a Wall Street unrestrained by any sense of rules or discipline go?
A few weeks ago, under the byline of commentator Alice Schroeder, Bloomberg
News published a fairly curious story, about "Arming Goldman [Sachs] with
pistols". In it, Schroeder claimed "that senior Goldman people have loaded up
on firearms and are now equipped to defend themselves if there is a populist
uprising against the bank."
Schroeder provided precious little evidence for this remarkable assertion; the
most was that Blankfein "got permission from the local authorities to install a
security gate at his house two months before Bear Stearns Cos collapsed". Other
news outlets dug into the story and found it wanting. The Wall Street Journal's
Dealblog blog found out that no Goldman employee had been granted a so-called
"carry permit" in six years; carrying a concealed firearm in New York without
one was considered a serious crime, unlike the current situation in most
American sunbelt cities, where not wearing one gets you sized up for a
waterboard.
Bloomberg pulled the story off the site for a day or two, then put it back up
with corrections.
But I wonder, what if the story had been absolutely true? What if everybody in
Goldman has the necessary permits, but, as with their skill in high-frequency
computer trading, they've managed to bury the record somewhere in their
worldwide forests of silicon? Maybe their task was even easier. Maybe, in much
the same way that they've bought the US government lock, stock and barrel this
year, they've done likewise with the bureaucrats and pencil pushers in the New
York Police Department's permit office.
The key point is, after this past year, does anybody really doubt that they
couldn't, or, more importantly, that they wouldn't?
If you looked around the world situation a year ago to try to guess who would
be on top of the greasy pole of power today, the US banking industry might not
have been on your list of favorites. Back then, most of its major players had
already had to go running for the first round of government bailout, with many
anticipating more life preservers to come.
Bank and financial stock prices were still in freefall, as they would be until
the market lows in early March of this year. Indeed, it was in February that
many observers such as former International Monetary Fund official Simon
Johnson, economics columnist Paul Krugman, even conservative South Carolina
Republican Senator Lindsay Graham, called for an expedited end of the banking
crisis by means of the nationalization of America's banking system once and for
all.
Then, on March 10, something anomalous happened - Citigroup reported
better-than-expected profits in its first-quarter earnings statement. Nobody
knew how or why this happened. But little did we know just how momentously
significant it was. It was here, from about March 1-10 depending on the market,
that most world stock indices made the bottoms that have held do far, with US
stock prices up almost 65% since then.
With the clarion hindsight of time, we can see the hand behind the magician's
trick. The main factor pressuring the banks, indeed, pressuring the entire
world economy, was the question of what to do with the trillions, or possibly
tens of trillions, of mortgages and mortgage-backed securities still in the
banks' portfolios, the vast majority worth well under their par values due to
the decline in value of the properties on which the initial mortgages were
written.
For about a year, now many analysts have opined that unless something is done
to get these securities out of the banks' portfolios, their continued festering
would pressure and infect the global economy.
This was to have been the original intent of the Troubled Asset Relief Program
(TARP) introduced by then-Treasury secretary, Henry Paulson, in September 2008,
as the credit markets froze and ossified towards what was feared to be a
complete shutdown. The Paulson Plan, like most of its successor ideas to deal
with the mortgage security problem, foundered on a simple contradiction - how
much the government should pay for the mortgage securities.
On the secondary markets, since these securities traded at prices of 20 cents
to the dollar or lower, they traded infrequently or never - the banks would
rather let them rot away in their portfolios, thus inhibiting new lending due
to the hit the reduced values did to their capital accounts. The government, on
the other hand, had to look after its balance sheet as well as the overall
health of the general economy. Offering cheap prices for the securities
advanced the government's fiscal position, but it did little to get the US
economy going again.
By mid-March, traders began to believe the message of the many administration
leaks appearing in the press - that, when prices were finally made and offered
for the mortgage-backed securities, the government would be cognizant of the
banks' balance sheet needs; in other words, amazingly enough, it was almost as
if the administration had decided that it, and the general public, was going to
be the one taking the bullet for, and rather than, the banks.
What was the government's plan for the banks? It announced that it would
involve so called "stress tests" of banks' ability to maintain financial
viability in the case of another economic leg downward. However, like a large
American university more concerned with its football results than its academic
record, the Barack Obama administration soon found a way to ensure that the
jocks breezed through this yet other instance of life's travails.
Since the beginning of the financial crisis, many financial observers, usually
on the right side of the political spectrum, contended that there really wasn't
any financial crisis at all, just a phenomenon arising from out of the
mis-application of an obscure accounting rule, FAS 157, which called for banks
to assign values for securities in their portfolio according to market prices.
The markets were wrong (a remarkable assertion for conservatives) in that the
low prices for mortgage-backed securities reflected actual values; just allow
them to value the prices higher, and all the bad things would reverse
themselves and everything would be fine again.
Therefore, a few eyebrows were raised when, in early April, the Treasury
Department did exactly that - it loosened FAS 157. Exactly as predicted, what
this did was to make bank balance sheets overnight look far healthier than they
appeared previously. And, when these new, healthier bank asset values were
applied to the stress tests, they came out better as well. Quite in contrast to
the PR verbiage about stock prices and markets being ever-reliable lanterns of
truth in a miasmic fog of lies, it appears that the soft lies of profit will
always be more desired than the jagged, lacerating edges of truth.
Taken together, the subterfuges of spring went a long way towards keeping the
banks alive until the present, for the banks anyway, happier holiday season;
but it would not have been sufficient enough for today's circumstance, with
society's keys to the kingdom actually jangling around on the banks' trousers.
Any little girl running a lemonade stand knows the secrets to prosperity; buy
50 cents of lemonade mix, add iced water and a smile, sell for $5. For the
banks, it's just about the same - substituting a Hugo Boss suit for the gingham
dress. You buy your product cheap, sell it dear.
The banks' product is, of course, money; the cost for acquiring it is the
interest rate. For over a year now, the interest rate banks charge to each
other to fund their overnight loan balances has been at a historically low rate
of between 0.0% and 0.25%.
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