WHAT REALLY CAUSED THE FINANCIAL CRISIS? Part 3

Part 3 of 3:

THE FINANCIAL CRISIS: A LOOK BEHIND THE WIZARD’S CURTAIN

March, 2009, written by Bruce Wiseman

(Before reading this, please make sure you have read Part 1 and 2 of this series which were presented in previous Blogs). Feel free to comment on what you have read at our Discussion Forum on the Silkin Facebook Page.

ODDITIES

It is fascinating to look at the date coincidence of the crash in the U.S. Earlier I noted that the stock market continued to rise throughout 2007, peaking in October of 2007. The dip in October turned to a route in November.

The Basel II standards were implemented here by the U.S Financial Accounting Standards on November 15th 2007.

There are more oddities.

Despite the fact that Hammering Hank dished out hundreds of billions to his banker buddies to “stimulate” the economy and defrost the credit markets, the recipients of these taxpayer bailout billions have made it clear that they will be reducing the amount of money they will be lending over the next 18 months by as much as $2 trillion to conform to Basel II.

What do you think…Hank, with his Harvard MBA, didn’t know? The former Chairman of the most successful investment bank in the world didn’t know that the Basel II regulations would inhibit his homies from turning the lending back on? Maybe it slipped his mind.

Like the provision he put into his magnum opus, the $700 billion bailout called TARP. It carried a provision for the Federal Reserve to start paying interest on money banks deposited with it.

Think this through for a minute. The apparent problem is that the credit markets are frozen. Banks aren’t lending. They can’t use the money from TARP to lend because Basel II says they can’t. On top of this, Paulson’s bailout lets the Fed pay interest on funds it deposits there.

If I am the president of a bank, and let’s say that I’m not Basel II impaired, why in the world am I going to lend to customers in the midst of the worst financial crisis in human history when I can click a mouse and deposit my funds with the Fed and sit back and earn interest from them until the chaos subsides?

But, hey, maybe Hank’s been putting Aspartame in his coffee. No, this stuff is as obvious as the neon signs on Broadway to the folks who play this game. This is banking 101.

So, given, the provisions of Basel II and the refusal of the BIS to lift or suspend the regulations when they are clearly the driving force behind the planet wide credit crisis, and considering the lack of provisions in Paulson’s bailout bill to mandate that taxpayer funds given to banks must actually be lent, and given the added incentive in the bill for banks to deposit their bread with the Fed, one gets the idea that maybe, just maybe, these programs weren’t designed to cure this crisis; maybe they were designed to create it.

Indeed, my friends, this is crisis by design. Someone planned the assassination and someone pulled the trigger.

THE RUBBER MEETS THE ROAD

All of which begs the question…How Come?

Why drive the planet into the throws of fiscal withdraw – of job losses, vaporized home equity, and pillaged 401ks and IRAs?

Because when the pain is bad enough, when the stock markets are in shambles, when the cities are teaming with the unemployed, when the streets are awash with riots, when governments are drenched in the sweat of eviction and overthrow, then the doctor will come with the needle of International Financial Control.

This string of ineffective solutions put forth by people who know better are convincing bankers, investors, corporations and governments of one thing: the system failed and even the U.S. government – the anchor of international finance (which is blamed for causing the disaster) – has lost its credibility.

The purpose of this financial crisis is to take down the United States and the U.S. dollar as the stable datum of planetary finance and in the midst of the resulting confusion, put in its place a Global Monetary Authority - A planetary financial control organization to “ensure this never happens again.”

Sound Orwellian? Sound conspiratorial? Sound too evil or too vast to be real? This entity is being moved forward by world leaders “as we speak.” It is coming and the pace is quickening.

A year ago, I saw an article in which the President of the New York Federal Reserve bank was calling for a “Global Monetary Authority” or GMA to deal with the world’s financial crisis. While I have been following international banking institutions for some time, this was the clue that they were making their move. I wrote an article on it at the time.

