BLAGAROON

US FINANCE CAPITAL

DOES A NOSE DIVE



BLACK MONDAY FOLLOWED BY BLACK MONDAYS

Last week’s turbulent events in the world of finance capital indicate not only the corruption and outright criminal conspiracy of many of the major players in the murky world of corporate finance but, a massive structural and political failure of the entire globalised system itself. These events mark the inevitable and ignominious end of the false doctrines of the Reagan-Thatcher era which have dominated business and commerce since the 1980’s.

The US banking scandal of unregulated credit issued to debtors on a wide scale who had little prospect of keeping up their payments now threatens a world-wide recession as investor confidence evaporates in a welter of bankruptcies, rumour-mongering and Government incompetence as Central Banks scramble to shore up wobbly financial institutions with deposit guarantees and direct bail-out with capital transfers of public funds. While guarantees for deposits of ordinary savers is immediately necessary, the decision to bail-out delinquent lending banks has to be questioned and the terms and conditions of these proposals made available for public scrutiny and strict accountability. The taxpayers must not be saddled with the bad debts of an arrogant and profligate gang of financial manipulators who have misused their position and virtual monopoly of control of credit to create massive payoffs to themselves for “inventing” the very instruments which have brought about the current crisis.

The problem was that the entire system was under-capitalised and over-leveraged. This means that the amount of capital assets which they were allowed to write credit on for loans was far too small to safely cover defaulting debtors. When Bear Stearns collapsed last year, it was levered at a ratio of 26 to 1. When Hedgie Carlyle Capital failed, it was levered at 32 to 1. When Fannie Mae and Freddie Mac, the US semi-state mortgage holders, were eventually brought under direct control of the US Treasury Department both organisations were levered at a disastrous 80 to 1, which means that they had only one dollar capital reserve for every $80 they had loaned out. This amounts to borderline criminal delinquency. Nevertheless, the US Treasury Secretary, Henry “Hank” Paulson, continued to pour public funds into these two institutions although they were technically insolvent. The illusion that these two were still functional was maintained largely by the amount of foreign investment by countries like China holding their dollar currency reserves in such Government backed institutions. This situation is unlikely to continue in the future. Foreign investors are also financing the US $700 Billon current account deficit. As foreign investors withdraw from US securities, interest rates will have to increase to attract foreign capital to the US making it even more difficult for mortgage debtors to pay back their loans.

WHAT CRISIS?

Secretary Paulson’s “solution” to the immediate crisis and threatened meltdown of major financial institutions in the United States, the $700 Billion “bail-out” of Wall Street was initially rejected by the House of Representatives last Monday week mainly by two opposing factions; the neo-con Republican conservatives to whom state intervention of any kind is anathema, and Democrats who questioned the favouritism being shown to Wall St and the delinquent banking sector to the detriment of the ordinary worker and home owner facing eviction. An estimated 6 million home-owners in the US will default on their mortgages this year. The legislation was taken out of the HoR and re-introduced in modified form in the Senate with massive pressure being mounted against the “dissidents” to make them change their votes in the second round. Never mind that this manoeuvre was likely unconstitutional as money bills require to be introduced and passed by the HoR before going to the Senate.

The “Emergency Economic Stabilization Act 2008" was passed by the Senate and then returned to the HoR which passed it on Friday last despite continued opposition. A close inspection of the connections between certain politicians and Wall St. is revealing; individuals working for Wall Street finance, insurance and real estate companies and the companies’ political action committees have contributed more than $47 million to the campaigns of Senator Obama (three of main five sources) and Senator McCain (main five sources), both of whom voted for the bailout.

Wall Street has contributed more than $1.1 billion dollars to congressional candidates since 2002. Nine of the top ten House recipients of Wall Street slush, who each received an average of $1.5 million, are on the financial oversight and taxation committees.The bipartisan Congressional "leaders" most responsible for pushing the bail-out through Congress, Senators Dodd and Gregg and Representatives Frank and Blunt have accepted almost $20 million from Wall Street sources during the last 20 years. Dodd recently received $6 million in contributions during his presidential primary campaign, and Frank has collected $720,000 this year. Other key politicians also have been well compensated this year; Congressman Kanjorski received $755,000 and Congressman Bachus banked $704,000.

Secretary Paulson, who came from Goldman Sachs, where he collected $575 Million by cashing out his Goldman Sachs stock before becoming the Secretary of Treasury (not having to pay any taxes on the sale). Paulson also collected more than $53 million in cash bonuses during his last two years at Goldman Sachs for “innovations” such as a new line of "Mortgage Backed Securities." Gambling more than a trillion dollars on high risk subprime second mortgages, Paulson smartly converted them into AAA-rated "secure" investments by purchasing guarantees from the American International Group of mortgage insurers.AIG, conveniently, was just bailed out two weeks ago by Secretary Paulson for $85 billion of borrowed money that taxpayers will have to repay with interest, avoiding massive losses by Goldman Sachs, which was holding more than $20 billion in otherwise dud second mortgages. Is it surprising, therefore, that Lloyd Blankfein, Goldman’s current CEO, was present with Paulson when the decision was made to bailout AIG?

THE POLITICS

The EESA is an attempt to stabilise the financial markets but without any adverse affect on the power elite which caused the crisis by their insatiable greed and predatory business methods, the politicians, the supposed “elected representatives of the people” groveling in support. There is nothing in these “plans” for an actual change of policy in Washington. Last Tuesday night’s Presidential “debate” between Obama and McCain showed both peddling the same claptrap about America’s destiny as world policeman and solver of all problems. Both declared hostility to Russia and claimed “punishment” would be necessary for “bad behaviour” by Russia. I mean, the colossal arrogance of it! Who gave them the right to judge other's behaviour and apply “punishments”. Who is to judge THEIR behaviour? Both declared unconditional support for Zionist Israel and both declared they would attack Iran in defence of Israel regardless of any UN Security Council decisions.

Neither proposed any significant elements of control over the workings of finance capital in the long term but, competed on minor palliatives of income tax reliefs which would not reduce the huge burden of debt with which the US population now lives. In an objective review, Obama was the more composed and clear-headed of the two with apparently workable suggestions on the crisis but McCain bumbled and stumbled all over the venue (which supposedly is his favourite location type) with an incoherent rant and overt hostility to his opponent. The audience seemed comatose and bored out of their minds with the whole performance. Undoubtedly, though, McCain's fate was sealed with this lack-lustre outing. Wall St wants someone calm and collected in the White House right now who will provide the political support to keep the whole system together. Senator Obama fills this role perfectly.

FearFeasa Mac Léinn

Áth Cliath/DUBLIN, 09 Deire Fomhair/October 2008.