That's just the way it is! Isn't it?

Is China an Emerging Superpower? What is a "Superpower"?

2008-12-22T16:45:00.000-08:00

People have been predicting China’s emergence as a superpower since the days of Napoleon. He appreciated China’s potential as a world power and cautioned against waking the sleeping dragon. China’s subordination into the Western international system in the 1839-1842 Opium War and its decline as the “sick man” of East Asia for the rest of the nineteenth and for the first half of the twentieth centuries dulled, but never extinguished, the expectation that, sooner or later, China would again dominate the world.

The term “superpower” is often used loosely in popular discourse to describe anything that achieves unmatched dominance from the status achieved in international affairs by the United States since World War II. The discussion here will be better served by a somewhat more precise definition: a “superpower” is a country that has the capacity to project dominating power and influence anywhere in the world, and sometimes, in more than one region of the globe at a time, and so may plausibly attain the status of global hegemon. The basic components of superpower stature may be measured along four axes of power: military, economic, political, and cultural (or what political scientist Joseph Nye has termed “soft”).

China is not now a superpower, nor is it likely to emerge as one soon. It is establishing itself as a great power, on par with Great Britain, Russia, Japan, and, perhaps, India. China is today a serious player in the regional politics of Asia, but also is just one of several. At a broader level, in global affairs, its stature and power are growing, but in most respects it remains a regional power, complementing the cast of other great powers under the overarching dominance, however momentary, of the United States. [1]

Will dumping the dollar make a difference? Not likely!

Bailouts / Ponzi Scheme

2008-12-18T10:29:00.000-08:00

As the U.S. government is looking for something or someone to blame for the housing and banking debacle, finally it seems that they have chosen Bernard Madoff as one of the many scape goat's in a supposed Ponzi like scheme.

Today's schemes are often considerably more sophisticated than Ponzi's, although the underlying formula is quite similar and the principle behind every Ponzi scheme is to exploit investor naïveté.

Back in May, four months before it collapsed, American International Group Inc. increased its dividend at the same time it unveiled plans to raise $12.5 billion in capital. Later, when its cash ran out, AIG got a government bailout, the size of which has expanded to about $150 billion.

It might not have been such a bad thing for those shareholders that invested in the last round of $12.5 billion in capital. It has been shown that entering a Ponzi scheme can be rational even at the last round of the scheme if a government will likely bail out those participating in the Ponzi scheme.

Fannie Mae, Freddie Mac and Citigroup are just a few firms that have required taxpayer bailouts to the tune of hundreds of billions of dollars. They were not running a traditional Ponzi scheme but their scheme collapsed under its own weight, as investment slows and the promoters start having problems paying out the promised returns.

It seems that many companies have a business model that resembled a Ponzi scheme. Ponzi hired a publicity agent, James McMasters. The so called legit companies did too. However, Ponzi's publicity agent quickly became suspicious of Ponzi's endless talk of postal reply coupons, as well as the ongoing investigation against him. He went to the Post, calling Ponzi a "financial idiot." The paper offered him five thousand dollars for his story, and ran a headline on August 2 declaring Ponzi hopelessly insolvent. We have all heard the world insolvent recently in the news.

When a Ponzi like scheme is exposed, legal authorities begin examining accounting records of the so-called enterprise and they find that many of the "assets" that should exist do not.

In Michigan a company and A.J. Obie, two firms with the same managers, Sixteen hundred investors lost approximately $50 million. In what was described as the largest reported 'Ponzi' scheme in the history of the state. The scheme led to the passage in 1987 of the MBLSA (Mortgage Brokers, Lenders, and Servicers Act)."

Another Ponzi like scheme, Lou Pearlman's scam involved bilking investors out of their savings with a fraudulent savings and loans program claiming it to be FDIC insured though it was not.

Fast forward today Ponzi’s schemes are very much alive. Wall Street and its bankers, mortgage lenders, and soon to be automakers were all caught running Ponzi like schemes.

GM out of options

2008-12-12T09:10:00.000-08:00

The UAW's refusal to agree to wage concessions by a specific date in 2009 killed the senate version of H.R. 7321. [1] According to GM's annual report, it paid the UAW workers $73.26 per hour in wages and benefits. [2] The Senate Majority leader Harry Reid of Nevada spoke shortly after Republicans left a closed-door meeting. He said that Republicans balked at giving the automakers federal aid unless their powerful union agreed to slash wages next year to bring them into line with those of Japanese carmakers. [3]

GM has sought to reduce production costs to about $48 per hour, about the average hourly cost incurred by Toyota, Honda and Nissan Motor Co., company officials have said.[4] If wages were reduced the vehicle assembly cost would have saved GM about $1,000 per vehicle. General Motors had offered buyouts to all of its 74,000 U.S. hourly employees. [5] Those workers could have elected to take a lump-sum payment of $45,000 or $62,500, depending on their job description, and retire with full benefits. [6]

Republican Sen. George V. Voinovich of Ohio, a strong bailout supporter, said the UAW was willing to make the cuts - but not until 2011. GM built 9,286,000 vehicles last year [7] , if it could have brought wages down to that which the Japanese auto makers pay their hourly workers it would have saved GM $9,286,000,000 last year. In stead GM's share holders lost $68,450,000 last year.

For now my question on my post, “Who killed GM? Will it rise again?”, looks like it was true when I stated that if anything has killed GM it is its managements lack of vision and the UAW's not looking out for the best interest of its members.

The BIG 3’s auto bail out is a joke.

2008-12-11T07:30:00.000-08:00

As of now.

The house bill H.R. 7321 loans $14 billion at the rate of 5% for each of the first five years, after that the rate will be 9%. The President shall designate one or more from the Executive branch. The designate shall have private expertise in such areas as economic stabilization, financial aid to commerce and industry and financial restructuring, energy efficiency, and environmental protection. Where in the h#$% will the White House find this person?

Those that take part in the bridge financing will give warrants to the government, these warrants shall give the President’s designee the right to receive nonvoting common stock or preferred stock. Warrants that are common stock will have value that is equaled to 20 percent of the aggregate amount of all loans provided. The common stock warrant price of each company shall be the 15 day moving average of the company that is requesting assistance as of December 2, 2008. Preferred stock Warrants may also be issued.

The Secretary of Energy will make $7.1 billion available to the President’s designee. The Secretary of Energy will also reserve $500 billion.

Congressional Oversight - Troubled Asset Relief Program TARP - Emergency Economic Stabilization Act of 2008

2008-12-10T07:05:00.000-08:00

The White House, spokesman Tony Fratto said that, “The Treasury Secretary Henry Paulson said he's working to continue to design and develop programs, and when it's the right time to use them Treasury will announce it. And if it then makes sense to go to Congress, he'll recommend we request to drawdown the second $350 billion,” Last week the Treasury secretary announced he was abandoning his plan to free up the nation’s credit system by buying up toxic assets from troubled financial institutions. Paulson wants to take a more direct action on the consumer credit front. So far, the Treasury Department has pledged $335 billion mostly for banks in return for partial ownership, a measure designed to encourage the institutions to boost lending and stabilize credit markets.

The Oklahoma U.S. Senator Jim Inhofe told the Tulsa World that, “It is just outrageous that the American people don’t know that Congress doesn’t know how much money the Treasury Secretary Henry Paulson has given away to anyone,” Later he learned of the initial $250 billion being allocated, the Treasury has sent out more than $161 billion in checks to 52 banks in exchange for preferred shares and a high dividend.

When the bill was enacted a Congressional Oversight Panel was created to review the state of the markets, current regulatory system, and the Treasury Department's management of the Troubled Asset Relief Program. The panel is required to report their findings to Congress every 30 days, counting from the first asset purchase made under the program. The panel must also submit a special report to Congress about regulatory reform on or before January 20, 2009.

The panel consists of five outside experts appointed as follows, one member chosen by the Speaker of the House, Richard H. Neiman, one member chosen by the minority leader of the House, Judd Gregg quit the panel citing his congressional duties, one member chosen by the majority leader of the Senate, Elizabeth Warren, one member chosen by the minority leader of the Senate, Jeb Hensarling, and one member chosen by the Speaker of the House and the majority leader of the Senate, Damon Silvers, following consultation with the minority leaders of Congress.

The Comptroller General (director of the Government Accountability Office) is required to monitor the performance of the program, and report findings to Congress every 60 days. The Comptroller General is also required to audit the program annually. The bill grants the Comptroller General access to all information, records, reports, data, etc. belonging to or in use by the program.

When Senator Inhofe said, “It is just outrageous that the American people don’t know that Congress doesn’t know how much money the Treasury Secretary Henry Paulson has given away to anyone.” Is he not reading the reports from the Comptroller General the director of the Government Accountability Office or the reports of the Congressional Oversight Panel that was created as part of the legislation? Did they get lost in the mail? For God’s sake he is a member of the Senate if he is not getting the reports he should do something about it.

The dangers of deflation can be scary not to mention Inflation

2008-12-09T10:38:00.000-08:00

The Federal Reserve Chairman Ben Bernanke seems to have his hands full lately.

When asked about General Motors Corp., Ford Motor Co. and Chrysler LLC Bernanke said that Congress should consider a “range of possible policy actions” besides direct aid, including a government-assisted “orderly bankruptcy reorganization” or company mergers.

General Motors Corp., Ford Motor Co. and Chrysler LLC have asked U.S. lawmakers for as much as $34 billion in aid. Congress is discussing a $15 billion rescue proposal where the Treasury would get warrants for stock equivalent to 20 percent of any government loans. Stock warrants are issued so that the warrant holder has the option to buy stock at a particular price.

“Even if the companies have sufficient collateral, lending to an auto manufacturing company would represent a marked departure from that policy, and would take us into distinctly new realms of policymaking,” Bernanke said. He also said that, “the Federal Reserve would be extremely reluctant to extend credit where Congress has actively considered providing assistance but, after due consideration, has decided not to act.” [1]

As default rates get high enough, banks will simply be unwilling to lend which will severely limit money and credit creation. Whitney, an analyst and managing director at Oppenheimer & Co. who predicted the current financial-services industry meltdown, now says credit-card issuers will eliminate more than $2 trillion in available credit over the next 18 months. [2]

Pumping up the money supply should melt a credit freeze. The Fed chairman faces huge obstacles in trying to restart the credit engine and get maxed out consumers spending again. Given the scale of the Fed's interventions, it should be weakening the value of the dollar and setting us on a course toward inflation. Inflation happens when prices rise. Deflation happens when they fall. In this December's dark economy, falling prices for gasoline, cars, and clothes and just about anything would seem like a silver lining.

Federal Reserve Chairman Ben Bernanke and his colleagues are clearly more concerned with the risk of a deflationary spiral than with inflation right now. But deflation can be scary. Buyers assume everything will be cheaper in the future, so they wait for bargains. If no one is buying, factories curb production. Workers lose their jobs and shops close.

“The federal funds rate is trading persistently below target,” said Poole, who is a contributor to Bloomberg News. “That can’t be an accident. I personally do not believe the Fed should tie asset purchases to any specific fiscal programs, whatever their merits,” Jeffrey M. Lacker President of the Federal Reserve Bank of Richmond said after a speech in Charlotte, North Carolina, Dec. 3. At the same time, he said he was open to purchasing U.S. government debt for the purpose of fighting the danger of deflation.

