FAIL: One Word For Them All

Karl Denninger
Market Ticker
Nov 12, 2008

Paulson, Bernanke, Geithner, Congress...

President Bush...

And if he doesn't get on top of this, President-Elect Obama.

Let us begin by noting that President-Elect Obama voted for the $700 billion bailout - The "No Banker Left Hungry Act" - while the rest of America literally was losing their jobs and homes.

Yesterday we learned that Fannie Mae lost $29 billion in the third quarter, most of it by admitting to what they knew back in the first quarter - that a huge tax credit they had would be worthless.

Of course they didn't admit this at the time, even though I and others pointed it out.

Why aren't the former executives in prison for that bit of book-cooking?

American Express had a petition approved to become a bank holding company. Why? How about a bit of truth here Amex? Do you intend to toss bad credit-card debt on the taxpayer's back and cover it with a TARP?

AIG had its bailout package nearly double in cost, and worse, they now have a huge bolus of CDOs that are being "sold" to Treasury for 50 cents on the dollar - when market prices are closer to a nickel. That's a direct gift, and our exposure is now $150 billion - when the original bailout, which included taxpayer exposure, never got a vote in Congress.

Even better, AIG apparently hasn't stopped its high-priced junkets for executives - with one taking place as recently as this last week:

"Even as the company was pleading the federal government for another $40 billion dollars in loans, AIG sent top executives to a secret gathering at a luxury resort in Phoenix last week.

Reporters for abc15.com (KNXV) caught the AIG executives on hidden cameras poolside and leaving the spa at the Pointe Hilton Squaw Peak Resort, despite apparent efforts by the company to disguise its involvement."

Nice. $343,000 worth of nice, if this report is correct.

Treasury says:

"In return," said Kashkari in a speech today, "AIG must comply with stringent limitations on executive compensation for its top executives, gold parachutes, its bonus pool, corporate expenses and lobbying."

Hmmmm... will we see enforcement Cash-And-Carry or will you live up to your name?

Out of the roughly $2 trillion committed thus far only about $450 billion of this money was actually passed through Congress - $100 billion in initial backstop for Fannie and Freddie, along with $350 billion for the first half of the TARP. Nearly all of the rest was committed literally by fiat in The Federal Reserve and Treasury without a bill in Congress, Congressional debate, or a vote.

We have discovered that Treasury, on its own initiative, changed tax policy in a fashion that will cost taxpayers another $150 billion, this beyond the TARP as well, without Congressional approval - this time as an "incentive" for banks buying up other banks.

Under The Constitution all revenue bills must originate in The House.

Congress is "afraid" to call this what it sure looks like to both me and many of them - illegal - for fear of scuttling deals that were done under the "TARP" of darkness.

General Motors got a "going concern" statement in its 10Q, which is for all intents and purposes Last Rites in the corporate sphere. Absent some sort of intervention (more than the $50 billion already authorized for the automakers in the "Housing Bill" this spring), again under the TARP of darkness and obfuscation, GM is likely toast.

Treasury has committed all but $60 billion of its first $350 billion, and is expected to issue one half trillion dollars in funding this quarter - on top of another half-trillion last. That's over one trillion dollars in debt, most of it new - and we're just getting warmed up.

How does Congress - and Treasury - think they're going to be able to sell this debt?

You don't think that The Fed would monetize it by just printing up some money, do you?

Do you think they might have already done that, perchance?

Well Bloomberg (among many others, myself included) would like to try to figure it out, but The Fed doesn't seem to want to disclose what it has taken in, from whom, and how it valued those alleged assets.

Why not Ben?

Are you afraid that you might wind up disclosing that you in fact have been printing money, after you told Congress there was no inflationary impact of your actions, and that such a disclosure might not only result in a contempt citation from Congress (or worse) but might also trigger mass capital flight by foreign governments and investors who suddenly come to realize that you've screwed them?

The only beneficiary of secrecy is the scoundrel who intends to lie, cheat and steal - or all three.

You wouldn't be guilty of any of that would you Ben?

How about you Tim (Geithner, at the NY Fed)? Is everything on the up-and-up over there in NY? If so, why don't you "bare all" and let us have a look-see?

Since it's our money you're playing with, in that we the taxpayer are the source of the wealth you shuffle around, we have every right to know what the hell you're doing with it and so does Congress.

