Our Impending Financial Situation?

I'm a mystic, and not too savy regarding financial matters. If there is one, or several, among us who has/have more actual udrestanding of these matters, I'd like to hear from you.

I received this from a spiritual friend in Germany, today, 2/13/08:

------ Weitergeleitete Nachricht
Von: MaxReport <[email protected]>
Datum: Sun, 10 Feb 2008 20:02:47 +0800
An: MaxReport <[email protected]>
Betreff: Road to Independence: South America's new Bank of the South

Published: 4-5 times weekly

(4) Reimbursing depositors after bank failure - “It's All Downhill”, by Mike
Whitney
(5) Road to Independence: South America’s new Bank of the South

(4) Reimbursing depositors after bank failure - "It's All Downhill", by Mike
Whitney

From: Paul de Burgh-Day <pdeburgh{at}eldersnet.com.au> Date: Fri, 8 Feb 2008
12:11:15 +1100

My friends,

This should ensure that most of you - in the USA at least - do not sleep so
well tonight. Mind, there are more than plenty of things to keep you in a
state of insomnia. This is one to add to the pile!

You have money in a bank? Time to watch VERY, Very Closely. Time to think
what you should do.

Oh, and for my Aussie friends - my advice is to dismiss any claims that
Australia is strong and that what happens in the USA will impact upon us!
Excuse me, but that is bullshit! The whole world is going to take a massive
hit. Ironically, the poorest, most backward nations will be least affected.
They can't all much further.

Paul

The Bush Bust of '08

"It's All Downhill From Here, Folks"

By Mike Whitney

"I just saw a picture Bernanke stripped to the waist in the boiler-room
shoveling greenbacks into the furnace." Rob Dawg, Calculated Risk blog-site

On January 14, 2008 the FDIC web site began posting the rules for
reimbursing depositors in the event of a bank failure. The Federal Deposit
Insurance Corporation (FDIC) is required to "determine the total insured
amount for each depositor....as of the day of the failure" and return their
money as quickly as possible. The agency is "modernizing its current
business processes and procedures for determining deposit insurance coverage
in the event of a failure of one of the largest insured depository
institutions."
(http://www.fdic.gov/news/news/financial/2008/fil08002.html#body)

The implication is clear, the FDIC has begun the "death watch" on the many
banks which are currently drowning in their own red ink. The problem for the
FDIC is that it has never supervised a bank failure which exceeded 175,000
accounts. So the impending financial tsunami is likely to be a crash-course
in crisis management. Today some of the larger banks have more than 50
million depositors, which will make the FDIC's job nearly impossible.

Good luck.

It's worth noting that, due to a rule change by Congress in 1991, the FDIC
is now required to use "the least costly transaction when dealing with a
troubled bank. The FDIC won't reimburse uninsured depositors if it means
increasing the loss to the deposit insurance fund....As a result, uninsured
depositors are protected only if a bank acquiring the failed bank will pay
more for all of the deposits than it would for insured deposits only."
(MarketWatch)

Great. That's reassuring. And there's more, too. FDIC Chairman Shiela Bair
warned that "as of Sept. 30, there were 65 institutions with assets of $18.5
billion on its list of "problem" institutions;" although she wouldn't give
names.

So, what does it all mean?

It means there's going to be an unprecedented wave of bank closures in the
US and that people who want to hold on to their life savings are going have
to be extra vigilant as the situation continues to deteriorate. And it is
deteriorating very quickly.

Right now, many of the country's largest investment banks are holding $500
billion in mortgage-backed securities and other structured investments that
are steadily depreciating in value. As these assets wear-away the banks'
capital, the likelihood of default becomes greater. This week, Fitch Ratings
announced that it will (probably) cut ratings on the 5 main bond insurers
(Ambac, MBIA, FGIC, CIFG,SCA) "regardless of their capital levels". This
seemingly innocuous statement has roiled markets and put Wall Street in a
panic. If the bond insurers lose their AAA rating (on an estimated $2.4
trillion of bonds) then the banks could lose another $70 billion in
downgraded assets. That would increase their losses from the credit
crunch--which began in August 2007---to $200 billion with no end in sight.
It would also impair their ability to issue loans to even credit worthy
customers which will further dampen growth in the larger economy. Structured
investments have been the banks' "cash cow" for nearly a decade, but,
suddenly, the trend has shifted into reverse. Revenue streams have dried up
and capital is being destroyed at an accelerating pace. The $2 trillion
market for collateralized debt obligations (CDOs) is virtually frozen
leaving horrendous debts that will have to be written-down leaving the
banks' either deeply scarred or insolvent. It's a mess.

