24 November 2008

A “Bold Plan”

Filed under: Culture, Reflections — ktismatics @ 8:57 am

I wake up Monday morning to discover that a “bold plan” has been announced. The US Treasury is pumping an additional $20 billion into Citigroup, and the Treasury and FDIC are guaranteeing $306 billion of risky loans in Citicorp’s portfolio. In exchange, the US government receives $7 billion in preferred stock and warrants for 254 million shares of Citigroup common at $10.61 per share.

We aren’t privy to all the information and my expertise is limited, but based on what’s been publicly revealed I’ll attempt to summarize the value of the deal for both the Citigroup Corporation and the U.S. government.

  • The $20 billion cash injection is easy to understand.
  • How much are the loan guarantees worth? All loans are “risky” in the sense that the lender faces some risk that the borrower won’t pay back the loan: that’s why the lender charges interest. That these loans have been specifically identified as “risky” means that there’s a greater-than-average likelihood that the borrowers will default. They aren’t all likely to default; rather, some higher-than-average percentage of them probably will. Ordinarily extra risk commands extra interest. But we presume that these are extraordinary loans: subprime, earning lower-than-average interest. So let’s say that the loan guarantees are worth the difference between the interest rate actually charged and the interest a high-risk loan ought to earn. How much is that? Let’s be conservative and say it’s 3%, meaning that if an additional 3% of these loans default the guarantor breaks even. So: $306 billion in guarantees × 3% risk premium = $9.2 billion is the value to Citigroup of these guarantees. In fact these guarantees could be worth a lot more if the property held as collateral by the bank securing these loans — presumably mostly houses and other buildings — turn out not to be worth in today’s real estate market what they’re valued at in Citigroup’s books. Because the government is only guaranteeing the loans and not acquiring them outright, Citigroup continues to hold the collateral. I presume this means that Citigroup can still decide when to sell these non-liquid assets and for how much. If they sell a house now, when its market value is down, then presumably this difference between book and sale value of the collateral will be written up as a loss on Citigroup’s loan. The government would then have to recoup Citigroup for the difference.
  • Now the preferred Citigroup shares. The news releases say the shares are worth $7 billion. These aren’t shares currently in investors’ hands, traded on the stock exchange; they’re a new issue offered directly and exclusively to the U.S. government as part of this deal. The government is paying another $20 billion in cash to Citigroup to buy more of these preferred shares. How was the value for the preferred shares set? I don’t know, but let’s assume that they really are worth what the dealmakers say they’re worth. Why be skeptical? Well, there’s this…
  • The warrants. The US government receives an assurance that it can buy Citigroup stock at $10.61 per share, whenever the government chooses to exercise its option to do so. At the time this deal was struck Citigroup shares were trading at $3.71 per share. That means the warrants are worthless. Potentially even worse, the government could decide to redeem their warrants at a loss in order to prop up the market for Citigroup stock.

To summarize: Citigroup gets $20 billion in cash, along with presumably uncollateralized loan guarantees in excess of $300 billion worth a minimum of $9.2 billion in risk premiums, for a total of $29.1 billion cash and equivalent. In exchange the U.S. government gets $7 billion in preferred Citigroup stock. That really is a bold plan. Put it this way: I’m not sure I’ve got all the facts at my disposal, but what’s been said leaves plenty of questions unanswered in my mind anyway.



  1. Everyone is curious about Bush’s pending pardons, but the real meat is in the ‘pardons with interest’ being handed out as sweet deals to banks (and insurance companies) that are broke – banks that have effectively lost all their customers’ money and their shareholders’ investments to boot!

