THIS JUST IN: Former Georgia Congresswoman Cynthia Mckinney and activist/journalist Rosa Clemente were nominated as the Presidential and Vice Presidential candidates of the Green Party at their convention in Chicago.

SPECIAL REPORT TODAY

I have been tracking the latest phase of the financial crisis. This doesn’t seems to be of much interest to the highly partisan among us but it must become a subject for us to deal with. I have two reports on Mediachannel today: I hope you will ignore any duplication. I wrote the first piece Friday and updated/supplemented it Sunday. Comments welcome to dissector@mediachannel.org

FANNIE MAE: WHAT DO YOU HAVE TO SAY?

July 13 ‘08: At the Boston Globe, the challenge after the prior week’s panic over the fall in the stock price of America’s leading mortgage agencies, Freddie Mac and Fannie Mae, was about how to find a reassuring silver lining in a highly destructive financial storm.

“WHEN WILL IT STOP? That was the large type headline in the Sunday Business section followed by this subhead: “THE GOOD NEWS. ”Many Analysts Agree The Current Downturn Will Not Topple Into A Full Fledged Depression. And the Fed is Taking Unprecedented Actions To Prevent One.” The only bad news was ‘there is no way to stop the shocks.’

How the goal posts have shifted! For months, as I have documented in grueling detail, mainstream outlets denied that a recession was imminent. They avoided the “D” Word. Now they are talking about preventing a depression. Suddenly, comparisons with the 1930’s are in vogue but always with the view of denying they exist.

The emphasis was on confident building and reassurance. Arguably we have had just heard the worst financial news in months with a major bank failing and the institutions with trillions of dollars in mortgages—the centerpiece of the housing market threatening to collapse even after the Treasury Secretary Henry Paulson personally advised investors that the Government support companies Fannie Mae and Freddie Mac were still strong. The Market heard the reassurance and rejected it with stock prices in both of these institutions dropping to new lows.

THE RESPONSE

On Sunday, the day before the market reopens, the Fed Announced that there is plenty of money available if the two mortgage backstops needed it. The Federal Reserve and the U.S. Treasury announced steps Sunday to shore up the mortgage giants Fannie Mae and Freddie Mac, whose shares have plunged as losses from their mortgage holdings threatened their financial survival. The Fed sad it authorized its New York authority to lend to the two companies “should such lending prove necessary.” If the companies did borrow directly from the Fed, they would pay 2.25 percent — the same rate given to commercial banks and Big Wall Street firm.” The Treasury Department announced that the Bush administration will ask Congress for authority to prop up Fannie Mae and Freddie Mac. This is a sign to the market that the government is behind these troubled companies.

Here’s more on what the Administration proposes—from the Washington Post.

Problem solved? Not so fast.

AS OF THIS MORNING, ACCORDING TO CNBC:

The stock rally triggered by the bailout of Fannie Mae and Freddie Mac fizzled within the first half hour of trading.

The Dow Jones Industrial Average had opened up 120 points, and Fannie and Freddie jumped by more than 20 percent, but before the clock struck 10 on Wall Street, the Dow was up just 60 points and Fannie and Freddie’s gains had all but vanished.

Contrast the Fed’s heady intervention and the Globe’s sunny disposition with a report from the Economic Trends Institute, a small think tank, published the same day.

THE PANIC OF ‘O8

“The “Panic of ’08″ that we had predicted is “ON.” Only the blind can’t see it, the deaf don’t hear it and those in denial won’t admit it. America’s economy has taken a direct hit. The nation’s financial superstructure is collapsing. Those waiting for the “official word” and hesitate to take survival measures will go down with the sinking ship of state.

The Economic 9/11 that we had warned would “topple corporate giants” and “crush the man on the street” hit on Friday. While an economic terror strike was long in the making and the devastation long predicted, the financial markets melted down and panic hit the Street on the news that the nation’s two largest mortgage finance companies, Freddie Mac and Fannie Mae, were on the brink of failing.”

Even as the Federal Reserve Bank rushed in for one of its now expected multi- billion dollar rescue—what many saw as a temporary fix—there was fear that we may be at some tipping point Are we, perhaps, “tipping” us, beyond that point of no return?

