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Thursday, September 25, 2008
Israel asked US for green light to bomb nuclear sites in Iran
Brigade homeland tours start Oct. 1
The 3rd Infantry Division’s 1st Brigade Combat Team has spent 35 of the last 60 months in Iraq patrolling in full battle rattle, helping restore essential services and escorting supply convoys.
Now they’re training for the same mission — with a twist — at home.
Beginning Oct. 1 for 12 months, the 1st BCT will be under the day-to-day control of U.S. Army North, the Army service component of Northern Command, as an on-call federal response force for natural or manmade emergencies and disasters, including terrorist attacks.
It is not the first time an active-duty unit has been tapped to help at home. In August 2005, for example, when Hurricane Katrina unleashed hell in Mississippi and Louisiana, several active-duty units were pulled from various posts and mobilized to those areas.
But this new mission marks the first time an active unit has been given a dedicated assignment to NorthCom, a joint command established in 2002 to provide command and control for federal homeland defense efforts and coordinate defense support of civil authorities.
After 1st BCT finishes its dwell-time mission, expectations are that another, as yet unnamed, active-duty brigade will take over and that the mission will be a permanent one. ....
My Answer to the President
Dear Friends:
The financial meltdown the economists of the Austrian School predicted has arrived.
We are in this crisis because of an excess of artificially created credit at the hands of the Federal Reserve System. The solution being proposed? More artificial credit by the Federal Reserve. No liquidation of bad debt and malinvestment is to be allowed. By doing more of the same, we will only continue and intensify the distortions in our economy - all the capital misallocation, all the malinvestment - and prevent the market's attempt to re-establish rational pricing of houses and other assets.
Last night the president addressed the nation about the financial crisis. There is no point in going through his remarks line by line, since I'd only be repeating what I've been saying over and over - not just for the past several days, but for years and even decades.
Still, at least a few observations are necessary.
The president assures us that his administration "is working with Congress to address the root cause behind much of the instability in our markets." Care to take a guess at whether the Federal Reserve and its money creation spree were even mentioned?
We are told that "low interest rates" led to excessive borrowing, but we are not told how these low interest rates came about. They were a deliberate policy of the Federal Reserve. As always, artificially low interest rates distort the market. Entrepreneurs engage in malinvestments - investments that do not make sense in light of current resource availability, that occur in more temporally remote stages of the capital structure than the pattern of consumer demand can support, and that would not have been made at all if the interest rate had been permitted to tell the truth instead of being toyed with by the Fed.
Not a word about any of that, of course, because Americans might then discover how the great wise men in Washington caused this great debacle. Better to keep scapegoating the mortgage industry or "wildcat capitalism" (as if we actually have a pure free market!).
Speaking about Fannie Mae and Freddie Mac, the president said: "Because these companies were chartered by Congress, many believed they were guaranteed by the federal government. This allowed them to borrow enormous sums of money, fuel the market for questionable investments, and put our financial system at risk."
Doesn't that prove the foolishness of chartering Fannie and Freddie in the first place? Doesn't that suggest that maybe, just maybe, government may have contributed to this mess? And of course, by bailing out Fannie and Freddie, hasn't the federal government shown that the "many" who "believed they were guaranteed by the federal government" were in fact correct?
Then come the scare tactics. If we don't give dictatorial powers to the Treasury Secretary "the stock market would drop even more, which would reduce the value of your retirement account. The value of your home could plummet." Left unsaid, naturally, is that with the bailout and all the money and credit that must be produced out of thin air to fund it, the value of your retirement account will drop anyway, because the value of the dollar will suffer a precipitous decline. As for home prices, they are obviously much too high, and supply and demand cannot equilibrate if government insists on propping them up.
It's the same destructive strategy that government tried during the Great Depression: prop up prices at all costs. The Depression went on for over a decade. On the other hand, when liquidation was allowed to occur in the equally devastating downturn of 1921, the economy recovered within less than a year.
The president also tells us that Senators McCain and Obama will join him at the White House today in order to figure out how to get the bipartisan bailout passed. The two senators would do their country much more good if they stayed on the campaign trail debating who the bigger celebrity is, or whatever it is that occupies their attention these days.
F.A. Hayek won the Nobel Prize for showing how central banks' manipulation of interest rates creates the boom-bust cycle with which we are sadly familiar. In 1932, in the depths of the Great Depression, he described the foolish policies being pursued in his day - and which are being proposed, just as destructively, in our own:
Instead of furthering the inevitable liquidation of the maladjustments brought about by the boom during the last three years, all conceivable means have been used to prevent that readjustment from taking place; and one of these means, which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion.
To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about; because we are suffering from a misdirection of production, we want to create further misdirection - a procedure that can only lead to a much more severe crisis as soon as the credit expansion comes to an end... It is probably to this experiment, together with the attempts to prevent liquidation once the crisis had come, that we owe the exceptional severity and duration of the depression.
The only thing we learn from history, I am afraid, is that we do not learn from history.
The very people who have spent the past several years assuring us that the economy is fundamentally sound, and who themselves foolishly cheered the extension of all these novel kinds of mortgages, are the ones who now claim to be the experts who will restore prosperity! Just how spectacularly wrong, how utterly without a clue, does someone have to be before his expert status is called into question?
Oh, and did you notice that the bailout is now being called a "rescue plan"? I guess "bailout" wasn't sitting too well with the American people.
The very people who with somber faces tell us of their deep concern for the spread of democracy around the world are the ones most insistent on forcing a bill through Congress that the American people overwhelmingly oppose. The very fact that some of you seem to think you're supposed to have a voice in all this actually seems to annoy them.
I continue to urge you to contact your representatives and give them a piece of your mind. I myself am doing everything I can to promote the correct point of view on the crisis. Be sure also to educate yourselves on these subjects - the Campaign for Liberty blog is an excellent place to start. Read the posts, ask questions in the comment section, and learn.
H.G. Wells once said that civilization was in a race between education and catastrophe. Let us learn the truth and spread it as far and wide as our circumstances allow. For the truth is the greatest weapon we have.
In liberty,
Ron Paul
EMP Effects
"The first recorded EMP incident accompanied a high-altitude nuclear test over the South Pacific and resulted in power system failures as far away as Hawaii. A large device detonated at 400–500 km over Kansas would affect all of CONUS." [CONUS= continental United States]
At contrast to this is the more conventional explosive energized EMP weapon. this is also a much smaller size. To see the device and its affect on a Taurus, check out THIS link.
