The End

by Michael Lewis Nov 11 2008

The era that defined Wall Street is finally, officially over. Michael Lewis, who chronicled its excess in Liar’s Poker, returns to his old haunt to figure out what went wrong.

Photoillustration by: Ji Lee

To this day, the willingness of a Wall Street investment bank to pay me hundreds of thousands of dollars to dispense investment advice to grownups remains a mystery to me. I was 24 years old, with no experience of, or particular interest in, guessing which stocks and bonds would rise and which would fall. The essential function of Wall Street is to allocate capital—to decide who should get it and who should not. Believe me when I tell you that I hadn’t the first clue.

I’d never taken an accounting course, never run a business, never even had savings of my own to manage. I stumbled into a job at Salomon Brothers in 1985 and stumbled out much richer three years later, and even though I wrote a book about the experience, the whole thing still strikes me as preposterous—which is one of the reasons the money was so easy to walk away from. I figured the situation was unsustainable. Sooner rather than later, someone was going to identify me, along with a lot of people more or less like me, as a fraud. Sooner rather than later, there would come a Great Reckoning when Wall Street would wake up and hundreds if not thousands of young people like me, who had no business making huge bets with other people’s money, would be expelled from finance.

When I sat down to write my account of the experience in 1989—Liar’s Poker, it was called—it was in the spirit of a young man who thought he was getting out while the getting was good. I was merely scribbling down a message on my way out and stuffing it into a bottle for those who would pass through these parts in the far distant future.

Unless some insider got all of this down on paper, I figured, no future human would believe that it happened.

I thought I was writing a period piece about the 1980s in America. Not for a moment did I suspect that the financial 1980s would last two full decades longer or that the difference in degree between Wall Street and ordinary life would swell into a difference in kind. I expected readers of the future to be outraged that back in 1986, the C.E.O. of Salomon Brothers, John Gutfreund, was paid $3.1 million; I expected them to gape in horror when I reported that one of our traders, Howie Rubin, had moved to Merrill Lynch, where he lost $250 million; I assumed they’d be shocked to learn that a Wall Street C.E.O. had only the vaguest idea of the risks his traders were running. What I didn’t expect was that any future reader would look on my experience and say, “How quaint.”

I had no great agenda, apart from telling what I took to be a remarkable tale, but if you got a few drinks in me and then asked what effect I thought my book would have on the world, I might have said something like, “I hope that college students trying to figure out what to do with their lives will read it and decide that it’s silly to phony it up and abandon their passions to become financiers.” I hoped that some bright kid at, say, Ohio State University who really wanted to be an oceanographer would read my book, spurn the offer from Morgan Stanley, and set out to sea.

Somehow that message failed to come across. Six months after Liar’s Poker was published, I was knee-deep in letters from students at Ohio State who wanted to know if I had any other secrets to share about Wall Street. They’d read my book as a how-to manual.

In the two decades since then, I had been waiting for the end of Wall Street. The outrageous bonuses, the slender returns to shareholders, the never-ending scandals, the bursting of the internet bubble, the crisis following the collapse of Long-Term Capital Management: Over and over again, the big Wall Street investment banks would be, in some narrow way, discredited. Yet they just kept on growing, along with the sums of money that they doled out to 26-year-olds to perform tasks of no obvious social utility. The rebellion by American youth against the money culture never happened. Why bother to overturn your parents’ world when you can buy it, slice it up into tranches, and sell off the pieces?

At some point, I gave up waiting for the end. There was no scandal or reversal, I assumed, that could sink the system.

Then came Meredith Whitney with news. Whitney was an obscure analyst of financial firms for Oppenheimer Securities who, on October 31, 2007, ceased to be obscure. On that day, she predicted that Citigroup had so mismanaged its affairs that it would need to slash its dividend or go bust. It’s never entirely clear on any given day what causes what in the stock market, but it was pretty obvious that on October 31, Meredith Whitney caused the market in financial stocks to crash. By the end of the trading day, a woman whom basically no one had ever heard of had shaved $369 billion off the value of financial firms in the market. Four days later, Citigroup’s C.E.O., Chuck Prince, resigned. In January, Citigroup slashed its dividend.

