Tuesday, May 26, 2009

The Unraveling of America - Part 1

Following the financial system collapse of 1933, the Glass-Steagall Act was enacted to separate investment banks from commercial banks.

The following study was done after the Savings and Loan Crisis of the 1980's.

Congressional Research Service, 1987

In the nineteenth and early twentieth centuries, bankers and brokers were sometimes indistinguishable. Then, in the Great Depression after 1929, Congress examined the mixing of the "commercial" and "investment" banking industries that occurred in the 1920s. Hearings revealed conflicts of interest and fraud in some banking institutions' securities activities. A formidable barrier to the mixing of these activities was then set up by the Glass-Steagall Act. It consists of four sections of the Banking Act of 1933. Its language makes it a felony for anyone -- banker, broker, dealer in securities, or savings institution -- to engage in the deposit-taking and securities businesses at the same time. For Federal Reserve member banks, it included reinforcing language designed to separate the two activities directly and through corporate affiliation or interlocking directorates.

In 1999, contrary to the current Clinton mudslinging of right-wing political blogs, Senator Phil Gramm (R,TX) introduced legislation to repeal Glass-Steagall. Now, I know I am ruffling some right-wing feathers out there, but don't fret. This legislative corruption was supported by Democrats, Independents, and Republicans in a firestorm of deregulation which, to this day, still rages.


In 1999, former Senator Phil Gramm (who is, incidentally, Senator John McCain's economic adviser and cochairs his presidential campaign) set out to completely gut the Glass-Steagall Act, and did so successfully, replacing most of its components with the new Gramm-Leach-Bliley Act: allowing commercial banks, investment banks, and insurers to merge (which would have violated antitrust laws under Glass-Steagall).

So, regulations that kept the markets safe for 60 years were stripped.

In 2000, shortly after George W. Bush was elected president, Congress and President Clinton were trying to pass a $384 billion omnibus spending bill, and while the debates swirled around the passage of this bill, Senator Phil Gramm clandestinely slipped a 262-page amendment into the omnibus appropriations bill titled: Commodity Futures Modernization Act. It is likely that few senators read this bill, if any. The essence of the act was the deregulation of derivatives trading (financial instruments whose value changes in response to the changes in underlying variables; the main use of derivatives is to reduce risk for one party). The legislation contained a provision -- lobbied for by Enron, a major campaign contributor to Gramm -- that exempted energy trading from regulatory oversight. Basically, it gave way to the Enron debacle and ushered in the new era of unregulated securities.

Mr. Gramm isn't done.


The legislation's "Legal Certainty for Bank Products Act of 2000," Title IV of the law - a law that Gramm snuck in without hearings hours before the Christmas recess - provided Wall Street with an unbridled license to steal. It made certain that financiers could legally get away with a whole new array of financial rip-off schemes.

One of those provisions, summarized by the heading of Title III, ensured the "Legal Certainty for Swap Agreements," which successfully divorced the granters of subprime mortgage loans from any obligation to ever collect on them. That provision of Gramm's law is at the very heart of the problem. But the law went even further, prohibiting regulation of any of the new financial instruments permitted after the financial industry mergers: "No provision of the Commodity Exchange Act shall apply to, and the Commodity Futures Trading Commission shall not exercise regulatory authority with respect to, an identified banking product which had not been commonly offered, entered into, or provided in the United States by any bank on or before December 5, 2000. ..."


In 2003, Gramm left the Senate to join UBS, which had acquired investment house PaineWebber due to his deregulation bill. At UBS, Gramm lobbied Congress, the Fed and the Treasury Department. During Gramm's tenor at UBS and as a lobbyist, Congress passed the Responsible Lending Act, billed as an anti-predatory-lending measure, but was called the "Loan Shark Protection Act" by consumer advocates, as it was designed to preempt stronger state laws against anti-predatory lending.

And, of course, The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 pulls the rest of the rug from under the American people.

The Uptick Rule

The Uptick Rule was instated in 1938 by SEC to block the downward spiral of short selling when a stock or financial instrument was taking a nose dive.

Investopedia: Uptick Rule

A former rule established by the SEC that requires that every short sale transaction be entered at a price that is higher than the price of the previous trade. This rule was introduced in the Securities Exchange Act of 1934 as Rule 10a-1 and was implemented in 1938. The uptick rule prevents short sellers from adding to the downward momentum when the price of an asset is already experiencing sharp declines.

Since 1938, short selling on the down-tic was outlawed until July 2007 when the SEC struck down the measure. The "UpTick Rule" kept the stock market from collapsing by a rush to hedge on the fall of stocks.


The SEC has voted to remove the “short sale tick test”, Rule 17 CFR 240.10a-1 for all equity securities. Effective Friday, July 6, traders will be able to short all securities on an up, down, or zero tick.

The Commission first imposed restrictions on the execution prices of short sales almost seventy years ago, when we adopted the "tick test" of Rule 10a-1 in 1938. The tick test permits short sales only at a price above the last sale price, or alternatively, at the last sale price -- if that is higher than the previous price.

Globalization will be the topic of discussion in my next Part II of this series.


Sunday, May 17, 2009

Where is the TARP Money Going?

The media doesn't mention a word about where that $350 billion went.

Actually, the Congressional Oversight Panel, commissioned to oversee the Wall Street bailout, doesn't know where it went, either.

As a matter of fact, I am predisposed to do this research because the COP Chairwoman, Elizabeth Warren, was a guest on Bill Maher (HBO) 5/15 at which time she stated that COP, and Congress, don't know where the money went.