    I think we could use Bush here as president of India for the next couple of terms…


    Comment by samlcarr — 24 November 2008 @ 11:20 am

  2. http://krugman.blogs.nytimes.com/

    You probably saw, but 2nd post down follow link to Mark Thoma. Yves Smith says this will make it nearly impossible for Big 3 not to get a bailout, and Obama also said today confident that they’ll work out a plan. You’re possibly against this on principle, but a lot of people think a new system disorder as great as the panic allowing Lehman to fail will occur. That might be the one silver lining in the fucked-up new bailout, but the first enormous panic occurred just when Bear Stearns was bailed out, but then subsided. A number of people got confused about the size of Lehman and thought Bear was bigger; it wasn’t, it was half the size. Paulson knows how royally he fucked up on this, and has been dismissive and haughty about it, plus there has been much made about how ‘Lehman was small’ compared to Goldman Sachs and the other 2 biggies (it was, but that’s beside the point). Agree with Krugman, Friedman, Collins and all the others about the state of emergency and the destruction being caused by the lame duck administration. Agree with the conspiracy people on this one even–they’re using it for last-minute profits. Obama showing remarkably good leadership through this, though, and if this shitty plan prevents another worldwide panic, it may have been worth it (not in itself, but the millions of jobs lost as a result of failure of Big 3 will be terrifying, and cause things to self-destruct.)


    Comment by Jonquille de Camembert — 24 November 2008 @ 12:29 pm

  3. “I think we could use Bush here as president of India for the next couple of terms…”

    Here’s an article that Bush can put in his resume when he applies for the job.

    I hadn’t seem the Thoma remarks — thanks Jonquille. Obama had said he didn’t favor bailing out the auto companies because of their longstanding mismanagement and resistance to building fuel-efficient cars and thus putting them behind the 8 ball in world competition. But certainly the banks too have been mismanaged on a grand scale.

    Chicago (AP) — Obama said he would “honor the commitments made by the current administration” to deal with the problems, signaling approval of the Bush administration’s latest effort to rescue Citigroup as well as the broader $700 billion bailout designed to shore up the financial markets. Bush said earlier in the day that the government’s dramatic rescue of Citigroup was necessary to “safeguard the financial system” and help the economy recover, and he said there could be more such moves if other institutions need help. “We have made these kind of decisions in the past. We made one last night. And if need be we will make these kind of decisions to safeguard our financial system in the future,” Bush said.


    Comment by ktismatics — 24 November 2008 @ 1:25 pm

  4. I can’t quite get a grasp on how the Federal Reserve works. It’s an “independent government institution that has private aspects,” says the Wikipedia entry. The regional Federal Reserve banks are owned in part by the member private banks within the region, but the Fed is also owned in part by the U.S. government. So in the Citigroup bailout when it says that the Treasury Dept. will cover the first $5 billion in bad loan commitments, the FDIC the next $10 billion, and the Federal Reserve financing the rest through loans, I don’t quite get how it works. Would the other banks in the Fed system pool their money to loan to Citigroup? I don’t think so. Does the Federal govt. keep that much in reserve cash in the Fed vaults? Doubtful, but maybe. Would the Fed inject money into the Fed by borrowing it, via issuing Treasury bills, and then lending the proceeds to the Federal Reserve? Probably. But who will buy these new T-bills? Not the U.S. banks surely. The Chinese government maybe?


    Comment by ktismatics — 24 November 2008 @ 1:25 pm

  5. Too complex for me to answer. I was just talking with a friend yesterday who worked in banks downtown for years, writing software for Manufacterures Hanover, Chemical, goes back to the mainframe days. I had read about the Federal Reserve Bank of New York at Liberty St. and the gold bullion you used to be able to see on the tours. She did see these, and I am quite sure it’s quite the Superior Museum Experience, all those gold bricks. What I didn’t know till the other day is that there is more gold down 86 ft. below sea level than there is in Fort Knox. I also read about the literal cash, but can’t remember it. I’m going to call about the tour soon, because even if you can’t go into the vault, I’m sure they show a brick or two.

    Of course, all the mismanagement, down to not having sense enough to ‘jet-pool’ is why they’re being given a last chance to come up with something that Pelosi and Obama can try to sell. That’s not just corporate–huge jobs loss that then almost make Obama’s two-year creation of 2.5 or so million jobs seen very much too little, too late. The automakers have no choice but to come up with something that sounds plausible, because the Chapter 7 bankruptcy will definitely be the funeral, people don’t buy from bankrupt companies that can’t replace parts, etc.