LOSS OF FAITH IN FREE MARKET RELIGION

Also falling with the stock market and public confidence was faith in some widely held tenets of ecoonmic ideology, as E.J Dione explained in the Washington Post:

“The biggest political story of 2008 is getting little coverage. It involves the collapse of assumptions that have dominated our economic debate for three decades.

Since the Reagan years, free-market cliches have passed for sophisticated economic analysis. But in the current crisis, these ideas are falling, one by one, as even conservatives recognize that capitalism is ailing.

……”We are in a worldwide crisis now because of excessive deregulation,” Rep. Barney Frank, D-Mass., the chairman of the House Financial Services Committee, said in an interview.

He notes that in 1999 when Congress replaced the New Deal-era Glass-Steagall Act with a looser set of banking rules, “we let investment banks get into a much wider range of activities without regulation.” This helped create the subprime mortgage mess and the cascading calamity in banking.”

As oil prices climbed and foreclosures mounted—up 56% in June—it seemed as if the while system was unraveling. Tom Petruno of the Los Angeles Times cataloged the “fraying of faith”

“In Wall Street’s version of a bank run, investors drove shares of Fannie Mae and Freddie Mac to 17-year lows, signaling a gnawing lack of faith in the companies’ ability to survive rising mortgage defaults without government help.

Later in the day, regulators took over IndyMac Bank of Pasadena, saying the $32-billion lender had collapsed under the weight of bad home loans and withdrawals by spooked depositors. It was the second-largest bank failure in U.S. history.

“This is a flare-up in the financial forest fire that is far beyond anything we’ve seen before,” said Christopher Low, chief economist at investment firm FTN Financial in New York.

And it is triggering worries that would have been unthinkable even a year ago — including that the U.S. Treasury’s debt might lose its AAA credit grade because of heavy blows to the nation’s fiscal health from the housing mess.

Just four months ago, many on Wall Street believed they had seen the worst of the credit crisis rooted in the housing market’s woes.”

“IT’S DISPIRITING..”

For New York Times columnist Gretchen Morgenson who has been trying to blow the whistle on financial irresponsibility for years, these latest developments were predictable and depressing:

“It’s dispiriting indeed to watch the United States financial system, supposedly the envy of the world, being taken to its knees. But that’s the show we’re watching, brought to you by somnambulant regulators, greedy bank executives and incompetent corporate directors.

This wasn’t the way the “ownership society” was supposed to work. Investors weren’t supposed to watch their financial stocks plummet more than 70 percent in less than a year. And taxpayers weren’t supposed to be left holding defaulted mortgages and abandoned homes while executives who presided over balance sheet implosions walked away with millions.

Over the course of this 18-month financial crisis, we have lurched from land mine to land mine…..”

Once again those who feared the worse were validated more than those expected the best.

DECEITFUL SOCIALISM

One irony is that to some critics, the truth was that for all the talk of a free market, institutions like Freddy and Fannie were actually examples of government control, a form of socialism or state capitalism gone wrong. That was the take of the financial writer Wilhem Butler:

“There are many forms of socialism. The version practiced in the US is the most deceitful one I know. An honest, courageous socialist government would say: this is a worthwhile social purpose (financing home ownership, helping my friends on Wall Street); therefore I am going to subsidize it; and here are the additional taxes (or cuts in other public spending) to finance it.

Instead the dishonest, spineless socialist policy makers in successive Democratic and Republican admininstrations have systematically tried to hide both the subsidies and size and distribution of the incremental fiscal burden associated with the provision of these subsidies, behind an endless array of opaque arrangements and institutions. Off-balance-sheet vehicles and off-budget financing were the bread and butter of the US federal government long before they became popular in Wall Street and the City of London.

The abuse of the Fed as a quasi-fiscal agent of the federal government in the rescue of Bear Stearns is without precedent, and quite possibly without legal justification.”

This all burst in to the surface on another Black Friday, July 11, when world financial markets began quaking because of the threats to two government linked companies with five TRILLION dollars in mortgages,

A year ago, the Dow was about to hit 14,000; this past week it dropped below 11,000. Panic, volatility, and fear can no longer be contained. On talk radio, conservative callers still mostly lambast irresponsible borrowers, but more and more recognize that this crisis is systemic and non-partisan in origins.

CARLY IS CONCERNED

Even John McCain’s ex-CEO, economic advisor Carly Fiorina, who of course doesn’t want to blame anyone or name anyone, says ‘there was a situation where there was greed on Wall Street, there was a lack of transparency around a new set of financial instruments…, there were a whole new set of financial players who were less regulated than banks, and all that together created a situation, which now is rippling through the economy.

