Posts
DEBKAfile’s intelligence sources report that it took Damascus a year to recover from the demolition of its plutonium project at El Kibar in northern Syria, but already the nuclear scientists and technicians who were to have been employed there have been hired for new projects. This time the installations are scattered in different parts of the country. North Korean nuclear experts are back too. ....
Sunday, September 28, 2008
Here is the latest bailout draft bill if you can’t access the House website
The House website is down.
I’ve uploaded the most recent bailout draft bill right here:
Via N.Z. Bear, here’s a quick-and-dirty, section-by-section analysis of the latest draft going around the Hill: .....
Bailout Plan! The House Aint Buyin It!!
Video
If you want to understand why the House Republicans are protecting taxpayers' hard-earned money by not buying the bailout plan, watch this video!
Building a National Enterprise to Keep America Safe, Free, and Prosperous
In 2004, a task force chaired by homeland security experts from the Center for Strategic and International Studies (CSIS) and The Heritage Foundation (and consisting of representatives from academia, research centers, the private sector, and congressional staffs) presented its conclusions in "DHS 2.0: Rethinking the Department of Homeland Security." Their report evaluated the capacity of the Department of Homeland Security (DHS) to fulfill its mandate as set out in the Homeland Security Act of 2002. Their evaluation was based on four criteria: management, roles and missions, authorities, and resources. It offered more than 40 major recommendations and made the case for a significant reorganization of the DHS to improve this instrument's effectiveness and efficiency for preventing and responding to terrorist threats. Many of these proposals in the report were subsequently adopted by Congress and the Secretary of Homeland Security.
Four years later, this follow-up report concludes that, while many still find the department a work in progress, the most pressing needs for enhancing the protection of the country from transnational terrorist threats do not lie in further major reorganization of the DHS or revisiting its roles and missions. Rather Congress and the Administration should shift their focus to strengthening the effectiveness of the national homeland security enterprise as a whole.
The terrorist threat is nimble and dynamic. It exploits the seams of our society, operating in the gaps between bureaucratic notions of foreign and domestic, state and federal, civil and military. To counter this threat, we must build a national homeland security enterprise that is as agile and seamless as those who seek to harm us. The objective of this report is to highlight the most critical tasks for building such an enterprise.
To be more agile, our bureaucracy must foster better decision making in Congress and in the interagency process, support the development of a new generation of professionals, and facilitate information sharing throughout all elements of the enterprise. Furthermore, to close the gaps where terrorists hide, we must empower individuals and communities and extend international cooperation throughout our homeland security activities.
Each section of this report consists of findings and recommendations agreed upon by the task force. Major recommendations in the report include:
- Empowering a national culture of preparedness by focusing on building more self-reliant communities and individuals,
- Shifting to a strategy that is focused on building and sustaining a resilient national infrastructure,
- Expanding international cooperation throughout homeland security programs,
- Developing a framework for domestic intelligence, and
- Establishing national programs to improve professional development at all levels of governance on security and public safety.
The next Congress and Administration have an opportunity to look at our national homeland security enterprise anew. In doing so, they should adopt specific initiatives to address these critical tasks. The Administration should adopt an interagency approach led by a revitalized, reorganized, and integrated National Security Council that treats domestic and international security concerns in a more holistic manner.
In addition to consolidating committee jurisdiction over the DHS and creating committees to oversee interagency education, assignments, and accreditation, Congress should establish a bipartisan caucus that meets regularly to consider issues that affect the national homeland security enterprise. Both the next Congress and Administration need to engage private businesses and the American people—two great, but seemingly forgotten strengths of American society—more effectively to persuade them to contribute to and participate in homeland security.
Protecting America at home is a national mission that requires the concerted effort of the nation, including state and local governments, the private sector and nongovernmental organizations, local communities, families, and individuals. Many of the most vital tasks are conducted most effectively in a decentralized manner. The national enterprise must facilitate cooperation, innovation, resiliency, flexibility, and adaptability, not promote rigid Washington-centric solutions. In addition, virtually every aspect of domestic security from securing the border to disaster response has an international dimension requiring the cooperation of friends and allies around the world. We are facing threats—naturally occurring and deliberate—that can, will, and do target all elements of our society. It is therefore incumbent upon all elements of our society to work together to counter these threats.