    Comment by Jonquille de Camembert — 24 November 2008 @ 1:44 pm

  6. http://www.washingtonpost.com/wp-dyn/content/article/2008/11/23/AR2008112302700_pf.html

    A very hasty read of this explains some specifics of the Fed, as opposed to such phenomena as the Treasury Dept. and TARP.


    Comment by Jonquille de Camembert — 24 November 2008 @ 5:04 pm

  7. Geithner involved in Citi bailout, which is also very Rubin. Here’s the melding of the financialism of the two parties. But these bear market rallies have been typical, and do show that investors are very subject to ‘atmosphere’ and ‘changes of mood’, otherwise why a rally on election day, and then on Geithner’s appt. Friday? which don’t ‘mean anything’ in terms of hard data, as opposed to unemployement reports or even Citibank bailouts, which are at least events, however odious. I don’t think anybody is correct in maintaining that ‘good spirits’,however primitive-sounding, boost markets, and make everybody, including leading economists jubilant. But another fact that I read about a month ago is how people don’t remember that after the stock market crash of 1929 there was a lot of rallying in the next few weeks. So that one can only know that there are definitely big messes, and not too much else, beyond FDIC for one’s deposits. But commenters at Krugman have already noted the vast difference in amounts for Citi as opposed to the Big 3 and how much more high dudgeon is expressed for Detroit than for Citi, even though there’s a lot of criticism. But $25 billion compared to $300 billion, and then other infusions that are about the same size the Big 3 are begging for.

    And people won’t spend, it’s interesting. Definitely another Great Depression. Remember it’s only about a week now that people got out of denial enough to call it a ‘recession’ long after they talked about ‘financial crisis’ for 2 months.


    Comment by Jonquille de Camembert — 24 November 2008 @ 5:13 pm

  8. should be ‘good spirits’ and ‘sense of hopefulness’ DO definitely influence investors. By the way, there’s a huge growth industry in New York of psychics, who charge huge fees to Wall Streeters when they can’t eke out the answers themselves. Corrupt beauty, anyone? We got it!


    Comment by Jonquille de Camembert — 24 November 2008 @ 5:15 pm

  9. Doylomania,

    Thanks for pointing me here. Interesting and informative post and also the discussion. Part of what I’ve been wondering about, too, came at the end…

    And people won’t spend, it’s interesting. Definitely another Great Depression. Remember it’s only about a week now that people got out of denial enough to call it a ‘recession’ long after they talked about ‘financial crisis’ for 2 months.

    Of course, all the inter-relations between the Fed and other fincancial institutions is too far advanced for me at this point. I’m still learning the basics. Although I did know about the physicists…that’s some rediculous crap, there.



    Comment by Jason Hesiak — 24 November 2008 @ 9:04 pm

  10. One would expect that, in hammering out a deal with a company on the brink of failure, the US government could negotiate a better deal on behalf of its “owners;” i.e., the American citizenry. Even in terms of straight-ahead capitalism it seems as though the government got taken to the cleaners. Why couldn’t the Citigroup bailout have resulted in the government getting a more equitable equity stake in the company, just like any other investor in similar circumstances would have negotiated? The bank would have gotten its liquidity infusion and its risk reduction, and the taxpayers would have gotten something of equal value in return. It’s strange.

    Also there’s this: The $700 billion bailout money comes from the Treasury Dept. In this Citigroup deal only $5 billion of costs is assigned to the Treasury; another $10 billion is FDIC; the rest — nearly $300 billion in high-risk loan guarantees — is assigned to the Fed. So I think it means that this deal amounts to only $5 billion of the $700 allocated billion; the other $300 billion of risk assigned to the Fed comes in addition to the $700 billion.


