Sunday, October 14, 2007

Party Like It's 1929?!

"In a far-reaching response to the global credit crisis, Citigroup, Inc. and other big banks are discussing a plan to pool together and financially back as much as $100 billion in shaky mortgage securities and other investments. ... The meeting was hosted by Treasury's undersecretary for domestic finance, Robert Steel, a former Goldman Sachs Group Inc. [GS] official and the top domestic adviser to Treasury Secretary Henry Paulson [HP]. The Federal Reserve has been kept informed but has left the active role to the Treasury. ... The new fund represents a way for Citigroup and other banks to 'outlast the current market conditions that are so dry right now,' says Jaime Peters, an analyst at Morningstar Inc. ... Because the superconduit would be backed by the big banks themselves, it's expected this would reassure investors and make them more willing to buy its short-term debt, or commercial paper. ... One supporter of the effort is ... HP, who decided to assemble the banks after conversations with businesspeople who expressed concerns about SIVs and their impact on the economy. ... SIV are purposely kept off the balance sheets of the banks to which they are affiliated", WSJ, 13 October.

This story brings six things to mind. 1. This pool resembles a large "pump and dump" scheme. The banks put problem assets in the pool and sell it to the ignorant public. Where is the SEC when you need it? 2. The superconduit is to "reassure investors and make them more willing to buy its short-term debt". Does this mean the banks believe the underlying "pool" investments have tens of billions of dollars of unrecognized losses and want to use the superconduit to delay recognition? 3. Who are the businesspeople who claim to be concerned about SIVs "impact on the economy"? Is "impact on the economy" a bank executives euphemism to provide cover for an attempt to prop up their earnings? 4. Where were the Big Four when all this was going on? Did they learn nothing from Enron? 5. Establish a 25-year moratorium on any GS executive working for the Treasury or Fed. 6. We've seen pools before. Huh? "Pools. Any Wall Streeter knows, but few Senators do, how pools are run. ... With dictatorial powers, the pool manager begins accumulating stock, buying a little more each day than he sells. ... When the manager has the stock he wants, publicity is shot out, bullish rumors about the company appear, the stock is 'tipped,' for it is now advantageous to whisper the existence of the pool. ... At its high point [GS] Trading Corp. was worth over half a billion dollars. Last week at its price of $1.50 per share it had a market value of $8,700,000". What is the source of this news of a GS-sponsored investment "pool" which lost 98% of its value? Time, 30 May 1932! There are a few differences between the 1920s "bull pools" and this "superconduit", i.e., the banks now own the securities which are not stocks, but bond-related. I thought pools like this were outlawed by the 1930s "reforms". Apparently not for GS, or only stock pools were outlawed, not bond-related securities pools. I estimate the $500 million referred to in this Time 1932 article would be about $18 billion today.

"If banks are forced to take assets onto their books? Either it's a bank asset or its not. If it's a bank asset, it ought to be on the books in the first place. Did the idiot regulators learn nothing from Enron? Chuck Prince [Citigroup Head] ought to be sharing a cell with Andy Fastow", W.C. Varones at wcvarones.blogspot.com, 13 October. I thought of having Robert Rubin (RR) share Andy Fastow's cell, but I give W.C. Varones two thumbs up, he beat me to the post. Why RR? He's a former Treasury Secretary and GS executive, a potential "triple header", were he to join Andy in prison.

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