Henry
Paulson has lost the control over US finance, economy
By
F. William Engdahl, 3 August 2008
When
Henry Paulson agreed to leave his job as chairman of the powerful
Wall Street investment bank, Goldman Sachs to go to Washington as
Treasury Secretary in 2006 he demanded extraordinary powers as de
facto economic czar. He got it. Paulson is also head of the
President’s Working Group on Financial Markets -- the secretary
of the treasury and the chairmen of the Federal Reserve Board, the
Securities and Exchange Commission and the Commodity Futures Trading
Commission. The Working Group is the financial world's equivalent of
the Pentagon war room. Paulson, not Fed chairman Bernanke, is the
person running the Administration’s crisis management. And his
recent actions indicate he has lost control as the snowballing
problems from the semi-government mortgage companies Freddie Mac and
Fannie Mae to the collapse of the multi-trillion dollar market in
Asset Backed Securities (ABS) to the real economy are compounding
into the worst crisis since the 1930’s Great Depression.
‘The
US banking system is sound…’
In
an eerie echo of President Herbert Hoover in 1932, during a
Presidential campaign against Roosevelt, following the stock market
crash and collapse of numerous smaller banks, Paulson recently
appeared on national TV to declare “our banking system is a
safe and sound one.” He added that the list of “troubled”
banks “is a very manageable situation.” In fact what he
did not say was that the US bank deposit insurance fund, the Federal
Deposit Insurance Corporation (FDIC) has a list of problem banks that
numbers 90. Not included on that list are banks such as Citigroup,
until recently the largest bank in the world.
The statement is
hardly reassuring. The California savings bank, IndyMac Bank which
was declared insolvent a month ago was not on the FDIC list a week
before it collapsed. The reality is the crisis created by
“securitizing” millions of home mortgages into new
financial instruments and selling the packages to pension funds and
investors is unfolding like a snowball rolling down the Swiss
Alps.
Indication of the lack of control is the statement just
weeks ago by Paulson that “financial institutions must be
allowed to fail.” That was two weeks before Paulson went to
Congress to ask for “Congressional authority to buy unlimited
stakes in and lend to Fannie Mae and Freddie Mac.” As
I noted in my recent piece, Financial
Tsunami: The Next Big Wave is
Breaking: Fannie Mae Freddie Mac and US Mortgage Debt ,
those two private companies insured some $6 trillion worth of home
mortgages, half the entire US mortgage debt. Paulson defended the
request by calling Freddie Mac and Fannie Mae “the only
functioning part of the home loan market.”
That comes
back to the statement about a “sound banking system”. Can
we have a sound banking system where the only functioning part is
literally insolvent—its debts greater than its assets?
It
is well known on Wall Street that some of the largest financial
institutions have huge undeclared problems with Asset Backed
Securities they have valued far above their worth to make their books
look better than they are. The names Citigroup, Lehman Bros., Morgan
Stanley, even Paulson’s old firm, Goldman Sachs and
of course the inventor of sub-prime mortgage securitization, Merrill
Lynch, all hold a huge percentage of what are called Level Three
assets, these being assets where no one is willing to buy but the
bank declares their worth based on “fantasy.” In short
the value of those core financial institutions of the US financial
system is massively overvalued compared with their value were they
forced to sell into the open market today. In a sobering aside,
readers should not expect any serious economic remedies for the
crisis from a President Barack Obama. Obama’s National Campaign
Finance Chairman is Chicago real estate billionaire, Penny Pritzker,
who is heir to among other things the Hyatt Hotels. It was Pritzker
together with Merrill Lynch ten years ago who first developed the
model for securitizing “sub-prime” real estate, the
trigger for the current Financial Tsunami crisis.
Already
Citigroup has been forced to go to Dubai hat in hand and ask for
billions in cash. After it announced it would not need more capital.
Now Citigroup just announced plans to sell some $500 billion more
assets to raise funds. Is Citigroup really solvent
is the question sober investors are asking. Similarly Merrill Lynch
raised $6.6 billion from Kuwait Mizuho, stated it was fine and weeks
later had to raise still more capital. Morgan Stanley sold a 10%
share of the company to China International Corp.
The
real economy contracting rapidly
Behind
the reassuring statements from Paulson and others that the “worst
is over” the reality of the credit collapse since August 2007
is a deepening economic contraction which I have said several times
in this space will surpass the Great Depression of the 1929-1938
period. A good friend who is an unemployed homebuilder in a
prosperous part of Arizona just sent me the following list of US
department retail store closures. It is worth noting that over 70% of
the US GDP is consumer spending and that the entire Federal Reserve
strategy of Alan Greenspan after the March 2000 collapse of the stock
market bubble, was to bring US interest rates to their lowest levels
since the 1930’s in order to stimulate consumer spending on
credit, i.e. debt, to avoid “recession.” Note the scale
of the following store closings across America in recent weeks:
Ann Taylor closing 117 stores nationwide.
Eddie Bauer to close more stores after closing 27 stores in the first quarter.
Cache, a women’s retailer is closing 20 to 23 stores this year.
Lane Bryant, Fashion Bug, Catherines closing 150 stores nationwide
Talbots, J. Jill closing stores. Talbots will close all 78 of its kids and men's stores plus another 22 underperforming stores. The 22 stores will be a mix of Talbots women's and J. Jill.