There were some interesting developments in a case involving Merrill Lynch
last week which sheds a bit of light on the true "market value" of these
complex debt-pools called CDOs. The Massachusetts Secretary of State has
charged Merrill with "fraud and misrepresentation" for selling them a CDO
that was "highly risky and esoteric" and "unsuitable for the City of
Springfield." (Most cities are required by law to only purchase Triple A
rated bonds) The city of Springfield bought the CDO less than a year ago for
$13.9 million. It is presently valued at $1.2 million---MORE THAN A 90% LOSS
IN LESS THAN A YEAR.

Merrill has quietly settled out of court for the full amount and seems
genuinely confused by the Massachusetts Secretary of State's apparent anger.
A Merrill spokesman said blandly, "We are puzzled by this suit. We have been
cooperating with the Secretary of State Galvin's office throughout this
inquiry."

Is it really that hard to understand why people don't like getting ripped
of?

This anecdote shows that these exotic mortgage-backed securities are real
stinkers. They're worthless. The market for structured debt-instruments has
evaporated overnight leaving a massive hole in the banks' balance sheets.
The likely outcome will be a rash of defaults followed by greater
consolidation of the major players. (re: banking monopolies) The Fed's
multi-billion bailout plan; the "Temporary Auction Facility" (TAF) is a
quick-fix, but not a permanent solution. The real problem is insolvency, not
liquidity.

The smaller banks are [in] dire straights, too. They're bogged down with
commercial and residential loans that are defaulting faster than any time
since the Great Depression. The Comptroller of the Currency, John Dugan--who
is presently investigating commercial real estate loans---discovered that
commercial banks "wrote off $524 million in construction and development
loans in the third quarter of 2007, almost nine times the amount of 2006".
The commercial real estate market is following residential real estate off a
cliff and will undoubtedly be the next shoe to drop.

Dugan found out that, "More than 60% of Florida banks have commercial real
estate loans worth more than 300% of their capital, a level that
automatically attracts more attention from examiners." (Wall Street Journal)
He said that his office was prepared to intervene if banks with large real
estate exposure maintained unreasonably low reserves for bad loans. Dugan is
forecasting a steep "increase in bank failures."

According to Reuters: "Dozens of U.S. banks will fail in the next two years
as losses from soured loans mount and regulators crack down on lenders that
take too much risk, especially in real estate and construction," predicts
Gerard Cassidy, RBC Capital Markets analyst. Apart from the growing losses
in commercial and residential real estate, the banks are carrying over $150
billion of "unsyndidated" debt connected to leveraged buyout deals (LBOs)
which are presently stuck in the mud. Like CDOs, there's no market for these
sketchy transactions which require billions in cheap, easily available
credit. They've just become another anvil dragging the banks under.

On January 31, Bloomberg News reported: "Losses from securities linked to
subprime mortgages may exceed $265 billion as regional U.S. banks, credit
unions and overseas financial institutions write down the value of their
holdings." Standard and Poor's added that "it may cut or reduce ratings of
$534 billion of subprime-mortgage securities and CDOs as default rates
rise." Another blow to the banks withering balance sheets. Is it any wonder
why the "new loans" spigot has been turned off?

Surprisingly, there's an even bigger threat to the financial system than
these staggering losses at the banks. A default by one of the big bond
insurers could trigger a meltdown in the credit-default swaps market, which
could lead to the implosion of trillions of dollars in derivatives bets. The
inability of the under-capitalized monolines (bond insurers) to "make good"
on their coverage is likely to set the first domino in motion by increasing
the number of downgrades on bond issues and intensifying the
credit-paralysis which already is spreading throughout the system.