    Comment by ktismatics — 24 November 2008 @ 9:46 pm

  11. That sounds right. And wasn’t the Big 3 $25 billion supposed to come from the TARP $700 billion? Maybe it’s less controversial if it comes straight from the Fed, which is all-powerful and can print money as needed. But I still think the Big Three has to be bailed out. Not that the intertwined relationships are ever going to be easy, because they aren’t meant to be. Plus the all-powerful Fed would seem to be God, therefore you could ask him for anything. Hence, conspiracies must stem primarily from the oligarchy of the Fed, the beneficent and evil Santa Claus which used to look just like Alan Greenspan (and his God Complex was a bit too theatrical, I thought. Bernanke doesn’t come anywhere near the Zeus-like performances of Greenspan, that latter-day dungbeetle…)


    Comment by Jonquille de Camembert — 24 November 2008 @ 10:54 pm

  12. though the government got taken to the cleaners

    Except that the takers-to-the-cleaners and the taken-to-the-cleaners are in this case somewhat often exactly the same, e.g., Geithner, Rubin. Plus, Paulson as a Goldman Sachs veteran, may have been victimized and insulated in ‘Goldman Sachs Culture’ when determining what could or could not be done with Lehman. Bear Stearns was coarse and not very Park Avenue. Lehman looked down on them when they were failing. Then Lehman managed to get failed more deeply than Bear. After all, Goldman Sachs is ‘creme de la creme’. At the top of those elites, those class differences surely matter. And the big funds of Harvard and Yale have fucked up too, which had been very successful through 2007. Nick Land is good on this right now.


    Comment by Jonquille de Camembert — 24 November 2008 @ 11:01 pm

  13. “Under the new financing program that Treasury Secretary Henry M. Paulson Jr. plans to announce on Tuesday, the Federal Reserve would create a new special-purpose entity that would buy a wide range of consumer and business debt. The Treasury would contribute the “equity” part of the fund, which would absorb most of the losses that might occur. The Fed would then pump in as much as 95 percent of the money that would be used to purchase assets.”

    A bit more on the Great Power that must be not the Treasury Dept., but the Fed.


    Comment by Jonquille de Camembert — 24 November 2008 @ 11:28 pm

  14. Regarding psychics on Wall Street, I offer today’s post on the old movie Nightmare Alley as a moral fable presaging the current crisis.

    Nick Land is the Hyperstition guy, right? Where does he hold forth?

    The Wash. Post article on the Fed you linked to is almost informative. As I understand it, the Fed creates money not by printing it — that’s the Treasury’s job — but by lending it. The Fed is lending huge amounts of money to its member banks, which the banks then presumably lend to others, who deposit some of the money they borrow in banks, which the banks then lend out again, etc. etc. his is the multiplier effect on money supply produced by fractional-reserve lending that propagates through the economy. Because banks aren’t lending, the multiplier effect isn’t operating and the money supply is contracting.

    Actually injecting newly-printed physical currency into the top of the funnel requires the Treasury to print it, and so I assumed that the Treasury controls this function. But maybe the Fed can simply tell Treasury to print up a whole pile of new cash — or else just create it on the Fed’s balance sheet. If that’s the case, then I would have thought that the US would be experiencing inflation, where the purchasing value of a dollar declines because there are so many new dollars in circulation. But because of the multiplier effect, most of the money supply increases come not through newly-minted currency but through new lending of existing currency. The total money supply in the US economy consists of something like 5% currency + 95% loans. So minting new money creates inflation only if the central banks at the top of the funnel turn around and lend it out, stimulating the money multiplier.

    And that’s the complaint: the central banks are hoarding the money rather than lending it, preventing the expansion of the overall money supply, contracting both spending power of consumers and expansion capabilities of business. That’s why so much effort is going into jump-starting the banks. The economy runs not on manufacturing or knowledge but on borrowing. It’s also why the economy relies on perpetual expansion, because businesses expand rapidly less through money it’s already earned than through money it borrows. Increasingly, individual consumers have likewise financed their own expansion not through saved income — real income has remained flat for the last 3 decades or so — but through borrowed money: bigger mortgages and credit card debt. People assume that the value of their houses will keep going up, that they’ll keep getting raises in pay at work, etc., so they can pay off the debt. When those assumptions start falling apart then individual consumers too are less likely to borrow, further contracting the money supply through reduced demand for lending institutions’ services.


    Comment by ktismatics — 25 November 2008 @ 3:47 am

  15. speculation or simulacrum?