By the way, as some may recall, the President of the New York Fed last year was a man named Timothy Geithner. Geithner was very involved in structuring the booby-trapped TARP bailout with Paulson and Bernanke. Of course now, he is the Secretary of the Treasury of the United States. Change we can believe in.

Once Geithner started to push a global financial authority as the solution to the world’s financial troubles, other world leaders and opinion leading voices in international finance began to forward this message. It has been a PR campaign of growing intensity. Meanwhile, behind the scenes, the international bankers are keeping their hands on the throat of the credit markets choking off lending while the planet’s financial markets asphyxiate and become more and more desperate for a solution.

British Prime Minister, Gordon Brown, who has taken the point on this, has said that the world needs a “new Bretton Woods.” This is the positioning. (Bretton Woods, New Hampshire was the location where world leaders met after the second World War and established the international financial organizations called the International Monetary Fund (IMF) and the World Bank to help provide lending to countries in need after the war).

Sir Evelyn de Rothschild called for improved (international) regulations while the Managing Director of the IMF suggested a “high level of ministers capable of reaching agreements and implementing them.” The former director of the IMF, Michael Camdessus, called on “the global village” to “urgently and radically” implement international regulations.

As the crisis has intensified, so too have calls for a global financial policeman, and of late, the PR has been directed in favor of…surprise, the Bank of International Settlements. The person at the BIS who was primarily responsible for the creation of Basle II is Jaime Caruana. The BIS Board has now appointed him as the General Manager, the bank’s chief executive position, where he will be in charge of dealing with the current financial crisis which he had no small part in creating.

A few well chosen sound bites tell the story.

Following a recent IMF function, discussion centered on the fact that the BIS could provide effective market regulation while the Global Investor Magazine opined that “…perhaps the Bank of International Settlements in Basel...” could undertake the task of best dealing with the crisis in the financial markets.

The UK Telegraph is right out front with it:

“A new global solution is needed because the machinery of global economic governance barely exists…it’s time for a Bretton Woods for this century.” “ The big question is whether it is time to establish a global economic ‘policeman’ to ensure the crash of 2008 can never be repeated.’ …. “The answer might be staring us in the face in the form of the Bank of International Settlements (BIS). The BIS has been spot on throughout this.”

And so you see, this was a drill. This was a strategy: bring in Easy Money Alan to loosen the credit screws; open the flood gates to mortgage loans to the seriously unqualified with the CRA, bundle these as securities, repeal Glass Stegall and waive capital requirements for investment banks so the mortgage backed securities could be sold far and wide, wait until the loans matured a bit and some became delinquent and ensure the media spread this news as if Heidi Fleiss had a sex change operation, then slam in an international accounting rule that was guaranteed choke off all credit and crash the leading economies of the world. Ensure the right people were in the key places at the right time – Greenspan, Paulson, Geithner, and Caruana.

When the economic pain was bad enough promote the theory that the existing financial structures did not work and that a Global Monetary Authority – a Bretton Woods for the 21st Century - was needed to solve the crisis and ensure this does not happen again.

Which is exactly where we are right now.

WHAT DO YOU DO?

Let me preface this section by saying that this is advice designed to help you orient your assets, i.e. your reserves, your retirement plans, etc. to the Brave New World of international finance. It is not meant as advice about what you do with your business or your job, your personal life. Those things are all senior to this subject, which has a very narrow focus. There is an embarrassment of riches of materials that you can use to stay ahead of and on top of this crisis. Use them to flourish and prosper. This article is not a call to cut back or contract. It is to provide you information so you know what is going on and can plan. Enough said.