MSN Money's financial analyst Jim Jubak summed it up like this:

"Actually, I'm worried not so much about the junk-bond market itself as the
huge market for a derivative called a credit-default swap, or CDS, built on
top of that junk-bond market. Credit-default swaps are a kind of insurance
against default, arranged between two parties. One party, the seller, agrees
to pay the face value of the policy in case of a default by a specific
company. The buyer pays a premium, a fee, to the seller for that protection.

This has grown to be a huge market: The total value of all CDS contracts is
something like $450 trillion..... Some studies have put the real credit risk
at just 6% of the total, or about $27 trillion. That puts the CDS market at
somewhere between two and six times the size of the U.S. economy.

All it will take in the CDS market is enough buyers and sellers deciding
they can't rely on this insurance anymore for junk-bond prices to tumble and
for companies to find it very expensive or impossible to raise money in this
market." (Jim Jubak's Journal; "The Next Banking Crisis is on the Way", MSN
Money)

Jubak really nails it here. In fact, this is what Wall Street is really
worried about. $450 trillion in cyber-credit has been created through
various off balance sheets operations which neither the Fed nor any other
regulatory body can control. No one even knows how these abstruse,
credit-inventions will perform in a falling market. But, so far, it doesn't
look good.

The enormity of the derivatives market ($450 trillion) is the direct result
of Greenspan's easy-credit monetary policies as well as the reconfiguring of
the markets according to the "structured finance" model. The new model
allows banks to run off-balance sheets operations that, in effect, create
money out of thin air. Similarly, "synthetic" securitization, in the form of
credit default swaps (CDS) has turned out to be another scam to avoid
maintaining sufficient capital to cover a sudden rash of defaults. The
bottom line is that the banks and non-bank institutions wanted to maximize
their profits by keeping all their capital in play rather than maintaining
the reserves they'd need in the event of a market downturn.

In a deregulated market, the Federal Reserve cannot control the creation of
credit by non-bank institutions. As the massive derivatives bubble unwinds,
it is likely to have real and disastrous effects on the
underlying-productive economy. That's why Jubak and many other market
analysts are so concerned. The persistent rise in home foreclosures, means
that the derivatives which were levered on the original assets (sometimes
exceeding 25-times their value) will vanish down a black hole. As trillions
of dollars in virtual-capital are extinguished by a click of the mouse; the
prospects of a downward deflationary spiral become more likely.

As economist Nouriel Roubini said:

"One has to realize that there is now a rising probability of a
'catastrophic' financial and economic outcome, i.e. a vicious circle where a
deep recession makes the financial losses more severe and where, in turn,
large and growing financial losses and a financial meltdown make the
recession even more severe. That is why the Fed has thrown caution to the
wind and taken a very aggressive approach to risk management." (Nouriel
Roubini EconoMonitor)

"In the fourth quarter of 2007, new foreclosures averaged 2,939 a day,
double the pace of a year earlier." (RealtyTrac Inc.) The banks are
presently cutting back on home equity loans which provided an additional
$600 billion to homeowners last year for personal consumption. Bush's $150
billion "stimulus package" will barely cover a quarter of the amount that is
lost. As consumer spending slows and the banks become more constrained in
their lending; businesses will face overproduction problems and will have to
limit their expansion and lay off workers. This is the downside of "low
interest" bubble-making; a painful descent into deflation.

Capital is now being destroyed at a faster pace than it is being created.
That's why the Fed is looking for solutions beyond mere rate cuts. Bernanke
wants direct government action that will provide immediate stimulus. But
that takes political consensus and there's still debate about the gravity of
the upcoming recession. The pace of the economic contraction is
breathtaking. This week's release of the Institute for Supply Management's
Non-Manufacturing Index (ISM) was a shocker. It showed steep declines in all
areas of the nation's service sector---including banks, travel companies,
contractors, retail stores etc-The Business Activity Index, the New Orders
Index, the Employment Index, and the Supplier Delivery Index have all
contracted at a "historic" pace. Everyone took a hit.

"The numbers are so terrible, it's beyond belief," said Scott Anderson,
senior economist at Wells Fargo & Co.