“The situation”—that’s a rather vague way of putting it.

PHIL GRAMM’S COMPLICITY

As it turns out, one of McCain’ closest advisors, Former Senator and subprime lobbyist Phil Gramm who criticized Anericans for “whining” and showing signs of “mental depression” played a direct role in planting the seeds of the subprime “situation” that started the ball free-falling downhill and gathering more than mere moss.
Appearing on Democracy Now with Amy Goodman, journalist David Corn explained that it involved “ a sly backroom legislative maneuver mounted by Phil Gramm, who was Republican chairman of the Senate Banking Committee in the ’90s.”

…”It was the week that the Supreme Court was giving the election to George W. Bush. As often happens in Washington, Congress had yet to pass most of the appropriation measures that are needed to before that Congress coming to a close, and so they were lumping together, you know, six, seven different appropriation bills into one mega bill, working all hours of the day…

And in the midst of all that chaos, Senator Phil Gramm slipped into this must-pass spending bill a 268-page bill, the Commodity Futures Modernization Act…a portion of the bill deregulated these financial instruments called “swaps…The problem is that these swaps, thanks to Phil Gramm’s bill, are totally, totally unregulated, and the swap market is something like now about four times the size of Wall Street, in terms of securities that are regulated. And it really turned a lot of the economy into a secret casino, all this action going back and forth, people betting on bets.

And how this related to the subprime crisis is, about this same time, you know, securities firms started bundling all these bad or risky mortgages and securitizing them, and then they would sell these securities or buy them and then buy swaps or sell swaps to cover the possible loss. So it really enabled a lot of firms to go hog wild on the subprime stuff ….’”

The subprime “stuff” has now led to a massive rise in foreclosures and a fall in profits as investment banks are forced to write off billions in bad investments. That in turn destroyed credit markets and confidence in Wall Street. Even after interest rates were cut seven times by the Fed, little improvement was registered except the rise in joblessness and inflation.

And that, in turn is what is behind, at least in part, the current fall of mortgage giants Fannie Mae and Freddie Mac. Add in the Bush policies of lowering the value of the dollar, and you got higher oil prices. Add in speculators and short sellers and a total lack of effective regulation, and you get the possibility of a system collapse.

The Administration that led us into war overseas by raising fear of nukes has stoodbye while our economic well-being was being nuked.

HOW LONG WILL IT LAST?

The truth is that this crisis will not be turned around anytime soon. As economist Joshua Rosner puts it: “”People say we’re in the final innings of the credit crisis. We’re in the late innings of the first game, and this is the World Series.” The hedge fund Bridgewater Associates ‘has issued an apocalyptic warning to clients that bank losses from the worldwide credit crisis may reach $1,600bn (£800bn), four times official estimates and enough to pose a grave risk to the financial system.’

Banks are already failing. Just this past week, IndyMac Bank’s assets were seized by federal regulators.The bank is considered the largest regulated thrift to fail and the second largest financial institution to close in U.S. history. This is the fifth bank to fail this year. More will follow, as Diane Francis explained in Canada’s National Post:

“This week’s Indymac (Failure)… marks the opening of Part Two of the credit crunch. Smart money says many members of the U.S. financial sector will be defeated by their own foolishness and, therefore, the wise would be ill-advised to invest in banks or other financial institution stocks anywhere for awhile. This is not the beginning of the end, but the end of the beginning. So stay tuned for more bank failures in the U.S., thanks to the lack of regulatory oversight, massive frauds and lack of restrictions on the cowboy mortgage market.”

Reuters found an expert with some numbers: “More than 300 banks could fail in the next three years, said RBC Capital Markets analyst Gerard Cassidy, who had in February estimated no more than 150.”

SOME CAUSES TO CONSIDER?

How did all this happen?

l. Warnings were ignored. One example: Bruce Marks, the CEO of NACA, The Neighborhood Assistance Corporation of America (Naca.com) which is leading the fight for affordable home ownership and opposing foreclosures testified in Congress in 2000 warning of the consequences of Fannie And Freddy getting into subprime lending. His concerns were noted and forgotten.

In several cities, community groups protested against Fannie Mae’s role in financing predatory lending.