While this report's 25 recommendations are grouped by critical task subject, many of the proposals are interdependent, affecting more than one mission area. In particular, the initiatives regarding community preparedness and resiliency of national infrastructure and global systems dovetail closely. Thus, the task force envisions these recommendations as integral parts of a holistic strategy for building the national homeland security enterprise that the nation needs, not as a menu from which policymakers should pick and chose.
Your scorecard for understanding mortgage scandal
Find out who's who in the 'Rogues Gallery' of economic crisis
As Congress works on a $700 billion bailout plan for the U.S. financial system, the FBI has extended fraud investigations to 26 companies involved in mortgage lending. Authorities are attempting to determine whether any of the firms have participated in accounting fraud, insider trading or inflating values of mortgage-related assets. The FBI has not disclosed a list of companies under investigation, but the following are just a few firms in distress and executives under scrutiny. ....
As Congress works on a $700 billion bailout plan for the U.S. financial system, the FBI has extended fraud investigations to 26 companies involved in mortgage lending. Authorities are attempting to determine whether any of the firms have participated in accounting fraud, insider trading or inflating values of mortgage-related assets. The FBI has not disclosed a list of companies under investigation, but the following are just a few firms in distress and executives under scrutiny. ....
Pirates die strangely after taking Iranian ship
By Andrew Donaldson
A tense standoff has developed in waters off Somalia over an Iranian merchant ship laden with a mysterious cargo that was hijacked by pirates.
A tense standoff has developed in waters off Somalia over an Iranian merchant ship laden with a mysterious cargo that was hijacked by pirates.
Somali pirates suffered skin burns, lost hair and fell gravely ill “within days” of boarding the MV Iran Deyanat. Some of them died.
Andrew Mwangura, the director of the East African Seafarers’ Assistance Programme, told the Sunday Times: “We don’t know exactly how many, but the information that I am getting is that some of them had died. There is something very wrong about that ship.”
The vessel’s declared cargo consists of “minerals” and “industrial products”. But officials involved in negotiations over the ship are convinced that it was sailing for Eritrea to deliver small arms and chemical weapons to Somalia’s Islamist rebels.
The drama over the Iran Deyanat comes as speculation grew this week about whether the South African Navy would send a vessel to join the growing multinational force in the region.
A naval spokesman, Lieutenant-Commander Greyling van den Berg, told the Sunday Times that the navy had not been ordered by the government to become involved in “the Somali pirate issue”.
About 22000 ships a year pass through the Suez Canal and the Gulf of Aden, where regional instability and “no-questions-asked” ransom payments have led to a dramatic rise in attacks on vessels by heavily armed Somali raiders in speedboats.
The Iran Deyanat was sailing in those waters on August 21, past the Horn of Africa and about 80 nautical miles southeast of Yemen, when it was boarded by about 40 pirates armed with AK-47s and rocket-propelled grenades. They were alleged members of a crime syndicate said to be based at Eyl, a small fishing village in northern Somalia.
The ship is owned and operated by the Islamic Republic of Iran Shipping Lines, or IRISL, a state-owned company run by the Iranian military.
According to the US Treasury Department, the IRISL regularly falsifies shipping documents to hide the identity of end users, uses generic terms to describe shipments and operates under various covers to circumvent United Nations sanctions.
The ship set sail from Nanjing, China, at the end of July. According to its manifest, it was heading for Rotterdam where it would unload 42500 tons of iron ore and “industrial products” purchased by a German client.
At Eyl, the ship was secured by more pirates — about 50 on board, and another 50 on shore.
But within days those who had boarded the ship developed mysterious health trouble.
This was also confirmed by Hassan Allore Osman, minister of minerals and oil in Puntland, an autonomous region of Somalia.
He headed a delegation sent to Eyl when news of the toxic cargo and illnesses surfaced.
He told one news publication, The Long War Journal, that during the six days he had negotiated with the pirates, a number of them had become sick and died.
“That ship is unusual,” he was quoted as saying. “It is not carrying a normal shipment.”
The pirates did reveal that they had tried to inspect the ship’s cargo containers when some of them fell sick — but the containers were locked.
Osman’s delegation spoke to the ship’s captain and its engineer by cellphone, demanding to know more about the cargo.