The $2 trillion that has been wiped out from falling home prices, the
slowdown in lending activity at the banks, the loss $600 billion in home
equity loans, and the faltering stock market have all contributed to a
noticeable change in the public's attitudes towards spending. Traffic to the
shopping malls has slowed to a crawl. Retail shops had their worst January
on record. Homeowners are hoarding their earnings to cover basic expenses
and to make up for their lack of personal savings. The spending-spigot has
been turned off. America's consumer culture is in full-retreat. The slowdown
is here. It is now. We are likely to see the sharpest decline in consumer
spending in US history. Bush's $150 billion will be too little too late.

America's place in the world has been guaranteed not by what it produces but
by what it consumes. The American consumer has been the locomotive that
drives the global economy. Now that engine has been derailed by the reckless
monetary policies of the Fed and by shortsighted financial innovation. When
equity bubbles collapse; everybody pays. Demand for goods and services
diminishes, unemployment soars, banks fold, and the economy stalls. That's
when governments have to step in and provide programs and resources that
keep people working and sustain business activity. Otherwise there will be
anarchy. Middle class people are ill-suited for life under a freeway
overpass. They need a helping hand from government. Big government.
Good-bye, Reagan. Hello, F.D.R.

The Bush stimulus plan is a drop in the bucket. It'll take much, much more.
And, we're not holding our breath for a New Deal from George Walker Bush.

(5) Road to Independence: South America's new Bank of the South

Forwarded from: ERA <hermann{at}picknowl.com.au> Date: Fri, 08 Feb 2008
17:29:14 +1030

Latin America Banks on Independence

by Mark Engler

In These Times

Tuesday 22 January 2008

The new Bank of the South shatters neoliberal economics.

In the closing weeks of 2007, a region in revolt against the economics of
corporate globalization issued its most unified declaration of independence
to date.

On Dec. 9, standing before the flags of their countries, the presidents of
Argentina, Bolivia, Brazil, Ecuador, Paraguay and Venezuela, along with a
representative from Uruguay, gathered in Buenos Aires and signed the
founding charter of the Banco del Sur, or the Bank of the South.

The Bank of the South will allow participating governments to use a
percentage of their collective currency reserves to strengthen Latin
America's economy and promote cooperative development. It plans to begin
lending as early as 2008 with around $7 billion in capital.

By itself, the bank represents a serious challenge to U.S.-dominated
institutions, such as the International Monetary Fund (IMF), the World Bank
and the Inter-American Development Bank (IDB). As part of a larger trend, it
signals a major break from the policies of "free trade" neoliberalism that
dominated in the region throughout the '80s and '90s.

The Bank of the South's creators are keenly aware of the significance of
this break. In the words of Venezuelan President Hugo Chávez, the bank is
"aimed at freeing us from the chains of dependence and underdevelopment."
Ecuadorian President Rafael Correa concurred, arguing that with the bank,
"South American nations will be able to put an end to their political and
financial dependence that they have had with the neoliberal model."

Officially, the international financial institutions are keeping their tone
upbeat. On Dec. 11, IMF Director General Dominique Strauss-Kahn told Agence
France-Presse that the new bank is "not a problem; it's maybe an
opportunity." Similarly, Augusto de la Torre, World Bank chief economist for
Latin America, said, "As far as the World Bank is concerned, this new
initiative is not perceived as a competitor."

But in March 2007, as Latin American leaders were first discussing the
creation of a new body, one anonymous insider at the neoliberal IDB told the
Financial Times that the Bank of the South represented the largest threat to
his institution in decades. "With the money of Venezuela and political will
of Argentina and Brazil, this is a bank that could have lots of money and a
different political approach," he explained. "No one will say this publicly,
but we don't like it."

Breaking Washington's Hold

There is good reason for those invested in the Washington Consensus to
dislike the Bank of the South. In recent decades, the IMF, the World Bank
and the multilateral regional banks have largely controlled poorer
countries' access to credit and development financing. These institutions
allowed developing countries to avoid defaulting on their debt, provided
funds in some difficult times and gave a nod of approval to private
creditors. But the price the countries paid in return was steep.