There was a form of amnesia inside big banks as well in connection with the securitization of mortgages. Revealed Gillian Tett in the Financial Times:

“A few years ago, Ron den Braber, an outspoken Dutch mathematics geek, was working in the risk department at Royal Bank of Scotland when he became alarmed about the models being used to price collateralised debt obligations.

Most notably, he concluded that the so-called Gaussian Copula approach then in use at RBS (and many other banks) significantly underplayed risks attached to the most senior pieces of debt - creating a danger of future, large losses.

So he duly tried to raise the alarm. But, as he tells the tale, he faced hostility. “I started saying things gently - in banks you don’t use the word ‘error’, but the problem is that in banks . . . people just don’t want to listen to bad news,” Mr den Braber recalls.”

FED ENCOURAGED THE SUBPRIME SLIME

2. The Fed under Alan Greenspan encouraged the securitization of mortgages calling it “financial innovation.” Today, he rails out at the crooks and criminals who cashed in on an industry he boostered.

3. The Wall Street firms ignored worries raised by their own risk managers and ploughed resources into the slimy waters of a shadowy underground banking system. They made a fortune—until they didn’t. Some were bailed out like Bear Stearns via JP Morgan; others were taken over in various ways or encouraged to merge with stronger institutions.

Earlier this year, the FBI called many of their practices criminal and have already indicted hundreds in the mortgage business with only a few symbolic busts, so far, of truly fat cats. Nevertheless, much of the subprime “dream” now stands exposed as a subcrime scheme.

New rules by the Federal Reserve Bank seem too little and too late. As CNN reported,

“Had these rules been in place, many of these things wouldn’t have happened,” said Ken Wade, chief executive of NeighborWorks America, a national community revitalization group chartered by Congress whose board is made up of bank regulators. The late Edward Gramlich, a former Fed governor who served as chairman of NeighborWorks’ board, pushed unsuccessfully to rein in the mortgage industry.”

Now the Fed wants more power and seems to want to push The SEC aside which is the only regulatory body that did regulate in the pre-Bush era.

The Minyanville financial blog insists this will be a disaster:

“The Federal Reserve has mis-managed America’s money supply. They have sucked vast wealth away from the middle class to support rich institutions which they call “the system”. Why would we give vast new powers to the berries that run the Fed when they have proven they don’t know what they are doing?”

As for Congress, AP reports “Final passage of a package has been delayed for close to two months due to substantive disagreements as well as countless procedural delays.

On Thursday, Senator Dodd lamented how long it has taken to move the bill through. “Candidly, we can’t wait any longer.” He cited the latest foreclosure data, showing 250,000 new foreclosure filings in June, up 53% from a year earlier.”

“A lot of us hoped the market would take care of all of this and there would be light at the end of the tunnel,” Dodd said. “[But now] the only light at the end of the tunnel is a train coming.”

That train is headed for a train wreck. The Wall Street Journal insists the new bill will not help most homeowners in need: “ Lawmakers can say they’ve “done something” about the crisis. The only problem is the bill won’t work. Contractual and incentive problems in securitized mortgages will defeat the legislation’s attempt to provide a significant amount of relief.”

WHO IS TO BLAME?

I have been tracking this story for over a year now every day and every week. I lashed out at most of the media for ignoring it. My book PLUNDER on the subject will be out by Summer’s end—after 30 publishers rejected it as “alarmist.” Now, Bloomberg tells us a new book is coming out making a similar argument:

`Chain of Blame,'’ a ripping piece of reporting that shows how subprime-mortgage lending rose amid the ruins of the savings-and-loan crisis in the late 1980s and early 1990s, slithered throughout the financial system, and ended with some 1 million Americans losing their homes.

Authors Paul Muolo and Matthew Padilla introduce us to the bankers, non-bank lenders and loan brokers who drove the reckless practices that ultimately engulfed Bear Stearns Cos., brought down Wall Street bosses including Chuck Prince and Stan O’Neal, triggered more than $400 billion in writedowns and credit losses so far, and now threaten Fannie Mae and Freddie Mac.

Who’s to blame? The authors identify swarms of culprits, from local predatory lenders and unscrupulous loan brokers to contract underwriting firms that, by this account, deployed armies of grunts with laptops to review billions of dollars worth of mortgages. Grunts were pressured, the book reports, to review one loan an hour.

