The Long Crisis

Archive for the ‘Financial Meltdown’ Category

Laurence Copeland is the author of an article titled, “Waiting for the Next Shoe to Drop” and is professor of finance at Cardiff University Business School. The opinions expressed are his own and do not constitute investment advice.

A few of his colorful but all too true quotes from the article are as follows:

1. How can you fail to be pessimistic when the world economy is still dominated by the U.S. – a basket case, becoming weaker every day, with a political class too blind or too scared to admit in public the obvious fact that the country cannot carry on living beyond its means?

2. The Americans remain in denial, with monetary and fiscal authorities primed to pick up any slack created by U.S. consumers unable to make their mortgage repayments and maxed out on their credit cards.

3. As long as the markets continue to see the dollar as a safe haven, it remains strong and U.S. competitiveness suffers accordingly, making it impossible to generate the export-led recovery the U.S. so desperately needs.

4. First, remember that, with the exception of the Canadian and Australian dollars, and Swiss franc, all the world’s major convertible currencies are priced on the Manure Standard: the dollar is viewed as slightly higher grade organic fertilizer than the euro, the yen is somewhat less disgusting than the dollar.

5. All are malodorous to a degree which would have made them near-worthless only a few years ago. No wonder gold – useless, but odourless – is riding high. If I am right, it has far further to go.

To review the entire article “Waiting for the Next Shoe to Drop” and to gain some insight as to just how clueless the Obama administration is about the probable disaster to come go to Shoe to Drop

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US Treasury Secretary Timothy F. Geithner expressed confidence that Europe will resolve the sovereign debt crisis that is expanding across the region and said the U.S. economy is strong enough to withstand any fallout.

“Europe has the capacity to manage through this,” Geithner said in an interview on Bloomberg Television’s “Political Capital With Al Hunt,” set to air this weekend. “And I think they will.

Haven’t we heard all this before? Geithner’s predecessor, Hank Paulson, expressed full confidence in the US financial system about two weeks before the bottom fell out with the demise of Lehman Brothers. And of course, President George Bush used to brag about the increasing numbers of Americans that were purchasing homes, while failing to mention that many of the homes were being financed by liar loans to people that absolutely lacked the ability to repay.

More recently, President Obama’s financial team, and the President himself, have been talking about how the economy is turning the corner and that soon enough happy days will be here again. As Treasury Secretary, Timothy Geithner, has been one of the Obama’s administrations chief cheerleaders.

There appears to be only one honest man, former Federal Reserve Bank Chairman Paul Volker, giving advice to the present administration. When asked if he agreed with Obama economic adviser Paul Volcker that there is a risk of “disintegration” of the euro, cheerleader Tim Geithner said Europe is “committed to fix this problem.”

Of course, I recognize how difficult it is for politicians to acknowledge and to speak truthfully about problems that confront their countries. No politician anywhere wishes to appear that any situation is beyond their ability to remedy. That is one inherent weakness in the democratic form of government. Politicians fear to say anything that may cost them votes no matter how true the statement may be.

Politicians are unwilling to speak truthfully about difficult situations that would require sacrifice and frugality on the part of voters in order to solve the problems. Politicians seem to prefer to engage in a confidence game whereby no real solutions are offered but speechs proliferate that they have taken appropriate action and that things will soon get better. The belief for politicians seems to be that if only we are confident enough that difficult situations will improve they will in fact improve. That is, with enough confidence problems will be solved, even if we don’t know exactly what caused the problems in the first place or refuse to acknowledge the source of the problem.

Therefore, we have Timothy Geithner responding to skepticism in financial markets about Europe’s efforts to tackle its debt by saying “it’s very natural that people want to see what Europe does. By acting, they will have the chance to earn people’s confidence over time.”

What Obama, Geithner, Summers, and the other administration cheerleaders probably don’t realize is that time is fast running out. The financial bailouts of the last two years have in effect transferred trillions of dollars of bad debt from the private sector, think bank bailout loans to Goldman Sachs, AIG, Citigroup, and others, to the public sector.

Governments around the world have taken on trillions of dollars of additional debt in an effort to revitalize their economies. The debt burdens of nations such as Greece, Spain, Portugal, Ireland, and Italy have probably become unmanageable. In our interconnected world sovereign debt issues are now spreading from these nations to effect stock markets and financial markets in the United States, the UK, Japan, and elsewhere.

Politicians around the world are strong believers in the “kick the can down the road” method of governing and managing economies. However, time is rapidly running out for the politicians favorite game. Not only are they running out of time but they are running out of road. Nations cannot save each other by simply creating Fiat currencies and loaning what passes for money to each other. The idea that you can solve problems of excessive debt by creating additional debt is ludicrous.