There is reason to believe these devices could be used by terrorists. Designs of critical facilities should consider proper protection such as Faraday cages, etc.
Rice admits Bush officials held White House talks on CIA interrogations
Rice's written response to investigators on the Senate Armed Services Committee marks the first time a high-ranking White House official has formally acknowledged the White House discussions, which led to the CIA's use of waterboarding and other coercive methods. ....
FDIC May Need $150 Billion Bailout as Local Bank Failures Mount
Sept. 25 (Bloomberg) -- Deborah Horn tugs on the handle of the glass-paned entrance of the IndyMac Bancorp Inc. branch in Manhattan Beach, California. The door won't budge. The weekend is approaching, and Horn, 44, the sole breadwinner in a family of three, needs cash.
A small notice taped to the window on this Friday afternoon in mid-July tells her why she's been locked out. IndyMac has failed, the single-spaced, letter-sized paper says; the bank is now in the hands of the Federal Deposit Insurance Corp.
``The Receiver is now taking possession of the Bank,'' the sign says.
``I'm physically shaking,'' says Horn, an academic tutor, as she peers into the bank. Inside, an FDIC examiner is talking to six stone-faced IndyMac employees. ``I don't know when I'm going to be able to get my money,'' Horn says. ``I'm a single mom. This is the money I live on.''
Don't worry about Horn. She'll be all right, as will most of Pasadena, California-based IndyMac's 200,000-plus customers.
That's because the FDIC, created in 1934, insures all accounts up to $100,000 at its member banks, and it has never failed to honor a claim. The people to worry about are U.S. taxpayers.
The IndyMac debacle is taking a large bite out of FDIC reserves, and if scores of other banks fail in the year ahead, the fund will be depleted. Taxpayers will have to step in.
Worst Wave
Americans have gotten used to the idea that bank failures were as rare as a category five hurricane. No banks went bust in 2005 or 2006. Seven collapsed in 2007 as the credit crisis began to exact a toll. So far in 2008, 12 more, with total assets of $42 billion, have fallen -- that's the worst wave of bank failures since 1992.
IndyMac, which had $32 billion in assets when it went into receivership, is the most expensive bank failure the FDIC has ever covered. And that record may not stand for long.
By the end of 2009, about 100 U.S. banks with collective assets of more than $800 billion will fail, predicts Christopher Whalen, managing director of Institutional Risk Analytics, a Torrance, California-based firm that sells its analysis of FDIC data to investors.
``It's not going to be Armageddon,'' says Mark Vaughan, an economist and assistant vice president for banking supervision and regulation at the Federal Reserve Bank of Richmond, Virginia. ``But it's going to be bad.''
FDIC's Secret List
The FDIC knows which banks are at risk; it has a watch list with 117 institutions. The agency won't disclose their names because doing so could cause depositors to panic and pull out all of their funds.
It won't take many more failures before the FDIC itself runs out of money. The agency had $45.2 billion in its coffers as of June 30, far short of the $200 billion Whalen says it will need to pay claims by the end of next year. The U.S. Treasury will almost certainly come to the rescue.
Regardless of who wins control of the White House and Congress in November, no politician is likely to vote in favor of leaving federally insured depositors out in the cold.
A taxpayer bailout of the FDIC would come on the heels of intervention by the U.S. Treasury Department and Federal Reserve to save investment bank Bear Stearns Cos., mortgage giants Fannie Mae and Freddie Mac and the world's largest insurer, American International Group Inc.
Uninsured Deposits
Emergency federal funding of the FDIC could swell the cost of government rescues of failed financial institutions to more than $400 billion -- not including the $700 billion general Wall Street bailout now under discussion in Congress.
That number would be even higher if the government were on the hook for uninsured deposits -- which amount to $2.6 trillion, 37 percent of the total of $7 trillion held in the U.S. branches of all FDIC member banks.
The subprime crisis -- which started in the suburbs of California and Florida and migrated through the alchemy of securitization to Wall Street investment banks -- has come almost full circle, spreading its toxins to the very lenders who first extended those teaser-rate, no-document mortgages to homeowners.
In 2006, IndyMac was the largest provider of mortgages that didn't require borrowers to provide proof of their incomes. And as of mid-September, investors were worried that Washington Mutual Inc., the biggest thrift in the U.S., would be the next bank to go belly up.
A federal takeover of Washington Mutual, which has assets of $310 billion, could cost taxpayers $24 billion more, according to Richard Bove, an analyst at Miami-based Ladenburg Thalmann & Co.
Slower To Hit
The reckoning that has run through Wall Street, claiming investment banks Lehman Brothers Holdings Inc. and Bear Stearns among its victims, has been slower to hit Main Street. In mid- 2007, Wall Street firms began disclosing losses on their packages of securitized home loans.
From August 2007 to September 2008, banks worldwide wrote down more than $500 billion. Regional banks, by contrast, have waited to write off their bad mortgages, hoping the housing market would improve and defaults would level off. Instead, they've risen.
FDIC-insured banks charged off $26.4 billion of bad loans in the second quarter of 2008, the most since 1991.
U.S. lenders, in their embrace of subprime lending, committed the same analytical fallacy as their Wall Street counterparts. When it came to assessing risk, they relied on the recent past to predict the near future.
Living in the Past
They were blinded by years of rising home prices and low mortgage default rates.
The FDIC fell into the same trap. As recently as March, an internal FDIC memo estimated the cost to cover bank collapses in 2008 would be just $1 billion, dropping to $450 million in 2009. It wasn't even close.
The IndyMac failure alone, which happened four months after that memo was circulated, will cost the FDIC $8.9 billion -- and the bill for all 12 collapses will be about $11 billion, the FDIC says.
FDIC Chairman Sheila Bair says the agency's forecast was based on models using data from the past 20 years, which included long periods with few bank failures.
``Given the change in economic conditions, we need to weight the more recent data more heavily,'' Bair says. ``You also need a good dose of common sense.''
Bair says depositors shouldn't fret about their banks. ``We do have a handful with some significant challenges,'' she says. ``Overall, banks are quite safe and sound.''