From that moment, Whitney became E.F. Hutton: When she spoke, people listened. Her message was clear. If you want to know what these Wall Street firms are really worth, take a hard look at the crappy assets they bought with huge sums of ­borrowed money, and imagine what they’d fetch in a fire sale. The vast assemblages of highly paid people inside the firms were essentially worth nothing. For better than a year now, Whitney has responded to the claims by bankers and brokers that they had put their problems behind them with this write-down or that capital raise with a claim of her own: You’re wrong. You’re still not facing up to how badly you have mismanaged your business.

Rivals accused Whitney of being overrated; bloggers accused her of being lucky. What she was, mainly, was right. But it’s true that she was, in part, guessing. There was no way she could have known what was going to happen to these Wall Street firms. The C.E.O.’s themselves didn’t know.

Now, obviously, Meredith Whitney didn’t sink Wall Street. She just expressed most clearly and loudly a view that was, in retrospect, far more seditious to the financial order than, say, Eliot Spitzer’s campaign against Wall Street corruption. If mere scandal could have destroyed the big Wall Street investment banks, they’d have vanished long ago. This woman wasn’t saying that Wall Street bankers were corrupt. She was saying they were stupid. These people whose job it was to allocate capital apparently didn’t even know how to manage their own.

At some point, I could no longer contain myself: I called Whitney. This was back in March, when Wall Street’s fate still hung in the balance. I thought, If she’s right, then this really could be the end of Wall Street as we’ve known it. I was curious to see if she made sense but also to know where this young woman who was crashing the stock market with her every utterance had come from.

It turned out that she made a great deal of sense and that she’d arrived on Wall Street in 1993, from the Brown University history department. “I got to New York, and I didn’t even know research existed,” she says. She’d wound up at Oppenheimer and had the most incredible piece of luck: to be trained by a man who helped her establish not merely a career but a worldview. His name, she says, was Steve Eisman.

Eisman had moved on, but they kept in touch. “After I made the Citi call,” she says, “one of the best things that happened was when Steve called and told me how proud he was of me.”

Having never heard of Eisman, I didn’t think anything of this. But a few months later, I called Whitney again and asked her, as I was asking others, whom she knew who had anticipated the cataclysm and set themselves up to make a fortune from it. There’s a long list of people who now say they saw it coming all along but a far shorter one of people who actually did. Of those, even fewer had the nerve to bet on their vision. It’s not easy to stand apart from mass hysteria—to believe that most of what’s in the financial news is wrong or distorted, to believe that most important financial people are either lying or deluded—without actually being insane. A handful of people had been inside the black box, understood how it worked, and bet on it blowing up. Whitney rattled off a list with a half-dozen names on it. At the top was Steve Eisman.

Steve Eisman entered finance about the time I exited it. He’d grown up in New York City and gone to a Jewish day school, the University of Pennsylvania, and Harvard Law School. In 1991, he was a 30-year-old corporate lawyer. “I hated it,” he says. “I hated being a lawyer. My parents worked as brokers at Oppenheimer. They managed to finagle me a job. It’s not pretty, but that’s what happened.”

He was hired as a junior equity analyst, a helpmate who didn’t actually offer his opinions. That changed in December 1991, less than a year into his new job, when a subprime mortgage lender called Ames Financial went public and no one at Oppenheimer particularly cared to express an opinion about it. One of Oppenheimer’s investment bankers stomped around the research department looking for anyone who knew anything about the mortgage business. Recalls Eisman: “I’m a junior analyst and just trying to figure out which end is up, but I told him that as a lawyer I’d worked on a deal for the Money Store.” He was promptly appointed the lead analyst for Ames Financial. “What I didn’t tell him was that my job had been to proofread the ­documents and that I hadn’t understood a word of the [obscenity deleted] things.”