How does the Federal Reserve spend so much?

2008-12-05T12:38:00.000-08:00

The Federal Reserve Banks earned $6.9 billion in 1977. How are the Federal Reserve Banks able to “earn” this amount of income? One popular misconception is that the Federal Reserve Banks earn income by investing member bank reserves. In fact, earnings of the Federal Reserve Banks are not the result of the volume of member bank reserves, but that bank reserves and earnings of the Federal Reserve Banks are both by-products of the way a central bank operates. [1]

Assume that there were no legal restrictions that required banks to hold deposits at Federal Reserve Banks. Would the ability of the Federal Reserve Banks to generate their own earnings be affected? The answer is no. To implement its monetary policy objectives, the Federal Reserve would still buy and sell Government securities. Its holdings of Government securities would still represent the primary source of the “base” under bank deposits. The Federal Reserve would pay for the securities just as it does now, with a check written on itself. Commercial banks would then be “paid.” [2]

In 2005 the Federal Reserve System had holdings of $753,748,000,000, in 2006 it had $787,872,000,000 and in 2008 it had holdings of $816,115,000,000.[3]

As of September 2008 the holdings of the Federal Reserve System was $476,600,000,000. [4]

Reserve requirements affect the potential of the banking system to create transaction deposits. If the reserve requirement is 10%, for example, a bank that receives a $100 deposit may lend out $90 of that deposit. If the borrower then writes a check to someone who deposits the $90, the bank receiving that deposit can lend out $81. As the process continues, the banking system can expand the change in excess reserves of $90 into a maximum of $1,000 of money ($100+$90+81+$72.90+...=$1,000), e.g.$100/0.10=$1,000.

Federal Reserve lending crisis lending:

(TAF) Term Auction Credit (allocated) $900,000

Discount Window Lending $139,256

Banks (other loans primary credit) $92,645

Investment Banks $46,611

(other loans Primary dealer and other broker-dealer credit)

Loans to buy ABCP (other loans Asset-backed $661,923

commercial paper money market mutual fund liquidity facility)

AIG (allocated minus Treasury 40B) $112,500

Bear Stearns (initial loan to JPMorgan) $295,000

(TSLF) Term Securities Lending Facility $225,000

Swap Lines (other federal reserve assets) $601,963

debt issued by government-sponsored mortgage $100,000

financers Fannie Mae (FNM, Fortune 500) and $100,000

Freddie Mac (FRE, Fortune 500).

mortgage-backed securities purchase $500,000

(these amount are in millions of dollars)

Total amount guaranteed by the Federal Reserve is $6,549,398,000,000.

[5][6]

When Reserve requirements are considered the potential from the banking system is $4,766,000,000,000 yet the Federal Reserve has committed spending of about $6.5 trillion.

Hmmm, what system are they working with now to justify their spending spree? Earlier in the week Bernanke said that the Fed may buy treasuries to aid economy. [7] I guess they will just write a check written on themselves to buy them!

The BEG 3 don't forget the foolish UAW

2008-12-03T08:32:00.000-08:00

The big day is coming up for the auto industry. The bailout will affect the Big 3 and their 1,000 parts manufacturers.

General Motors Corp on Tuesday submitted the accelerated restructuring plan demanded by Congress, saying it needed up to $18 billion in loans and credit lines from the government. Their position is that GM needs to receive $4 billion of that U.S. government financing this month to survive. GM said that they would offer the government equity warrants in exchange for the financing. [1]

GM said that it hopes to increased production of fuel-efficient vehicles and energy-saving technologies. GM also plans rationalization of brands, models and retail outlets. It also plans to reduce wage and benefit costs, including further reductions in executive compensation. It plans for further and significant capital restructuring. Finally it wants to further consolidation in manufacturing operations.[2]

GM is weighed down by heavy "legacy costs" in the pensions and health care of its retirees, while other companies have no pension plan, and its health care costs per vehicle are barely a tenth of GM's. GM's $1.1 billion loss in the first quarter doesn't begin to tell the whole story. The carmaker is saddled with a $1,600-per-vehicle handicap in so-called legacy costs, mostly retiree health and pension benefits. [3]

All UAW leaders and the Big 3 automakers need to show up this week together. The leaders in Congress need to know what the UAW is willing to do to help also. According to GM's annual report, it paid $73.26 per hour in wages and benefits to its hourly workers last year.[4] GM will seek to reduce costs to about $48 per hour, which is about the average hourly cost incurred by Toyota, Honda and Nissan Motor Co., company officials have said. [5]

General Motors offered buyouts to all of its 74,000 US hourly employees as the automotive giant continues to downsize operations in response to declining US market share and massive financial losses. [6] The head of the United Automobile Workers Union said it expected 15,000 to 20,000 workers to leave General Motors during a new round of buyouts, and that G.M. would replace nearly all of them with lower-paid employees. Including benefits and retiree health care costs, each worker who leaves under the buyout program and is replaced by someone on the lower pay scale would save G.M. about $48 an hour, or nearly $100,000 a year.

[7]

Germany has shown their faith in GM and its management since it is ready to guarantee funds for ailing carmaker Opel but any money it provides to the General Motors' unit must stay in Germany, Chancellor Angela Merkel said. [8]

So how will the bridge loan at GM be used? Cash will support ongoing operations as we continue to restructure the business. It plans $8.0 billion in payments to parts suppliers and another $1.2 billion for other vendors. It also plans another $900 million in wages and another $500 million in healthcare and legacy costs. Last but not least GM plans another $500 million in capital expenditures.[9]

Local United Auto Workers leaders from across the U.S. will hold an emergency meeting in Detroit on Wednesday to discuss concessions the union could make to help auto companies get government loans.[10]

Chrysler LLC, its monthly sales were off more than GM's, says it will need "immediate liquidity support" of $7 billion to reassure customers, encourage dealers and make it into next year. Cerberus / Chrysler LLC says that it will work with government to provide collateral and secure taxpayer funding. Cerberus / Chrysler LLC expect to be in a position to begin repaying government loans in 2012. So how will the bridge loan at Chrysler be used? Cash will support ongoing operations as they continue to restructure the business, including in the first quarter alone. It plans $8.0 billion in payments to parts suppliers and another $1.2 billion for other vendors. It also plans another $900 million in wages and another $500 million in healthcare and legacy costs. Last but not least Chrysler plans another $500 million in capital expenditures. [11]

Ford Motor Co., says it's OK for now. Although it is seeking up to $9 billion in bridge financing, but says it hopes to complete turnaround without accessing the loan should Congress agree to make the funds available. But it wants the ability to access up to $9 billion in government credit. They also said that if GM fails it could take the entire domestic auto industry down with it. [12]

All UAW leaders and the Big 3 automakers need to show up with this week too. The leaders in Congress need to know what the UAW is willing to do to help also. According to GM's annual report, it paid $73.26 per hour in wages and benefits to its hourly workers last year.[13]

Do you think that U.S. automakers should be allowed to fail? I do.

I think they should file for Chapter 11 bankruptcy protection under the U.S. courts and reorganize. The reason is that the decline in competitiveness of General Motors, Ford and Chrysler is a long-term problem, going back to the 1970s and 1980s, beginning with lagging physical productivity in assembling automobiles compared to the leading Japanese companies, and then in quality and also in engineering productivity for product development. "The Machine that Changed the World", which documents the state of the world auto industry circa 1990 and the mounting problems of the U.S. automakers. But things have gone from bad to worse.

The only question is shall they stay or shall they go now?

Can the mess be cleaned up in time?

2008-12-01T09:46:00.000-08:00

According to Keynes, the root cause of an economic downturns is an insufficient aggregate demand. When the total demand for goods and services declines, businesses throughout the economy see their sales fall off. Lower sales induce firms to cut back production and to lay off workers. Rising unemployment and declining profits further depress demand, leading to a feedback loop with a very unhappy ending.[1]

The economy’s output of goods and services is traditionally divided into four components: consumption, investment, net exports and government purchases. Any expansion in demand has to come from one of these four. But in each case, strong forces are working to keep spending down.[2]

Drivers in the U.S. traveled 15 billion miles less in August, or 5.6%, which is about 770 million barrels of oil in reduced consumption. [3][4] The miles driven per month have been on a decline for many months.

Since March, the dollar has appreciated 19 percent, a move that will put a crimp in the export boom. [5]

The U.S. Treasury announced last week that is had invested $290 billion of the $350 billion that remained from the initial Tarp offering.[6]

The Fed’s decision last week to start buying mortgage debt shows its willingness to act creatively. Between the Federal Reserve’s and the U.S. Treasury department’s new investments have been promised up to $7.6 trillion. Of the $7.6 trillion promised $3.7 trillion has been committed for spending. [7]

In normal times, a fall in consumption could be met by an increase in investment, which includes spending by businesses on plant and equipment and by households on new homes. But several factors are keeping investment spending at bay. One problem seems to be the dropping real estate values, which typically sees people waiting for the floor to be reached.[8]

In 2003, William White and a colleague, Claudio Borio, attended the annual conference in Jackson Hole, where they argued that policymakers needed to take greater account of asset prices and credit expansion in setting interest rates, and that if a bubble appeared to be developing they ought to “lean against the wind”—raise rates. “Ben Bernanke really believes that it is impossible to lean against the wind on the way up and that it is possible to clean up the mess afterwards,” White said recently that, “Both of these propositions are unproven.”[9]

Conditions are different under a credit expansion which first affects the loan market. In this case the inflationary effects are multiplied by the consequences of capital malinvestment and overconsumption. Ludwig von Mises, warning, “There is no means of avoiding the final collapse of a boom brought about by credit expansion.”[10]

From the tools used today it is likely to be a long road before things get back on track. For everyone’s sake we hope that Chairman Bernanke was right and that it is possible to clean up the mess afterwards.

Send the money to the people you fools, they can spend it better than you

2008-11-26T15:25:00.000-08:00

The Emergency Economic Stabilization Act of 2008 also known as H.R. 1424 cost the American people $850 billion. The population according to census estimates in the U.S. is 305,747,371. [2] This means that the government's effort to spend $850 billion is costing $2780 for every man woman and child in the United States.

The Emergency Economic Stabilization Act of 2008 originally was sold to Congress by telling our government that it would allow the treasury to buy troubled assets from struggling financial institutions. It would also establish a program whereby the government would offer insurance to companies for their assets rather than buying them. It would also establish "appropriate standards" for the compensation of executives at companies that sell assets to the government, create a congressional oversight panel and require the government to collect warrants from bailed out companies so they can collect part of any profits that may result from the bailout. The size of bank deposits that the FDIC can insure would also be raised, from $100,000 to $250,000. [3]

The bill has not bought troubled assets from struggling financial institutions. Although this was the first thing that the bill addressed and we were told that the funds would do just that.

The Treasury Secretary has invested in 53 U.S. banks in the amount of $161,471,163,000. [4] This spending was not part of what we were told. Yesterday I posted details of the spending of $65 billion and the shares and warrants of each company that was purchased.