First of all, while not likely, but just in case Timothy Geithner is shocked into some New Age epiphany and Ben Bernanke grows some real wisdom in his polished dome, what the government should do is:

1. Cancel any aspects of Basel II that are causing banks to mis-evaluate their assets.
2. Remove the provision of TARP that permits the Fed to pay interest on deposits.
3. Mandate that any funds given under the TARP bailout or that are to be given to banks in the future must be used to lend to deserving borrowers.
4. Repeal The Community Reinvestment Act.
5. Reinstate Glass Stegall.
6. Restore mandated capital requirements to investment banks.
7. And in case Congress decides to cease being a flock of frightened sheep and take responsibility for the country’s monetary policy, they should get rid of the privately owned Federal Reserve Bank and establish a monetary system based on production and property.
8. But if a global monetary authority is put in place, it should not be controlled by central bankers. It should be fully controlled directly by governments with real oversight over it and with a system of checks and balances. This you can communicate when this matter hits Congress or the White House or both (which it almost certainly will).

And what do you with your reserves in this Brave New World of international finance?

Modesty aside, please do what I have been recommending for a few years now: get liquid (out of the stock and bond markets) and put some of your assets into precious metals, gold and silver, but more heavily to silver. Keep the rest in cash (CDs and T-bills) and perhaps a small bit in some stronger foreign currencies like the Swiss Francs or Chinese Yuan (also referred to as the RMB, which is short for Reminbi)

We are living in the most challenging economic times this planet has ever seen. I hope this article has helped shed some light on what currently happening on the international financial scene. I didn’t cover everything as I don’t have time to write another book right now. Nor did I cover everyone involved but these are the broad strokes.

If you want to follow these shenanigans, log on to The Road to London Summit. It will all look and sound very reasonable – all about saving jobs and homes – but you have seen behind the wizard’s curtain and the above is what is really going on.

Keep your powder dry.

Bruce Wiseman
Wiseman Management Services
4312 Talofa Ave
Toluca Lake, Ca 91602
bdwiseman@earthlink.net
818-406-9950


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WHAT REALLY CAUSED THE FINANCIAL CRISIS? Part 2

Part 2 of 3:

THE FINANCIAL CRISIS: A LOOK BEHIND THE WIZARD’S CURTAIN

March, 2009, written by Bruce Wiseman
(Before reading this, please make sure you have read Part 1 of this series which was presented in the previous Blog). Feel free to comment on what you have read at our Discussion Forum on the Silkin Facebook Page.

Larry Silver
President, Silkin

BASEL II

Greenspan, the Community Reinvestment Act, the repeal of Glass Stegall and Paulson getting the SEC to waive the capital rule for investment banks have all set the stage: the economy is screaming along, real estate is in a decade long boom and the stock market is reaching new highs. Paychecks are fat.

But by the first quarter of 2007, the first nigglings that all was not well in the land of the mortgage back securities began to filter into the press. And like a chilled whisper rustling through the forest, mentions of rising delinquencies and foreclosures began to be heard.

Still, the stock market continued to rise with the Dow Jones reaching a high of 14,164 on October 9th 2007. It stayed in the 13,000 range through the month, but in November, a major stock market crash commenced from which we have yet to recover.

It’s not just the U.S. stock market that has crashed, however. Stock exchanges around the world have fallen like a rock off a tall building. Most have lost half their value, wiping out countless trillions.

If it was just stock markets, that would be bad enough, but, let’s be frank, the entire financial structure of the planet has gone into a tail spin and it has yet to hit ground zero. While there surely would have been losses, truth be told, the U.S. banking system would likely have gotten through this, as would have the rest of the world, had it not been for an accounting rule called Basel II promulgated by the Bank of International Settlements.

Who? What?

That’s right, I said an accounting rule.

The final nail in the coffin, and this was really the wooden spike through the heart of the financial markets, was delivered in Basel, Switzerland at the Bank of International Settlements (BIS).

Never heard of it? Neither of have most people so, let me pull back the wizard’s curtain.

Central banks are privately owned financial institutions that govern a country’s monetary policy and create the country’s money.

The Bank of International Settlements (BIS), located in Basel, Switzerland is the central banker’s bank. There are 55 central banks around the planet which are members, but the bank is controlled by a Board of Directors, which is comprised of the elite central bankers of 11 different countries (U.S., UK, Belgium, Canada, France, Germany, Italy, Japan, Switzerland, the Netherlands, and Sweden).