Ames Financial belonged to a category of firms known as nonbank financial institutions. The category didn’t include J.P. Morgan, but it did encompass many little-known companies that one way or another were involved in the early-1990s boom in subprime mortgage lending—the lower class of American finance.

The second company for which Eisman was given sole responsibility was Lomas Financial, which had just emerged from bankruptcy. “I put a sell rating on the thing because it was a piece of [obscenity deleted],” Eisman says. “I didn’t know that you weren’t supposed to put a sell rating on companies. I thought there were three boxes—buy, hold, sell—and you could pick the one you thought you should.” He was pressured generally to be a bit more upbeat, but upbeat wasn’t Steve Eisman’s style. Upbeat and Eisman didn’t occupy the same planet. A hedge fund manager who counts Eisman as a friend set out to explain him to me but quit a minute into it. After describing how Eisman exposed various important people as either liars or idiots, the hedge fund manager started to laugh. “He’s sort of a [obscenity deleted] in a way, but he’s smart and honest and fearless.”

“A lot of people don’t get Steve,” Whitney says. “But the people who get him love him.” Eisman stuck to his sell rating on Lomas Financial, even after the company announced that investors needn’t worry about its financial condition, as it had hedged its market risk. “The single greatest line I ever wrote as an analyst,” says Eisman, “was after Lomas said they were hedged.” He recited the line from memory: “ ‘The Lomas Financial Corp. is a perfectly hedged financial institution: It loses money in every conceivable interest-rate environment.’ I enjoyed writing that sentence more than any sentence I ever wrote.” A few months after he’d delivered that line in his report, Lomas Financial returned to bankruptcy.

Eisman wasn’t, in short, an analyst with a sunny disposition who expected the best of his fellow financial man and the companies he created. “You have to understand,” Eisman says in his defense, “I did subprime first. I lived with the worst first. These guys lied to infinity. What I learned from that experience was that Wall Street didn’t give a [obscenity deleted] what it sold.”

Harboring suspicions about ­people’s morals and telling investors that companies don’t deserve their capital wasn’t, in the 1990s or at any other time, the fast track to success on Wall Street. Eisman quit Oppenheimer in 2001 to work as an analyst at a hedge fund, but what he really wanted to do was run money. FrontPoint Partners, another hedge fund, hired him in 2004 to invest in financial stocks. Eisman’s brief was to evaluate Wall Street banks, homebuilders, mortgage originators, and any company (General Electric or General Motors, for instance) with a big financial-services division—anyone who touched American finance. An insurance company backed him with $50 million, a paltry sum. “Basically, we tried to raise money and didn't really do it,” Eisman says.

Instead of money, he attracted people whose worldviews were as shaded as his own—Vincent Daniel, for instance, who became a partner and an analyst in charge of the mortgage sector. Now 36, Daniel grew up a lower-middle-class kid in Queens. One of his first jobs, as a junior accountant at Arthur Andersen, was to audit Salomon Brothers’ books. “It was shocking,” he says. “No one could explain to me what they were doing.” He left accounting in the middle of the internet boom to become a research analyst, looking at companies that made subprime loans. “I was the only guy I knew covering companies that were all going to go bust,” he says. “I saw how the sausage was made in the economy, and it was really freaky.”

Danny Moses, who became Eisman’s head trader, was another who shared his perspective. Raised in Georgia, Moses, the son of a finance professor, was a bit less fatalistic than Daniel or Eisman, but he nevertheless shared a general sense that bad things can and do happen. When a Wall Street firm helped him get into a trade that seemed perfect in every way, he said to the salesman, “I appreciate this, but I just want to know one thing: How are you going to screw me?”

Heh heh heh, c’mon. We’d never do that, the trader started to say, but Moses was politely insistent: We both know that unadulterated good things like this trade don’t just happen between little hedge funds and big Wall Street firms. I’ll do it, but only after you explain to me how you are going to screw me. And the salesman explained how he was going to screw him. And Moses did the trade.