Initially it was claimed the cargo contained “crude oil”; later it was said to be “minerals”.
And Mwangura has added: “Our sources say it contains chemicals, dangerous chemicals.”
But IRISL has denied that — and threatened legal action against Mwangura. The company has reportedly paid the pirates 200000 — the first of several “ransom instalments”, but that, too, has been denied.US Financial Crisis: Where is all began .... note the date
Read this carefully.......It wasn't GWB's administration that started this ...... it was long before. Notice the date on NY Times article in 1999.
Pelosi: Dems bear no responsibility for economic crisis
By STEVEN A. HOLMES
Published: September 30, 1999
In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.
The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.
Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.
''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer (and current Obama advisor) . ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''
Pass the salt, please.
The article below gives more information regarding those values and how they get there. It confirms much of what appears in the Holmes article that initiated this thread and then what happened AFTER the Holmes article was written in 1999. This could be one of the most informative e-mail articles you read this month, maybe even this year!
How the Democrats Created the Financial Crisis: Kevin Hassett
Commentary by Kevin Hassett
Sept. 22 (Bloomberg) -- The financial crisis of the past year has provided a number of surprising twists and turns, and from Bear Stearns Cos. to American International Group Inc., ambiguity has been a big part of the story.
Why did Bear Stearns fail, and how does that relate to AIG? It all seems so complex.
But really, it isn't. Enough cards on this table have been turned over that the story is now clear. The economic history books will describe this episode in simple and understandable terms: Fannie Mae and Freddie Mac exploded, and many bystanders were injured in the blast, some fatally.
Fannie and Freddie did this by becoming a key enabler of the mortgage crisis. They fueled Wall Street's efforts to securitize subprime loans by becoming the primary customer of all AAA-rated subprime-mortgage pools. In addition, they held an enormous portfolio of mortgages themselves.
In the times that Fannie and Freddie couldn't make the market, they became the market. Over the years, it added up to an enormous obligation. As of last June, Fannie alone owned or guaranteed more than $388 billion in high-risk mortgage investments. Their large presence created an environment within which even mortgage-backed securities assembled by others could find a ready home.
The problem was that the trillions of dollars in play were only low-risk investments if real estate prices continued to rise. Once they began to fall, the entire house of cards came down with them.
Turning Point
Take away Fannie and Freddie, or regulate them more wisely, and it's hard to imagine how these highly liquid markets would ever have emerged. This whole mess would never have happened.
It is easy to identify the historical turning point that marked the beginning of the end.
Back in 2005, Fannie and Freddie were, after years of dominating Washington, on the ropes. They were enmeshed in accounting scandals that led to turnover at the top. At one telling moment in late 2004, captured in an article by my American Enterprise Institute colleague Peter Wallison, the Securities and Exchange Commission's chief accountant told disgraced Fannie Mae chief Franklin Raines that Fannie's position on the relevant accounting issue was not even ``on the page'' of allowable interpretations.
The clear gravity of the situation pushed the legislation forward. Some might say the current mess couldn't be foreseen, yet in 2005 Alan Greenspan told Congress how urgent it was for it to act in the clearest possible terms: If Fannie and Freddie ``continue to grow, continue to have the low capital that they have, continue to engage in the dynamic hedging of their portfolios, which they need to do for interest rate risk aversion, they potentially create ever-growing potential systemic risk down the road,'' he said. ``We are placing the total financial system of the future at a substantial risk.''
What happened next was extraordinary. For the first time in history, a serious Fannie and Freddie reform bill was passed by the Senate Banking Committee. The bill gave a regulator power to crack down, and would have required the companies to eliminate their investments in risky assets.
Different World
If that bill had become law, then the world today would be different. In 2005, 2006 and 2007, a blizzard of terrible mortgage paper fluttered out of the Fannie and Freddie clouds, burying many of our oldest and most venerable institutions. Without their checkbooks keeping the market liquid and buying up excess supply, the market would likely have not existed.
But the bill didn't become law, for a simple reason: Democrats opposed it on a party-line vote in the committee, signaling that this would be a partisan issue. Republicans, tied in knots by the tight Democratic opposition, couldn't even get the Senate to vote on the matter.
That such a reckless political stand could have been taken by the Democrats was obscene even then. Wallison wrote at the time: ``It is a classic case of socializing the risk while privatizing the profit. The Democrats and the few Republicans who oppose portfolio limitations could not possibly do so if their constituents understood what they were doing.''