Today Secretary Henry M. Paulson, Jr. discussed this week the announcement of $20 billion to back a lending facility for the consumer asset backed securities market established by the Federal Reserve Bank of New York. The asset backed securities market provides liquidity to financial institutions that provide small business loans and consumer lending such as auto loans, student loans, and credit cards. It is beginning to look like the U.S. Federal Reserve and Treasury Department heads really are lost and that they do not know what to do. [5]

Now the U.S. Federal Reserve and Treasury Department announced November 25, 2008 that it had developed an $800 billion worth of stimulus measures to rev up three primary engines of the U.S. economy – homebuyers, consumers and small businesses. [6][7] Are they selling us another smoke screen?

Where has the money come from to keep spending like we are? Why has this global crisis occurred? They say it was a housing bubble, maybe an oil bubble. I think it is a masterful magician that holds his audience captive with his illusion. If they really want to get the economy going the might want to consider giving they average size household a check call it a tax rebate. The American household has on average 2.69 members. [8]

If you take the population as a whole and then break it down there are 113,660,733 households. Then pay each household $13975.64 which is the planned spending. People that are facing foreclosure will be able to catch up or find a new home, others might buy a set of tires for the car because they need them, some might buy new carpet for their home and many other things. More jobs producing the products, people shipping them, more people working, and they all would be spending. This makes more sense to me but I only write a blog.

Was the bailout as much of a scam as it looked.

2008-11-25T05:10:00.000-08:00

Have you heard the Treasury Secretary Henry Paulson lately? If so he has been using the term warrants when he is talking about the governments investment into companies that claim the are in need of capital.

The holder of a warrant does not have any voting, shareholding or dividend rights. The investor can therefore have no say in the functioning of the company, even though he or she is affected by any decisions made.[1]

If the Fed is indeed taking a 79.9 percent interest in warrants, A.I.G. still needs a sufficient number of authorized shares to make this share issuance. To issue enough shares to support the warrants, A.I.G. shareholders would need to approve an amendment to A.I.G.’s certificate of incorporation to authorize the issuance. [2]

N.Y.S.E. Rule 312 requires that shareholders approve any common stock issuance when the common stock will have voting power equal to or in excess of 20 percent of the voting power outstanding before the issuance of such stock. [3]

The Bank of America Corporation received $15 billion from the Troubled Assets Relief Program (TARP). In exchange Bank of America Corporation issued 600,000 shares to the Federal government these shares give the government voting rights during any shareholder process. They also were given 73,075,674 warrants and when converted to shares $30.79 would be their cost. The shares outstanding for Wells Fargo & Company are 3,325,244,000. The market cap for The Bank of America Corporation is $72,754,895,500. The government invested $15,000,000,000 into a failing company and we the tax payer received stock warrants that only give us a 1% stake in the company. When you compare the investment to the market cap you find out that our investment is 20% of the market cap. [4] The share price today is $14.59.

The Wells Fargo & Company received $25 billion from the TARP. In exchange Wells Fargo & Company issued 600,000 shares to the Federal government. These shares give the government the same voting rights as any shareholder has. They also were given 110,261,688 warrants. To convert these warrants into shares $34.01 would be their cost. The shares outstanding for Wells Fargo & Company are 3,325,244,000. The market cap for the Wells Fargo & Company is $85,658,285,440. The government invests $25,000,000,000 into another failing company and we the tax payer receive overpriced stock warrants, when the warrants are converted into shares they only give the taxpayer a 3% stake in the company although our investment is actually 29% of the market cap. [5] The share price today is $26.98.

The JPMorgan Chase & Co. received $25 billion from the TARP. In exchange JPMorgan Chase & Co. issued 2,500,000 shares to the Federal government. These shares give the government and any other share holder the same voting rights during any shareholder process. They also were given 3,732,357,000 stock warrants to convert the warrants into shares the cost is $42.42 per share. The market cap for the JPMorgan Chase & Co. is $110,477,767,200. The government invested $25,000,000,000 into another failing company and all that we the tax payers have to show for it is some overpriced stock warrants. These warrants only give us a 2% stake in the company although our investment is actually 23% of the market cap. [6] The share price today is $29.63.

Why did we pay so much for so little? These figures don’t add up to me.

The new Treasury Secretary, he must know where all of the bodies are hidden.

2008-11-21T17:57:00.001-08:00

Timothy F. Geithner is President of the New York Federal Reserve Bank and Vice Chairman of the Federal Open Market Committee. Geithner was raised and educated in India with frequent visits to China. The Chinese-speaking Geithner graduated from the International School in Bangkok. The future Fed banker came to Dartmouth and then to Johns Hopkins where he majored in East Asian studies.

Geithner commands all expansion and contraction conducted by big investment banks either by buying securities from the Fed which shrinks money investment bankers had to invest in big corporations or loan to cities, states and the Federal Government or by selling securities to the Fed which gave the investment bankers more money to invest in corporations in the US or elsewhere.

Mr. Geithner served as Assistant Secretary and Senior Deputy Assistant Secretary of the Treasury for International Affairs. He joined the Treasury in 1988, and held a variety of positions, including the assistant attaché at the U.S. Embassy in Tokyo, Japan and the Deputy Assistant Secretary for International Monetary Affairs in the International Affairs Division. Mr. Geithner worked for Kissinger Associates, Inc. in Washington, D.C. from 1985 to 1988 before joining the Treasury. Mr. Geithner served as Under Secretary of the Treasury for International Affairs from 1998 to 2001 under Secretaries Robert Rubin and Lawrence Summers. In 2001 Geithner was employed by the International Monetary Fund. In 2003 Paul Volcker was one of those who recommended Geithner for the position of chairman of the New York Federal Reserve Bank, the position that he now holds. Paul Volcker was the Fed Chairman who played out the last act of the S & L scandal, by tightening the money supply after Fed Chairman Miller had overseen the hyperinflation that forced the S & Ls to invest in junkbonds and forced the banking deregulation that made that possible.

Mr. Obama has reportedly chosen the Federal Reserve Bank of New York's President Timothy Geithner as Treasury Secretary.

Who killed GM? Will it rise again?

2008-11-20T08:34:00.000-08:00

For years now, we've heard General Motors complain that it's being lapped in the United States by Toyota because it's got five retirees in the back seat for every two people actively building its vehicles, while Toyota's U.S. operations are virtually retiree-free. GM is also weighed down by heavy "legacy costs" for pensions and health care, while Toyota has no pension plan, and its health care costs per vehicle are barely a tenth of GM's. GM's $1.1 billion loss in the first quarter doesn't begin to tell the whole story. The carmaker is saddled with a $1,600-per-vehicle handicap in so-called legacy costs, mostly retiree health and pension benefits. [1]

According to GM's annual report, it paid $73.26 per hour in wages and benefits to its hourly workers last year. [2] GM will seek to reduce costs to about $48 per hour, about the average hourly cost incurred by Toyota, Honda and Nissan Motor Co., company officials have said. [3]

This would reduce assembly cost for each vehicle of about $1,000. In addition if legacy costs were reduced to that which Toyota, Honda and Nissan Motor Co pay it could earn an additional $24 billion each year.

General Motors offered buyouts to all of its 74,000 US hourly employees as the automotive giant continues to downsize operations in response to declining US market share and massive financial losses. [5] The head of the United Automobile Workers Union said it is expected 15,000 to 20,000 workers to leave General Motors during a new round of buyouts, and that G.M. would replace nearly all of them with lower-paid employees. Including benefits and retiree health care costs, each worker who leaves under the buyout program and is replaced by someone on the lower pay scale would save G.M. about $48 an hour, or nearly $100,000 a year. [6]

If anything has killed GM it is its managements lack of vision and the UAW's not looking out for the best interest of its members. GM could rise again if it is able to reduce compensation to its hourly employees. The only question is wether or not it has the time and money.

Germany must have faith in GM and its management since it is ready to guarantee funds for ailing carmaker Opel but any money it provides to the General Motors' unit must stay in Germany, Chancellor Angela Merkel said on Monday[7]

A GM bailout makes no sense

2008-11-18T12:09:00.000-08:00

The potential GM bailout doesn’t have a sugar daddy to fall back on like Delphi had, unless the tax payer steps in. Before we do a little history would help.

GM took on $2.1 billion of unfunded hourly pension liabilities and assumed about $6.8 billion of Delphi’s post-retirement benefit liabilities. GM, Delphi’s former parent, has taken on billions of dollars in financial obligations for the parts maker. However, in a regulatory filing, GM said Delphi is unlikely to emerge from bankruptcy protection in the short term and may not be able to emerge at all. Delphi had many suitors during its early bankruptcy.

Delphi's bankruptcy began in 2005. Its bankruptcy opened the floodgates for the buyout crowd. Cerberus entered into negotiations with Delphi and in 2007 Cerberus dropped out of the bidding. Cerberus dropped partly because of the hard stand its workers are taking. To obtain UAW agreement for the 1999 spinoff, Delphi agreed to match the pay of GM factory workers. This averaged $73.26 per hour in pay and benefits last year. Most longtime Delphi workers have since taken buyouts. The union has agreed that unskilled workers hired since 2004 will earn $27 an hour and $42 by 2011. Cerberus told the union it wouldn't pay that much, since it's double the pay at other U.S. parts companies.

The UAW needs a little tough love. It derailed the Cerberus deal at Delphi. Today GM suffers a loss of about $2,000 per vehicle sold. On the other hand Toyota whose employees are not part of the UAW earns a profit of about $1,200 per vehicle sold. If GM was able to operate with labor prices near Toyota’s it would have pocketed an additional $29,715,200,000.

If there is going to be a bailout the heads of the UAW, the Big 3, Treasury, the Fed and a few members of congress need to sit in a room and find a way to restructure employees pay to look more like that which Toyota has. As painful as it might be for me a resident of Michigan where the auto industry began, a bailout would only buy GM a little more time before it went into bankruptcy anyway.

Congressional Oversight - Troubled Asset Relief Program TARP - Emergency Economic Stabilization Act of 2008

2008-11-17T13:37:00.000-08:00

The White House, spokesman Tony Fratto said that, “The Treasury Secretary Henry Paulson said he's working to continue to design and develop programs, and when it's the right time to use them Treasury will announce it. And if it then makes sense to go to Congress, he'll recommend we request to drawdown the second $350 billion,” Last week the Treasury secretary announced he was abandoning his plan to free up the nation’s credit system by buying up toxic assets from troubled financial institutions. Paulson wants to take a more direct action on the consumer credit front. So far, the Treasury Department has pledged $250 billion for banks in return for partial ownership, a measure designed to encourage the institutions to boost lending and stabilize credit markets.

The panel consists of five outside experts appointed as follows, one member chosen by the Speaker of the House (Richard H. Neiman), one member chosen by the minority leader of the House (Judd Gregg), one member chosen by the majority leader of the Senate (Elizabeth Warren Harvard Law proferson) one member chosen by the minority leader of the Senate (Jeb Hensarling) and one member chosen by the Speaker of the House and the majority leader of the Senate (Damon Silvers), following consultation with the minority leaders of Congress.

