The Money Launderers
A week ago, on the day President Bush disavowed government intervention in financial markets, the Federal Reserve announced the fruit of its weekend labor: essentially guaranteeing hundreds of billions in toxic financial derivatives owned by banks. Money laundering has become the de facto standard of Federal Reserve policy.
The financial press has been filled with praise for the US government rescue of Bear Stearns, one of the worst offenders of reason and logic in the issuance of securitized mortgage debt. You have to turn to blogs to get a sense of the malfeasance.
Excerpt from the Hussman Funds’ Weekly Market Comment (3/24/08) regarding the Fed’s involvement on JPMorgan’s (JPM) deal to buy out Bear Stearns (BSC):
In effect, the Federal Reserve decided last week to overstep its legal boundaries going beyond providing liquidity to the banking system and attempting to ensure the solvency of a non-bank entity. Specifically, the Fed agreed to provide a $30 billion "non-recourse loan" to J.P. Morgan, secured only by the worst tranche of Bear Stearns’ mortgage debt. But the bank J.P. Morgan was in no financial trouble. Instead, it was effectively offered a subsidy by the Fed at public expense. Rick Santelli of CNBC is exactly right. If this is how the U.S. government is going to operate in a democratic, free-market society, "we might as well put a hammer and sickle on the flag."
What is a "non-recourse loan"? Put simply, if the homeowners underlying that weak tranche of debt go into foreclosure, they will lose their homes, and the public will lose as well. But J.P. Morgan will not lose, nor will Bear Stearns’ bondholders. This will be an outrageous outcome if it is allowed to stand.
… it’s a picnic for insiders, bought and paid for through the abuse of public funds by government officials too unprincipled even to recognize the abuse. The only good thing about this deal is that it buys time while principled ways of busting and restructuring it can be settled.
At a moment in history when the US treasury is hemorraging ($5000 per second in Iraq), the Bush White House is setting up to do something that can be understood only through a corrective lens that takes every sighting and reverses it: the party of laissez faire, free markets and minimal regulation supports the costliest nationalization of industry in US economic history.
Last week, in addition to rescuing Bear Stearns, the shadow financial system intervened in metals and commodity markets– beating down anxiety indexes more sharply than at any time in the past half century. At the same time, the coordinated release of quarterly reports whose numbers ever so slightly "exceeded expectations" was enough justification–along with massive buying by US government operations that can only be faintly glimpsed–to send world stock markets back upwards.
Various metaphors have been used to describe US government intervention in the markets, like band-aid solutions to cure a gaping wound. In fact, the US government’s attempts to calm investor anxiety at the observable financial disarray is like using chemical foam at the surface to kill a deep-burning coal fire.
There was more micromanaging of the news cycle by the money launderers this morning:
March 24 (Bloomberg) — Forget lower interest rates. For the Federal Reserve to keep the financial markets from imploding it needs to buy troubled mortgage bonds from banks and securities firms, say the world’s biggest Treasury investors.
Even after cutting rates by 3 percentage points since September, expanding the range of securities it accepts as collateral for loans and giving dealers access to its discount window, the Fed has been unable to promote confidence. The difference between what the government and banks pay for three- month loans doubled in the past month to 1.92 percentage points.
The only tool left may be for the Fed to help facilitate a Resolution Trust Corp.-type agency that would buy bonds backed by home loans, said Bill Gross, manager of the world’s biggest bond fund at Pacific Investment Management Co. While purchasing some of the $6 trillion mortgage securities outstanding would take problem debt off the balance sheets of banks and alleviate the cause of the credit crunch, it would put taxpayers at risk.
The US taxpayer is about to be force fed bad mortgage debt, that honest people didn’t ask for– created by Wall Street where incomes average $387,000 (NY Times, March 24, 2008 "With Economy Tied to Wall St. New York Braces for Job Cuts") and fostered by a culture of corruption rippling all the way down through mortgage brokers, appraisers, and local zoning officials for whom the hard currency of fraud is as likely Bahamian poker chips as dollars.
ALAN FARAGO of Coral Gables, who writes about the environment and the politics of South Florida, can be reached at firstname.lastname@example.org