Bair is duty bound to say that, says Joseph Mason, an economist who worked for the Treasury from 1995 to 1998. Part of the FDIC's job is to reassure the public and prevent runs on banks. Mason says Bair's rhetoric masks the agency's inability to grasp the scope of the coming crisis.
`Ignoring the Problem'
``The FDIC and the banking regulators are ignoring the problems, hoping they'll go away,'' he says. ``They won't.''
The quake that shook markets in September may make the FDIC's task more complicated and expensive. With investment banks in eclipse, deposit-taking institutions will now play a larger role in financing the economy.
Earlier this month, Bank of America Corp. agreed to buy Merrill Lynch & Co. for $50 billion, and Wachovia Corp. and Morgan Stanley were in talks about a potential merger.
'Would Be Miraculous'
From 2002 to 2007, U.S. lenders made a total of $2.5 trillion in subprime mortgages, according to the newsletter Inside Mortgage Finance. ``Given the magnitude of the bad loans still on bank balance sheets, it would be miraculous for the FDIC to squeak by with losses of less than $200 billion,'' Whalen says.
On Sept. 18, in yet another stunning turn of events, Paulson proposed a plan that would cost the government, if not necessarily the FDIC, hundreds of billions of dollars more.
The Treasury secretary says the government will purchase toxic mortgage debt from banks in an effort to cleanse the financial system. In an unprecedented move, the Treasury also pledged $50 billion to insure nonbank money market funds.
Bair says Paulson's plan won't reduce the number of banks on the FDIC's watch list.
One reason the rolling financial crisis is hitting regional banks later than it walloped Wall Street is because the very system that is meant to protect depositors -- federal insurance -- has also served to prop up weak lenders. So has the ready supply of credit extended to banks by another government- chartered group, the Federal Home Loan Banks.
Because all deposits up to $100,000 are insured, most savers can be agnostic about where they put their money. They don't have to know -- or care -- whether a bank is making sound or foolish loans.
Unlike buyers of stocks or bonds, people who put their money in banks rarely do research about the soundness of the institution. That makes it easy for banks -- both prudent and reckless ones -- to raise cash.
Brokered Deposits Loophole
Banks have taken the FDIC's protection and run with it, thanks to the phenomenon of brokered deposits -- and a giant loophole in federal regulations.
As of June 30, Whalen says banks held $644 billion from brokers who offer customers a way to gain FDIC insurance for multiple accounts.
Promontory Interfinancial Network LLC, an Arlington, Virginia-based company founded in 2002 by former federal officials --including some from the FDIC itself -- has figured out how to help wealthy clients insure as much as $50 million each by putting their money into separate accounts at 500 different banks.
While the law does limit insurance to $100,000 per account, it places no ceiling on the number of different banks where an individual can hold accounts -- a loophole Congress failed to close even after the savings and loan debacle of 1984- 1992.
Missing Discipline
Bair says brokered deposits can provide quick cash but also create potential danger.
``It is quite easy to get brokered deposits, and there's not a lot of market discipline with the brokered deposits,'' she says. ``When there's excessive reliance on them, particularly to fuel rapid growth on the balance sheet, that's definitely a high-risk factor.''
The other big source of money for banks is the FHLB, an under-the-radar network of 12 regional banks created by Congress in 1932 to help lenders finance mortgages. Lenders had borrowed a total of $840.6 billion from the FHLB system as of June 30, up 38 percent from $608 billion in the same period a year earlier.
Treasury Secretary Henry Paulson, in a little-noticed action on Sept. 7, the day after he announced the bailout of Fannie and Freddie, extended a secured credit line to the FHLB to provide an emergency source of funding if needed.
FHLB Advances
Vaughan says credit from the FHLB is keeping some sick banks afloat and postponing the inevitable.
`What's going to happen,'' he says, ``is that weak banks will use FHLB advances to avoid discipline from funding markets. In some cases, that will keep their doors open longer than they otherwise would, all-the-while offloading more and more potential losses onto the FDIC and taxpayers.''
Normally, the FDIC is no more than four initials customers see when they walk into their banks. In recent years, the agency hasn't had to close many banks, as it collected small amounts of insurance premium payments.
President Franklin D. Roosevelt signed the law creating the FDIC in the middle of the Depression. As part of the New Deal, Congress created a system of federal insurance to end bank runs by reassuring the public that depositing money in banks was safe. All banks paid the same rate for insurance.
Wave of Failures
The FDIC shares regulatory authority with other agencies. The Office of Thrift Supervision oversees federally chartered savings and loans, the Comptroller of the Currency monitors national banks, and state banking regulators review state- chartered banks.
The FDIC is the only one of these agencies that insures deposits.
By and large, the government's insurance system worked until the 1980s, when thrifts went on a commercial real estate lending binge, triggering a wave of failures and consolidation that lasted from 1984 to 1992.
In 1991, Congress changed the way FDIC premiums were assessed, requiring banks to pay rates based on how well capitalized they were for the risks they faced. As bank failures subsided to less than a dozen a year by 1995, the FDIC's reserves began to swell.
As a result, the agency cut to zero the premiums it charged to the 90 percent of the banks deemed safest. That free ride continued for 10 years.
`No Good Way'
In 2006, Congress increased insurance payments for most banks, averaging $5-$7 per $10,000 of deposits.
The insurance premiums imposed by the FDIC on the riskiest banks -- running as high as $43 per $10,000 -- are still far below the rates private insurers would charge, says Sherrill Shaffer, former chief economist of the Federal Reserve Bank of New York.
At the same time, charging struggling banks a fair price for insurance premiums may drive them into insolvency, he says.
``That can be destabilizing,'' says Shaffer, who's now a professor of banking at the University of Wyoming in Laramie. ``There's really no good way around that. It's an issue that policy makers and analysts have wrestled with for decades.''
Bair says the FDIC is gearing up for the coming wave of bank failures. She says she's developing a plan to raise insurance premiums.
The agency's Division of Resolutions and Receiverships has boosted authorized staffing levels by 48 percent, to 331, this year. It has hired 178 new financial specialists and called up 65 retirees for temporary service under a special program.
Bair vs. Enron
Bair, 54, an attorney who graduated from the University of Kansas School of Law, has challenged financial institutions as a regulator for more than a decade. President George W. Bush nominated her as chairman, and she was sworn in on June 26, 2006.