The Emergency Economic Stabilization Act 2008

Reported spent under legislation $158,561,409,000

Fool me once shame on you. Fool me twice shame on me.

2008-11-14T09:59:00.000-08:00

In the tax someone else mentality that we in the US find ourselves. Why should we care about the craziness that we find ourselves in today.

As we all know the Treasury Secretary Henry Paulson announced the government will lend Fannie and Freddie money, will purchase their mortgage-backed securities, and will buy up to $200 billion in preferred stock to keep the companies afloat. With the Treasury committing up to $200 billion of taxpayers’ money for direct investment in Fannie Mae and billions more for loans to the companies and purchases of their mortgage-backed bonds. Freddie Mac is now asking for an injection of $13.8 billion in government aid after posting a massive quarterly loss.

We were told that TARP was essential if the American economy was to survive. The US Treasury said that it had hired accounting firms PricewaterhouseCoopers and Ernst & Young to help with its emergency buyouts of toxic assets from troubled financial institutions. The contracts were awarded as part of the government's new 700-billion-dollar TARP to bail out financial firms saddled with soured assets related to falling US home prices. The Treasury Secretary announced that he has shelved the original plan to buy troubled mortgage assets via the recently approved $700 Billion TARP. The Treasury said it had selected PricewaterhouseCoopers and Ernst & Young from a pool of bidding candidates and their contracts end on September 30, 2011.

Paulson is absolutely the most powerful person in the country, maybe the world. "In consultation with the Federal Reserve, I determined that the most timely, effective step to improve credit market conditions was to strengthen bank balance sheets quickly through direct purchases of equity in banks," Paulson said. Paulson is considering a new use for the TARP money: trying to resuscitate the market for securities backed by auto, credit card and student loans. Recently Paulson's erratic behavior led to a 180-degree turn with money approved by Congress under the $700 billion bailout bill.

Paulson has the ability to do so because once again Congress has failed to use its congressional oversight to protect the American people. In many ways just like they did on the run up to the Iraq war. In the aftermath of the 2008 congressional race only 21 incumbent members lost their seats in congress.

The situation has once again failed us. Maybe the situation can be summed up by the chinese proverb, "Fool me once shame on you. Fool me twice shame on me."

If you give AIG a cookie

2008-11-12T15:29:00.000-08:00

When the U.S. federal government initially invested in AIG with $85 billion it didn’t require any seats on the Board of Directors. The AIG members of the Board of Directors retained their seats as members of the board after the bailout. In effect this means that although the government owns 79.9% of AIG the U.S. federal government has no input as to how the company is ran. The original investment was made on September 16, 2008. There was a second bailout October 8, 2008 for another $37.5 billion. The third bail out occurred November 10, 2008 for another $29.5 billion raising the total bailout to date of $150 billion.

If you give a mouse a cookie.

He’s going to ask for a glass of milk.

When you give him the milk, he’ll probably ask you for a straw.

When he’s finished, he’ll ask for a napkin.

The childrens story, "If you give a mouse a cookie," goes on and on.

Maybe the U.S. federal government should demand some resignations on the Board of Directors. The democrat Rep. Elijah E. Cummings called yesterday for the resignation of American International Group's top executive after news reports of another resort hotel event involving employees from the giant insurance firm. Notice he only asked for the resignation because of another resort hotel event and not the poor management of the Board of Directors and their incessant need for more.

If you give a politician reelection.

The AIG and Berkshire Hathaway scandal

2008-11-11T13:07:00.001-08:00

We now have a government willing to "bailout" every overpaid blundering idiot who over-leveraged their company. The federal government delved deeper and more intricately into the bondholder bailout business by announcing plans to goose its investment in American International Group (AIG) once again, this time to $150 billion. Nine of the eleven AIG board members retained their seats after the Governments first intervention. A former AIG CEO Maurice R. Greenberg of the scandal ridden company was forced out March 28, 2005, after four decades amid an accounting scandal.

The Securities and Exchange Commission and the New York attorney general's office poured over dozens of transactions with scores of reinsurance companies to determine how many transactions A.I.G. might have used to bolster its bottom line. AIG acknowledged March 30, 2005 that its accounting for a number of transactions, including a deal with a unit of Warren E. Buffett's company, was improper. Investigators focused on a 2000 transaction between A.I.G. and General Re, a unit of Mr. Buffett's company. Investigators found that Berkshire Hathaway, artificially inflated A.I.G.'s reserves by $500 million. Investigators interviewed the Berkshire Hathaway executive Mr. Buffett on April 11, 2005. Investigators commented that it felt to them that they were only seeing the tip of an iceberg.

Billionaire investor Warren Buffett, who owns Berkshire Hathaway, is expected to keep an eye on AIG’s subsidiaries in case they come up for sale to pay off AIG’s debt.

update --- Berkshire Hathaway owns 13.1% of American Express stock. The same company that is now looking for a government bailout.

The Fed and irrational fear

2008-11-10T11:45:00.000-08:00

The Federal Reserve (Fed) is refusing to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral. Ted Forstmann, senior partner of Forstmann Little & Co. in New York said “It's your money; it's not the Federal Reserve's money,” “Of course there should be transparency.”

The Fed is transparent in that it is subject to the oversight of Congress. Periodically Congress reviews the Fed’s activities and can alter its responsibilities by statute. The intent of Congress in shaping the Federal Reserve Act was to keep politics out of monetary policy. Legislation requires that the Federal Reserve reports annually on its activities to the Speaker of the House of Representatives, and twice annually on its plans for monetary policy to the banking committees of Congress.

The recently failed Franklin Bank which is based in Houston, described their founder Lewis Ranieri in a securities filing last year as "the father of the securitized mortgage market," during the 1980’s. Today, we are in the midst of experiencing the consequences of the failure of a party that got way out of control. The party was brought on by the geeks bearing formulas. Their party gave us the credit default swap, mortgage backed securities and other structured investments that have pushed the global banking system into crisis. One of the greatest of Federal Reserve chairmen, William McChesney Martin, once said that the job of the Fed is “to take away the punch bowl just as the party gets going.” Washington Irving wrote about the Mississippi Bubble in his paper “Crayon Papers” from 1719 that common sense told him that eventually, the “short but brilliant” phenomenon of irrational exuberance bursts and is most often replaced by irrational fear. What was a sure thing yields to uncertainty; uncertainty undermines decision making; and the confident decision making that is needed to sustain the economy retreats into a defensive crouch. Counterparties come to be viewed with suspicion. No business appears worthy of financing. Cash is hoarded. The economy, starved of the lifeblood of capital, staggers and begins to weaken.

Now that the economy has weakened again the Fed has stretched out the terms with which we lend to bankers; accepted new forms of collateral; broadened access to our lending window to securities dealers and one particular insurance company—AIG—whose failure was deemed by the Federal Reserve Board to present a risk to the financial system; opened a window for financing commercial paper; backstopped money market mutual funds; and, recognizing that we are inextricably interwoven with a global economy, established swap lines to help meet the dollar-funding needs of 14 central banks, ranging from the European Central Bank and the Bank of England to the Banco de México and the Singapore Monetary Authority, the total of which now aggregates to hundreds of billions of dollars. The Fed's staff and policymakers have provided substantial intellectual input into activities of other regulators, such as the FDIC and the Treasury, as they develop innovative means and modes of recapitalizing the banking system, dealing with the mortgage crisis and restoring economic growth.

You can see the size and breadth of the Fed’s efforts to counter the collapse of the credit mechanism in its balance sheet. At the beginning of this year, the assets on the books of the Fed totaled $960 billion. Today the Fed's assets exceed $1.9 trillion. I would not be surprised to see them aggregate to $3 trillion—roughly 20 percent of GDP—by the time we ring in the New Year. The composition of the Fed's holdings has shifted considerably. Previously, almost 100 percent of its holdings were in the form of core holdings of U.S. Treasuries; today, less than a third are. The remainder consists of claims deriving from our new facilities.

The fourth President of the United States James Madison once said, “The circulation of confidence is better than the circulation of money.” Madison led the unsuccessful attempt to block Hamilton's proposed Bank of the United States, arguing the new Constitution did not explicitly allow the federal government to form a bank. While President in 1815, he supported the creation of the second National Bank. James Madison also said, "Union of religious sentiments begets a surprising confidence."

The post election economy ... UGH

2008-11-07T12:43:00.000-08:00

The day after the presidential election of 2008 the democrats in congress pushed for a bill that would provide $61 billion in economic stimulus. President Bush objects to the bill as it is currently written. The continuing recession fears and worries about corporate profits have once again swept stock markets around the world. As profits shrink most businesses tend to retract in order to remain afloat usually this means that the first thing to go is jobs.

The U.S. Department of Labor reported that the filings for state jobless benefits reached 481,000 for the week that ended November 1. The number of people continuing to receive unemployment insurance jumped by 122,000 to 3.84 million, the highest since 1983, when the nation was coming out of a deep recession. The nation' s unemployment rate for November bolted to a 14-year high of 6.5 percent, far worse than economists expected and stark proof the economy is deteriorating at an alarmingly rapid pace.

When economic conditions get bad, banks pull back and then the pull back tends to make economic conditions even worse, resulting in banks that pull back even more. The Federal Deposit Insurance Corporation (FDIC), the federal agency that backs bank deposits, last week reported the biggest jump in "problem institutions" it has seen since the savings and loan crisis of the late 1980s. The FDIC directly examines and supervises about 5,160 banks and savings banks, more than half of the institutions in the banking system. There are 1,479 FDIC member banks that are at risk of failure with total assets of $2.4 trillion. The federal government has pledged as much as $3 trillion for the crisis.

Humpty Dumpty sat on a wall.

Humpty Dumpty had a great fall.

All the king's horses and all the king's men

Couldn't put Humpty together again.

When these times are looked back on, maybe they will be called the period of a Humpty Dumpty economy.

What happened during the presidential election of 2008?

2008-11-05T09:58:00.000-08:00

In the historic election of 2008 many people had great hopes yet others had a more realistic point of view. We were told daily how this election was to have one of the greatest turn out efforts in history. During the United States presidential election of 2004 there were 121,069,054 votes cast for George W. Bush and John Kerry. During the United States presidential election of 2000 there were 101,455,899 votes cast for the major political parties. The presidential election of 2000 had registered voters in the amount of 194,285,000 and the 2004 was 201,541,000. The presidential election of 2008 had 231,229,580 potential voters. In 2000 the voter turnout rate was 50.0% and the 2004 presidential election had a turn out rate of 58.2%. The turnout during the 2008 election was 124,470,000 and the turnout rate was about 53%. The weather across the United States was good and voting problems were very low. Voter turnout 1996 was 51.7%.

The independent Pew Research Center's Project for Excellence in Journalism found that Obama's coverage in the media was more positive at 30 percent than negative at 44 percent, while McCain's coverage was 57 percent negative and 14 percent positive. As discussed in an earlier post our hearing the same thing over and over again tends to impact our judgment and emotions.