Both Daniel and Moses enjoyed, immensely, working with Steve Eisman. He put a fine point on the absurdity they saw everywhere around them. “Steve’s fun to take to any Wall Street meeting,” Daniel says. “Because he’ll say ‘Explain that to me’ 30 different times. Or ‘Could you explain that more, in English?’ Because once you do that, there’s a few things you learn. For a start, you figure out if they even know what they’re talking about. And a lot of times, they don’t!”

At the end of 2004, Eisman, Moses, and Daniel shared a sense that unhealthy things were going on in the U.S. housing market: Lots of firms were lending money to people who shouldn’t have been borrowing it. They thought Alan Greenspan’s decision after the internet bust to lower interest rates to 1 percent was a travesty that would lead to some terrible day of reckoning. Neither of these insights was entirely original. Ivy Zelman, at the time the housing-market analyst at Credit Suisse, had seen the bubble forming very early on. There’s a simple measure of sanity in housing prices: the ratio of median home price to income. Historically, it runs around 3 to 1; by late 2004, it had risen nationally to 4 to 1. “All these people were saying it was nearly as high in some other countries,” Zelman says. “But the problem wasn’t just that it was 4 to 1. In Los Angeles, it was 10 to 1, and in Miami, 8.5 to 1. And then you coupled that with the buyers. They weren’t real buyers. They were speculators.” Zelman alienated clients with her pessimism, but she couldn’t pretend everything was good. “It wasn’t that hard in hindsight to see it,” she says. “It was very hard to know when it would stop.” Zelman spoke occasionally with Eisman and always left these conversations feeling better about her views and worse about the world. “You needed the occasional assurance that you weren’t nuts,” she says. She wasn’t nuts. The world was.

By the spring of 2005, FrontPoint was fairly convinced that something was very screwed up not merely in a handful of companies but in the financial underpinnings of the entire U.S. mortgage market. In 2000, there had been $130 billion in subprime mortgage lending, with $55 billion of that repackaged as mortgage bonds. But in 2005, there was $625 billion in subprime mortgage loans, $507 billion of which found its way into mortgage bonds. Eisman couldn’t understand who was making all these loans or why. He had a from-the-ground-up understanding of both the U.S. housing market and Wall Street. But he’d spent his life in the stock market, and it was clear that the stock market was, in this story, largely irrelevant. “What most people don’t realize is that the fixed-income world dwarfs the equity world,” he says. “The equity world is like a [obscenity deleted] zit compared with the bond market.” He shorted companies that originated subprime loans, like New Century and Indy Mac, and companies that built the houses bought with the loans, such as Toll Brothers. Smart as these trades proved to be, they weren’t entirely satisfying. These companies paid high dividends, and their shares were often expensive to borrow; selling them short was a costly proposition.

 

Enter Greg Lippman, a mortgage-bond trader at Deutsche Bank. He arrived at FrontPoint bearing a 66-page presentation that described a better way for the fund to put its view of both Wall Street and the U.S. housing market into action. The smart trade, Lippman argued, was to sell short not New Century’s stock but its bonds that were backed by the subprime loans it had made. Eisman hadn’t known this was even possible—because until recently, it hadn’t been. But Lippman, along with traders at other Wall Street investment banks, had created a way to short the subprime bond market with precision.

Here’s where financial technology became suddenly, urgently relevant. The typical mortgage bond was still structured in much the same way it had been when I worked at Salomon Brothers. The loans went into a trust that was designed to pay off its investors not all at once but according to their rankings. The investors in the top tranche, rated AAA, received the first payment from the trust and, because their investment was the least risky, received the lowest interest rate on their money. The investors who held the trusts’ BBB tranche got the last payments—and bore the brunt of the first defaults. Because they were taking the most risk, they received the highest return. Eisman wanted to bet that some subprime borrowers would default, causing the trust to suffer losses. The way to express this view was to short the BBB tranche. The trouble was that the BBB tranche was only a tiny slice of the deal.