COP Report 12/08 (Adobe.pdf)
This is the first report of the Congressional Oversight Panel. We
are here to investigate, to analyze and to review the expenditure
of taxpayer funds. But most importantly, we are here to ask the
questions that we believe all Americans have a right to ask: who
got the money, what have they done with it, how has it helped the
country, and how has it helped ordinary people?

In the course of its meetings with Treasury, the Inspector General
of Treasury, and the staff of the Federal Reserve, the Oversight
Panel has confirmed that the Office of Financial Stabilization
has administered the TARP program without seeking to monitor
the use of funds provided to specific financial institutions.49 Interim Assistant Secretary for Financial Stability Neel Kashkari has said that Treasury favors monitoring through ‘‘general metrics’’ that look at the overall economic effects of the disbursed funds.50

Assessing Treasury’s Strategy: Six Months of TARP
The April oversight report for COP is entitled Assessing Treasury’s Strategy: Six Months of TARP. In this report, COP offers a preliminary look at Treasury’s strategy and offers a comparative analysis of previous efforts to combat banking crises in the past.
Over the last six months, Treasury has spent or committed $590.4 billion of the TARP funds. Treasury has also relied heavily on the use of the Federal Reserve’s balance sheet which has expanded by more than $1.5 trillion (not including expected TALF loans) in conjunction with the financial stabilization activities it has undertaken beyond its monetary policy operations. This has allowed Treasury to leverage TARP funds well beyond the funds appropriated by Congress.

The total value of all direct spending, loans and guarantees provided to date in conjunction with the financial stability efforts (including those of the FDIC as well as the Treasury and the Federal Reserve) now exceeds $4 trillion. This report reviews in considerable detail specific criteria for evaluating the impact of these programs on financial markets.
Mortgage Foreclosures / Defaults / Delinquencies.
As measured by foreclosure initiations or completions, either as a rate or absolutely, or by delinquent mortgages, this problem continues to worsen.100
Housing Prices.
Although some of the drop in real estate value reflects a retreat from unsustainable bubble levels, the continued drop in housing prices is a leading contributor to bank asset write downs, recent declines in household net worth, and the weakening broader economy.107
Overall Loan Originations.
In its most recent report, Treasury cited rising consumer lending, especially in mortgages and student loans; however, seasonal changes in student loan demand and increased refinancing demand largely explain this increase.114 Commercial and industrial lending both fell considerably.115 The combination indicates that credit markets remain tight, especially in the business sector.
Mortgage Originations.
A low risk premium coupled with low mortgage volume indicates substantial tightening of lending standards.120 The GAO has indicated a substantial drop in this figure, both as measured by originations and applications, since the first quarter of 2008.

Oh, yes, and what about those "general metrics"?
Indeterminate Metrics (Too Early to Tell)
Some measures of the health of both credit markets and the broader economy are difficult to evaluate as either improving or worsening, either because they are too volatile or because they are contradictory depending on how one examines them.

And, finally, ....
Since October, approximately $280 billion of capital infusions have been made with TARP funds. Nonetheless, losses on impaired assets have continued to weaken the balance sheets of banks and foster uncertainty in the financial markets.

No word about where the money went. (It went OFFSHORE!)

Chrysler Bailout

Let's take a look at why Chrysler is in Chapter 11 bankruptcy.

Chrysler got $4 billion from TARP. It wasn't enough. They asked for another $5 billion. Obama said "No!". Chrysler will close 789 dealerships affecting 40,000 jobs.

This map shows the names and locations of the 789 dealers Chrysler plans to close, about a quarter of the 3,200 total.

Here is what I see from Chrysler's recent world domination strategy and costs.

Daimler Chrysler to build new India plant by 2009
50 million Euros = 67.37 million U.S. dollars

Chrysler bankruptcy has little impact on China market

Chrysler Still Hopes To Form New JV In China

Saltillo, Mexico named as home to second Phoenix V-6 engine plant-- $570 million plant to begin production of fuel-efficient engines in 2009-- $3 billion Chrysler Group Powertrain Offensive part of 'Recovery and Transformation Plan'

The bailout money is going OFFSHORE!


GM Bailout

One topic no one mentions in the Detroit Bailout controversy is all the offshoring that has been, and still continues, in the auto industry. GM has announced new plants in China, Mexico, Brazil, Russia and India, coinciding with plant and dealership closings in America. GM's dealership closings will cost 100,000 jobs. GM plant closings will eliminate 20,000 jobs. The ripple effect through local economies may cost over a million US jobs.

More plant closings, job cuts due at GM

The Treasury Department has loaned GM $13.4 billion dollars so far.

Guess where the bailout money will go?

GM to invest $200 million in India engine plant

General Motors to invest $300 m in Maharashtra car plant

GM buys India dream, to spend $500m more

GM Cuts Dealers & Starts to Outsource Overseas

GM announces $5 billion investment in China

UAW Furious Over New GM Plant in China

GM opens new China plant

GM Mexican Plants Expand as Carmaker Seeks Funds for Rescue
"GM, for instance, has invested $3.6 billion in Mexico in the last three years."

General Motors to Invest $1 Billion in Brazil Operations
"According to the president of GM Brazil-Mercosur, Jaime Ardila, the funding will come from the package of financial aid that the manufacturer will receive from the government and will be used to complete the renovation of the line of products up to 2012."

General Motors to Build Chevrolet Cars in St. Petersburg, Russia

The bailout money is going OFFSHORE!


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