Mounds of Materials
Now that the collapse has occurred, the roadblock built by Senate Democrats in 2005 is unforgivable. Many who opposed the bill doubtlessly did so for honorable reasons. Fannie and Freddie provided mounds of materials defending their practices. Perhaps some found their propaganda convincing.
But we now know that many of the senators who protected Fannie and Freddie, including Barack Obama, Hillary Clinton and Christopher Dodd, have received mind-boggling levels of financial support from them over the years.
Throughout his political career, Obama has gotten more than $125,000 in campaign contributions from employees and political action committees of Fannie Mae and Freddie Mac, second only to Dodd, the Senate Banking Committee chairman, who received more than $165,000.
Clinton, the 12th-ranked recipient of Fannie and Freddie PAC and employee contributions, has received more than $75,000 from the two enterprises and their employees. The private profit found its way back to the senators who killed the fix.
There has been a lot of talk about who is to blame for this crisis. A look back at the story of 2005 makes the answer pretty clear.
Footnote bailout
(Kevin Hassett, director of economic-policy studies at the American Enterprise Institute, is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: Kevin Hassett at khassett@aei.org
Last Updated: September 22, 2008 00:04 EDT
Backlash to Obama officials squelching political speech
Following legal threats by Missouri state law-enforcement officials supporting Barack Obama against presidential campaign ads that appeared to be false or misleading, Gov. Matt Blunt today likened the intimidation to "police state tactics."
"St. Louis County Circuit Attorney Bob McCulloch, St. Louis City Circuit Attorney Jennifer Joyce, Jefferson County Sheriff Glenn Boyer, and Obama and the leader of his Missouri campaign Senator Claire McCaskill have attached the stench of police state tactics to the Obama-Biden campaign," said Blunt in a statement released today. "What Senator Obama and his helpers are doing is scandalous beyond words, the party that claims to be the party of Thomas Jefferson is abusing the justice system and offices of public trust to silence political criticism with threats of prosecution and criminal punishment." ....
Tentative accord reached on bailing out bankers
(Compiler's note: We the American people -- those paying for this social re-engineering failure -- had better read very carefully what it ultimately written down. Some of the same people who set up this failure are now trying to "fix it." And I for one would not trust them to run a shoe shine business let alone this newly proposed wall street operation that has global impact. You can be sure that the "devil will be in the details." Since we will be paying for their mess, the politicians can be sure that this time we will be watching and speaking with our votes.)
The Seattle Times - Sunday, September 28, 2008
Congressional negotiators and the Bush administration's top Treasury officials go to work Sunday on settling the final details of a historic $700 billion Wall Street bailout aimed at keeping credit flowing and saving the nation's shaky economy from collapsing into a crippling recession.
"We've made great progress. We have to get it committed to paper so that we can formally agree," House Speaker Nancy Pelosi, D-Calif., told reporters in announcing the tentative deal shortly after midnight Sunday.
Congressional leaders hope to have a House vote on the measure Monday, with a vote in the Senate coming later.
All sides expressed optimism and Senate Majority Leader Harry Reid, D-Nev., said he expected an announcement soon.
"We've still got more to do to finalize it, but I think we're there," said Treasury Secretary Henry Paulson, who participated in the negotiations in the Capitol.
"We worked out everything," said Sen. Judd Gregg, R-N.H., the chief Senate Republican in the talks.
Under the plan, the federal government would purchase mortgage-backed securities and other bad debts held by banks and other investors. The money should help troubled lenders make new loans and keep credit lines open. The government would later try to sell the discounted loan packages at the best possible price.
At the insistence of House Republicans, some of the program's $700 billion would be devoted to a program that would encourage holders of distressed mortgage-backed securities to keep them and buy government insurance to cover defaults.
The legislation would place "reasonable" limits on severance packages for executives of companies that benefit from the rescue plan, said a senior administration official who was authorized to speak only on background.
It also calls for the financial sector to help make up the difference if the government does not recoup its investment in five years, the official said, but details remained unclear.
Also, the government would receive stock warrants in return for the bailout relief, giving taxpayers a chance to share in financial companies' future profits.