But the scarcity of truly crappy subprime-mortgage bonds no longer mattered. The big Wall Street firms had just made it possible to short even the tiniest and most obscure subprime-mortgage-backed bond by creating, in effect, a market of side bets. Instead of shorting the actual BBB bond, you could now enter into an agreement for a credit-default swap with Deutsche Bank or Goldman Sachs. It cost money to make this side bet, but nothing like what it cost to short the stocks, and the upside was far greater.  

The arrangement bore the same relation to actual finance as fantasy football bears to the N.F.L. Eisman was perplexed in particular about why Wall Street firms would be coming to him and asking him to sell short. “What Lippman did, to his credit, was he came around several times to me and said, ‘Short this market,’ ” Eisman says. “In my entire life, I never saw a sell-side guy come in and say, ‘Short my market.’ ”

And short Eisman did—then he tried to get his mind around what he’d just done so he could do it better. He’d call over to a big firm and ask for a list of mortgage bonds from all over the country. The juiciest shorts—the bonds ultimately backed by the mortgages most likely to default—had several characteristics. They’d be in what Wall Street people were now calling the sand states: Arizona, California, Florida, Nevada. The loans would have been made by one of the more dubious mortgage lenders; Long Beach Financial, wholly owned by Washington Mutual, was a great example. Long Beach Financial was moving money out the door as fast as it could, few questions asked, in loans built to self-destruct. It specialized in asking home­owners with bad credit and no proof of income to put no money down and defer interest payments for as long as possible. In Bakersfield, California, a Mexican strawberry picker with an income of $14,000 and no English was lent every penny he needed to buy a house for $720,000.

More generally, the subprime market tapped a tranche of the American public that did not typically have anything to do with Wall Street. Lenders were making loans to people who, based on their credit ratings, were less creditworthy than 71 percent of the population. Eisman knew some of these people. One day, his housekeeper, a South American woman, told him that she was planning to buy a townhouse in Queens. “The price was absurd, and they were giving her a low-down-payment option-ARM,” says Eisman, who talked her into taking out a conventional fixed-rate mortgage. Next, the baby nurse he’d hired back in 1997 to take care of his newborn twin daughters phoned him. “She was this lovely woman from Jamaica,” he says. “One day she calls me and says she and her sister own five townhouses in Queens. I said, ‘How did that happen?’ ” It happened because after they bought the first one and its value rose, the lenders came and suggested they refinance and take out $250,000, which they used to buy another one. Then the price of that one rose too, and they repeated the experiment. “By the time they were done,” Eisman says, “they owned five of them, the market was falling, and they couldn’t make any of the payments.”

In retrospect, pretty much all of the riskiest subprime-backed bonds were worth betting against; they would all one day be worth zero. But at the time Eisman began to do it, in the fall of 2006, that wasn’t clear. He and his team set out to find the smelliest pile of loans they could so that they could make side bets against them with Goldman Sachs or Deutsche Bank. What they were doing, oddly enough, was the analysis of subprime lending that should have been done before the loans were made: Which poor Americans were likely to jump which way with their finances? How much did home prices need to fall for these loans to blow up? (It turned out they didn’t have to fall; they merely needed to stay flat.) The default rate in Georgia was five times higher than that in Florida even though the two states had the same unemployment rate. Why? Indiana had a 25 percent default rate; California’s was only 5 percent. Why?

Moses actually flew down to Miami and wandered around neighborhoods built with subprime loans to see how bad things were. “He’d call me and say, ‘Oh my God, this is a calamity here,’ ” recalls Eisman. All that was required for the BBB bonds to go to zero was for the default rate on the underlying loans to reach 14 percent. Eisman thought that, in certain sections of the country, it would go far, far higher.

