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The Master Liquidity Enhancement Con (duit)

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In a stunning editorial leap of faith, the New York Times headlines that “3 Major Banks Offer Plan to Calm Debts in Housing.” What three major banks have actually suggested, with Secretary of Treasury Henry Paulson safely in tow, is that someone else sail in to save their considerably-at-risk bacon.

Paulson, to his credit, is able to announce the laughably named Master Liquidity Enhancement Conduit without so much as the hint of a smile. Not even a little smirk at the corner of the lip. Hank is not a fan of irony, nor does he much embrace nuance. Liquidity enhancement is, in this master-stroke of name over content, a fund to keep a bunch of banks from losing their collective asses on bad loans they made. Loans dashed off, knowing full well they weren't worth anything and had little chance of being paid. Greed was the engine of their penmanship, pure greed.
(Floyd Norris, NYTimes) The biggest banks in the United States, with active encouragement from the Treasury Department, unveiled a plan yesterday to keep the housing-related debt crisis from worsening.

The plan calls for the banks to create a new financing vehicle to try to restore confidence and reduce the risk of a market meltdown by propping up an important part of the debt markets. But the banks hope to take minimal risk and avoid actually investing any of their own money.

Define crisis and define worsening. Lending institutions are paying the price for their collective failure of integrity and due diligence in offering loans. The crisis that is worsening is nothing more than a healthy market punishing the greedy. Happens all the time, Hank.

This plan, this con(duit) against the public interest, consists of a new financing vehicle. They call it a vehicle because it drives away with your money. The last vehicle these greedy characters came up with, drove off with enormous profits derived from sales commissions, finders' fees, plus rake-offs for each slice and dice of the slicing and dicing that offloaded what has traditionally been mortgage-banker risk.

Mortgage bankers used to hold mortgages. My old daddy knew his banker, the guy who underwrote his mortgage, for thirty-five years. No more.They essentially reincarnated themselves as used-car salesmen.

The used car they foisted off on those unsuspecting souls with poor credit, is now a smoking ruin at the side of the road.
It’s the image of a market in the healthy process of purging its excesses and there’s pain involved as there must be in every market correction.
I would caution Henry Paulson that a market saved from itself is no market at all, but a scam. They sold and profited from the sale of this smoking roadside wreck. Now that they have to repossess instead of pass off the liability, it's suddenly a worsening crisis. They beg now to be able to exchange the smoking vehicle for a new vehicle.
If the banks’ initiative works as planned, many investors that helped to finance risky loans — including supposedly safe money market funds — will be spared distress. And the banks will collect fees for little more than promising to make loans if no one else will.
Initiative. Spared distress. This bank scam is actually defended because of its supposed ability to spare distress. To the poor folks losing their homes? Not on your life. Surely not to the slicers and dicers—tell me it isn’t to save the butts of the slicers and dicers, many of whom take home $100 million incomes, taxed at half the rate you and I happen to pay. Tell me it’s not them.

It’s them.
The new entity, called a Master Liquidity Enhancement Conduit, or M-LEC, could raise as much as $200 billion or more through the issuance of its own securities, and use the money to buy securities that otherwise might be dumped on the market.

The announcement by Citigroup, JPMorgan Chase and Bank of America came on the same day that Citigroup reported a sharp fall in third-quarter profits, with write-offs on troubled securities that were substantially larger than it had forecast just two weeks ago. Other financial institutions, including Merrill Lynch, have also had to take substantial write-offs.

The perfect scam. A way to get at another $200 billion. Not their $200 billion, but someone’s $200 billion to buy the smoking wrecks they left littered along America’s highways, so they won’t have to do it. A conduit; (noun) a passage, pipe or tunnel through which water or electric wires (or money) can pass. I guess we know whose liquidity it is that Paulson and Citigroup, JPMorgan Chase and Bank of America would enhance.