To help struggling homeowners, the plan would require the government to try renegotiating the bad mortgages it acquires with the aim of lowering borrowers' monthly payments so they can keep their homes.
Despite the changes made during an intense week of negotiations, the heart of the program remains President Bush's original idea: spend billions of taxpayer dollars to buy mortgage-backed securities whose value has plummeted.
The White House said it was pleased with the progress made on the bill.
US, Iraq step up operations against Iranian terror groups
US forces detained five members of the Hezbollah Brigades in Baghdad on Saturday as part of a renewed push to blunt the return of Iranian-backed Shia terror groups reentering Iraq. The Iraqi and US military have stepped up operations against the Special Groups over the past two weeks. Iraqi and US forces killed two Special Groups fighters and captured 107 since Sept. 16.
The latest series of raids in Baghdad netted five members of the Hezbollah Brigades in New Baghdad, a former stronghold of Muqtada al Sadr's Mahdi Army. The Hezbollah Brigades is an Iranian-backed terror group that has been behind multiple roadside bombings and rocket attacks against US and Iraqi forces in Baghdad. The group films these attacks and posts them on the internet. More than 30 Hezbollah Brigades operatives have been captured over the past two months. The group is estimated at having several hundred members. ....
Deepening financial crisis engulfs the banking industry
By Louise Armitstead
As Washington Mutual became America’s biggest bank failure and politicians argue over the terms of a $700bn rescue plan, a solution to the global credit crisis looked more remote than ever.
As Washington Mutual became America’s biggest bank failure and politicians argue over the terms of a $700bn rescue plan, a solution to the global credit crisis looked more remote than ever.
It has already become an iconic moment. On Thursday, Henry 'Hank’ Paulson, the US Treasury Secretary and a man with a personal fortune estimated at $700m (£380m), bent down on one knee before the most powerful woman in Congress, Nancy Pelosi, and begged her to save his plan to rescue Wall Street.
It didn’t work. Ten days after America announced a $700bn bailout for its stricken banks, weary financiers on both sides of the Atlantic went home for the weekend convinced their futures were in the hands of a group of American politicians whose priority was an election in a month, not the markets on Monday.
President Bush repeatedly pleaded with Congress to back the deal. “This sucker could go down,” Bush told them, apparently referring to the teetering US economy.
Congressional staff worked until 2am on Saturday morning and resumed again at 7am in an attempt to reach an agreement on the bailout – which could be the most extensive peacetime state intervention in the financial system since the Great Depression – by the time the markets open in Asia tomorrow.
However, Congressmen were under intense pressure to reject the bailout, which would allow the US government to buy toxic housing-related investments from banks.
A source close to the meetings said: “American Congressmen are being lobbied by voters at a scale of nearly 100 to 1 to vote against this bailout. It could be politically lethal to be seen as the ones taking the side of Wall Street against the people.”
Not, screamed Wall Street, as dangerous as the impact on financial markets if it were not granted. Last week Warren Buffett, America’s richest man and most famous investor with a huge retail following, tried to impress the importance: “This is sort of an economic Pearl Harbor we’re going through. I’m sure we didn’t want to go to war in 1941. There are times when events force a timetable on you and force action. If they think about it for three weeks, it will be very different and more difficult.”
Bob Diamond, boss of Barclays Capital and new owner of Lehman Brothers in America, told The Sunday Telegraph: “The reality is that the world needs a functioning financial system and it’s up to everyone involved to make sure this happens.”
Another senior banker said: “I don’t think people realise how serious this is. We are facing a full-scale meltdown of the financial system and liquidity is drying up. Imagine not being able to withdraw cash from the banks to buy food. This, in financial terms, is what’s happening. There is no way this bailout can’t happen. It’s about confidence and the blow would be huge.”
Bankers pointed to the events of last week as proof. While the markets had soared last Friday on news of the bailout, within days the uncertainty surrounding it had again unleashed fresh fear into the markets.
Overnight last Sunday, Morgan Stanley and Goldman Sachs were converted from independent to ordinary regulated banks, adding shocking emphasis to the depth of the crisis: Wall Street as it had long been known ceased to exist.
Then as politicians wrangled, the interbank lending market froze.