She replaced Donald Powell, a former Texas banker. In 1992, as a member of the Commodity Futures Trading Commission, Bair cast the lone vote against Enron Corp.'s effort to exempt certain energy contracts from the agency's anti-fraud and anti- market manipulation enforcement powers.
Nine years later, Enron blew up in one of the biggest financial scandals in U.S. history.
As assistant secretary of the Treasury for financial institutions in 2002, Bair criticized abusive subprime mortgage brokers.
``Lenders have made loans with little or no regard for a borrower's ability to repay and have engaged in multiple refinance transactions that result in little or no benefit to a borrower,'' she told the Pittsburgh Community Reinvestment Group on March 18, 2002.
`Rock and Brock'
Bair has published two children's books. One of them, ``Rock, Brock, and the Savings Shock'' (Albert Whitman, 2006) is a tale of two twins -- Rock the Saver and Brock the Spender -- that encourages thrift and explains the benefits of compound interest to elementary school readers.
Some of those lessons seem to have been lost on America's bankers and lawmakers, starting with the dangers of brokered deposits. During the S&L crisis, banks financed their lending spree by raising billions of dollars by selling FDIC-insured CDs, often at high interest rates, through brokers.
When banks rely on brokers to garner as much as 15 percent of their deposits, it's a red flag calling for closer examination by regulators, Yeager says.
'I Was Death'
William Isaac, who chaired the FDIC from 1981 to '85, tried to ban brokered deposits.
``I was death on brokered deposits,'' says Isaac, 64, now chairman of Vienna, Virginia-based Secura Group of LECG LCC, a bank consulting firm. ``I waged a major war against them. I lost that battle with courts and the Congress.''
In 1991, Congress passed a law banning banks that weren't classified as ``well capitalized'' by the FDIC from using brokered deposits. The law left open a loophole, and the FDIC made it wider. Banks that are just ``adequately capitalized'' are allowed to petition the agency for exemptions from the law.
From 2005 to 2007, 88 banks asked the FDIC for waivers, according to agency records. The FDIC granted approval to all of them.
``There are always financial incentives for banks in the U.S. to use brokered deposits to take on excessive risk without having to pay for it,'' Shaffer says. ``It allows them to bring in large chunks of money relatively quickly.''
In 1980, following lobbying from the S&L industry, Congress raised the ceiling on accounts that qualified for FDIC insurance to $100,000 from $40,000. That ceiling has holes in it.
$2 Million FDIC-Insured
A family of two adults and two children can get up to $2 million of FDIC insurance at just one bank.
Here's how: Each person opens an individual account, insuring a total of $400,000. They can hold four more insured joint accounts, each in the names of two family members, protecting another $400,000.
The family can protect $600,000 more if each spouse opens an account that's payable upon death to family members. Each adult can also insure $250,000 for individual retirement holdings in the same bank.
And a family-owned incorporated business qualifies for another $100,000 of insurance.
Banks don't always explain these rules to customers. They might not even know about them.
``They're very complex for depositors to understand,'' says Alan Blinder, 62, a former vice chairman of the Federal Reserve. ``My mother every once in a while asks me a question, and I don't always get it right. I have to scurry back to the rule book. It is complicated.''
Biggest Loophole
Blinder is now vice chairman of Promontory Interfinancial, the deposit broker that exploits the biggest FDIC loophole of all -- the one that allows individuals to have insured accounts at an unlimited number of banks. Isaac serves as an adviser to Promontory.
Along with the flood of brokered deposits that flows into their coffers, banks can also tap another source of money: loans from the Federal Home Loan Banks.
They lend money to banks at low interest rates, accepting mostly real estate debt worth as much as twice the value of the bank loans as collateral.
In 1989, until which FHLBs lent just to savings banks, Congress expanded the charter to allow most commercial banks to tap into the inexpensive source of loans. New York-based Citigroup Inc., the largest U.S. bank by assets, was the largest borrower this year, with $84.5 billion from the FHLBs as of June 30.
Lacks Staff
Former Fed economist Tim Yeager says FHLB offices lack the staff to keep up with financial conditions of their thousands of member banks.
``The Federal Home Loan Banks cannot effectively control or monitor the risks that are in these institutions,'' says Yeager, now a finance professor at the University of Arkansas at Fayetteville. ``As long as they have collateral, they're just going to lend.''
Behind the scenes, the surge of FHLB lending has created a clash of federal authorities. Bair says the ability of struggling banks to borrow billions from FHLB branches is likely to lead to large losses for her agency.
The FDIC can't start recovering assets from a failed bank until after the FHLB collects 100 percent of its loans.
``We really get a double whammy,'' says Bair, who has short dark hair and is dressed in a well-tailored gray suit, with a pearl necklace, as she speaks in San Francisco before participating in a panel discussion on financial education.
`I Have a Beef'
``The Federal Home Loan Bank has priority over us in the claims queue if we have to close the bank,'' she says. ``I have a beef with excessive reliance on Federal Home Loan Bank advances.''
John von Seggern, president of the Council of Federal Home Loan Banks, a nonprofit trade association that lobbies Congress on behalf of the 12 independently operated regional offices, says the FHLB provides an essential service, quickly dispatching low-interest loans to member banks.
``We are not the regulator,'' he says. ``Our role is to be the liquidity provider.'' He says the FHLBs would halt lending to a weak bank if a bank regulator asked; he doesn't remember that ever happening.
``If we turn off the tap, that bank would positively fail,'' he says. ``Even healthy banks would fail.''
Von Seggern opposes Bair's efforts to increase insurance premiums for FDIC member banks that rely on FHLB advances for a large share of their funding.
`Making Good Loans?'
``The question should be, `Are you making good loans?' as opposed to `Where did you get the money to fund those loans?''' von Seggern says. ``This is a tough issue. We are very interested in working with the FDIC in coming to an agreement that works for both of us.''
Vaughan of the Richmond Fed says the FHLBs will be stretched with more banks on the cusp of failing.
``U.S. bank supervisors barely have the staff to handle routine bank exams,'' he says.
``Now, when a bank falls into problem status, there's a lot of stuff you got to do,'' he says. ``You've got to monitor the condition of that institution continuously, put all kinds of enforcement on them and stay in contact with the bank to make sure they're doing what they need to do. Dealing with a long list of problem banks takes resources, and there aren't a lot of bodies to spare.''