This being the Bush administration, there is a very good chance these looters who got caught with their hands in the till will be allowed to offload what few losses they were too busy to transfer. The slicing and dicing machine sent most of their risk on down the pipeline (conduit?).

But when the mortgage market collapsed, they still had a couple hundred billion unstuffed into the sausage grinder—not yet offloaded. It’s that part—still their part—that they don’t want ‘dumped on the market.’
“I don’t really see that this is going to make a significant difference,” said Jan Hatzius, chief United States economist at Goldman Sachs. “It seems a little more like a P.R. move, frankly.” Mr. Hatzius said he wondered “why this is going on when previously the official word was that things were getting better.”
With guys like Hatzius palming themselves off as economists with firms as prestigious as Goldman Sachs taking their cue from ‘official word,’ one can readily understand why the sheep have not been better shielded from shearing. And this has been a massive shearing. A clipping that victimized economic groups formerly protected from Wall Street avarice by the very fact they had nothing.
  • No assets,
  • No substantial source of income,
  • No credit history upon which
  • To value them as sheep.
Citigroup, JPMorgan Chase and Bank of America (among others) invented a way to steal money these people didn’t even have. A breakthrough metaphor; the John Dillingers of Wall Street finally find a way to rob banks that had already gone broke. Who would ever believe that the American creattive mind would figure out a way to take from those who don’t have?
Shearing naked sheep—the new paradigm.
They did it by approving loans. That’s the whole scam—approving loans. Once you have approved a loan, whole new worlds of avarice become visible. New fees (by the tens and twenties) are available to be taken from the loan itself, before the proceeds are dispersed. A way, when there is no wool, to shear the wool that may be there some time in the future, if things don’t come undone. There are sales fees, broker fees, management fees, slice fees, dice fees—all of them available now—ka-ching! Fees on hundreds and hundreds of billions of dollars.
Need didn’t drive this bubble, it was greed behind the wheel.
The market upheaval that took hold in July arose from securities that were supposed to be safe — and were certified as such by bond rating agencies — even though they financed risky mortgages. Those securities would not default unless a large portion of the underlying loans went bad, and that was deemed unlikely. But in the wake of the subprime mortgage crisis, questions have arisen about whether the rating agencies were too optimistic.
I can answer that definitively—they were not. They were way, way too greedy, but excessive optimism was not their problem. Even Alan Greenspan saw this one coming through his historically blurry Coke-bottle lenses. The real tip-off to further manipulation circles what a bad idea Alan thinks the Master Liquidity Enhancement Conduit will be for the freedom of the market.
(Emerging Markets Magazine ) Mr. Greenspan said, “If you believe some form of artificial non-market force is propping up the market,” he said, “you don’t believe the market price has exhausted itself.”
Translation; let the market work.

There is (for me) a parallel between the recent mis-management of financial markets and the past fifty years of Forestry Service mis-management of public lands. For decades, the Smokie-Bears prevented small fires. There were watch-towers and firefighters perched to pounce on any campfire gone bad. The result was an unnatural buildup of combustible material in the nation’s wild areas; pine needles and dead branches, leaves and blow-downs that had been consumed in less managed times by small, quick-moving fires.

Not having sufficient bio-mass, these earlier fires moved quickly, died out quickly and seldom killed the forests through which they raced. The new and better process of no fire tolerance was disproved in the 1988 Yellowstone Fire, when a third of the park was virtually turned to glass.

Paulson and his self-serving banks are trying to pursue a no-fire rule in the forests of the economic marketplace, conserving
  • an underbrush of indebtedness forgiveness,
  • a litter buildup of risk avoidance and
  • a massive tinderbox of deferred accountability.

There is likely to be a hell of a fire when the lightning finally strikes.
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Jim Freeman's op-ed pieces and commentaries have appeared in The New York Times, Chicago Tribune, International Herald-Tribune, CNN, The New York Review, The Jon Stewart Daily Show and a number of magazines. His thirteen published books are (more...)
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