Created in 1930, the BIS is owned by its member central banks, which, again, are private entities. The buildings and surroundings, which are used for the purpose of the bank, are inviolable. No agent of the Swiss public authorities may enter the premises without the express consent of the Bank. The Bank exercises supervision and police power over its premises. The Bank enjoys immunity from criminal and administrative jurisdiction. In short, they are above the law.

This is the ultra secret world of the planet’s central bankers and the top of the food chain in international finance. The Board members fly into Switzerland for once-a-month meetings, which they hold in secret.

In 1988 the BIS issued a set of recommendations on how much capital commercial banks should have. This standard, referred to as Basel I, was adopted worldwide.

In January of 2004 our boys got together again and issued new rules about the capitalization of banks (for those that are not fluent in bank-speak, this is essentially what the bank has in reserves to protect itself and its depositors). This was called Basel II.

Within Basel II was an accounting rule that required banks to adjust the value of their marketable securities (such as mortgage backed securities) to the “market price” of the security. This is called Mark to the Market. There can be some rationality to this in certain circumstances, but here’s what happened.

THE MEDIA AND MARK TO THE MARKET

As news and rumors began to circulate about some of the sub-prime, CRA loans in the packages of mortgage backed securities, the press, always at the ready to forward the most salacious and destructive information available, started promoting these problems. As a result, the value of these securities fell. And when one particular bank did seek to sell some of these securities, they got bargain basement prices.
Instantly, per Basel II, that meant that the hundreds of billions of dollars of these securities being held by banks around the world had to be marked down – Marked to the Market.

It didn’t matter that the vast majority of the loans (90% +) in these portfolios were paying on time. If, say Lehman Brothers had gotten fire sale prices for their mortgage backed securities, the other banks, which held these assets on their books, now had to mark to the market, driving their financial statements into the toilet.

Again, it didn’t matter that the banks were receiving payments (cash flow) from their loan portfolios, the value of the package of loans had to be written down.

A rough example would be if the houses on your street were all worth about $400,000. You owe $300,000 on your place and so have $100,000 in equity. Your neighbor, Bill, in selling his house, uncovered a massive invasion of termites. He had to sell the house in a hurry and wound up with $200,000, half the real value. Shortly thereafter, you get a demand letter from your bank for $100,000 because your house is only worth $200,000 according to “the market.” Your house doesn’t have termites, or perhaps just a few. Doesn’t matter.

Of course, if the value of your home goes below the loan value, banks can’t make you cough up the difference. But if you are a bank, Basel II says, you must adjust the value of your mortgage backed securities if another bank sold for less -- termites or no.

When the value of their assets were marked down, it dramatically reduced their capital (reserves) and this – their capital - determined the amount of loans they could make. The result? Banks couldn’t lend. The credit markets froze.

Someone recently said that credit was the life blood of the economy. This happens to be a lie. Hard work, production, and the creation of products that are needed and wanted by others; this is the true life blood of an economy. But, let’s be honest, credit does drive much of the current U.S. economy: home mortgages, auto loans and Visas in more flavors than a Baskin Robbins store.

That is, until the banks had to mark to the market and turn the IV off.

THE CRISIS

Mortgage lending slammed to a halt as if it had run head long into a cement wall, credit lines were cancelled and credit card limits were reduced and in some cases eliminated all together. In short, with their balance sheets butchered by Basel II, banks were themselves going under and those that weren’t simply stopped lending. The results were like something from a financial horror film – if there were such a thing.