In order to stay in their good graces, developing nations have had to
privatize industries, open markets to foreign businesses, liberalize capital
flows, keep monetary policy tight and implement fiscal austerity (that is,
cut needed social services for their people). In the end, such policies
proved disastrous in Latin America.

Per capita GDP, which had been growing at a steady rate throughout the '60s
and '70s, grew hardly at all in the subsequent two decades of neoliberalism.
During the latter period, the region also developed some of the highest
levels of inequality in the world.

The Bank of the South would work to remedy this situation. Unlike the
preexisting financial institutions, the new bank will be run by Latin
American countries themselves, will not be dominated by any single nation
and will be free to support development approaches that are much more
sensitive to the needs of the poor.

A May 2007 statement of South American finance ministers affirmed that the
new bank and other mechanisms of regional integration "must be based on
democratic, transparent and participatory schemes that are responsible to
their constituencies."

With the exception of Paraguay's Nicanor Duarte Fruto, each of the Latin
American leaders involved in the Bank of the South was elected in recent
years on a mandate to split from Washington. Well aware of the failures of
economic neoliberalism in the region, and under pressure from an enlivened
citizenry, the bank's members have outraged the international business press
by working to do just that.

Several governments have moved to free themselves of direct oversight from
the IMF by repaying loans early. In December 2005, Argentina and Brazil
announced that they would pay off $9.8 billion and $15.5 billion,
respectively. The IMF, which benefits from interest payments on long-term
loans, was nonplussed.

Argentina, which was a model of the IMF during the '90s and suffered severe
economic collapse in 2001, vocally declared good riddance. Then-President
Néstor Kirchner triumphantly proclaimed that throwing off the chains of IMF
debt constituted a move toward "political sovereignty and economic
independence."

Since then, Latin American governments have been one-upping each other in
their acts of defiance.

In Bolivia, upon taking office in 2006, President Evo Morales announced he
would let the country's standing loan agreement with the IMF expire. In May
2007, he declared Bolivia would withdraw from a World Bank arbitration
center that handles investment disputes, usually favoring corporate
interests. Nicaragua has similarly rejected the authority of the center.

Correa topped them by ejecting the World Bank's representative to Ecuador in
April 2007. He declared the officer a persona non grata in the country,
insisting, "We will not stand for extortion by this international
bureaucracy."

That same month, Chávez announced that Venezuela would withdraw from
membership in the IMF and World Bank altogether. While the country is still
working out the details of this move, the prospect is unprecedented in the
era of corporate globalization.

The ability of oil-rich Venezuela to provide its neighbors with financing
they previously might have needed to beg for from Washington is a
significant factor in their willingness to break with the IMF and World
Bank. Venezuela has offered billions in support to countries-including
Argentina, Bolivia and Ecuador-and those backup funds make many countries
less susceptible to threats of capital flight than in the past. Along with
investments from China and India, it dramatically reduces Washington's
ability to starve dissident leaders of financial resources when governments
grow, in its view, disobedient. The Bank of the South will help to formalize
a source of alternative finance and place it under regional control.

Rude Awakenings

The establishment of the Bank of the South comes at a particularly bad time
for the IMF. The institution's troubles were brought into relief at its
annual fall meetings in mid-October, after which the Washington Post
contended, "the International Monetary Fund needs restructuring, and maybe a
bailout."

IMF lending has plummeted in recent years, as its supposed beneficiaries
have launched a rebellion. Cutting ties with the fund is not just a Latin
American phenomenon. Russia, Thailand, Indonesia and the Philippines have
also pursued strategies of early debt repayment. Many Asian countries that
were burned by the region's neoliberal financial crisis in 1997 are building
large cash reserves to prevent a return to the IMF in times of economic
downturn, and they have recently worked on creating a regional currency
exchange that will further increase their distance from Washington.

These developments are sapping both the IMF's influence and its cash flow.
Its loan portfolio has dwindled from nearly $100 billion in 2004 to around
$20 billion today. A single country, Turkey, now accounts for the bulk of
its lending. The IMF has lost almost all influence in Latin America, with
lending there plummeting to a paltry $50 million, less than 1 percent of its
global loan portfolio. As recently as 2005, the region had accounted for 80
percent of its outstanding loans.