    Comment by Jason Hesiak — 25 November 2008 @ 10:08 am

  16. “Actually injecting newly-printed physical currency into the top of the funnel requires the Treasury to print it, and so I assumed that the Treasury controls this function. But maybe the Fed can simply tell Treasury to print up a whole pile of new cash — or else just create it on the Fed’s balance sheet.”

    Yes, because if the Fed has the power to ‘create money’, that’s the power. It’s the Bureau of Engraving and Printing within the Treasury Dept. that does the actual printing. How the actual process works is not something I know anything about. Since the Fed is so shrouded in secrecy, which gives it its ‘holy aura’, the relationship of the Treasure and the Fed is also in many ways secret, and to find out how they work together (and they do, with Bernanke and Paulson appearing together, and only later do we hear that Bernanke ‘always wanted’ to do the capital infusions kind of bailout in the original, not the buying up of toxic mortgage-backed assets) is probably even harder to find out than how the CIA and White House work together (in the Bush Administration the White House had the upper hand, from ‘slam-dunk’ on down, and before in ignoring CIA visits to Crawford to inform Bush of the 9/11 intelligence in August, 2001; while CIA-FBI continue their time-honoured dysfunctional relationship). Clearly, their pecking order would be important to them as with the different ‘classes’ of former investment banks, with the Fed obviously the boss, ‘mostly the boss’, or ‘with the appearance of the boss.’ But the president is privy to all this. Now that you bring it up about the physical printing, it is interesting that the Fed and Treasury Dept. have a capitalist relationship all their own, with Treasury supplying the ‘labour’ in this case, although the analogy is not precise, of course, except in authority. I suppose the reason the Federal Reserve Bank of New York, the largest regional bank of the Fed, has the largest supply of gold, etc., is because that is where the Financial Center is, but it wouldn’t be possibly for the most central bank to be in NYC. Whether the central Fed has lots of gold and other ‘treasure’ on hand I don’t know, but I imagine they would, just because it wouldn’t make sense not to.


    Comment by Jonquille de Camembert — 25 November 2008 @ 10:52 am

  17. “With a recession looming, if not here already, ”

    And THIS was in a New York Times article on the Citigroup bailout yesterday and still running today. How on earth can they write this kind of shit? Even the cowardly among the economists finally admitted 2 weeks ago that the recession started in March and ‘will last 14 months’, which is considered unlikely.


    Comment by Jonquille de Camembert — 25 November 2008 @ 12:30 pm

  18. Here’s another announcement from the Fed:

    (Reuters) Under the new mortgage program, the Fed will buy up to $100 billion of debt issued by government-sponsored mortgage enterprises Fannie Mae, Freddie Mac and the Federal Home Loan Banks. It will also buy up to $500 billion of mortgage securities backed by Fannie Mae, Freddie Mac, and Ginnie Mae. The central bank also launched a $200 billion facility to support consumer finance, including student, auto, and credit card loans and loans backed by the federal Small Business Administration. This will lend to investors who hold securities backed by this debt… The new mortgage-support facility was intended to strike at the collapsed housing market, the core of the United States’ economic woes. “This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved financial conditions more generally,” the Fed said.

    So that’s 100+500+200 = $800 billion in new spending from the Fed to loosen up the credit markets. Doesn’t this exceed the $700 billion approved by Congress? No:

    Under the consumer-finance facility, the Treasury will help cover any losses the Fed might face by providing $20 billion of credit protection from its $700 billion financial bailout fund, which Congress approved last month. A Treasury spokeswoman said the $20 billion will come from the remaining unallocated $40 billion in the first tranche of the $700 billion financial rescue fund. That leaves Treasury with $20 billion, and once that is used it must ask Congress for access to the remaining $350 billion in the fund.

    In light of our discussions, maybe we infer that the Fed will instruct the Treasury to issue $800 billion in newly-minted currency to cover this initiative. If so, then this next statement makes sense:

    Some, however, are worried the mounting costs of the measures, which have the potential to reach several trillion dollars, could eventually fuel a troubling inflation.