On Thursday, regulators seized control of Washington Mutual, making it the biggest banking failure in US history. Then shares in Wachovia, the fourth largest bank in the US, fell 27 per cent on Friday. In the panic, fresh doubts were poured on the future of Morgan Stanley as its credit default swap rate widened dramatically, a sign of extreme distress.
By now all eyes were fixed on the bailout as the market’s only hope.
Yet this weekend, City pessimists argued that Paulson’s plan might not work, even if it does get through Congress. They said confidence in the banks was shattered beyond repair when Paulson let Lehman Brothers fail and that no amount of US taxpayer money set aside to buy toxic assets from banks will get banks to start lending to one another again. Neither will it get investors to start buying bank shares again.
Instead, they argued, investors and banks themselves will keep scouting for – and steering clear of – institutions perceived to be the weakest links in the financial system. This self-fulfilling process could well lead to a 1930s-style domino effect of failing banks.
“I think Paulson has gone for the wrong model,” a senior London banker said on Friday. “The model he chose was the one used to bail out bankrupt US building societies in the 1980s. The model he should have chosen was used to inject government funds directly into banks in the 1930s.”
Others argued, the panic was being overblown by self-important bankers who ought to take responsibility for their own mistakes during what Gordon Brown has condemned as the “age of irresponsibility”. They pointed to the fact that plenty of banks have managed the downturn perfectly well and are now in a position of strength.
Barclays, which made write-downs early in the crisis, has bought Lehman Brothers’ US operations from administration in a move that propelled the British bank up the table of global powerhouses.
This weekend, Diamond said: “All banks have assets they’d prefer not to have on their balance sheets. If you’d asked me a month ago if we were going to buy an investment bank, the answer would be very, very unlikely. This unique opportunity came very quickly. Opportunities only come along in crises.”
Similarly, Deutsche Bank has quietly made four acquisitions over the summer.
But even the strong banks recognised the importance of the US bailout to the wider economy.
Michael Cohrs, head of global banking at Deutsche Bank said: “Our losses, while modest are not acceptable. But we continuing to work hard to ensure we are in the best shape to cope with this crisis. Ensuring stability in the US markets is important for us all. The bailout will not solve the problems but if doesn’t happen it will be yet another negative. There’s a psychology to a crisis and more bad news compounds the problems.”
Last week was meant to be a fresh start. After the collapse of Lehman, the fire sale of Merrill Lynch and HBOS and the nationalisation of AIG, news of the Fed’s planned bailout announced on Thursday was supposed to be the bottom line. On Friday soaring markets reflected a new optimism in the financial system .
Instead, on Monday morning, the two last remaining investment banks, Morgan Stanley and Goldman Sachs, admitted they had been forced to seek humbling rescue measures too.
The most prestigious titans of finance had relinquished their independent status and became standard, regulated banks. Wall Street as it has long been known ceased to exist.
Morgan Stanley then rapidly announced talks to sell a stake to Mitsubishi UFJ Financial while it emerged that Warren Buffett had bought a stake in Goldman on very favourable terms.
One rival said: “The real shock was Goldman. If Goldman were in trouble, we all were.”
It was a reality Goldman’s chief executive Lloyd Blankfein had been fighting for nearly two weeks.
On Friday, September 12 Blankfein joined 30 other bosses for a crisis meeting called by the Fed in New York. They had been told that Lehman was in big trouble and would probably collapse if a buyer could not be found .
Blankfein was considered a leader of the pack, not just because he was the boss of Wall Street’s smartest bank, but he was old chums with the chairmen of the meeting, Paulson, from the US Treasurer’s Goldman days.
He was also on the 'strong side’ of the room – among those considered to have best withstood the financial maelstrom of the past year .
While Bear Stearns went bust and others haemorrhaged unprecedented losses, Goldman adopted the lofty role of adviser and stabiliser.
Yet it was in this meeting that a new reality was realised. The dire problems of Lehman, AIG and Merrill made it clear that this was no longer about weak or strong institutions but about a huge crisis of confidence from which none of them were safe.
One Goldman insider said: “In days after that meeting the atmosphere in the bank changed very quickly from the normal bravado to horror. The worst part was when our share price hit 80p. It was truly frightening.”
More threatening for the bank’s senior management was the distinct possibility that credit rating agencies would downgrade Goldman. The move would mean the cost of borrowing money would soar, putting severe pressure on the lifeblood of the bank.