As FDIC examiners find the truth about a bank's deteriorating condition, the agency faces a conundrum. It knows which banks are on the verge of failure, but in order to avoid customer panic, it doesn't make its watch list public.
No Warning
The FDIC gave no warning to the public or depositors that IndyMac was nearing collapse. The agency knew that IndyMac was at risk a month earlier when it placed it on the watch list, the FDIC says.
Still, as recently as May 12 -- two months before it failed -- IndyMac declared it was ``well capitalized'' by FDIC standards as of March 31.
When IndyMac collapsed, $10 billion, or a third of the bank's assets, were funded by FHLB advances. Another $5.5 billion came from brokered deposits.
Indymac specialized in so-called Alt-A loans, also known as liar loans because they didn't require borrowers to provide documentation of their income. The bank accepted whatever borrowers said they had in annual wages.
Bundled Loans
From 2003 to 2007, the bank had bundled many of its loans into securities and sold them to Wall Street firms. As the credit crisis took hold on Wall Street, the bank could no longer offload its mortgages.
It had $2.7 billion in bad loan reserves on its books on June 30, up from $813 million a year earlier. Over its final nine months, the bank reported losses totaling $896 million.
The agency almost always closes banks on Friday afternoons, after the close of the U.S. stock market. That timing allows FDIC examiners a weekend to prepare the bank to reopen the next business day.
Customers generally have uninterrupted access to their insured funds over the weekend through the use of debit cards and checks.
No Buyers
The FDIC shut down IndyMac at 6 p.m. New York time on Friday, July 11. The FDIC tried to find a buyer for IndyMac, as it had for every other bank that failed this year. That usually is the least-expensive solution.
No bank was willing to purchase IndyMac for a fair price, the FDIC says. So the FDIC took over bank management itself -- just the 13th time in the agency's 74-year history that it has taken control of a bank, spokesman Andrew Gray says.
The agency is now working to sell IndyMac's assets. One of its goals is to recoup customer losses of uninsured deposits from remaining bank holdings, Bair says.
The FDIC told 10,000 customers that it wasn't certain it could repay their $1 billion in deposits in excess of the $100,000 insurance limit. The agency told these depositors it would pay them 50 percent of their uninsured money in so-called dividends.
Further recovery of those uninsured assets will depend on the salvage value of the bank's holdings.
`A Big Mistake'
One IndyMac customer who had uninsured funds is Jeff Capistran, an architect undergoing chemotherapy for colon cancer. Capistran, 46, had planned to close his $127,000 account at the bank a few days before it was shut down, but he was unable to because of his medical treatment.
``I'm somewhat worried,'' he says. ``I made a big mistake.'' Still, the FDIC has told him he'll get half of his deposit above $100,000. ``I have faith they will come through with the rest,'' he says. ``This is an election year.''
On Monday, July 14, three days after the FDIC closed IndyMac, the bank reopened under FDIC supervision. More than a hundred depositors lined up to pull their money from the bank's Manhattan Beach branch.
Horn, the single mother who had shown up the previous Friday to find the branch shuttered, transferred all of her funds to a new account at Wells Fargo & Co. She says her new bank allowed her to withdraw just $5,000 and held the balance, $27,000, for two weeks.
``The mere fact that it was from IndyMac, they put a hold on it,'' she says. Wells Fargo spokeswoman Julia Bernard says her bank wouldn't have placed a hold on an IndyMac check unless it was unable to verify it.
`What's Going On?'
Which will be the next bank to fail? Depositors like Capistran and Horn have no way of knowing. Even the experts can be stumped.
``How are people supposed to know what's going on in the depths of the bank's balance sheets when the regulators, as we've learned in this crisis, don't even know?'' Blinder asks.
One warning sign may be the size of a bank's brokered deposits, Shaffer says.
``Banks that are in distress, facing a reluctance by the general public to place money in these banks, may be forced to turn to brokered deposits,'' he says.
Six of the 12 banks across the U.S. that failed this year relied on brokered deposits for more than 15 percent of their customer holdings. The average rate among all U.S. banks is 7.5 percent.
ANB Financial NA of Bentonville, Arkansas, had received 87 percent of its deposits from brokers; Columbian Bank & Trust Co. of Topeka, Kansas, had received 44 percent; and Silver State Bank of Henderson, Nevada, had received 41 percent.
Bite the Dust
In mid-September, investors were signaling that Seattle- based Washington Mutual, the nation's largest thrift, would be the next big lender to bite the dust.
It had reported losses totaling $6.3 billion during the previous three quarters.
WaMu, which has 2,300 branches, has a 98 percent chance of defaulting on its debt over the next five years, according to credit-default-swap traders, as of yesterday.
On Sept. 8, Washington Mutual fired CEO Kerry Killinger and disclosed that the Office of Thrift Supervision had heightened scrutiny of the bank.
Five percent of WaMu's $182 billion of residential mortgage holdings were in default on June 30, according to Moody's. On Sept. 11, Moody's reduced WaMu's senior unsecured debt rating to Ba2 from Baa3.
Since November 2007, Moody's has slashed that rating by six grades, to Ba2 from A2.
Tripled FHLB Loans
WaMu owns $53 billion of option-adjustable-rate mortgages, according to Moody's. Because these mortgages allow the homeowner to skip payments by adding them to their existing loans, WaMu failed to receive about $2.5 billion of interest payments in 2006 and 2007.
As of June 30, WaMu had gathered $34 billion through deposit brokers, which amounted to 18 percent of all its deposits, according to the FDIC. As bad loans grew, the bank raised cash by tripling its borrowing from the FHLBs during a 12-month period to $58.4 billion.
Advances as of June 30 represent 19 percent of WaMu's assets, up from 7 percent a year earlier.
About $45 billion of the deposits at WaMu aren't insured by the FDIC.
Across the U.S., still-standing banks large and small have similarities to the 11 that have failed.
Florida's Largest Bank
BankUnited Financial Corp., based in Coral Gables, Florida, is the state's largest bank. Hard hit by the collapse of the state's real estate market, BankUnited for the first time began using brokered deposits in the quarter ended on June 30.