Prof. Peter Spencer, one of Britain’s leading economists, makes it very clear that the Basel II regulations “…are at the root cause of the crunch…” and that “…if the authorities retain the strict Basel regulations, the full scale of the eventual credit crunch and economic slump could be disastrous.” “The consequences for the macro-economy,” he says “of not relaxing (the Basel regulations) are unthinkable.”
Spencer isn’t the only one who sees this. There have been calls in both the U.S. and abroad to, at least, relax Basel II until the crisis is over. But the Boys from Basel haven’t budged an inch. The U.S did modify these rules somewhat a year after the devastation had taken place here, but the rules are still fully in place in the rest of the world and the results are appalling.

The credit crisis that started in the U.S. has spread around the globe with the speed that only the digital universe could make possible. You’d think Mr. Freeze from the 2004 Batman movie was at work.

We have already noted that stock markets around the world have lost half of their value erasing trillions. Some selected planet-wide stats make it clear that it is not just stock values that have crashed:

China’s industrial production fell 12% last year, while Japan’s exports to China fell 45% and Taiwan’s were off 55%.

South Korea’s overseas shipments decreased 17%, while their economy shrank 5.6%.

Singapore’s exports were off the most in 33 years and Hong Kong’s exports plunged the most in 50 years.

Germany had a 7.3% decline in exports in the 4th quarter of last year while Great Britain’s real estate market declined 18% in the last quarter compared to a year earlier.

Australia’s manufacturing contracted at a record pace last month bringing the index to the lowest level on record.

There’s much more, but I think it is obvious that credit pipe can no longer be smoked. Welcome to planetary cold turkey.

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Small Business Owners: Are you surviving the Economic Crisis?

Alright folks! We’ve been hearing the hubbub in the news that help is on its way for the recovery from the economic crisis in the form of the stimulus. The question is – will it be enough for small business? As I'm sure everyone reading this knows, the contents of the new economic stimulus bill is being argued back and forth in both the House of Representatives and the Senate. In fact, a joint committee is now working on a final bill that President Obama is pushing on a daily, sometimes hourly basis to get done.

We all know that this bill and the past "TARP" bill have enormous amounts of money to both help and bailout some of our major financial institutions on Wall Street and elsewhere. But what about small businesses? I was looking for information on this topic and ran across Keith Girard’s latest blog, “Small Business Stimulus Bill: Is "Half a Loaf" Enough?”

According to the blog, “Already, it seems, some groups are sowing the seeds of disappointment.”

If you are in small business, then you know that small businesses and startups create a huge percentage of new jobs. Mr. Girard’s position is that “in order to create new jobs, small businesses need access to capital”. Currently, access to capital in the form of small business loans are down. He says, “The SBA says it is racking up mounting losses from loans made through its lending programs, as small firms struggle to make payments or go out of business. Loan losses more than doubled last year, topping out at $1.3 billion compared with $504 million in 2007 and $276 million in 2005…The net result is a vicious cycle. As banks tighten credit, small businesses become strapped for capital and cut back or go under, forcing bad small business loans to pile up on balance sheets, which the banks use to invoke even tighter standards.”

The lack of access to capital is creating a situation for those managing small businesses wherein not only can they not make payments on funds already borrowed, they cannot borrow more; and they are downsizing adding to the highest unemployment rate some have ever seen.

The current actions taken by President Obama and Congress may be just “half a loaf”. Is it better than nothing? What can we, as small business owners and managers do to counteract the effects of the economy?

Here at Silkin Management Group, our clients are mostly sole practice owners and very much a part of the small business community. We have rallied our clients to out-create the economic downturn and its effects by consulting them on savvy financial strategy and sound management principles to steer them through this storm. Our viewpoint is that it's up to each of us to respond to the challenges present in today's economic climate armed with knowledge and carefully planned actions that are conducive to long-term survival. Now is the time to roll up our sleeves and get to it! Congress can pass bills intended to give the economy a shot in the arm, but aren't we cause over our own future? Let's not wait for others to act on our behalf.

It’s a tough market out there and getting tougher. What actions are you taking to survive in these times? This is the topic of our Discussion Forum located at Silkin Management Group Facebook Page. We look forward to hearing from you.


Larry Silver
President
Silkin Management Group


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