A study conducted by the Advertising Research Foundation concluded that “likeability” – a dimension of emotion – is the attitude measure which is the most predictive element of whether an advertisement will increase sales. Emotions have almost three times more influence on purchase intent than does the content of an advertisement. An election is really just a sale on a particular canidate. According to the CNN poll, viewers found the Illinois Democrat more likeable by a margin of 65 to 28 percent--a far larger spread than either Reagan, Bush, Clinton or W. ever enjoyed in similar surveys.

The economy was the overriding election emotion which may have led to anxiety, particularly among older voters. Economic anxiety of middle-aged and the middle-class men were communicated through a relentless drumbeat of how bad the economy is. This didn't seem to impact voter turnout either. Even though Mr. Obama had more positive media coverage than Mr. McCain the voter turnout wasn’t impacted. Like it or not, the presidential election is about 'likability.' Even though Obama won the election the emotion of likeability didn’t impact on the voter turnout. Anxiety on issues such as the economy, unemployment, energy, crime and terrorism didn’t impact voter turnout either.

Maybe the most likely factor as to why voter turnout declined is that we really weren’t excited about either candidate.

Income taxes DOWN but everything costs more

2008-11-03T10:26:00.000-08:00

It seems to be a foregone conclusion that Mr. Obama is going to win the Presidency. Too bad the major media hasn't asked him how much of his $4.3 trillion of new programs are going to cost the taxpayer.

Consider if you will that 2% of Americans filing income taxes are taxed at a 35% rate. In 2006 they earned $ 1.3 million per filing and then they paid 39% of their adjusted gross income (AGI). When you sum all the taxes paid by this group it totals to $1.14 trillion. The next 3% of income tax payers’ pays at a rate of 33% of their AGI. This group earns $333 thousand per filing. When you sum all the taxes paid by this group it totals to $410 billion. These two groups are the top 5% taxpayers.

The sum of taxes paid by the top 5% adds up to $1.45 billion per year. Under Obama’s plan your taxes will revert to the pre-2001 levels of 36 percent and 39.6 percent for the top 5% of wage earners. Simply put the top 2% will pay an extra $150 billion of new taxes. The next 3% will pay $37.2 billion of new income taxes. So an additional $187.2 billion in new income taxes are paid. Mr. Obama’s tax plan requires $430 billion per year. Under Mr. Obama’s plan another $242.8 billion is needed to pay for his new programs.

The shortage is to be paid by increasing corporate taxes by more than 25%. Today most corporations pay taxes at a rate of 35%. The new rate would be 43.75%. A meal out with the family might cost $100 and of that $100 taxes are paid on profits of $33. Under the current plan the meal has $8.25 built in. Under the new plan the tax of $14.44 will still be built in. The new price of the meal would be $106.19. Let’s say that you go out to eat once a week you will pay $322 per year. The corporations that make your food are taxed. Consider that you buy $244 groceries the national average price for this example $80 is profit. Under the new tax plan groceries will cost you an extra $364 per year. The example can go on and on. So just because you might get an income tax reduction your actual taxes will go up, just not your income taxes.

Economic EKG

2008-10-31T13:14:00.000-07:00

During this election the economy has been a big issue. So what is the real state of the economy? If you listen to the media it is the worst that it has ever been since the great depression. Similarly the Democrat and Republican presidential candidates suggest the same thing.

The U.S. consumer sentiment index has fallen to 57.6 in late October. The index was 70.3 in late September. What made the index drop some much so quickly? At first I thought it was due to the bailouts by the federal government of mortgage giants Fannie Mae and Freddie Mac on 9/7/2008. This couldn’t be the reason because the bailouts happened in early September when the U.S. consumer sentiment index was 70.3 in late September. It wasn’t the $85 billion bailout for the insurer AIG in mid September because again the rate in late September was still 70.3. Was it the $700 billion bailout in late September? It doesn't seem likely because again the rate was 70.3 then. Just like an EKG the stock market radically changed each time the government stepped in.

Was it the election that impacted the study? Maybe considering that on September 26 the first presidential debate took place at the University of Mississippi. The vice-presidential debate was hosted October 2 at Washington University in St. Louis. The second presidential debate took place October 7 at Belmont University. The third and final presidential debate was hosted at Hofstra University on October 15. In each debate the economy was discussed. The second Presidential debate was to focus on the economy. During the debate season the NYSE DJIA dropped 2,500 points.

During each debate the economy was beaten and battered by the candidates. Americans were also bombarded with 30 second spots telling us how bad the economy is. The hearing of the same thing over and over again is a form of propaganda. Of course the mind is susceptible to being influenced by others. This is why we have slogans such as the don’t drink and drive or don’t do drugs. When we hear that the economy is bad we tend to believe it.

Now that the debates are over the same stock market has climbed nearly 1,000 points. Maybe the economy isn’t as bad as everyone tells us it is.

Promises to the American people

2008-10-30T14:08:00.001-07:00

It seems that daily we are inundated by the presidential candidates and their promises to the American people. This election isn’t really any different than previous elections. Although more money has been spent during this election it really is like others and both candidates make promises to help. On July 28, 1988 former President Ronald Regan said,”The nine most terrifying words in the English language are, 'I'm from the government and I'm here to help.”

The older I get the more his statement means to me. In the aftermath of hurricane Katrina President Bush said 3 years ago that, "We will do what it takes, we will stay as long as it takes, to help citizens rebuild their communities and their lives" He also said, "Katrina exposed serious problems in our response capability at all levels of government." President Bill Clinton said some 15 years ago that, "Under our health care system, all Americans will have access to quality and affordable health care through coverage from their employer, or if they're unemployed, through their government.” President George H.W. Bush said during his campaign for president, "Read my lips, no new taxes." President Jimmy Carter promised, ''I'll never lie to you''

During this election we have been promised lower taxes again. Mr. Obama promised to “spread the wealth around." Similarly Mr. McCain said, "I believe the role of government is to help the needy and to give people a level playing field." We are getting spoon fed the same promises as before. Change? The only real change has been the names on the ballots. Other than that these Presidential candidates are likely to put the American people farther in debt and maybe spread the wealth around a little.

1972 Nixon won having 97% of the electorial college votes.

1976 Carter won with 56%

1980 Regan won with 91%

1984 Regan won with 98%

1988 Bush I won with 79%

1992 Clinton won with 69%

1996 Clinton won with 70%

2000 Bush II won with 50.3%

2004 Bush II won with 53%

Confidence in Capitalism

2008-10-29T11:29:00.001-07:00

During the past many months many things have changed in the economic world. The United States, most of its allies in Western Europe, Japan, and South Korea have all funded private banks through recapitalizations. A handful of countries, including the United States, took the more radical step of buying assets directly from private firms. President Bush said that U.S. bank takeovers were "not intended to take over the free market, but to preserve it."

Karl Marx posited that socialism would be achieved via class struggle and a proletarian revolution which represents the transitional stage between capitalism and communism. A proletarian revolution is a social and/or political revolution in which the working class attempts to overthrow the bourgeoisie. The bourgeoisie are members of the upper or merchant class, whose status or power comes from employment, education, and wealth.

In this presidential election Mr. Obama has approximately 3 million donors that do not have to be disclosed under federal law because they gave less than $200. These donors have contributed just over $300 million. Also contributing to Mr. Obama was approximately 300,000 more donors who donated another $300 million. In the 2008 democrat presidential primaries 12.1 million votes out of 22 million were cast for Mr. Obama and in 2004 Senator John Kerry garnered nearly 10 million votes of the 16 million cast.

Senator Obama has promised to give 95% of Americans a tax cut. A third of Americans do not pay income taxes. The top 5% of income earners paid 59.67% of all income taxes; this group earned $2.7 trillion. The Tax Policy Center estimates that Mr. Obama’s tax package would add $3.5 trillion to the total debt. Obama has proposed new tax breaks for low- and middle-income taxpayers, including a tax credit of up to $500 for individuals and $1,000 for married couples. He would expand the earned income tax credit, a tax break that benefits the working poor. And seniors with income of $50,000 or less would pay no federal income tax.

It seems that although both candidates plan to increase the federal debt it is more interesting to watch Obama and his plan. So far watching and listening to Obama we learn that he uses the political realm to achieve class struggle. The next step is to create a social and or a political revolution to so that he can get a trifecta.

The people are already enraged by the bourgeoisie and the Wall Street elite.

What happened to the Gold Standard?

2008-10-27T11:27:00.000-07:00

After the Second World War, a system similar to the Gold Standard was established by the Bretton Woods Agreements. In the Agreements the US agreed to fix the price of gold at $35 per ounce. When the World War II (WWII) ended, the U.S. dollar was the currency with the most purchasing power and it was the only currency that was backed by gold. Many of the European countries that were involved in WWII were highly in debt. To satisfy the debts the Europeans transferred large amounts of gold into the United States. Thus, the U.S. dollar was strongly appreciated in the rest of the world and therefore became the key currency of the Bretton Woods system.

To ensure economic stability and political peace, states agreed to cooperate to regulate the international economic system. The pillar of the U.S. vision of the postwar world was free trade. Harry Dexter White said, “the absence of a high degree of economic collaboration among the leading nations will…inevitably result in economic warfare that will be but the prelude and instigator of military warfare on an even vaster scale.”

In the 1960s there was a growing U.S. balance-of-payments deficit. Due to this foreign governments were accumulating large amounts of dollars the aggregate volume far exceeding the U.S. government's stock of gold. In the second week of August 1971, the British ambassador turned up at the Treasury Department to request that $3 billion be converted into gold. In response, on August 15, 1971, President Nixon unilaterally imposed 90-day wage and price controls, a 10% import surcharge, and most importantly "closed the gold window," making the dollar inconvertible to gold directly, except on the open market. He also refused to pay out any of our remaining 280 million ounces of gold.

Today the value of the Gold held is the US is worth $210,585,164,529.42 at today's prices.

Schadenfreude

2008-10-24T11:11:00.000-07:00

Do you find pleasure felt at someone else's misfortune?

Schadenfreude is a normal human emotion. If you have looked at your retirement accounts lately you surely aren’t feeling Schadenfreude. The Economic Stabilization Act of 2008 hasn't helped yet. President Bush sign the legislation on October 3, 2008 only three weeks ago. On October 3, 2008 the DJIA’s closed at 9258.1 and it closed on October 24, 2008 8159.21. This represents a 12% change. The Economic Stabilization Act of 2008 has an ownership stake in Fannie Mae, Freddie Mac, AIG, Citigroup, JPMorgan Chase, Wells Fargo, Bank of America, Merrill Lynch, Goldman Sachs, Morgan Stanley, Bank of New York and State Street. The Economic Stabilization Act was sold to America as a program which was to buy mortgage assets from any U.S.-based financial institution. The US Treasury said Tuesday it had hired accounting firms PricewaterhouseCoopers and Ernst & Young to help with its emergency buyouts of toxic assets from troubled financial institutions. The Treasury announced on October 13 it had hired Ennis Knupp & Associates as its investment adviser for the massive Troubled Asset Relief Program. Everyone is starting to feel that things are not changing fast enough.

