Suggested Discussion Outline

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johnkarls
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Suggested Discussion Outline

Post by johnkarls »

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SUGGESTED DISCUSSION OUTLINE -- THE NY TIMES BESTSELLER “ALL THE DEVILS ARE HERE: THE HIDDEN HISTORY OF THE FINANCIAL CRISIS”

A. The Real Cause of the Financial Meltdown = The $4-5 TRillion Reduction in American Payroll and American Capital Expenditures ??? [Has President Obama “signed off” on another economic crash?]

A-1. The American Jobs DESTRUCTION Act of 2004 permitted U.S. companies that had exported American jobs to extract from their tax-haven subsidiaries as dividends the $4-5 TRillion of profits that had accumulated for more than a decade from exporting American jobs, at a special one-time 5.25% corporate income tax rate (vs. the normal 35% rate) WHICH MEANT THAT THE TAX-HAVEN SUBS REQUIRED REPAYMENT OF THE $4-5 TRILLION OF LOANS THEY HAD MADE TO THE UNRELATED CHUMP AMERICAN COMPANIES THAT HAD NOT EXPORTED AMERICAN JOBS (for more details, please see the attachment to this newsletter = last weekend’s Short Quiz Answers).

A-2. Following the $4-5 TRillion of reductions in American payroll and American capital expenditures so that the CHUMP companies could repay the unrelated tax-haven companies, ANOTHER $3 TRILLION OF PROFITS FROM EXPORTING AMERICAN JOBS HAS PILED UP IN THE TAX-HAVEN SUBSIDIARIES.

A-3. Following our 5/11/2011 meeting, we launched a Six-Degrees-Of-Separation E-mail Campaign imploring President Obama to honor his campaign pledge NOT to reward companies that had exported American jobs, since his Deficit-Reduction Commission had recommended exempting American companies from corporate income taxation on their profits from exporting American jobs (so-called “territoriality”) and since the White House has been widely reported as willing to accept this as part of a deficit-reduction plan.

A-4. Here we are focusing on a different aspect of President Obama’s capitulation = ANOTHER economic meltdown because rewarding once again the companies that have exported American jobs will mean another $3 TRillion reduction in American payroll and American capital expenditures as the CHUMP companies struggle to repay another $3 TRillion of loans from the unrelated tax-haven companies.


B. Is the $50 Billion Special Fund of the Dodd-Frank Financial Reform Act of 2010 Sufficient to “Guarantee” (as President Obama loves to claim) that a “financial meltdown” cannot occur again ???

B-1. The problem is the inability (or refusal) of decision makers to distinguish between the long-time Las Vegas-style balanced-book derivatives (interest-rate swaps and currency swaps) WHICH ENTAIL LITTLE RISK BECAUSE THE BETS ON EACH SIDE ARE KEPT BALANCED BY THE MARKET MAKERS and the relatively-recent insurance for mortgage-pool investments WHICH EVERYONE STARTING WITH ALAN GREENSPAN AND CONGRESS (AND INCLUDING OUR AUTHORS) FALSELY CLAIM WAS NOT INSURANCE BECAUSE AIG INSERTED “SWAP” INTO THE NAME OF THE INSURANCE CONTRACTS AND WHICH ENTAIL INCREDIBLE AMOUNTS OF RISK BECAUSE AIG FAILED TO MAINTAIN ADEQUATE INSURANCE RESERVES TO COVER LOSSES.

B-2. When Yours Truly was associated with Dresdner Kleinwort Wasserstein 1997-2003, Dresdner Bank had not only been the inventor of the interest-rate swaps and currency swaps but was one of six market makers -- each of the market makers at that time ran “balanced books” of $7-8 TRillion and those amounts were NOT required under Generally-Accepted Accounting Principles (“GAAP”) to be disclosed in their financial statements.