Gap Inc. closing 85 stores
Foot Locker to close 140 stores
Wickes Furniture is going out of business and closing all of its stores. The 37-year-old retailer that targets middle-income customers, filed for bankruptcy protection last month.
Levitz - the furniture retailer, announced it was going out of business and closing all 76 of its stores in December. The retailer dates back to 1910.
Zales, Piercing Pagoda plans to close 82 stores by July 31 followed by closing another 23 underperforming stores.
Disney Store owner has the right to close 98 stores.
Home Depot store closings 15 of them amid a slumping US economy and housing market. The move will affect 1,300 employees. It is the first time the world's largest home improvement store chain has ever closed a flagship store.
CompUSA (CLOSED).
Macy's - 9 stores closed
Movie Gallery – video rental company plans to close 400 of 3,500 Movie Gallery
and Hollywood Video stores in addition to the 520 locations the video rental
chain closed last fall as part of bankruptcy.
Pacific Sunwear - 153 Demo stores closing
Pep Boys - 33 stores of auto parts supplier closing
Sprint Nextel - 125 retail locations to close with 4,000 employees following 5,000 layoffs last year.
J. C. Penney, Lowe's and Office Depot are all scaling back
Ethan Allen Interiors: plans to close 12 of 300 stores to cut costs.
Wilsons the Leather Experts – closing 158 stores
Bombay Company: to close all 384 U.S.-based Bombay Company stores.
KB Toys closing 356 stores around the United States as part of its bankruptcy reorganization.
Dillard's Inc. will close another six stores this year.
For
anyone familiar with American shopping malls and retailing, this
represents a staggering part of the daily economic life of the
nation, from furniture stores to clothing to video rentals to
leather. The process has only begun and neither major party
Presidential candidate has dared to mention this on the ground
economic reality, because they evidently have no solutions to offer
that would not jeopardize their campaign finances. Obama is tied to
not only Pritzker but also to Omaha billionaire, Warren Buffett and
George Soros. McCain depends on the traditional money contributions
of the Republican Party which demand permanent tax reform for highest
income earners and a pro-bank laissez faire treatment of millions of
homeowners facing home foreclosure and asset seizure by banks.
Banks
across the country have severely cut back on loans, fearful of bad
debts. That has aggravated the consumer collapse documented above.
Hundreds of thousands of real estate brokers, small and large
bankers, furniture workers and salespeople, and construction workers
are unable to find work. Jobs are being cut wholesale and those
working are often on reduced hours. Car sales in June plunged by 28%
for Ford, 18% for General Motors and even 21% for Toyota which will
mean more layoffs in coming weeks. This will be the next wave of
unemployment.
The economic reality is not reflected in
official US Commerce Department or Labor Department statistics. There
the data is constantly being “revised” to hide the grim
reality in an election year.
My good friend, economist John
Williams of California, has meticulously tracked such “data
revisions” for more than 25 years and found the manipulation of
reality so alarming that he founded an independent subscriber service
titled “Shadow Government Statistics”
(http://www.shadowstats.com/
),
where he makes best estimate calculations of the reality not the
official mythology.
By Williams’ calculations the US
economy first entered recession, defined as two consecutive quarters
of negative GDP growth, at the end of 2006. Ever since, the recession
has deepened, dramatically so in the past 12 months. Little known is
the fact that the Labor Department also publishes six different
unemployment statistics from U1, U2 through to U6 being the most
comprehensive. The reported “official unemployment” is
the very narrowly defined U3 which stands at 5.5%. However, as
Williams notes, U6 is the real measure and that officially shows 9.7%
unemployed. His calculations put the figure at 13.7% actually
unemployed and seeking work.
A
personal account
The
unemployed homebuilder from Arizona I mentioned above recently sent
me the following personal note on the situation. “Here is how
it looks to people like me: Real estate dealings fuelled the economy
in most areas of the country for the past decade or more. We’ve
been in a market downturn for three years. We have seen the cost of
doing business increase for builders, along with a big drop in buyers
as everyone tightens their belts, or can’t sell existing homes.
Many employers have gone under ending thousands of jobs. If they have
a job people are worried about losing it. Driving long distances to
work is not possible with gasoline costs double that of 2006. There
has been a 40% drop in most peoples’ home equity worth. Many
people are “underwater” on their homes, meaning they owe
more than the market price is worth today. So many under-employed
don’t show up in government unemployed statistics. Self
employed like me never get counted.”
The Arizona
homebuilder continued, “Today nobody is building. Unsold home
inventories are triple that of 2003. Banks no longer give easy credit
for home buyers. Many realtors I know have gone two years without
selling a home. Empty storefronts are becoming common. In many areas
unemployment among construction trades people is 50% or more. Tens of
thousands of illegal Mexicans who did most of the manual labor have
returned to Mexico to find work. What now? Well, I do handyman
projects of all sorts, big or small and make about 70-90% of what it
takes to survive with a family of a wife and three young children. My
savings make up the rest. That can’t go on for too much longer.
We went from affluent and comfortable to nervous and broke with
diminished opportunities in just three years. We used to be the
middle class.”
To be continued…