Initially the Europeans had an outburst of schadenfreude about the US financial crisis. Now, evidence is piling up that Europe is facing a serious slowdown. Meanwhile there are doubts whether Europe is reacting quickly enough. Europe lacks the flexibility of US in dealing with this crisis.

History tells us that if the US enters recession the rest of the world will follow, but the US will be the first to emerge from a recession.

Bank of America...................47.93% - loss in value

Barclays............................69.35% - loss in value

Citigroup............................57.71% - loss in value

Credit Suisse.......................41.09% - loss in value

Deutsche Bank.....................70.62% - loss in value

Freddie Mac........................97.74% - loss in value

HSBC................................32.97% - loss in value

IKB...................................94.60% - loss in value

JP Morgan Chase..................15.67% - loss in value

Merrill Lynch.......................66.81% - loss in value

Morgan Stanley....................68.30% - loss in value

Paribas..............................22.44% - loss in value

Royal Bank of Scotland............88.24% - loss in value

UBS..................................71.50% - loss in value

Wachovia...........................84.53% - loss in value

Are We Talking Ourselves into a Recession?

2008-10-21T10:58:00.000-07:00

Can gloomy talk doom the economy? In the past, economists dismissed the notion. The theory went that no matter how many downbeat headlines people read, the theory went, the outlook always comes down to basics such as jobs, incomes, and profits.

But in today's economy things are so much more complicated and confusing for the populous. In these times psychology does indeed have a huge impact on the stock market, and never before has the market played such a big role in real economic activity. It was the market's psychology more than fundamentals that drove financial share prices up so rapidly in early 2000s. The resulting surge in wealth was the jet fuel to the financial crisis. Then the chairman of the Federal Reserve, Ben Bernanke starts to bailout financial giants.

Now, psychology has turned sharply. In addition to market worries and a negative spin by the press on almost every new piece of data, the chairman of the Federal Reserve, Ben Bernanke warns of a possible "protracted slowdown.” Such talk is meant to promote the idea of a new U.S. stimulus plan, but downbeat sound bites continue to hit home. No wonder households are becoming more pessimistic.

Sentiment, especially on Wall Street, is so negative right now that the surprisingly big shift in the Federal Reserve's thinking about the possible need for lower interest rates failed to lift spirits. In fact, the stock market went south in a hurry after the Fed's decision to start bailouts, even though the central bank shifted its major concern for the future away from inflation and toward economic weakness.

Nationalize this! Nationalize that!

2008-10-20T12:13:00.000-07:00

Current members include AIG, Freddie Mac, Fannie Mae, AIG, Citigroup, JP Morgan Chase, Wells Fargo, Bank of America, Merrill Lynch, Goldman Sachs, Morgan Stanley, Bank of New York and State Street Bank. I have a couple of question. Where is all of the money coming from? The major foreign owners of U.S. Treasury Securities are

#1 Japan.......................................$593.4 billion 22.17%

#2 Mainland China............................$518.7 billion 19.38%

#3 United Kingdom............................$290.8 billion 10.87%

#4 Oil exporters...............................$173.9 billion 6.50%

#5 Brazil........................................$148.4 billion 5.54%

#6 Caribbean banking centers................$133.5 billion 4.99%

There are many other countries that own U.S. Treasury Securities. The total of all of the foreign owners of U.S. Treasury’s is $2676.4 billion as of July 2008. At that time the national debt was $10,024.7 billion. In 2008 $4.216 trillion were Intragovernmental Holdings. There was also $5.809 trillion which was debt held by the public.

Where is the bailout money coming from? It looks like we have spent $1 trillion in the last few months.

Nationalizing the Banking System

2008-10-17T09:27:00.000-07:00

On Monday Oct 3rd nine major banks in the U.S. met at the Treasury Headquarters. On one side of the table sat Treasury Secretary Henry Paulson, who was flanked by Federal Reserve Chairman Ben Bernanke and Federal Deposit Insurance Corporation Shelia Bair. On the other side there were executives of Citigroup, JPMorgan Chase, Wells Fargo, Bank of America, Merrill Lynch, Goldman Sachs, Morgan Stanley, Bank of New York and State Street Bank. The executives were told of the chosen course which is an attempt to shore up consumer confidence. During the meeting they were told of the $250 billion share purchase program. The U.S. Treasury Department and Federal Reserve Bank had each decided to put up $125 billion to start.

In a move that is reminiscent of Don Corleone they were told that they would not be allowed to negotiate. They were also told that they needed to sign onto the program while in the meeting which ended at 6:30. Also during the meeting they were told that it was for the good of the country.

These banks will receive $25,000,000,000 each.

Citigroup had 2007 net earnings of $3,617,000,000.

The average of last five years is $19,260,000,000.

JPMorgan Chase had 2007 net earnings of $15,365,000,000.

The average of last five years is $ 5,770,600,000.

Wells Fargo had 2007 net earnings of $8,057,000,000.

The average of last five years is $7,003,000,000.

These banks will receive $12,500,000,000 each.

The Bank of America had 2007 net earnings of $14,982,000,000.

The average of last five years is $1,849,000,000.

Merrill Lynch had 2007 net earnings of $3,733,000,000.

The average of last five years is $1,849,000,000.

Goldman Sachs had 2007 net earnings of $11,599,000,000.

The average of last five years is $6,408,000,000.

Morgan Stanley had 2007 net earnings of $11,000,000,000.

The average of last five years is $4,105,000,000.

Finally the earnings of the Bank of New York and State Street each received $ 2-3 billion.

The earnings of the Bank of New York and State Street Bank were not located.

Wells Fargo Chairman Richard Kovacevich initially rejected the Treasury Secretary Henry Paulson’s offer. Later the Chairman was told that if he turned the investment down and later found it needed more capital, the government wouldn't be as generous the second time around.

By the end of the day all of the sheets were handed in signed.

They should have also invited the Commissioner of Internal Revenue Douglas Shulman, so that all the made men would be represented.

Take a look at this BBC clip

How the markets really works (from 2007)

The media lies!

2008-10-14T09:19:00.001-07:00

We have arrived at a moment in history once again where the truth is something that is easy for people to believe whether it is true or untrue. The methodology for creating that belief is repetition. Say something enough times and it becomes, for millions of people, the truth. The economy is in a recession. This is why control of the media equals control of the populace. The economy is in a recession. This is why a state run television news channel is so very dangerous. The economy is in a recession. Now there are those who would argue this has already happened. For example an aide to a President becomes an election analyst. Or a certain cable news networks are actually covert extensions of our government. The economy is in a recession. There is another cable news network that is run by a high-ranking party official. There is an anchor person from the same network that became a White House spokesman. There is another top-ranking party official that becomes an on-air news commentator who is often used to make this argument. The economy is in a recession. Of course, this fact would be entirely inconsequential if the often repeated falsehoods weren’t an attempt to fix firmly into the spirit of the times something that was simply amusing, or at worst, insanity. But, unfortunately, that is not the case. The economy is in a recession. The heavy repetition of lies and smears for political gain are by no means inconsequential. The economy is in a recession. Which is why each and every one of us must use whatever resources we have at our disposal to disseminate the actual truth? The economy wastn't really in a recession.

Are you a victim of ad nauseum propaganda?

The bailout / rescue mission is changing

2008-10-11T11:21:00.000-07:00

In June 2008 there were foreclosures in all home mortgage markets. These include Prime 217,088, Alt-A 118,018, and Subprime 154,955 these numbers are based on information provided by Bank of America, Citibank, First Horizon, HSBC, JPMorgan Chase, National City, USBank, Wachovia, Wells Fargo, Countrywide, IndyMac, Merrill Lynch, Wachovia FSB, and Washington Mutual. Some of these financial institutions are no longer in business. On October 3, 2008 the U.S. Treasury Secretary Henry Paulson said that the administration may use the authority granted in the $700 billion rescue plan to take ownership stakes in financial institutions to stabilize and restore confidence in them. This isn’t this what we were being told to sell us on the idea? The U.S. current has holdings of 79.9% in both Fannie and Freddie. If AIG fails to manage their company properly then the U.S. holds 79.9% of the company. This begs the question, who is next?

How big is the Credit Default Swaps market?

2008-10-10T10:49:00.000-07:00

Credit derivatives have grown rapidly over the past several years as dealers increasingly used them to structure securities to help meet investor demand for higher yields. From 2003 to 2007, credit derivative contracts grew at a 100% compounded annual growth rate. Given current credit market turmoil, credit derivative growth has eased. In the first quarter, credit derivatives grew only 4%, or $581 million, to $16.4 trillion. Credit default swaps represent the dominant product at 99% of all credit derivatives notionals. Notionals are the nominal or face amount that is used to calculate payments made on swaps and other risk management products. This amount generally does not change hands and is thus referred to as notional. As is often the case with a new and rapidly growing market, operational issues became a supervisory concern in the credit derivatives market in recent years.

How the farm bill caused the economic crisis.

2008-10-09T10:55:00.000-07:00

The origins of the financial crisis isn't as simple as black and white. Many people believe that the numbers of foreclosures and poor payment history are the reason. Many believe in was derivatives and credit default swaps. In 1936 there was a act of Congress called the Commodity Exchange Act in which all commodities and activities and requires all futures and commodity options to be traded on organized exchanges. In the act prohibits fraudulent conduct in the trading of futures contracts. In 1974, Congress amended the Act to create a more comprehensive regulatory framework for the trading of futures contracts and created the Commodity Futures Trading Commission, replacing the Commodity Exchange Authority CFTC. Today, the CFTC assures the economic utility of the futures markets by encouraging their competitiveness and efficiency, ensuring their integrity, protecting market participants against manipulation, abusive trading practices, and fraud, and ensuring the financial integrity of the clearing process. Through effective oversight, the CFTC enables the futures markets to serve the important function of providing a means for price discovery and offsetting price risk. The Commodity Futures Modernization Act of 2000 has been cited as a public policy decision significantly contributing to Enron's bankruptcy in 2001 and the much broader liquidity crisis of September 2008 that led to the failure of Lehman Brothers and American International Group and to the creation of the U.S. Emergency Economic Stabilization fund. The bill was signed by President Bill Clinton on December 21, 2000. The then president was considered a lame duck since he had left office one month later. The act repealed the Shad-Johnson jurisdictional accord, which had banned single stock futures in 1982. The legislation also provided certainty that products offered by banking institutions would not be regulated as futures contracts. The Shad-Johnson Jurisdictional Accord is an agreement reached between the Chairmen of SEC and CFTC in 1981 to resolve a dispute concerning jurisdiction over securities-based derivatives. In September 2007, Senator Carl Levin introduced Senate Bill S.2058 to specifically close the "Enron Loophole". This bill was later attached to H.R. 6124, the Food, Conservation, and Energy Act of 2008, aka "The 2008 Farm Bill". President Bush vetoed the bill, but was overridden by both the House and Senate, and on June 18th, 2008 the bill was enacted into law. One specific reason behind its introduction was to address the record high oil prices of the 2000s energy crisis. Since it was enacted, average gas prices of regular unleaded gasoline in the U.S. have dropped $0.357, from their record high of $4.114 on July 17, 2008 to an average of $3.757 as of September 21, 2008. The value of the Dow Jones Industrial average has dropped nearly 2,500 points during the same time also. Many economists and politicians wanted to stop its proposed regulation of energy futures trading, a market that was famously abused when Enron Corp. manipulated California’s electricity prices in 2001. The current crisis that we find ourselves in can be attributed to the executive and the congress and the lack of a reasonable time frame for the law to become effective.

