Bank bail-outs are only to save George’s cronies; let’s hope they fail


10:18 am - October 8th 2008

by John B    


      Share on Tumblr

Summary: The bank bail-outs aren’t necessary to save the US domestic economy, and they can only have negative effects on the rest of the world by forcing a pointless game of asset rescue that forces up the dollar. Worst, it’ll prop up two of the malign institutions that have been parasites on the global economy for 80 years, and whose greed largely caused the crisis: Goldman Sachs and Morgan Stanley.

Before last week’s bail-out, the three largest US domestic banks were so large that the Fed was able keep to them afloat with loans and/or nationalisation, the two largest mortgage lenders were already nationalised, the largest insurer was already nationalised, and the second largest was owned by Warren Buffett.

So the ‘bail-out’ package does nothing to help the domestic US economy, as everyone who needs rescuing to protect the American domestic financial system either has been or can easily be rescued without a bail-out package. Which raises the question, who is the rescue for?

Friends of politicians, of course

The answer is George Bush’s Saudi friends, who don’t want to lose their investment in Citibank if it is nationalised, along with the senior guys at Goldman Sachs (one of whom is on seat at the Treasury) and Morgan Stanley, who want to avoid the same fate as Bear Stearns, Lehman Brothers, and a bunch of other greedy scallywags who deserve no-one’s sympathy.

Whether McCain and Obama are going along with the bail out because they too are in bed with the Saudis and the Investment Bankers, or because they have fallen victim to the malign lobbying power that has protected Wall Street for the last 80 years, is an interesting conundrum. Obama shows the greatest scepticism – and he gets more money from Hollywood than Wall Street.

But even if the objective is to rescue George Bush and friends, these guys just don’t understand how badly their politicians and investment banks have screwed America – and therefore, why $700bn is less than 10% of what they need.

Far bigger than you’d imagine

Since the collapse of the Bretton Woods exchange rate system in 1971, America has been the lender of last resort to the world financial system. They didn’t get that status on purpose, but when they couldn’t meet their theoretical obligation to swap dollars for gold, they persuaded the world to just accept the dollars they printed. In this lie the seeds of the present disaster.

Led by the usual suspects, the world’s investment banks have created an enormous and largely unregulated euromarket (i.e. asset market not subject to US regulation) and dramatically raised global debt levels. As this chart shows, world debt obligations in June 2007 were US$65 trillion. Of this, US$30 trillion is dollar-denominated (up from US$15 trillion in 1999).

If we reasonably assume that 50% of this is secured by charges on property or securities created by investment banks which appear to have intrinsic worth of 50% of face value or less, then there may be a 25% collectibility problem – or US$7.5 trillion, more than ten times the size of the admitted problem.

And it doesn’t stop there – a significant proportion of the US$8 trillion of yen-denominated and US$18 trillion of euro-denominated borrowings is also secured on US property or financial instruments…

So there are two main problems with a bail-out.

First, and most important for world stock markets, European governments also feel obliged to rescue their banks with substantial real dollar debts and toxic dollar assets. Their support has to be swapped for dollars to balance the rescued banks’ currency risk, draining the world of liquidity and pushing up the price of dollars, when realistically the dollar should be crashing.

Secondly, and more disastrous in the long-term, permitting the survival of Morgan Stanley and Goldman Sachs maintains a reservoir of the malign talent which has taxed the world economy for personal gain for the last 80 years and in doing so has finally brought it to its knees.

And we’re also a long way from safe

A final thought – just because the crisis is worst in America doesn’t mean that UK banks are out of the water. In 2001 British bank deposits equalled British bank lending. In 2008 British bank deposits were £650 billion short of British bank lending.

The Bank of England has already lent the banks £250 billion. Royal Bank of Scotland, Lloyds TSB and Barclays are said (by the BBC) to be each asking the BoE for £15 billion sterling each of equity or quasi-equity. And they need to refinance another £400 billion of euro-borrowings over the next couple of years. That’s a total prospective bill of US$1.2 trillion.

HSBC is not involved. They must be very relieved they walked away from their deal with Merrill a few years back. But I think we can assume that several German, French and Swiss banks have similar problems.

Note: this article is by John Band V, the father of regular LC conspirator John Band VI. The former has spent 40 years in investment banking and dark sarcasm; the latter has spent 15 years in management consultancy and dark sarcasm.

    Share on Tumblr   submit to reddit  


About the author
John Band is a journalist, editor and market analyst, depending on who's asking and how much they're paying. He's also been a content director at a publishing company and a strategy consultant. He is a regular contributor to Liberal Conspiracy and also blogs at Banditry.
· Other posts by


Story Filed Under: Blog ,Economy

Sorry, the comment form is closed at this time.


Reader comments


Excellent piece.

Informed and brilliantly explained.

Re. US

I think the mad rush to force through a deal gives some legitimacy to your argument. Likewise Paulson’s desperate attempt to block any oversight. He would have, and has to some extent, become something of an economic dictator – with almost limitless power to bail out his buddies.

Re. UK

I wonder, if we – the taxpayers – are to bail out banks, shouldn’t we implore bankers to sit through some basic home economics classes?

I mean, if banks are lending £650bn more than the deposits they hold, wasn’t it always going to go tits-up when the credit dried up?

I feel sorry for the families who are struggling to arrange a mortgage in the current climate. That said, I feel the borrowers who blew all their liquidity on cheap loans should bare some of the blame too.

I mean, if banks are lending £650bn more than the deposits they hold, wasn’t it always going to go tits-up when the credit dried up?

I think the problem is optimistic i-bankers confusing “when” with “if, but that would never happen in our wonderful globalised financial system, surely”

You know John, I was battling with conservatives over this for years on forums. They actually claimed I was a doom-monger and that *this* globalised capitalist dream would never end.