    So now we see 2 programs — the Citigroup’s $300 billion in risky asset guarantees and now this new $800 billion program — with a total price tag of $1.1 TRILLION, but the Fed is on the hook for only $25 billion of it. Just hard to fathom how this all works, and especially whether the Fed portion is backed by US government debt or is just creating new money out of thin air.


    Comment by ktismatics — 25 November 2008 @ 2:28 pm

  19. Just hard to fathom how this all works, and especially whether the Fed portion is backed by US government debt or is just creating new money out of thin air.

    Indeed so. I had read what you just posted here, as well as dozens of other versions and comments on Krugman’s blog, but the only thing I can sense is another new ‘sensation’, which is at least not panic in the same way as last week (and I’m talking about ‘last week’ literally.) Your quote about the possibility of a ‘troubling new inflation’ from the article doesn’t mean a thing to me when just a few days ago I was reading about how refusal to spend was going to cause deflation. Maybe today’s new sum, which was first being talked about last week, which is meant to make various kinds of loans finally easier to get (again, i.e., as they were when the adjustable rates that fucked the whole thing got started) is being resisted because it seems to be another version of the same. On the other hand, it’s not particularly anti-Obama or -Democrat to want to jumpstart easier consumer credit again, just not to continue offering to people who have not got good credit history. Some Dems think this is partly political, and maybe it is, but the ‘sensation’ I get is that these actions combined with Obama’s promised fiscal stimulus package (they keep saying ‘maybe he’ll sign it the first day’) have somehow begun to dig out at least the panic of last week that was the worst since the week after Lehman.

    My perception of this ‘sensation’ may be completely meaningless, but that’s not going to really matter with this many ‘experts’ saying so many opposing things. I think the ‘saying opposing things’ is still better than freezing panics that you can definitely pick up on. You can pick up on them as an individual, but you haven’t ‘felt this’ out of some perversity, because then you’ll read about this precise fear from Floyd Norris, or some quote from somebody on the trading floor.

    There were aspects of deflation that I was actually looking forward to, for example. But I’m not that worried about inflation personally either. What I notice is talk of ‘a recession that is going to set in’ as if this is a different thing from financial panics. It almost sounds calming if you haven’t slipped through the cracks. I have noticed that some are not as subject to the ‘panic sensation’ as I have been (and only when there really WAS a systemic one–the ones you couldn’t miss were last spring with Bear, Sept, 14 with Lehman, and last week, with huge losses down below 8000. I’ve also finally accepted that one does feel this sensation in Manhattan more than I would have though would be specific, because 1/4 of NYC workforce is Wall Street-related, and 1/5 of New York State is (this last surprised me even more.) While there are still many ‘Main Street-thinking people’ who don’t seem to be involved in thinking about the crisis (and I don’t just mean wealthy people–in this crisis, even the super-rich are definitely not buying as they usually do no matter what), and this includes the ‘Main Street’ businesses in the Wall Street area itself, which I noticed on going down there around 15 october. There really is a terrible sensation here, and since the traders themselves talk about it with every passing day, it seems like the word ‘panic’ is used by now only when it gets really severe again, and they think they’ve seen the last bear market rally; then another one, as the last 3 days of trading, and you don’t find a word anywhere about ‘people are still searching for a bottom in the market’, without even noting that they were saying just that 3 business days ago. Now, if the Big 3 come back to Washington with a pitch no better than they did last week, we could, for example, get huge new panic on Wall Street, because that’s what caused the huge slides last week (the investors were not among those worried about GM’s inefficiency, for example, although it ‘sounds fine’ to me that they should be forced to come up with a better dog and pony show–I can’t imagine that they weren’t somewhat chastised and know they’re getting only one more chance to save their asses). So I’m just saying that all the complex details are impossible for me to grasp, esp. since nobody else who is supposed to be expert seems to be able to either, that I do pay more attention to this ‘sensation’, because they sure pay attention to it on the trading floors. As much as it logically seems to me that the lame duck wants to ‘knee-cap Obama’ as much as they can before he’s inaugurated, I can’t yet see for sure that that’s what they’ve done, even though they surely are trying to make a buck. But unfreezing consumer credit does not sound in itself a bad thing, esp. since people do nothing but talk about the ‘frozen credit markets.’ So, do they want to leave them frozen or not? I don’t know what anybody wants. A lot of the ‘saver types’ write comments on the big blogs about how they think all consumer credit should be illegal, which is idiocy, and there were even people who are so stupid they disapproved of debit cards, which are exactly the same as paying in cash. Another ‘sensation’, therefore, that I am noting, is that it doesn’t seem as bad ‘this week’ as I expected it too since last week. People really are living in this thing on a second-to-second basis–or that’s my impression, since I’m not sure of anything about this anymore. There was even somebody writing in to Josh Marshall that ‘no, it wasn’t Lehman REALLY, it was AIG even though it was not allowed to fail and was bailout and you can’t tell how this affected things since they happened the same day’. So you get this sensation of stasis ‘today’. Specifically today, Tuesday. In this crisis, every new day has nothing to do with the previous one ‘all that much’ anymore. Do you get this feeling too?