Private mortgage insurance and credit default swap

2008-10-07T10:15:00.001-07:00

Private mortgage insurance, or PMI, is insurance that most lenders require of borrowers who put less than 20 percent down on a home (or greater than 80 percent loan-to-value or LTV). Once the principal is reduced to a LTV of 80, the PMI is often no longer required. Whether it be that the principal has been paid down to a LTV of 80 or that the home has appreciated or both. The cost of a PMI policy with a down payment of 0-4.99 percent is 0.96 percent of the mortgage. The national average cost of a home for the subprime buyer is $183,917. The average LTV of a subprime buyer is 87.18. This means that the down payment combined with the difference paid for the home versus the actual appraised value is $2,109.62. The annual PMI policy premium in this case is $1,434.55 using 0.78 times the mortgage as the preimium or monthly it is $119.55. The monthly payment using the average interest rate of a subprime buyer which is 8.81 percent has a total payment in the amount of $1574.31 including the PMI policy.

PMI protects the lender not the home owner in the event that the house is foreclosed on. It also pays the lender the costs that it can't recover after foreclosing on the loan and the costs associated with selling the mortgaged property. PMI does not protect the owner of the policy. Even if you have a PMI policy a foreclosure from being in default on payments will result in the loss of the home. The subprime market currently has 57.3 percent of loans that are past due. Another 10.7 percent in the subprime market are in foreclosure.

When the government bailed out AIG it put the government in the PMI business. AIG's subsidiaries include United Guaranty Residential Insurance Co., the fifth-largest private mortgage insurer in the United States with a 12 percent share of the $357 billion in new private mortgage insurance written in 2007. The largest is GIC Investment Corp. Last year it lost $613.6 million. About 85.6 percent of the loans MGIC insures are prime, with 10 percent classified as A-minus and 4.2 percent as subprime/bad credit. It is difficult to find the total amount of mortgages that have PMI insurance.

Credit default swaps (CDS) are typically used to obtain capital relief. In this structure, the mortgage lender enters into a credit default swap agreement with an intermediary bank that guarantees to repay foreclosure-related losses on the lender’s mortgage portfolio. When you think about PMI it is a CDS.

Wall Street didn't do this ... part 2

2008-10-03T14:48:00.000-07:00

In a 2002 proposal delivered to Congress, Bush would allow the Federal Housing Administration to guarantee loans for the full purchase price of a home, plus any down-payment costs. As a practical matter, the FHA would guarantee mortgages as high as 103% of the value of the underlying home. The Community Reinvestment Act passed in 1977 ordered banks to make loans to low and moderate income people. In 2005 homeownership reached its high of 69.1 percent. Today homeownership is 67.3 percent. Since 2005 the percentage of households headed by renters increased to 32.2 percent, from the 2002 rate of 30.9 percent. The American Dream Downpayment Initiative, signed into law in Dec. 2003 didn't work as hoped. The foreclosures from homeowners who used the American Dream Downpayment Initiative were nearly 45 percent. Freddie Mac and Fannie Mae held 44 percent of the home loans using this plan. Nationally, 7.5 million homeowners now face foreclosure, another five million have zero or negative equity in their homes. The subprime loan foreclosure rate was 10.7 percent and only 57.3 percent were current with their payments. Would-be home buyers and anyone facing foreclosure might wish the government would try to make things harder, not easier.

Banking Panic

2008-10-03T09:40:00.001-07:00

The chain of bankruptcies this year has caused some banking panic and might cause a long economic recession. Many of the recessions in the United States were caused by banking panics. In August 2007, Countrywide Financial suffered a bank run as a consequence of the subprime mortgage crisis. In January 2008, Bank of America announced that it planned to purchase Countrywide Financial for $4.1 billion in stock. In September 2007, the British bank Northern Rock arranged an emergency loan facility from the Bank of England, which it claimed was the result of short-term liquidity problems. In March 2008, a bank run began on the securities and banking firm Bear Stearns. In July 2008, U.S. mortgage lender IndyMac Bank was seized by federal regulators. In September 2008, the Office of Thrift Supervision was forced to shut down Washington Mutual, the largest savings and loan in the United States and the sixth-largest overall financial institution, due to a massive run. Citigroup's move to buy Wachovia's banking operations was widely seen as an effort to shore up its deposit base, which will now look less solid. In September, Wachovia had suffered a silent run. The exact amount of the run withdrawn is still unknown. In September 2008, a deal was announced for Citigroup to buy Wachovia banking operations for $2.1 billion. Citigroup has not turned a profit for three straight quarters, and lost a total of $17.4 billion during that period after writing down its assets by about $46 billion. That's the most write-downs of any U.S. bank. Wachovia said in October 2008, that it had agreed to be acquired by Wells Fargo & Co. in a $15.1 billion all-stock deal this deal trumped Citigroup's plan to acquire Wachovia's banking operations. The deal wouldn’t require government assistance, like the Citigroup deal had. The question now is who is next? I think that Citigroup is going down within a year.

Interesting keywords: number are is millions

Stock market reports 14.8

Stock market report for today 22.4

Stock market report today 15.6

Stock market reporting 5.14

bank of America 41.2

bank of the west 26.0

bank of india 14.2

federal reserve 27.8

federal register 12.1

Federal reserve banks 6.99

Federal reserve system 3.21

Federal reserve bank of new York 1.10

dow jones 36.1

dow jones today 26.9

dow jones news 15.8

bail out program 2.14

bail out bill 2.16

energy crisis 2008 5.89

energy crisis in the world 6.36

energy solution 1.6

loan-to-value ratio 0.7

subprime crisis 4.56

subprime losses 2.67

Credit default swaps rates 2.15

bank panics 0.992

Constitution law 9.71

Freddie Mac fannie mae comparison 10.4

Freddie Mac fannie mae difference 8.59

Freddie Mac fannie mae news 3.46

Government Sponsored Enterprises 0.848

credit derivatives 1.3

credit derivatives swap 1.07 swaps 1.530

h.r. 6124 1.03

h.r. 6193 0.92

Community Reinvestment Act problems 1.26

Department of Housing and Urban Development 2.28 hud 2.43

market to market accounting 35.0

Financial Accounting Standards Board fasb 1.15 boards 2.5

Wall Street didn't do this ... part 1

2008-10-03T07:01:00.000-07:00

We are getting sold out. Who said that the Constitution will never fail you, but your leaders will and be wary of anyone who tries to convince you that it's the other way around. When did we as a country start heading down the prim rose path to socialism? It seems that the Emergency Economic Stabilization Act of 2008 is going to help us move down that path. The act simply believes, from each, according to his ability; to each, according to his need.

The Department of Housing and Urban Development said in 2005 that Fannie and Freddie should increase financing for low-income areas or moderate-income regions with high minority populations to 37 percent of new business from 34 percent in 2001 through 2004. That rose to 39 percent last year. Since many people wanted their own home subprime mortgages were given to people with poor credit scores. In 2006 Dan Mudd, a former CEO who left in late 2008, said in a 2006 interview that he planned to expand the companies' holdings to include more higher-risk loans. A short time later it was said that Freddie wouldn’t lose anything on about 95 percent of its uninsured subprime bonds unless more than 90 percent of borrowers already two months late are foreclosed upon and more than half of the rest default, according to slides from a company presentation in August. It seems that he was right because that was pretty much what happened.

As of August 2008 57.3% of their entire subprime loans were past due and 10.7% were in foreclosure. The former CEO of Freddie Mac had his salary last year was $900,000, although in a radio interview last month, he didn't deny reports that he raked in a total of $43 million in stock options, bonuses and overall compensation from 2005 to 2008. When Fannie Mae and Freddie Mac went into conservatorship the Government Sponsored Enterprises became the owner of 79.9% of the company. This means that the government now holds the mortgages of 55 million families at Fannie Mae and Freddie Mac holds 30 million. The U.S. government controls at least 85 million homes with more on the way as Freddie and Fannie are to manage the subprime mortgage securities.

Fannie Mae almost failed in the 80's

2008-10-01T15:16:00.000-07:00

Fannie Mae under the leadership of James A. Johnson worked to keep up with Wall Street expectations. The company began holding on to more mortgages and mortgage-backed securities for investment purposes. The same practice nearly drove the company into bankruptcy in the early 1980s, when interest rates strayed into the double digits. Its smaller rival, Freddie Mac, copied the strategy.

Around the time Freddie Mac's accounting scandal broke in 2003, the companies' combined portfolios totaled $1.5 trillion. Then-Federal Reserve Chairman Alan Greenspan and others came to fear that a sudden meltdown at Fannie Mae could bring down the financial markets with it -- an argument that Johnson and his successor, Franklin D. Raines, fought at every opportunity.

They assured investors and policymakers that no such thing could happen because the company was so well managed. James was also a managing director with Lehman Brothers (1985-1990). Mr. Johnson has been a director of Goldman Sachs since May 1999. Its sizable profits made during the 2007 Subprime mortgage financial crisis led the New York Times to proclaim that Goldman Sachs is without peer in the world of finance. Then a crisis hit and in September 2008 Goldman Sachs became a traditional bank. It had been an investment bank since 1869 during which time it had survived the Great Depression.

Franklin Raines served from 1991 to 1996 he served as the vice chairman of Fannie Mae. He left the company in 1996 to join the Clinton Administration as the Director of the U.S. Office of Management and Budget, where he served until 1998. In 1999, he returned to Fannie Mae as CEO, "the first black man to head a Fortune 500 company." In 2004 the New York Times reported that regulators "have said that of the $90 million paid to Mr. Raines from 1998 to 2003 at least $52 million—more than half—was tied to bonus targets that were reached by manipulating accounting." Raines agreed to a $24.7 million settlement with a federal regulator in exchange for charges being dropped, but he admitted no wrongdoing. As so often happens with large scandals, the cost will fall on everyone except the responsible parties. He was forced to leave Fannie Mae in 2004, when regulators discovered it had broken accounting rules "in an effort to conceal fluctuations in profit and hadn't maintained adequate risk controls." In 2006, federal regulators sued Franklin Raines and two other Fannie Mae executives to recover $115-million of compensation. The case was settled for $3-million, plus the surrender of some of the then probably valueless stock options and other contingent benefits. The $3-million was paid from Fannie Mae’s own insurance. An editorial in The Wall Street Journal called it a "paltry settlement" which allowed Raines and the other two executives to "keep the bulk of their riches."