Arch-rival Morgan Stanley was similarly panicked and abandoned all pretence, loudly searching for a buyer or an investor.
In the middle of the mayhem, Blankfein turned to Buffett, the one man in America who commanded both capital and, more importantly, confidence.
Initially, Buffett said he wasn’t interested. For six months he had rejected similar pleas for help from a raft of other embattled financial institutions, starting with Bear Stearns in March. But on Tuesday last week, his position changed. Just before lunch, Buffett said he was sitting with his feet on his desk in Omaha sipping a Cherry Coke and nibbling at some mixed nuts when he received a desperate call from Byron Trott, head of Goldman in Chicago and charged by Blankfein to secure a deal.
Blankfein knew Buffett – sources say the pair had been introduced by Paulson. But Buffett was close to Trott, whom he had once described in an investment letter as a “rare investment banker who puts himself in his client’s shoes . . . I trust him completely”.
In this phone call Trott simply asked Buffett to name the terms under which he would invest in Goldman and the bank would try to hammer out a deal. Hours later, Buffett’s Berkshire Hathaway had pledged to invest $5bn in Goldman. He also received the right to buy $5bn worth of Goldman shares at $115 per share.
Later Buffett said: “The price was right, the people were right, the terms were right and I decided to write a cheque.” He joked he had lots of cash which had to be spent. “Otherwise, it’s a bit like saving up sex for your old age – at some point you’ve got to use it.”
Within hours, the 'Buffett effect’ had sent Goldman shares soaring and netted him millions of dollars in paper profit.
But it was clear that Buffett recognised the situation was bigger than a single deal or a single bank. The next day he went on CNBC, the American cable channel, to stress the importance of the proposed bailout, and said the financial system was in grave danger and could take “years and years to repair”.
Although America listened to its most admired investor, he still failed to satisfy their increasingly angry question: why?
The financial system was structured after the 1929 Wall Street Crash and in the light of the Great Depression that followed.
Beforehand the banks had been run as an old boys’ club: when problems arose, the weakest institutions were helped along by the strongest, mostly to save their collective good names.
As the Great Depression set in, greedy bankers were blamed for taking too much risk and jeopardising the world economy.
Even so it was accepted that investment banking played a crucial role in the economy .
Peter Hahn of CASS business school said: “Investment banks were, as they are now, crucial for facilitating business and disseminating wealth. As security traders they allow company owners to sell part of their shares, freeing up money to spend and invest while allowing other to share in the growth of their company. To this day, countries with no securities system often have a big concentration of wealth in a few families – in the Middle East, for instance.”
Even so the US government decided the system needed to be properly controlled .
The Securities Act of 1933 brought standardisation to the securities industry, in particular disclosure to the equity and bonds markets, while the SEC was created as the watchdog. In addition, the Glass-Steagall Act divided firms into commercial banks, who took deposits and offered loans to companies, and securities firms that traded on the markets and kept their risks entirely separate from retail savers.
As such, firms such as Goldman Sachs were not really banks but securities dealers.
Hahn said: “In return for the privilege of being able to raise deposits from the public, the banks were heavily regulated and as such grew with a reputation of prudence, safety, watched by the strongest government institutions. The securities banks with their higher risks were kept away from savings.”
But in the following decades and with the onset of globalisation, the burgeoning financial system began to outgrow this structure.
The UK, for instance, had developed in a broadly two-tier sense. The merchant banks, such as Barings, Schroders, Hambros, were small but offered everything from deposits to securities trading to the rich while the clearing banks developed for mass savings.
American securities banks were quick to see the advantage of the more integrated and efficient rules in London.
Hahn said after Big Bang, the integrated system in London allowed for far greater competition and securities trading was “far more efficient and cheaper than New York”.
In 1990 the Rule 144A was passed to introduce competition into securities market and started the erosion of the Glass-Steagall Act by allowing institutional trading of unlisted and unregistered securities. The next big landmark was 1998 – Travellers Group bought Citicorp to add to Salomon Brothers creating an integrated bank which swept away the separation.
By now American regulators were more interested in formulating international banking rules being drawn up in Basel.
But when these rules were introduced, they were aimed at retail banks leaving the burgeoning investment banks to grow relatively unchecked. One expert said: “The only real monitors were credit rating agencies, dominated by Moody’s and Standard & Poor. These were ill-equipped to understand the radically changing products.”