B-3. Accordingly, as pointed out in “U.S. Government’s Confession Re AIG’s Subprime Mortgage Insurance” (posted on this Bulletin Board under “Participant Comments” for our 5/11/2011 meeting) –

B-3-a. Either Congress and President Obama are making a false claim that another “financial meltdown” cannot occur again because of their $50 Billion “Special Fund” WHICH IS ONLY 1/10 OF 1% OF THE AMOUNT OF CURRENCY AND INTEREST-RATE SWAPS 10 YEARS AGO,

B-3-b. Or Congress and President Obama have admitted by inference that the AIG insurance of mortgage-pool investments (aka credit-default swaps) WAS the only problem and the $50 Billion “Special Fund” MIGHT be sufficient going-forward because regulators will scrutinize the issuance of mortgage-pool insurance more closely.

B-4. The question for us to consider is whether there are new as-yet-unknown types of insurance contracts (vs. Las Vegas-style balanced book derivatives) which the regulators will fail to recognize and which will dwarf the $50 Billion “Special Fund.”


C. Should the Glass-Steagall Act of 1933 be restored to bar commercial banks and thrifts that enjoy federal-government deposit insurance/guarantees from engaging in investment banking (in effect limiting them to making corporate loans and mortgage loans)?

C-1. The “Savings & Loan Crisis” of the 1980’s and 1990’s was fueled by the ability of the S&L’s (aka “thrifts”) to obtain funds because of federal-government deposit guarantees.

C-2. The recent economic-meltdown of commercial banks was also fueled by the ability of the commercial banks to obtain funds because of FDIC insurance.

C-3. The Glass-Steagall Act of 1933 established FDIC insurance but also, recognizing the dangers of federal guarantees, barred from investment banking (underwriting new issues of securities) the commercial banks which accept deposits.

C-4. The Gramm-Leach-Bliley Act of 1999 repealed the separation requirement, which meant that financial institutions could obtain deposits courtesy of U.S. governmental guarantees (the FDIC insurance) and then use the funds for risky investments.

C-5. The question for us to consider is whether financial institutions that obtain funds courtesy of U.S. governmental guarantees such as FDIC insurance (but also including all borrowing by Fannie/Freddie which have cost American taxpayers $317 Billion per the CBO’s 6/2/2011 report vs. the $124 Billion claimed by the Obama Administration) should once more be barred from making risky investments.


D. What Were The Significant “Devils” Causing the Real Estate Disaster?

D-1. A review of “Devils” confirms for the cognoscenti that “there is nothing new under the sun” --

D-1-a. Risk “tranches” (or risk levels) of mortgage-pools, according to “Devils,” was invented by the U.S. Government’s Resolution Trust Company which cleaned up the S&L mess by creating risk “tranches” for selling off pools of real-estate assets owned by the bankrupt S&L’s -- but “Devils” fails to admit that “tranches” are “as old as the hills” when it comes to corporate bonds (indeed it wasn’t long ago that investors constantly encountered securities labeled “Senior Subordinated Debentures” which were a typical mid-level risk tranch of corporate debt).

D-1-b. Collateralized-Debt Obligations (which “Devils” calls CDO’s) are “as old as the hills” since car loans and home mortgages and pawn-shop loans for miscellaneous assets have always been CDO’s (whether or not so labeled).

D-2. It is respectfully suggested that the only significant developments in creating the “real estate bubble” were --

D-2-a. Nothing down (vs. 20%) for home mortgages,

D-2-b. “Liar loans” for home mortgages for which no repayment ability needed to be demonstrated,

D-2-c. Investors being stupid enough to believe the rating agencies vis-à-vis lack of risk, rather than insisting on the old standards of 20% down and documented ability to repay, and

D-2-d. AIG being stupid enough to insure for the investors who weren’t stupid, the value of their investments in sub-prime (zero-down and/or liar-loan) mortgage pools without charging large enough premiums to maintain any reserves for losses as is standard in the insurance industry.

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