The funny thing, looking back on it, is how long it took for even someone who predicted the disaster to grasp its root causes. They were learning about this on the fly, shorting the bonds and then trying to figure out what they had done. Eisman knew subprime lenders could be scumbags. What he underestimated was the total unabashed complicity of the upper class of American capitalism. For instance, he knew that the big Wall Street investment banks took huge piles of loans that in and of themselves might be rated BBB, threw them into a trust, carved the trust into tranches, and wound up with 60 percent of the new total being rated AAA.

But he couldn’t figure out exactly how the rating agencies justified turning BBB loans into AAA-rated bonds. “I didn’t understand how they were turning all this garbage into gold,” he says. He brought some of the bond people from Goldman Sachs, Lehman Brothers, and UBS over for a visit. “We always asked the same question,” says Eisman. “Where are the rating agencies in all of this? And I’d always get the same reaction. It was a smirk.” He called Standard & Poor’s and asked what would happen to default rates if real estate prices fell. The man at S&P couldn’t say; its model for home prices had no ability to accept a negative number. “They were just assuming home prices would keep going up,” Eisman says.

As an investor, Eisman was allowed on the quarterly conference calls held by Moody’s but not allowed to ask questions. The people at Moody’s were polite about their brush-off, however. The C.E.O. even invited Eisman and his team to his office for a visit in June 2007. By then, Eisman was so certain that the world had been turned upside down that he just assumed this guy must know it too. “But we’re sitting there,” Daniel recalls, “and he says to us, like he actually means it, ‘I truly believe that our rating will prove accurate.’ And Steve shoots up in his chair and asks, ‘What did you just say?’ as if the guy had just uttered the most preposterous statement in the history of finance. He repeated it. And Eisman just laughed at him.”

“With all due respect, sir,” Daniel told the C.E.O. deferentially as they left the meeting, “you’re delusional.”
This wasn’t Fitch or even S&P. This was Moody’s, the aristocrats of the rating business, 20 percent owned by Warren Buffett. And the company’s C.E.O. was being told he was either a fool or a crook by one Vincent Daniel, from Queens.

A full nine months earlier, Daniel and ­Moses had flown to Orlando for an industry conference. It had a grand title—the American Securitization Forum—but it was essentially a trade show for the ­subprime-mortgage business: the people who originated subprime mortgages, the Wall Street firms that packaged and sold subprime mortgages, the fund managers who invested in nothing but subprime-mortgage-backed bonds, the agencies that rated subprime-­mortgage bonds, the lawyers who did whatever the lawyers did. Daniel and Moses thought they were paying a courtesy call on a cottage industry, but the cottage had become a castle. “There were like 6,000 people there,” Daniel says. “There were so many people being fed by this industry. The entire fixed-income department of each brokerage firm is built on this. Everyone there was the long side of the trade. The wrong side of the trade. And then there was us. That’s when the picture really started to become clearer, and we started to get more cynical, if that was possible. We went back home and said to Steve, ‘You gotta see this.’ ”

Eisman, Daniel, and Moses then flew out to Las Vegas for an even bigger subprime conference. By now, Eisman knew everything he needed to know about the quality of the loans being made. He still didn’t fully understand how the apparatus worked, but he knew that Wall Street had built a doomsday machine. He was at once opportunistic and outraged.

Their first stop was a speech given by the C.E.O. of Option One, the mortgage originator owned by H&R Block. When the guy got to the part of his speech about Option One’s subprime-loan portfolio, he claimed to be expecting a modest default rate of 5 percent. Eisman raised his hand. Moses and Daniel sank into their chairs. “It wasn’t a Q&A,” says Moses. “The guy was giving a speech. He sees Steve’s hand and says, ‘Yes?’”

“Would you say that 5 percent is a probability or a possibility?” Eisman asked.

A probability, said the C.E.O., and he continued his speech.