Jamie S. Gorelick, whose official résumé describes her as "one of the longest serving Deputy Attorneys General of the United States," a position she held from 1997 to 2003. Although she had no background in finance, she joined Fannie Mae in 1997 as vice chair and departed in 2003. Gorelick collected a staggering $26.4 million in total compensation, including bonuses, during her time at Fannie Mae. Once again Fannie Mae was under investigation. Investigators would later say that "Fannie Mae's management directed employees to manipulate accounting and earnings to trigger maximum bonuses for senior executives from 1998 to 2003." The New York Times called the manipulations an "$11 billion accounting scandal." Gorelick, it should be noted, has never been charged with any wrongdoing. Then again she was a Deputy Attorneys General of the United States during the period in question. She also served on the 9/11 commission.

EMERGENCY ECONOMIC STABILIZATION ACT 2008

2008-10-01T08:39:00.001-07:00

It looks like a bailout of the subprime securities market is going to happen although it is very unpopular with the U.S. people. The question now is how the U.S. government will value the subprime mortgage backed securities. For example according to census estimates in 2007 the average price of a home was $183,917. The U.S. Census Bureau and Federal Reserve Bank of New York estimates that there are 2,919,604 subprime home loans. This means that the total amount paid at the average subprime interest rate of 8.46% is $504,255 per loan and a total paid to interest is $321,414. The total of all loans is $1,472,227,309,095 and the interest paid will be $58,767,833,432. Lehman reduced its subprime Alt-A mortgage valuations to 39% of face value compared with 63% of face value in the previous quarter. Similarly, Lehman reduced values on subprime securities and second loan securities from 55% of face value at the end of the second quarter to 34% of face value at present. If all values on subprime securities were valued at 36.5 % of face value which is $1,472,227,309,095 it would reduce the face value to $ 441,728,098,320. The number includes considerations that 10.7% are in foreclosure and 9.7% are 90+ days past due. The question is what will the reduction to the face value be? If is anything above 36.4% they will make profits for the holders of the subprime securities.

market-to-market accounting

2008-09-30T11:44:00.000-07:00

Companies such as Enron and likely many of the players in today's mortgage mess used “market-to-market accounting”. Enron used these rules for the energy trading business in the mid-1990s and used it on an unprecedented scale for its trading transactions. It looks like the players in the Mortgage mess also used market-to-market accounting. Under market-to-market rules, whenever companies have outstanding derivative contracts (either assets or liabilities) on their balance sheets at the end of a particular quarter, they must adjust them to fair market value, booking unrealized gains or losses to the income statement of the period. A difficulty with application of these rules in accounting for long-term futures contracts such as Mortgage Securities is that there are often no quoted prices upon which to base valuations. Companies having these types of derivative instruments are free to develop and use discretionary valuation models based on their own assumptions and methods. The Financial Accounting Standards Board’s (FASB) emerging issues task force has debated the subject of how to value and disclose related contracts for several years. It has been able to conclude only that a one-size-fits-all approach will not work and that to require companies to disclose all of the assumptions and estimates underlying earnings would produce disclosures that were so voluminous they would be of little value. For a company such as Enron, under continuous pressure to beat earnings estimates, it is possible that valuation estimates might have considerably overstated earnings. Furthermore, unrealized trading gains accounted for slightly more than half of the company’s $1.41 billion reported pretax profit for 2000 and about one-third of its reported pretax profit for 1999.

Citigroup

Revenue (2007) 80,707 (06) 88,453 (05) 82,1479

Net Income 3,617 21,538 24,589

When I look at these numbers I see something wrong. Why did Citigroup show profits in 2007 of $3,617,000,000 a drop of about $18,000,000,000 from the previous. In accounting everything will come out sooner or later. Ask the Arthur Andersen accounting firm oh yeah the Enron debacle put them out of business. Maybe you could visit the federal prison in Waseca, Minn. and ask Jeffrey Skilling.

Derivatives and Swaps

2008-09-29T10:34:00.001-07:00

Here's how derivatives derive their value - and their risk. Say you don't buy General Electric stock, but instead buy a call on GE, an option entitling you to buy GE for a specified time at a specified price. From then on the value of your call - your derivative - is going to be determined by what happens to the price of GE stock, which in trading lingo is known as ''the underlying.'' The cost of the call, or the premium, will be relatively small and give you great leverage if the stock does well. But if the stock loafs or falls, the call could be worthless. The meat and potatoes of the derivatives business is a kind of forward contract called a swap, which we will explain by momentarily benching the dealer community. Instead, imagine two homeowners, each holding a mortgage not entirely to his satisfaction. Joe's mortgage, whose principal value is $100,000, has a fixed 8% rate. Chuck's mortgage, also $100,000, has a floating rate, tied to Treasury bills and currently costing him 8% as well. But Chuck worries that interest rates are going to go up. Joe thinks they could go down. So they ''swap'' their interest positions (that is, swap floating for fixed), agreeing to settle up between themselves every quarter, depending on what interest rates have done in the meantime. In effect, the deal sets up a series of forward contracts, each covering a quarter. Chuck must pay money to Joe if interest rates go down, and Joe must pay off if they go up. Even if Chuck emerges the loser, he has eased his mind by putting a cap of 8% on the interest rate he will have to pay.

This is a simple explanation of derivates and swaps. Since it can be complicated regulators are adamantly insisting these days that CEOs, and their boards, do understand what is going on in the derivatives operations beneath them. The Office of the Comptroller of the Currency issued 26 pages of guidelines last October as to how national banks should manage the risks of their derivatives business and specifically mentioned more than a dozen times how responsibilities for these fall on the banks' boards.

Let’s see if anyone goes to jail. I wouldn’t take a derivative on this one.

The numbers don't add up. part 3

2008-09-28T09:31:00.001-07:00

Predatory lending is defined as a type of lending that falls between appropriate risk-based pricing and blatant fraud and combines certain products, terms, prices and practices. Ok lets think about this a loan is written to people with F type credit and then 55.1% get a loan with little or no documentation required. Then most of these people were written an ARM loan without concern if they would be able to pay the payment in the future. Many people are willing to do anything to get a home. The practice of giving such a loan might be predatory lending. Then again it could just be Mortgage fraud. This happens when someone knowingly misrepresents the truth or concealment of a material fact in a mortgage application to induce another to approve the granting of a mortgage. Mortgage fraud refers solely to fraudulent schemes pertaining to residential mortgages. Either way the question now is to bail the banks out or not to. If you just paid all of the homes off it would sum up to $536,964,808,868. But then if you pay off just those whose payments were late in the last twelve month which is 1,234,993 for a total of $227,136,207,581. Maybe those in government should explain why they need $700,000,000,000.

The numbers don't add up. part 2

2008-09-28T09:29:00.000-07:00

Lets break down the numbers. The subprime buyer has bought a home that cost $183,917 using a 30 year fixed mortgage not including any taxes or insurance their monthly payment would be $1,408.95. If the home was written with an adjustable rate which most were their initial payments would be $1,353.37. They would pay $1,454.76 when the interest rate changed to 8.81%. Then there are those that chose an interest only loan they would pay $1,230.71 as an initial payment per month. Once the interest only period ended they would pay the higher $1,454.76. It is important to note that these people would not have paid anything to the principle. Many of these people bought more home than they could afford especially with the changes. If they bought a $250,000 dollar home at the same rates the initial payment would be $1672.92 using the interest only loan. When the loan converted to a conventional ARM it would be $1,977.47. Housing prices dropped 5.3% this year and 2.7% last year and the year before that it had dropped 1.7%. So those that chose an ARM or an interest only have a home that is now worth $166,585.89 if they bought it in 2006. Since they owe more than the house is worth and there is a prepayment penalty for two thirds of such home owners they really can’t refinance their loan.

The numbers don't add up. part 1

2008-09-27T21:11:00.000-07:00

As of August there had been 2,919,604 subprime loans in the United States. The loans averaged 90.9% as owner occupied. In addition these loans had an average interest rate of 8.46%. Most of the homes bought had been occupied about 36 months. These loans were written to people with an average FICO score of 618. FICO scores are usually intended to show the likelihood that a borrower will default on a loan. A FICO score is between 300 and 850. Speaking of FICO scores 20 percent of people are below 620 and 80 percent of people are above it. If you think about grading A - above 780, B - between 745 and 780, C - between 690 and 745, D - between 620 and 690, and F - below 620. Of the subprime buyers 1,933,597 people got a loan that required a prepayment penalty if they paid the loan off early or chose to refinance. The average home has a LTV of 84.77%. The loan-to-value (LTV) ratio is a mathematical calculation which expresses the amount of a first mortgage lien as a percentage of the total appraised value. So the average subprime buyer bought a home with an average price of $183,917 with equity of $28,010.56. Then consider that 335,035 had an interest only loan with a variable interest rate and they would start paying their loan with principle usually in less than 5 years. Many of the people using subprime mortgages were refinancing and taking cash out of their home at closing. Due to the housing boom most buyers were told that their homes were worth more as were those that were refinancing their home so 1,065,412 of the subprime mortgages written. Within a twelve month period 57.6% had at least one late payment. There were 57.3% that were current with loan payment. The percentage of people that were 30 – 59 days past due or late on their mortgage payment was 10.2%. The percentage of people that were 60 – 89 days past due or late on their mortgage payment was 5.3%. The percentage of people that were 90 + days past due or late on their mortgage payment was 9.7%. Then there were the foreclosures at 10.7%. It is sad but then again 55.1% received their loan with little or no documentation. Then there are the ARM adjustable rate mortgage subprime buyers and 62.9% were in such a class. Usually they had a low interest rate and most of the time it was lower than a fixed rate loan the average ARM was 8.03% and the fixed rate was 8.46%. This meant that the variable rate would let them buy a larger or more spacious home. Today the ARM's usually change their rates once a year. In August the new interest rate was 8.81%.

Bailouts ?

2008-09-25T12:52:00.000-07:00

In recent days we the citizens of the United States of America have been asked to make an investment in poor quality mortgage backed securities. If we make these investments as you already know it is to the tune of $700,000,000,000.

The Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson in conjunction with President Bush have made the case that such an investment is needed now.

The Federal Reserve System which was created in 1913 by the enactment of the Federal Reserve Act is one of the groups encouraging such a bailout. The Federal Reserve System and its Reserve Banks issue shares of stock to member banks. The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. The stock may not be sold, traded, or pledged as security for a loan; dividends are, by law, 6 percent per year.

After paying its expenses, including the 6 percent to the Federal Reserve's share holders, it then turns the balance of its earnings over to the U.S. Treasury. The Federal Reserve's income is derived primarily from the interest on U.S. government securities that it has acquired through open market operations.

So let’s look at what we know the U.S. Treasury makes available; $700,000,000,000 in securities. Many of the stock holders of the Federal Reserve System are banks themselves and it is unknown if any of the banks looking for a bail out are stock holders of said system.

The banks that are in need of selling bad mortgage investments can dump these bad securities to the taxpayers at the taxpayers' expense. Once this is done the shareholders of the Federal Reserve System stock holders will earn $42,000,000,000 a year until the securities are bought back by the U.S. Treasury.

Is such a bailout really needed?

On a 30 day U.S. treasury note you get 0.13 percent. The Federal Reserve shareholders get 6 percent. Also one thing to remember a bailout has already been made to Freddie Mac, Fanny Mae and AIG to the tune of another $285,000,000,000.

US Federal Reserve
US Treasury