Deprived of lucrative interest payments from poorer countries, the IMF is
now desperately trying to meet its $1 billion administrative budget without
dipping into its gold reserves. In stark contrast to the triumphalist
pronouncements made in past fall meetings, in 2007 the IMF's newly installed
Dominique Strauss-Kahn confessed that "downsizing is on the table" for the
institution.

Ignoring the wider picture, pro-free trade pundits have generally responded
to the Bank of the South by minimizing its significance and predicting
failure. The Wall Street Journal characterized the bank as but one of Hugo
Chávez's many madcap schemes, insisting that it is "unlikely to live up to
his grandiose vision." Meanwhile the Economist asserted, "The IMF can sleep
easy." It pointed out that the Bank of the South's founding agreement lacked
many details about its governance and lending policies, and that
disagreements persist among the region's key players.

It is true that Latin America has a history of internal disputes thwarting
dreams of regional unity-and that quarrels persist today. While Venezuela
and Ecuador have pushed for the bank to have a far-reaching mandate, Brazil
prefers a more modest institution. To the disappointment of many of his
progressive supporters, Brazilian President Luiz Inácio Lula da Silva has
adhered to conservative economic policies designed to keep Brazil in good
standing with foreign creditors. The country also runs a large internal
development bank, which loaned $38 billion in 2007 to fund national
projects. Therefore, Brazil has less to gain directly from making the Bank
of the South into a robust regional lender.

Activists, while generally positive, have expressed some concerns.
Environmentalists worry the Bank of the South, while more democratically
managed than its counterparts in Washington, may nevertheless develop a
similarly destructive record of funding large-scale, ecologically harmful
construction projects.

Other progressives, ranging from the members of the Jubilee South coalition
to Cuban commentator Eduardo Dimas, have argued that the institution must go
beyond traditional development lending to support such measures as land
reform, a common regional currency and projects explicitly designed to
promote political solidarity in the region. These would more closely link
the bank with the Bolivarian Alternative for the Americas (ALBA), an
initiative through which the Venezuelan government has paid for Cuban
doctors to provide services in the region and has promoted other forms of
mutual assistance.

Reservations about the Bank of the South's mandate, however, should not
obscure the swiftness and severity of Latin America's assault on the
international financial institutions.

Chávez first floated the idea of the bank in 2006, and the speed at which it
has come into existence has been shocking. The widespread support within
Latin America for independent bodies such as the new bank suggests that the
days when the United States could act as an economic overseer dictating
policy for countries across the globe are coming to an end.

Upon the inauguration of the Bank of the South, even Lula da Silva delivered
a message of defiance to the North. "Developing nations must create their
own mechanisms of finance," he said, "instead of suffering under those of
the IMF and the World Bank, which are institutions of rich nations." He
added bluntly: "It is time to wake up." --

Mark Engler, a writer based in New York City, can be reached at
engler{at}democracyuprising.com.

The aims of a free sovereign society for all countries must be:

* Issue Sovereign Debt-Free National Currencies.
* Make Their Own Laws And Trade Agreements.
* Replace Democracy With Federalism - Swiss Model Referendum.
* Abolish Political Parties - Replace By Direct Vote Of The Sovereign.
* Finance And Banking Is A Communal Backed Public Service.
* Raise Tariffs On Imports Above Local Offerings
* Label goods stating domestic wage cost share in % - like sales tax
* Charge social costs in sales price reciprocal to domestic wage share
* Replace Professional Politicians By Unpaid Elected Citizens
* Allow Only Private Owned Foreign Shareholding And Real-Estate.
* Communally Own Public Utilities, Communication And Media Services.
* Land And Resources Under Communal Use And Ownership.
* Advertizing free Medias to slowdown exploitation of the environment.
* Medical, legal & consulting fees payable after health & success
* Economical Autarky - According To Fredrick List.
* Turn Government Servants Into Regular Accountable Employees.
* Abolish Corporates And Make Company Operators Accountable.
* Abolish Double Entry & Compulsory Bookkeeping.
* Work Is Non-Taxable - For Individuals And Companies.
* Export Only Surplus Commodities In Exchange For Needed Goods.

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