Eisman had his hand up in the air again, waving it around. Oh, no, Moses thought. “The one thing Steve always says,” Daniel explains, “is you must assume they are lying to you. They will always lie to you.” Moses and Daniel both knew what Eisman thought of these subprime lenders but didn’t see the need for him to express it here in this manner. For Eisman wasn’t raising his hand to ask a question. He had his thumb and index finger in a big circle. He was using his fingers to speak on his behalf. Zero! they said.

 “Yes?” the C.E.O. said, obviously irritated. “Is that another question?”

“No,” said Eisman. “It’s a zero. There is zero probability that your default rate will be 5 percent.” The losses on subprime loans would be much, much greater. Before the guy could reply, Eisman’s cell phone rang. Instead of shutting it off, Eisman reached into his pocket and answered it. “Excuse me,” he said, standing up. “But I need to take this call.” And with that, he walked out.

Eisman’s willingness to be abrasive in order to get to the heart of the matter was obvious to all; what was harder to see was his credulity: He actually wanted to believe in the system. As quick as he was to cry [obscenity deleted] when he saw it, he was still shocked by bad behavior. That night in Vegas, he was seated at dinner beside a really nice guy who invested in mortgage C.D.O.’s—collateralized debt obligations. By then, Eisman thought he knew what he needed to know about C.D.O.’s. He didn’t, it turned out.  

Later, when I sit down with Eisman, the very first thing he wants to explain is the importance of the mezzanine C.D.O. What you notice first about Eisman is his lips. He holds them pursed, waiting to speak. The second thing you notice is his short, light hair, cropped in a manner that suggests he cut it himself while thinking about something else. “You have to understand this,” he says. “This was the engine of doom.” Then he draws a picture of several towers of debt. The first tower is made of the original subprime loans that had been piled together. At the top of this tower is the AAA tranche, just below it the AA tranche, and so on down to the riskiest, the BBB tranche—the bonds Eisman had shorted. But Wall Street had used these BBB tranches—the worst of the worst—to build yet another tower of bonds: a “particularly egregious” C.D.O. The reason they did this was that the rating agencies, presented with the pile of bonds backed by dubious loans, would pronounce most of them AAA. These bonds could then be sold to investors—pension funds, insurance companies—who were allowed to invest only in highly rated securities. “I cannot [obscenity deleted] believe this is allowed—I must have said that a thousand times in the past two years,” Eisman says.

His dinner companion in Las Vegas ran a fund of about $15 billion and managed C.D.O.’s backed by the BBB tranche of a mortgage bond, or as Eisman puts it, “the equivalent of three levels of dog [obscenity deleted] lower than the original bonds.”

FrontPoint had spent a lot of time digging around in the dog [obscenity deleted] and knew that the default rates were already sufficient to wipe out this guy’s entire portfolio. “God, you must be having a hard time,” Eisman told his dinner companion.
 
“No,” the guy said, “I’ve sold everything out.”

After taking a fee, he passed them on to other investors. His job was to be the C.D.O. “expert,” but he actually didn’t spend any time at all thinking about what was in the C.D.O.’s. “He managed the C.D.O.’s,” says Eisman, “but managed what? I was just appalled. People would pay up to have someone manage their C.D.O.’s—as if this moron was helping you. I thought, You [obscenity deleted], you don’t give a [obscenity deleted] about the investors in this thing.”

Whatever rising anger Eisman felt was offset by the man’s genial disposition. Not only did he not mind that Eisman took a dim view of his C.D.O.’s; he saw it as a basis for friendship. “Then he said something that blew my mind,” Eisman tells me. “He says, ‘I love guys like you who short my market. Without you, I don’t have anything to buy.’ ”
 