Yet the ultimate subprime enabler, according to this book, is fingered in the subtitle: “How Wall Street Caused the Mortgage and Credit Crisis.'’

IMPACT ON FAMILIES

AT the same time, as the main focus on the loss of property, slowly there is a shift to more stories about the human costs of growing homelessness. Reports OneWorld.net.

“The United States’ current record-breaking rates of mortgage foreclosure will directly affect 2 million children this year and next, according to a recent report from First Focus, a bipartisan child advocacy organization.

“Our homeless education liaisons are noticing increase in the number of students who are homeless, not just in high-poverty families but also those who have typically been middle class and facing this for the first time,” says Patricia Popp, state coordinator for homeless education in Virginia.”

Apparently the financial crisis has had another impact too; “a twist of irony—considering money issues can often drive a wedge in a relationship—today’s shaky economy is stabilizing marriages. For example, in South Florida’s Miami–Dade County, where real estate values have dropped 20 percent, almost congruently, divorce filings from January to May of 2008 are down 18 percent from the same period in ’07.

BACK TO MINUS SQUARE ONE

So we are back to minus square one. Fannie and Freddy may be too big to fail but Washington taking on their trillion dollar obligations could double our already unsustainable national debt. This disaster already impacts the global economy. The losses are at 80 percent.

ROLE OF THE MEDIA

As the crisis exploded, University of Berkeley Economist Brad De Long was asked to appear on the BBC’s News Night program to explain the new “situation.” DeLong prepared key points and rushed off to the studio only to find that BBC, like so many US media outlets that also discussed the issue showcased it as a debate with hopes turning it into a hot button issue. When the discussion began he found himself being challenged not by an expert on the issue but a partisan political operative

He was incensed to be up against Grover Norquist, known as the strategist of far right wing lobbyists in Washington. He wrote about this all too tyical “media moment” on his blog.”

“ I FIND THAT I AM ON WITH GROVER-FRACKING-NORQUIST!! I FIND THAT I AM ON WITH GROVER-FRACKING-NORQUIST!!! WHO HAS THREE POINTS HE WANTS TO MAKE:

* Barack Obama wants to take your money by raising your taxes and pay it to the Communist Chinese.

* Oil prices are high today and the economy is in a near recession because of Nancy Pelosi: before Nancy Pelosi became speaker economic growth was fine–and she is responsible for high oil prices too.

* Economic growth is stalling because congress has not extended the Bush tax cuts. Congress needs to extend the Bush tax cuts, and if it does then that will fix the economy, and if it doesn’t then the economy cannot recover.

I am not paid enough to deal with this lying bullshit. I am not paid enough to deal with Grover Norquist and his willful stream of defecation into the global information pool.

It is as Paul Krugman says somewhere: Grover Norquist’s M.O.–George W. Bush’s M.O.–the entire Republican Party’s M.O. these days is (a) find a problem (i.e., financial crisis and threatening recession), (b) find something you want to do for other reasons unrelated to the problem (i.e., extend the Bush tax cuts), (c) claim without explanation that (b) will solve (a), and so (d) profit–because Peter Cardwell of BBC/Newsnight is too busy being the objective journalist referee of the yelling match to do his proper job…”

THE FED FOR HEADS

This approach is all too common At least one newspaper carried a rather unusual proposal. Peter Kennedy wrote on Oregon’s SalemNews.com:

“The mortgage market has crashed; gone to pot. The NY Times reports Freddie Mac & Fannie Mae stocks are crashing; who knows where they will be next Monday after the Fed buys-bails them out.

The dollar & stock market are falling; oil hit a new record high of $147 per barrel. Climate change and world food shortage and the wars continue. As a modest proposal, I suggest that Freddie Mac, Fannie Mae, the FED, McBush needs some marijuana to help them adjust their Eco-economic attitude. Perhaps a Joint Session of Congress would help.”

Yes, it had come to that. At least his cynicism was laced with humor aimed at….er…transcending the “situation.”
And as for the week ahead, Reuters reached into children’s stories to make its prognosis:

“LONDON (Reuters) - With the Goldilocks economy long gone, investors this week will wrestle again with the three bears of financial markets — banking woes, slow-to-stagnant economic growth and rising inflation.”

More to come. I am writing about all this in a forthcoming book, Plunder.

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