It raised $268 million through such long-distance deposits in three months, according to its SEC filings, which showed $7.6 billion of total deposits on June 30. It brought in another $506 million the same way during the next six weeks.
BankUnited has borrowed $5.1 billion from the FHLB of Atlanta, amounting to 36 percent of its $14 billion in assets. The bank reported delinquent payments on $982 million, or 8 percent, of its loans as of June 30.
Fifty-eight percent of the bank's loans are option- adjustable-rate mortgages. Customers took advantage of that deferral option in 92 percent of those loans, filings show.
BankUnited reported losses of $117.7 million in the quarter ended in June. On Sept. 5, the OTS reclassified the bank to ``adequately capitalized'' from ``well capitalized.'' Without a waiver, the bank will be banned from receiving brokered deposits.
`Prospects Fraying'
The bank's stock has lost more than half of its value since it began trying unsuccessfully in June to raise $400 million in a stock sale.
``We see the prospects for viability increasingly fraying,'' says analyst David Bishop, who follows the bank at Stifel Nicolaus & Co. in Baltimore. BankUnited spokeswoman Melissa Gracey didn't return calls and e-mails requesting comment.
Investors may or may not be right about which banks will fail next. Only the regulators know, and even they may not be sure. What's in little doubt, though, is that more collapses are on the way.
Banks still hold too much toxic debt, says Kenneth Rogoff, chief economist of the International Monetary Fund from 2001 to 2003.
``Like any shrinking industry, we're going to see the upset of some major players,'' says Rogoff, who's now a finance professor at Harvard University in Cambridge, Massachusetts.
`Doesn't Make Sense'
``The only way to put discipline into the system is to allow some companies to go bust,'' he says. ``You can't just have an industry where they make giant profits or they get bailed out. That doesn't make any sense.''
Horn, the IndyMac depositor, has already experienced the fear of being separated from her life savings and watching hundreds of anxious fellow customers lined up outside her branch -- like a scene from a 1930s newsreel.
Even with FDIC insurance, she no longer takes it for granted that making a bank deposit is risk free.
``I just don't know if any investment -- even a bank deposit -- is safe anymore,'' she says.
MURTHA SUED!... Innocent Haditha Marine Files Slander Charges
Breaking via WHP-CBS:
A Marine Corps lance corporal from Pennsylvania has sued U.S. Rep. John Murtha, saying the Democrat lawmaker slandered him by saying he and other marines killed 24 Iraqis in Haditha in "cold blood." Justin Sharratt has filed the suit in federal court in Pittsburgh. In the lawsuit, Sharratt claims the comments Murtha made in 2006 about the Haditha killings also violated the Marine's constitutional rights to due process and presumption of innocence.Exonerated Haditha Marine Lance Cpl. Justin Sharratt filed charges against Rep. John Murtha today in Pennsylvania.
7 of 8 marines who have now had their charges dismissed.
One marine awaits justice.
Photos via Defend Our Marines
John Murtha slandered the Haditha Marines when he gave several interviews after the inaccurate story broke in TIME Magazine saying that the US marines killed innocent civilians in cold blood.
Pittsburgh Live reported:
A Marine from Washington County today plans to sue U.S. Rep. John Murtha for publicly claiming his unit slaughtered innocent Iraqi civilians, according to the man's attorney.Here is a powerful ad running in Pennsylvania by William Russell who is challenging John Murtha this year for his House Seat:
A lawyer for Lance Cpl. Justin Sharratt, 24, of Canonsburg on Wednesday announced plans to sue Murtha, D-Johnstown, for comments he made to news outlets concerning the November 2005 killing of about two dozen people in Haditha.
Murtha repeatedly said Sharratt and seven fellow Marines "committed cold-blooded murder of innocent women and children," according to lawyer Noah Geary, who scheduled a news conference for 1:30 p.m. today to announce the lawsuit.
You can donate to Russell's campaign Here.
You can read more on the Haditha Marines Here.
Ex-Muslim reveals secret goal of Islam
An Egyptian who fled Islam and now lives under that religion's sentence of death says the goal of global jihad simply is the takeover of the world.
Kemel said Islamic tradition teaches that those who leave Islam should be killed, and Muhammad taught, "Whoever leaves his religion (Islam) kill him." And while the U.S. is not governed by Islam's Shariah religious law, many fundamentalist Muslims do not see Shariah as being limited by national boundaries.
Kemel said the truth is that the events of Sept. 11, 2001, were the actions of those who were following the Quran closely.
"Sadly, I heard some of our American leaders and church pastors state that Islam is a peaceful religion, and what happened on 9/11 was done by fanatic Muslims," Kemel said. "These individuals ignore the fact that the main goal of Islam is to rule the world."
He said such instructions are clear in the Quran and Islam's hadiths, or sayings that have been handed down from generation to generation.
"Muslims all over the world are working hard to achieve [the] goal of submission of the entire world to Islam. They are particularly committed to the indoctrination of youth in madrassas, special Islamic schools, particularly in Pakistan and Indonesia," Kemel said.
He said the goal is to have at least 40 million Muslim youths who have memorized the entire Quran.
He said the "average peaceful Muslim and moderate western Muslim" are that way "because they have not studied the Quran."
"If a Muslim begins to study the Quran, understands the true religion of Islam, and what true Islam requires a true Muslim to do, he will either reject Islam or he will become a Muslim committed to violence," Kemel said.
Those who hijacked airplanes on 9/11 and killed thousands "are not extremists from a Quranic viewpoint; only a Western viewpoint," he said. ....
Making Lemonade from Lemons – How Something Good Might Come From This Fiscal Crisis
....For years Americans have talked about instituting some form of mandatory national public service, but the timing was never right. For the most part, the last thirty years have been an uninterrupted bull market with low unemployment, and great educational and job opportunities. Why would a young person want to spend a year in serving the country when so few of his contemporaries were? Nobody wanted to ‘lose a year’.
Senator Bunning Blasts ‘Financial Socialism’
Bush Urges Quick Passage of Bailout Plan to Avert Recession
In a rare prime-time address to the nation Wednesday night, Bush pushed lawmakers wrangling over the $700 billion bailout legislation to consider the consequences of inaction, stating that "our entire economy is in danger."
He warned of a looming "financial panic," and he said the legislative package must be enacted "as soon as possible."
"We are in the midst of a serious financial crisis, and the federal government is responding with decisive action," Bush said. ....