If you refuse then I believe Congress should revoke your charter and subpoena everyone involved, including the Treasury Secretary's and both Bernanke's and Geithner's notes, phone records and meeting minutes, along with the details of every transaction taken by any of the above since August of 2007. Publish it all in The Federal Register and online via the web.

Congress bleats that it is "surprised" that Treasury has given money to banks to make acquisitions and fund bonus pools, but the Treasury Secretary threatened a Presidential Veto of the bill if there were constraints put on the funds' use when the measure was first handed to Congress, if you believe the statements made in in the media by the Congresspeople who were there.

In addition, Treasury said there would be an immediate banking system collapse and a Depression if they did not immediately buy "distressed mortgage-backed securities", and yet not one single dollar of said distressed assets have been purchased to date, while $310 billion has been spent or committed so banks can make acquisitions and fund bonus pools, with said acquisitions happening at 60% discounts to claimed balance sheet values just days prior.

Has the banking system collapsed?

Has your ATM card stopped working?

No, but Goldman and Morgan, along with others, have $70 billion in bonus pool money to pay to their employees, compliments of the US Taxpayer.

Has Congress reconvened (now that the election is over) to strip King Henry of power that he has clearly used in a fashion he said he wouldn't, and in at least one case in a fashion that many Congresspeople say is outright unlawful?

Nope.

Now our fine President-Elect is browbeating Bush to put forward a stimulus bill before he takes office. Why not introduce one Senator? After all, The Democrats currently have a majority in both houses of Congress, do they not? Get together with some House Members in your party, pen it, and have them send it up. Get a nice veto-proof majority together (you know, that "deliberative and across the aisle" stuff?) and pass it.

I'll tell you why - further stimulus bills will do nothing just as the last one did nothing, and President-Elect Obama knows it.

Stimulus Bills make good political theater and Americans who are long on sound bites but short on economic knowledge love the idea of "free money" but we are now flirting with a bond market dislocation and potential exposure of The Fed's machinations, which will bring the curtain down on all the games at once.

In my opinion the evidence is incontrovertible that we are literally teetering on the precipice; as evidence I cite the fact that credit-worthy firms continue to have to pay outrageous coupons to get their debt offerings to go (Verizon being among the most recent) and now The Fed has announced that it intends to delay one of the cornerstone pieces of "stabilizing" short-term funding markets - its money-market liquidity facility, which was slated to cover some $500+ billion in commercial paper.

Here's a WAG on the delay, and is nothing more than a theory that happens to fit the facts - The Fed is aware (perhaps because they've been told?) of an impending "problem" with rolling some of Treasury's short-term debt (and its excessive issue.) They are thus gambling on being able to "scare" some cash into those instruments from money-market funds, where it is currently hiding, to prevent "fails" (or a precipitous coupon jack-up) on those Treasury sales. In short, they're willing to risk melting money markets once again in order to avoid a potential Treasury Market problem.

How do 'ya like all them spinning plates Ben? Do 'ya think you can keep 'em all in the air, or will the first one fall and take out the rest?

President-Elect Obama is no dummy, and if we're going to have that sort of dislocation I'm quite certain he wants George Bush to be the one who has his hands all over it - as well he should, given that this is his administration and Treasury Department, along with his Fed Chairman, that has created the mess in the first place.

I put the odds of the plates falling within the next two months - and possibly within the next couple of weeks - at one chance in three.

If the plates fall we are going to have a very serious "event" in this country in the markets and in the economy - much worse than what we've seen to date. As in 10 million jobs lost almost all at once. A depression. And a new leg down in the market - 30-50% - essentially straight down.

As I said, I only give the odds of this event here and now at one in three - but if Ben and Hank have been playing games, that outcome has become inevitable - we are arguing about timing, not result.

If any of the above is the case the sooner we force the bs and lies in Treasury and The Fed out into the open and deal with it the better, although if any of this has happened a Depression has been assured.

If we discover that in fact Bernanke has attempted to monetize or simply has run out of credit in the "global money system" the Depression we will experience is the direct responsibility of Henry Paulson, Ben Bernanke and George W. Bush, with secondary responsibility resting with Congress through its refusal to put a stop to the stupidity in time and The Press, including and most especially CNBC, Larry Kudlow and Jim Cramer who have been cheerleading policies since last summer that have in fact shoved us right down the hole.

Buckle up.

Nov 11, 2008
Karl Denninger

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