Another oversight was the US insurance market where there has never been a national regulator only state ones.
One insurance expert said: “Essentially insurance went unchecked by professionals. It all worked fine for small players. But huge firms like AIG were becoming international. How was the New York State insurance guy supposed to understand a credit default instrument sold in London?”
Last week experts said that, in hindsight, the lax rules allowed the financial system to completely reinvent itself given a strong enough catalyst. This came in the form of the telecoms and media boom at the turn of the millennium.
A senior London banker said: “During the tech bubble the value of securities was rising so fast that it no longer became good enough for investment banks to just trade on behalf of clients, they wanted to own the securities too. Margins were particularly small in the debt markets – you could do a £10bn eurobond trade for BT and take away a tiny margin. Banks bought debt but also started creating more complicated financial instruments and derivatives that became part of financing. Hybrid capital was born and the 'off-balance sheet vehicles’ were designed to hold the risk.”
The risk systems at the credit rating agencies were not sophisticated enough to keep up and, despite their complexity, many were given AAA ratings. As well as the bank, insurance companies, which were searching for yield enhancing products to match their increasingly liabilities due in part to the ageing population, started lapping them up.
Experts argue that it was at this time that renumeration policies also started encouraging huge risk appetites at the banks.
Peter Hahn : “Bank bosses have been incentivised like tech bosses. If you’re a shareholder in Intel, you want the management to pull all the stops into developing the next chip because if they don’t and Samsung produces a better chip which captures the market, Intel could be bust. If it does go bust, it doesn’t effect anyone else.
“The difference with a bank is a boss can say: 'you want me to make more profits? No problem, I can just go out and buy more risk and deal with the problems later’.” One top UK investor agrees: “At RBS, Fred Goodwin was paid a bonus for doing the ABN deal. Actually, the board should have said, by doing the deal you have radically increased the risk profile of the bank, you’ll get the bonus when the acquisition has proved itself. The pay structure has rewarded risk taking rather than solid, tangible success.”
The hubris reached its zenith with the development of sub-prime mortgages in the US. The ease of originating loans was matched by a hunger to take them on and package them within the banks. Cheap credit flooded the markets and was eagerly taken up by the soaring ambitions of corporates, private equity firms and hedge funds.
One banker said: “The cycle was bound to turn eventually but since it did last summer, it’s the structural problems that have proved to be the real danger.”
Every day for the past two weeks, bosses at the investment banks in London and New York have been meeting to discuss the future of their businesses.
One said: “Large parts of the system are simply gone. Today the wholesale funding market is broken. Securitisation is shut, the bond markets are difficult and costly and other creditors are unreliable.”
Without the funding, the independent investment banks who relied on it must find another source. It is expected that Goldman and Morgan Stanley will buy big retail banks in the US to secure a deposit base.
A far higher level of regulation also seems likely, both from central banks and legislators.
One banker said: “We must accept large-scale intervention. The ban on short-selling is just an example. Perfectly ordinary practices will be banned or regulated into expediency until the system is back to health. This will hit banks, hedge funds, private equity firms and then have a knock-on effect on accountants and lawyers.
“We’re entering a whole new world. The question is, when it is safe to start building it?”
Who said what about the financial meltdown
US Treasury Secretary Hank Paulson on why the $700bn bailout package must be passed: “We must do so in order to avoid a continuing series of financial institution failures and frozen credit markets that threaten American families’ financial wellbeing, the viability of businesses both small and large, and the very health of our economy.”
Federal Reserve chairman Ben Bernanke: “Action by Congress is urgently required to stabilise the situation and avert what otherwise could be very serious consequences for our financial markets and for our economy.”
George W Bush : “Our entire economy is in danger.”
Democratic Congressman Mike McNulty on the rush to approve the bailout fund: “We have been told repeatedly by this administration that the economy is fundamentally sound and then, all of a sudden, they say the economy is going to collapse. That is unacceptable.”
Warren Buffett, after investment in Goldman Sachs: “You can’t keep money around for ever. It’s like saving sex for your old age.”
Dominique Strauss-Kahn, head of the IMF: “The consequences for some financial institutions are still in front of us.”
Subscribe to:
Posts (Atom)