Scientist accused of selling rocket data to China
Shu Quan-Sheng, 68, made an initial appearance in U.S. District Court in Norfolk and is being held in jail until a bond hearing Monday.
Shu, the president of AMAC International Inc., is charged with two counts of violating the federal Arms Control Act and one count of bribery. If convicted, he faces up to 10 years on each arms count and five years for the bribery charge. ....
The Perils of Judicial Policymaking: The Practical Case for Separation of Powers
....One would suspect that if the courts are drawn into other areas of public policies, we will see similar results. Today, interest groups are asking judges to approve their favored policies on everything from global warming to the precise amount of educational spending per pupil. Each of these and countless other areas would require constant and clumsy judicial oversight, with each decision creating a myriad of unintended consequences that would only create further legal disputes requiring judicial resolution.
We would be well advised to consider Alexander Bickel's caution about looking to the courts to settle our most divisive and complicated political issues: "In dealing with problems of great magnitude and pervasive ramifications, problems with complex roots and unpredictably multiplying offshoots—in dealing with such problems, the society is best allowed to develop its own strands out of its tradition."[32] This point was in fact unwittingly illustrated by Missouri v. Jenkins. While the court forced unsound and bizarre experiments on the children of Kansas City, educational common sense was restored by the political action of minority parents.
For those who do not believe that the idea of self-government has outlived its usefulness, this is as it should be.
E pluribus hokum or When the gamblers bail out the casino
Why should American taxpayers give US Treasury Secretary "Hank" Paulson a blank check to bail out the shareholders of busted banks? Why should the Treasury turn itself into a toxic waste dump for their bad loans? Why not let other banks join the unlamented Brothers Lehman in bankruptcy court, and start a new bank with taxpayers' money? Or have the Treasury pay interest on delinquent mortgages, and make them whole? Even better, why not let the Chinese, or the Saudis or other foreign investors take control of failed American banks? They've got the money, and they gladly would pay a premium for an inside seat at the American table.
None of the above will occur. America will give between US$700-$800 billion to the Treasury to buy any bank assets it wants, on any terms, with no possible legal recourse. It is an invitation to abuse of power unparalleled in American history, in which ill-paid civil servants will set prices on the portfolios of the banking system with no oversight and no threat of legal penalty.
Why are the voices raised in protest so shrill and few? Why will Americans fall on their fountain-pens for their bankers? If America is to adopt socialism, why not have socialism for the poor, rather than for the rich? Why should American households that earn $50,000 a year subsidize Goldman Sachs partners who earn $5 million a year?
Believe it or not, there is a rational explanation, and quite in keeping with America's national motto, E pluribus hokum. Part of the problem is that Wall Street, like the ethnic godfather in the old joke, has made America an offer it can't understand. The collapsing the mortgage-backed securities market embodies a degree of complexity that mystifies the average policy wonk. But that is a lesser, superficial side of the story.
Paulson's dreadful scheme will become law, because Americans love their bankers. The bankers enable their collective gambling habit. Think of America as a town with one casino, in which the only economic activity is gambling. Most people lose, but the casino keeps lending them more money to play. Eventually, of course, the casino must go bankrupt. At this point, the townspeople people vote to tax themselves in order to bail out the casino. Collectively, the gamblers cannot help but lose; individually they nonetheless hope to win their way out of the hole.
Americans are so deep in the hole that they might as well keep putting borrowed quarters into the one-armed bandit. They have hardly saved anything for the past 10 years. Instead, they counted on capital gains to replace the retirement savings they never put aside, first in tech stocks, then in houses. That hasn't worked out. The S&P 500 Index of American equities today is worth what it was in 1997, after adjusting for inflation (and a pensioner who sells stock purchased in 1997 will pay a 20% capital gains tax on an illusory inflationary gain of 40%). Home prices doubled between 1997 and 2007 before falling by more than 20%, with no floor in sight.
As it is, many of the baby boomers now on the verge of retirement will spend their declining years working at Wal-Mart or McDonalds rather than cruising the Caribbean. Some of them still have time to tighten their belts and save 10% of their income (by consuming 10% less), plus a good deal more to compensate for the missing savings of the 1990s.
Altogether, they'd rather gamble, and if that requires a bailout of the house, they gladly will chip in to pay for it. After all, today's baby boomers won't pay for the bailout. The next generation of taxpayers will pay for Paulson's $700-$800 billion. If that enables the present generation to keep borrowing rather than saving, it is no skin off their back. If home prices continue to collapse, the baby boomers will die in debt anyway, working at low-paying jobs until the day before their funerals.
The homeowners of America hope against hope that somehow, sometime, the price of their one only asset will bounce back. The character of Mortimer Duke in the 1983 film Trading Places comes to mind. After losing his fortune in the frozen orange juice futures market, Duke screams, "I want trading reopened right now. Get those brokers back in here! Turn those machines back on! Turn those machines back on!" If a reverse takeover of the US government by Goldman Sachs is what it takes to turn the machines back on, the American public will support it. Sadly, there is no reason to expect the bailout of bank shareholders to have any effect at all on American home prices, which will continue to sink into the sand.
Contrary to what the Bush administration says, it is not the case that banks' troubled mortgage assets cannot be sold in the private market. Those are the so-called "Level III" assets that banks say they cannot value. But that is only a dodge that the banks use to postpone taking losses. There is a ready bid for these assets from hedge funds, in multi-hundred-billion-dollar size. The trouble is that the market bid is 25% to 30% below the prices that banks carry these assets on their books. Traders at Wall Street boutiques who specialize in distressed securities say that US regional banks regularly make discreet offers to sell private mortgage-backed securities (not guaranteed by a federal agency) at prices, for example, of 75 to 80 cents on the dollar. Hedge funds bid, for example, 55 to 60 cents in return.
On rare occasions, the bank seller and the hedge fund buyer will meet in the middle, although very few transactions occur. Although many banks are desperate to sell, they cannot accept the offered price without taking losses over the threshold of mortality, for write-downs of this magnitude would destroy their shareholders' capital. Investment banks typically hold about $30 of securities for every $1 of capital, so a 3% write-down would leave them insolvent. Lehman Brothers classified 14% of its assets as Level III at the end of the first quarter; Goldman Sachs was at 13%. Why is Lehman bankrupt, and Goldman Sachs still in business? If Secretary Paulson, the former head of Goldman Sachs, had not proposed a general bailout last week, we might already have had the answer to that question.
