Can the Treasury’s Ponzi Scheme Lift the Stock Market?
by Gary Dorsch, Global Money Trends. March 24, 2009
The corruption of Wall Street’s financial elite has been extensively documented in the case of Bernard Madoff, who squandered more than $50-billion in client wealth in a giant Ponzi scheme. There are also Wall Street bankers who awarded themselves $18.5-billion in bonuses last year, even as they reported $500-billion in write-off’s, driving the US economy into its biggest crisis since the Great Depression.
While US-layoffs pile up by the hundreds of thousands each month, the financial robber barons have horded TARP cash, used it to buy up other banks, and handed money out to the members of their derivative trading units. But this transfer of wealth from the public purse pales in comparison to the scheme devised by US Treasury chief Timothy Geithner, which would transfer hundreds of billions to the same bankers that played the key role in setting the present economic disaster.
After the collapse of the housing market bubble, the exotic securities instruments built-up on the sub-prime mortgage market turned out to be scarcely worth the paper they were printed upon. Roughly $2-trillion of such toxic paper was spread across the entire global financial system. It soon became clear that the Ponzi scheme that built-up the stock market, the hedge funds, mortgage financiers, and the banks, represented claims of little of value.
Sub-prime and adjustable rate mortgages were relentlessly promoted, then sold, bundled, and resold, drawing the entire world financial system atop a massive bubble in US-home prices, aided by the Federal Reserve’s super easy money policies. New layers of speculation became evident in mortgage securities, stocks, and various forms of derivatives. In the process, Wall Street’s aristocracy expanded its influence over official political circles in Washington DC.
Today, the Wall Street aristocrats are ruthlessly exerting their political influence over the state to seize new resources to keep their enterprises afloat. Their political patrons, Democrats and Republican alike, continue to hand over hundreds of billions to the biggest banks, with no strings attached for executive bonuses.
On March 19th, Treasury Chief Geithner indicated that his Treasury staff worked with Connecticut Senator Christopher Dodd on inserting language into the recent stimulus bill that created a loophole for AIG to exploit in order to receive $200-billion in bonuses. As the ranking member of the all-important US Senate Committee on Banking, between 2003 and 2008, Dodd accepted donations from AIG totaling $225,000. In 2008, he received $157,200 from Citigroup as part of his total annual take of $854,200 from all TARP recipients.
Geithner’s plan is to enable Wall Street banks to offload up to $1-trillion of their toxic assets at public expense. It revolves around the use of taxpayer money to guarantee large profits for hedge-funds, private-equity firms, and mutual-fund companies, financed with low-interest, non-recourse government loans, in order to purchase virtually worthless mortgages at inflated prices from the banks.
As for the Wall Street banks, the plan will enable them to not only offload their failed investments at public expense, but profit handsomely from any resulting rise in the price of their stock. The Federal Deposit Insurance Corporation (FDIC), created in the 1930’s to insure the savings of ordinary bank depositors, will now be utilized into guaranteeing the profits of investment fund managers.
Private fund managers, not the government, will manage the investments portfolios, designed to buy the toxic assets. This way, the Treasury can claim it’s put together a free-market mechanism that is setting prices for these hard-to-sell assets. But by insuring the market makers against losses, the Treasury is creating conditions where the buyers can pay outlandishly high prices for toxic assets, and enable the banks to receive above the market value for the assets they offload.
On March 24th, FDIC chief Sheila Bair hired a JP-Morgan executive, Joseph Jiampietro to oversee the auctions that will rid troubled assets from the balance sheets of Wall Street banks. “I believe that the FDIC will benefit greatly from Mr. Jiampietro’s extensive markets and transactional expertise in significant and complex financial programs,” Bair explained, (as will JP-Morgan shareholders).
On March 23rd, House Minority Whip Eric Cantor (R-VA) attacked Geithner’s scheme as a giveaway to the banks. “As described, the plan seems to offer little incentive for private investors to participate unless the subsidy is made so rich that it comes at the expense of the taxpayer. In its current form, Secretary Geithner’s plan is a shell game that hides the true cost of the program from the taxpayers that will be asked to pay for it. Six months after Congress debated the first TARP, it is inexcusable that taxpayers still have not been told their true exposure,” Cantor said.
“The Geithner scheme would offer a one-way bet, - if asset values go up, the investors profit, but if they go down, the investors can walk away from their debt,” Nobel laureate economist Paul Krugman wrote in the New York Times. “So this isn’t really about letting markets work. It’s just an indirect, disguised way to subsidize purchases of bad assets. For the private investors, this is an open invitation to play heads I win, tails the taxpayers lose,” Krugman added.
The enormous personal fortunes of the elite are now tied by a thousand strings to the Obama administration. A long-term resolution to the economic instability of the country however, begins with breaking the political stranglehold of the financial elite over Washington, which would mean FDIC receivership for insolvent banks, and new management teams replacing yesterday’s proven failures.
The “Plunge Protection Team,” was smiling for the cameras after Wall Street stocks staged a 7% rally on March 23rd, after Geithner detailed his strategy to purge toxic assets from bank balance sheets. The S&P-500 Index and the Dow Jones Industrials posted their biggest one-day percentage gains since late October. The banking sector index posted its best one-day gain since 1993, driven higher by a 26% gain in Bank of America, a 25% advance in JP-Morgan and a 20% gain in Citigroup. Geithner could breathe a sigh of relief that the stock market didn’t replay the events of Feb. 10th, when his vague outline for subsidizing the banks was trashed.
This time around, Geithner was much more explicit, in detailing how taxpayer money would be placed at the disposal of Wall Street. By subsidizing private investors, who will bid against one another in auctions for toxic assets, supervised by JP-Morgan, the government can claim that the free-market is setting the prices. Neither the mainstream media nor the vast majority of the American public will realize or care how the Ponzi scheme works. All that matters is the values of investors’ 201-k’s.
How should investors react to the latest 20% recovery in the S&P-500 Index from its lowest levels set just two weeks ago? There have been several powerful rallies over the course of this 17-month old bear market, such as last October, when the Dow Industrials mounted a 1900-point rally in 48-hours, and a second 1,500-point rally after France, Germany, Italy, Spain, Holland, Austria and the United States joined forces to launch a $4-trillion bank bail-out, the biggest in history, with guarantees and fresh capital in a “shock and awe” blitz to halt the market meltdown.
Both rallies and many others since then were nothing more than Bull-traps. Stunning one-day rallies of 500-points or more in the Dow Industrials tend to be the signature of bear market rallies, in which the PPT engineers vicious short squeezes. Typically, it’s an ominous sign when a powerful 500-point+ rally simply stalls out the next day, then fizzles-out, and begins to turn lower. It means the retail investor hasn’t been duped by Wall Street pros, - who are anxious to book a quick profit.
© 2009 Gary Dorsch