In the end, sovereign debt issues can only be solved by the reduction of debt. Nations must reduce expenses while increasing revenues. The problem for politicians and for the citizens of many nations around the world is that the austerity measures necessary to reduce unmanageable debt loads will cause a deflationary environment that will lead to tremendous hardships.

Certainly, it is difficult for any politician to speak of increasing taxes at a time when many people are already struggling just to stay alive. There is the fear, absolutely justified, that austerity measures, including the increase of taxes, will lead to civil unrest and disorder. This has already occurred in Greece and will likely spread throughout Europe and beyond as government cutbacks in expenses and services become more pronounced.

The more vocal that confidence cheerleaders like Timothy Geithner become the more you can be assured that we have entered the end game. Sovereign debt issues are measured in the trillions of dollars. I see no way that the issues can be satisfactorily resolved without going through a long term period of depression, hardship, and despair as the implosion of the Mount Everest of debt leads to a massive scale of bankruptcies and loan defaults, not only among individuals and corporations but among sovereign nations.

When Timothy Geithner says relax, all is under control, it’s time to take cover.

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Goldman Sachs CEO Lloyd Blankfein is experiencing a rough week. Goldman Sachs and Blankfien have over the years enjoyed significant political cover due in large part to the significant contributions made to both Democrat and Republican politicians and to the numerous Goldman Sachs alumni that served, and still serve, at the highest levels of government. However, in a midterm election year, and with a majority of voters yelling “off with his head”, his sunny day friends in government are joining in the populist sentiment of “off with all the Wall Street big shot’s heads”.

Public sentiment is now so strong over the reckless, greedy, immoral, behavior of the big swinging dicks Masters of the Universe at a time when Main Sreet America was and still is severely hurting that surely it will be a temptation for vote seeking politicians to let a few heads roll. Who can forget that almost immediately after the government bailed Wall Street out, including Goldman Sachs, with billions of dollars of taxpayers funds that the Wall Street unrepentant tone deaf executives paid themselves multimillions of dollars in bonuses, even after running their firms into near bankruptcy?

Lloyd Blankfein, as the head of the most powerful investment bank in the world, Goldman Sachs, is a prime head to go after. This Tuesday he faced a blistering cross-examination from U.S. lawmakers about the company’s ethics and behavior toward its clients.

In Tuesday’s interrogation by Senator Carl Levin, Blankfein was constantly interrupted, told to answer the question and stick to the point. He often looked extremely disoriented and uncomfortable. He often squinted as if puzzled by the questions. No doubt, a man who makes multimillions of dollars per year, whether his firm or economy is doing well or not, is not used to being interrogated and treated with disrespect.

“You’re going short against the very security (you’re selling) … many of which are described as crap by your own sales force internally.” said Levin, chairman of the Senate Permanent Subcommittee on Investigations.

“How do you expect to deserve the trust of your clients, and is there not an inherent conflict here?”

The SEC has brought fraud charges against Goldman Sachs for the way in which it conducted its business in structuring and marketing of CDO’s during the run-up to and during the housing mortgage crises of 2007 and 2008. The initial charges by the SEC were filed as civil charges only and charged Goldman Sachs and only one employee with fraudulent misrepresentation of the quality and nature of the CDO securities marketed by the firm.

Goldman has also been charged with basically favoring a large hedge fund, Paulson and company, by allowing Paulson to select poor quality mortgages to be included in a CDO offering and then marketing the junk CDO portfolio to less sophisticated Goldman clients. The SEC has charged that the transaction was fraudulent, that basically the CDO was designed to fail, and that Goldman Sachs knew full well that money in effect would be transferred from the “chump” clients to Paulson & Co.

The SEC has now given a clear indication that additional charges will be filed, probably against a number of high-ranking Goldman Sachs executives, including CEO Lloyd Blankfein, by referring its investigation of Goldman to The Justice Department for possible criminal prosecution, according to several media reports, including one by the Wall Street Journal, Thursday night.

In this case, the standard top level executive defense of “a few bad apples” and “gee, we didn’t know” are unlikely to stand up as from the recent Senate hearings it is apparent that the SEC and congressional staffers have quickly assembled volumes of Goldman’s internal e-mails and documents that indicate immoral and possibly illegal behavior on the part of top level Goldman executives.

It appears that Goldman Sachs and its top executives, especially CEO Lloyd Blankfein, are about to find out just how fickle their politician former friends can be when the voting crowd starts shouting “off with his head”.

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