For the Paulson bailout to be helpful to the banks, it must buy their securities at much higher prices than the private market is willing to pay. Otherwise it makes no sense at all, for the banks could sell at any moment to the hedge funds. But that is a subsidy to private banks, administered at the whim of the Treasury Secretary, without oversight and without the possibility of legal recourse.
Some Democrats in Congress are asking for some form of oversight, but it is hard to imagine how they might use it, for a Treasury with $800 billion to spend would constitute the whole market bid for low-quality mortgage assets, and would set whatever prices it wished. Professionals with years of experience set prices on these securities with great uncertainty. How would an overseer determine if it had set the correct price? And if the Treasury decided to bail out one bank (say, Goldman Sachs) rather than another, how would the overseer judge whether that decision was judicious, politically motivated, venal, or arbitrary?
Opposition to the Treasury plan is disturbingly thing. Bloomberg News on June 21 quoted the Democratic chairman of the Senate Banking Committee, Christopher Dodd, saying, "I know of nobody who is arguing over the amount of money or even about that the secretary ought to have the authority to purchase these toxic instruments, these bad debts."
Why the taxpayers of America would allow their pockets to be picked in this fashion requires a different sort of explanation than one finds in economics textbooks. My analogy of gamblers taxing themselves to bail out the casino is inspired, in part, by a remarkable new book by the Canadian economists Reuven and Gabrielle Brenner (with Aaron Brown), A World of Chance. In effect, the Brenners re-interpret economic theory in terms of gambling, showing how profoundly gambling figures into human behavior, especially in such matters as so-called life-cycle investing. The 50-ish householder who has not made enough to retire may take outsized chances, considering that as matters stand, he will work until he drops dead in any case. The Brenners write:
If people reach the age of fifty or fifty-five and have not "made it," what are their financial options to still live the good life? Except for allocating a few bucks to buy lottery tickets, it is hard to think of any other option. If people find themselves down on their luck and see no immediate opportunities to get rich, what can they do to sustain their hopes and dreams? Allocating a fraction of their portfolios with a chance to win a large prize is among the options. And when people are leapfrogged - that is, when some "Joneses" who were "below" them jump ahead - how can they catch up? They will tend to challenge their luck for a while, taking risks that they might have contemplated before in business, financial markets, and other areas but did not follow up with action.A World of Chance undermines our usual view of "economic man" and substitutes the angst-ridden, uncertain denizen of a world that offers no certainties and requires risk-taking as a matter of survival. I hope to offer a proper review of the work in the near future. As my marker, though, permit me to leave the thought that for providing a theoretical foundation for the counter-intuitive behavior of American taxpayers, the Brenners deserve the Nobel Prize in economics.
Alas for the gamblers of America: they will tax themselves to keep the casino in operation, but it will not profit them. Where, oh where, is America's Vladimir Putin, who will drive out the oligarchs who have stolen the country's treasure and debased its currency?
China banks told to halt lending to US banks-SCMP
BEIJING, Sept 25 (Reuters) - Chinese regulators have told domestic banks to stop interbank lending to U.S. financial institutions to prevent possible losses during the financial crisis, the South China Morning Post reported on Thursday.
The Hong Kong newspaper cited unidentified industry sources as saying the instruction from the China Banking Regulatory Commission (CBRC) applied to interbank lending of all currencies to U.S. banks but not to banks from other countries.
"The decree appears to be Beijing's first attempt to erect defences against the deepening U.S. financial meltdown after the mainland's major lenders reported billions of U.S. dollars in exposure to the credit crisis," the SCMP said.
A spokesman for the CBRC had no immediate comment. (Reporting by Alan Wheatley and Langi Chiang; editing by Ken Wills)
The Birk Plan for Economic Recovery
Hi Pals,
I'm against the $85,000,000,000.00 bailout of AIG. Instead, I'm in favor of giving $85,000,000,000 to America in a We Deserve It Dividend.
To make the math simple, let's assume there are 200,000,000 bonafide U.S. Citizens 18+.
Our population is about 301,000,000 +/- counting every man, woman and child. So 200,000,000 might be a fair stab at adults 18 and up..
So divide 200 million adults 18+ into $85 billion that equals $425,000.00. My plan is to give $425,000 to every person 18+ as a We Deserve It Dividend. Of course, it would NOT be tax free.
So let's assume a tax rate of 30%. Every individual 18+ has to pay $127,500.00 in taxes. That sends $25,500,000,000 right back to Uncle Sam. But it means that every adult 18+ has $297,500.00 in their pocket.
A husband and wife has $595,000.00. What would you do with $297,500.00 to $595,000.00 in your family? Pay off your mortgage - housing crisis solved. Repay college loans - what a great boost to new grads. Put away money for college - it'll be there. Save in a bank - create money to loan to entrepreneurs. Buy a new car - create jobs. Invest in the market - capital drives growth. Pay for your parent's medical insurance - health care improves. Enable Deadbeat Dads to come clean - or else
Remember this is for every adult U S Citizen 18+ including the folks who lost their jobs at Lehman Brothers and every other company that is cutting back. And of course, for those serving in our Armed Forces.
If we're going to re-distribute wealth let's really do it...instead of trickling out a puny $1000.00 ("vote buy" ) economic incentive that is being proposed by one of our candidates for President.
If we're going to do an $85 billion bailout, let's bail out every adult U S Citizen 18+! As for AIG - liquidate it. Sell off its parts.
Let American General go back to being American General. Sell off the real estate. Let the private sector bargain hunters cut it up and clean it up.
Here's my rationale. We deserve it and AIG doesn't. Sure it's a crazy idea that can "never work." But can you imagine the Coast-To-Coast Block Party!
How do you spell Economic Boom? I trust my fellow adult Americans to know how to use the $85 Billion. We Deserve It Dividend more than I do the geniuses at AIG or in Washington DC
And remember, The Birk plan only really costs $59.5 Billion because $25.5 Billion is returned instantly in taxes to Uncle Sam.
Ahhh...I feel so much better getting that off my chest.
Kindest personal regards,
Birk
A Creative Guy & Citizen of the Republic