    Comment by Jonquille de Camembert — 25 November 2008 @ 8:18 pm

  20. http://www.talkingpointsmemo.com/talk/blogs/testing/2008/11/cheap-mortages-or-affordable-h.php

    I just found this lonely post at TPM, and surely much of it makes sense. They are trying to make another or possibly final attempt to actually sell dangerous financial instruments to non-creditworthy customers–and thatwon’t be difficult. Quite an amazing thesis on making supply overly abundant to an increasingly less solvent and smaller group. Are they trying to make credit available to those with poor ratings again? Which would lead to an even greater collapse? I can’t tell, but this guy thinks so. They are trying to sell new mortgages.


    Comment by Jonquille de Camembert — 25 November 2008 @ 10:11 pm

  21. I like what I’ve seen of Obama’s economic stimulus of creating new jobs in alternative energy, etc., but I really should look into it more before I call Barack with my approval.

    The US dollars in my wallet have “Federal Reserve Note” printed right at the top. Says Wikipedia:

    Federal Reserve Notes are fiat currency, with the words “this note is legal tender for all debts, public and private” printed on each bill. They are issued by the Federal Reserve Banks and have replaced United States Notes, which were issued by the Treasury Department until January 1971, after which they were entirely replaced by the Federal Reserve Notes which had circulated alongside them since 1914. Federal Reserve Notes are fiat currency, which means that the government is not obligated to give the holder of a note gold, silver, or any specific tangible commodity in exchange for the note.

    I remember when dollars went off the silver standard in the 60s, but I’d always thought that money was still issued by the Treasury. Not so: it’s issued by the Fed. So I guess the Fed really is printing new money in order to guarantee or buy up the member banks’ bad debt. Lack of lending limits business expansion, which reduces employment, which reduces consumer spending, which causes companies to drop prices on their goods, which equals deflation: a dollar buys more than it used to. So for the Fed to pump new dollars into the system both directly creates offsetting inflation and increases money available for lending. Now I’m wondering why the Treasury got involved at all, which requires the government to buy up stuff with its existing reservoir of dollars, when it’s the Fed that can actually increase the pile of dollars in circulation.

    There’s still something fucked up about this picture, though, because I think (though I’m not sure) that the Fed can only create new money by buying up US Treasury notes. But the Fed and its member banks never actually pay for these notes; they just issue their own promissory notes to pay, which are the Federal Reserve Notes. So as the Fed creates money and hands it around to banks to lend (and make interest), the Treasury must assume an offsetting debt (in the form of T-notes) that’s due to the banks. And I think the Treasury actually pays the banks interest for assuming this debt, which the Fed buys simply by printing up new money.

    Have you seen this video, made by a Canadian, called “Money as Debt”? 47 minutes long and not very visually stimulating, but really quite informative.