I was a sceptic, and they’d seen off my kind before.

Wow…Good thing this site has the word “Conspiracy” in it; otherwise, i would have taken it seriously.

Lets start with who created this mess: Liberals. Clinton and his administration pushed The Dept. of Housing and Urban Development, AND pushed Fannie and Freddie, to buy up subprime mortgages and loans from banks. Why? Liberals wanted to increase home-ownership among low-income families. So with Fannie and Freddie buying subprime loans form the banks, all the banks felt confident that they could issue these loans because Fannie and Freddie would always be there to buy them up; they woudlnt keep tons of them on their own books, thats for sure. This magnitude of subprime/defaulting loans never happened before until Clinton pushed for it.
So here we have it, Clinton’s admin. policies pretty much creating the real estate and housing bubble that burst, leading to this mess. But hey, thats not all.

Clinton repealed the Glass-Steagall act. By repealing this, banks were able to issue mortgage-backed securities. So all these worthless financial instruments people and banks are holding? Thats right! Couldnt have been possible without good ol’ Bill. Also, by people able to issue these securities, the banks were able to make more bad loans that they could just pawn off. Well done Clinton. Well done.

Hmm….the bailout was for Bush’s and Paulson’s friends. Novel, but wrong. Just because a Saudi prince or two have holdings in Citigroup, thats your big connection? The smoking gun? Too bad that the Saudi I know to which you refer has an entire holding firm that holds positions in a number of companies, in the US and abroad. Companies like AOL, Apple, Four Seasons, and Euro-Disney. So because hes diversified, a bailout of any industry would be labeled by you as a conspiracy, as opposed to a good economic measurement. Many US investors hold positions in financial firms in foreign companies. If any foreign country bails out the financial sector, Im going to be like you, and write about the big conspiracy of the ties between a foreign government and some investor. It will be very good reading, despite lacking credibility.

Alright, well Ive seen I wrote enough. I really dont think I need to prove much more because its apparent to me that you have no background in finance or economics, and by reading this, I hope all your readers can see that too…Oh, but what the hell. Lets see if I can make some real quick points.

-The bailout is the best move for the country. Theres a freeze in credit and lending, and when very large companies need lending, who do they go to? Thats right. big investment banks. People dont appreciate that these banks are the grease to the gears of the economy. Any and all major financing for large companies? Investment banks. When companies need to hedge their exposure and risk, who takes the otherside of that so that companies can continue with business as normal and properly operate. I-banks. Investment banks pretty much get that bad rap nowadays like the banks you see in old westerns when a farmer loses his land. Anyhow, with all those bad mortgage-securities on hand, it ties the hands of these banks. No one gets lending, and we get screwed. But government buys the securities, they get the cash needed to loan out. And the government holds loans that arent completely worthless. They may take longer to get repaid, but the government can hold onto them indefiently (unlike a company). So they are better off holding them. And then when they do get repaid, the 700 billion bailout is minimized, erased, or the government could potentially make money from the deal.

Alright, tired of typing. Hope you realize your wrong and do something better with your life since your not cut out for proper reporting of the facts. Ta-ta

I’m not sure whether or not JBV (yes, the number of prior JBs is embarassing, I think there’s there’s a historical family tradition of tax-dodging) is still reading this piece – but:

“because its apparent to me that you have no background in finance or economics”

wins some chutzpah awards in the context.

JBVI

Perhaps it does. I wont deny it. Maybe such a statement was too much. Maybe it wasnt. I feel annoyed when I read a story that doesnt have all the facts and fails to capture both sides. I dont expect a piece of be without opinions; it is important they are included; but the opinions shouldnt distort or hide the facts, and creates loose connections and claims that arent concretely proven, which I feel is the case here.

Perhaps I should have asked if there was any background in those fields. Is there?
I apologize if my remark was offensive in its audacity.

And regardless of that, I fail to see any rebuttals to the arguments and facts I presented. Your argument is that the bailout is to bailout Bush’s Saudi friends, yet, theres hardly any evidence other than the fact that yes, a Saudi prince has holdings in a US bank; hardly compelling evidence. When you make points as you do, you create this atmosphere of deceit and corruption; instead of pointing to one that may or may not exist. “Bush is bailing out the Banks; Bush has Saudi friends; Saudi friend owns shares in the Bank; Bush is clearly corrupt and bailing out his friend”. Smoking gun created. However, in the overall context, that this Saudi friend has his own investment firm and owns plenty of companies in the US and in the world, many foreign investors hold shares in US Banks and companies,and US investors hold positions in foreign companies; it really isnt as dubious as made out to be.

Let me raise another point. Bush had direct ties to Kenneth Lay; was a friend of his. And yet, the whole Enron scandal was brought out and I dont recall Bush bailing out Enron. He easily could have; the investigation could have easily been supressed, and would have been significantly cheaper and easier than the bank bailout. Yet he didnt. He could have said that with Enron holding so many energy contracts, that it was vital to the country to bailout Enron and save it, and there was no scandal. Could have, but didnt. If Bush is so corrupt and set on saving his crony friends, why didnt he?


Reactions: Twitter, blogs
  1. Banditry » Blog Archive » End of the world update: time to buy tins and shotguns?

    […] terms of the longer term, my dad has a piece up on Liberal Conspiracy arguing that liquidity bail-outs are a terrible idea, as the crisis would otherwise be an excellent opportunity t…. If my dad were Mark Steel, that’d be unsurprising; since he’s been a stockbroker for […]

  2. John B

    My dad, veteran i-banker, was shot down when I posted his piece about RUINED, REFLATION REQUIRED in 2008 http://t.co/DMyhoz0m





Sorry, the comment form is closed at this time.