    So now the question is this: why did the US Treasury stop printing money and instead hand it off to the Fed, which is partially owned and controlled by private, for-profit banks? If that happened, then the US debt owed to the Fed and its banks would be eliminated immediately, and the government rather than the banks would control how much money is in circulation. I think there are voices agitating for precisely this move to be made. Curiously, one of those voices is Ron Paul the Libertarian; I believe Milton Friedman advocated this position as well. And on the other side of the political spectrum the Socialists also promote returning control of the money supply to the US Treasury.


    Comment by ktismatics — 26 November 2008 @ 2:29 am

  22. From this NYTimes article:

    In the last year, the government has assumed about $7.8 trillion in direct and indirect financial obligations. That is equal to about half the size of the nation’s entire economy and far eclipses the $700 billion that Congress authorized for the Treasury’s financial rescue plan.

    To bolster the general economy, it relied on its traditional tool: reducing the overnight Federal funds rate, the interest rate that banks charge for lending their reserves to one another. Normally, a lower Federal funds rates leads to lower long-term rates, like those for mortgages. But the central bank has already lowered the rate to 1 percent, and it cannot reduce it below zero. Instead, policy makers are buying up other kinds of debt securities, which has the effect of driving down the rates in those parts of the market.

    The move amounts to what economists refer to as “quantitative easing,” which means having the Fed pump staggering amounts of money into the economy by buying up a wide range of debt instruments. Until the economy begins to turn around, Fed officials have made it clear they are prepared to print as much money as needed to jump-start lending, consumer spending, home buying and investment.

    Some big questions remain unanswered in these news articles: is there any offsetting liability that the Fed incurs when it prints up this new money? And is this liability consist of a debt incurred by the US Treasury which it promises to pay back to the Fed and its member banks? Or, at the very top of the financial pyramid, does the Fed just increase the total amount of cash in the system without an offsetting liability? If so, why involved the Treasury at all in bailing out the banks, when they can just bail themselves out by printing new money at the Fed and handing it around to its member institutions? Especially when the Treasury seems to negotiate such seemingly bad deals on behalf of the citizenry, it looks like the Treasury’s role in the bailout is to effect a direct transfer of money from the government coffers into the banks’ vaults.


    Comment by ktismatics — 26 November 2008 @ 9:11 am

  23. “The Bureau of Engraving and Printing (B.E.P.) is a government agency within the United States Department of the Treasury that designs and produces a variety of security products for the United States Government, most notable of which is paper currency for the Federal Reserve.”

    That’s from wikipedia too. They’re obviously just in bed together, maybe even married.


    Comment by Jonquille de Camembert — 26 November 2008 @ 10:43 am

  24. http://tpmmuckraker.talkingpointsmemo.com/2008/11/what_were_doing_–_and_spendin.php

    There’s a fairly good rundown on what the specific spending consists of, the insurance, etc.

    Nick Land is linked at traxus ‘The Complete Spengler’ under Apocalypse Porn. That’s Nick’s pen name and column.


    Comment by Jonquille de Camembert — 26 November 2008 @ 3:16 pm

  25. http://www.atimes.com/atimes/China/JL02Ad01.html

    Nick’s written a GORGEOUS efflorescence today–unlike anything I’ve ever read by him. I wrote him to tell him how good it was. I had no idea. He always made a point of not showing this side of himself at Hyperstition.


    Comment by Jonquille de Camembert — 1 December 2008 @ 9:44 pm

  26. Like I said…

    WASHINGTON (AP) – The Bush administration overpaid tens of billions of dollars for stocks and other assets in its massive bailout last year of Wall Street banks and financial institutions, a new study by a government watchdog says. The Congressional Oversight Panel, in a report released Friday, said last year’s overpayments amounted to a taxpayer-financed $78 billion subsidy of the firms.

    The findings added to the frustrations of lawmakers already wary of the $700 billion rescue plan, known as the Troubled Asset Relief Program. Congress approved the plan last fall, but members of both parties criticized spending decisions by the Bush administration and former Treasury Secretary Henry Paulson.

    Financially ailing insurance giant American International Group, deemed by the Treasury Department to be too big to be allowed to fail, received $40 billion from the Treasury for assets valued at $14.8 billion, the oversight panel found.


    Comment by ktismatics — 6 February 2009 @ 5:36 am

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