That’s when Eisman finally got it. Here he’d been making these side bets with Goldman Sachs and Deutsche Bank on the fate of the BBB tranche without fully understanding why those firms were so eager to make the bets. Now he saw. There weren’t enough Americans with [obscenity deleted] credit taking out loans to satisfy investors’ appetite for the end product. The firms used Eisman’s bet to synthesize more of them. Here, then, was the difference between fantasy finance and fantasy football: When a fantasy player drafts Peyton Manning, he doesn’t create a second Peyton Manning to inflate the league’s stats. But when Eisman bought a credit-default swap, he enabled Deutsche Bank to create another bond identical in every respect but one to the original. The only difference was that there was no actual homebuyer or borrower. The only assets backing the bonds were the side bets Eisman and others made with firms like Goldman Sachs. Eisman, in effect, was paying to Goldman the interest on a subprime mortgage. In fact, there was no mortgage at all. “They weren’t satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn’t afford,” Eisman says. “They were creating them out of whole cloth. One hundred times over! That’s why the losses are so much greater than the loans. But that’s when I realized they needed us to keep the machine running. I was like, This is allowed?”

This particular dinner was hosted by Deutsche Bank, whose head trader, Greg Lippman, was the fellow who had introduced Eisman to the subprime bond market. Eisman went and found Lippman, pointed back to his own dinner companion, and said, “I want to short him.” Lippman thought he was joking; he wasn’t. “Greg, I want to short his paper,” Eisman repeated. “Sight unseen.”

Eisman started out running a $60 million equity fund but was now short around $600 million of various ­subprime-related securities. In the spring of 2007, the market strengthened. But, says Eisman, “credit quality always gets better in March and April. And the reason it always gets better in March and April is that people get their tax refunds. You would think people in the securitization world would know this. We just thought that was moronic.”

He was already short the stocks of mortgage originators and the homebuilders. Now he took short positions in the rating agencies—“they were making 10 times more rating C.D.O.’s than they were rating G.M. bonds, and it was all going to end”—and, finally, the biggest Wall Street firms because of their exposure to C.D.O.’s. He wasn’t allowed to short Morgan Stanley because it owned a stake in his fund. But he shorted UBS, Lehman Brothers, and a few others. Not long after that, FrontPoint had a visit from Sanford C. Bernstein’s Brad Hintz, a prominent analyst who covered Wall Street firms. Hintz wanted to know what Eisman was up to. “We just shorted Merrill Lynch,” Eisman told him.

“Why?” asked Hintz.

“We have a simple thesis,” Eisman explained. “There is going to be a calamity, and whenever there is a calamity, Merrill is there.” When it came time to bankrupt Orange County with bad advice, Merrill was there. When the internet went bust, Merrill was there. Way back in the 1980s, when the first bond trader was let off his leash and lost hundreds of millions of dollars, Merrill was there to take the hit. That was Eisman’s logic—the logic of Wall Street’s pecking order. Goldman Sachs was the big kid who ran the games in this neighborhood. Merrill Lynch was the little fat kid assigned the least pleasant roles, just happy to be a part of things. The game, as Eisman saw it, was Crack the Whip. He assumed Merrill Lynch had taken its assigned place at the end of the chain.

There was only one thing that bothered Eisman, and it continued to trouble him as late as May 2007. “The thing we couldn’t figure out is: It’s so obvious. Why hasn’t everyone else figured out that the machine is done?” Eisman had long subscribed to Grant’s Interest Rate Observer, a newsletter famous in Wall Street circles and obscure outside them. Jim Grant, its editor, had been prophesying doom ever since the great debt cycle began, in the mid-1980s. In late 2006, he decided to investigate these things called C.D.O.’s. Or rather, he had asked his young assistant, Dan Gertner, a chemical engineer with an M.B.A., to see if he could understand them. Gertner went off with the documents that purported to explain C.D.O.’s to potential investors and for several days sweated and groaned and heaved and suffered. “Then he came back,” says Grant, “and said, ‘I can’t figure this thing out.’ And I said, ‘I think we have our story.’ ”

Eisman read Grant’s piece as independent confirmation of what he knew in his bones about the C.D.O.’s he had shorted. “When I read it, I thought, Oh my God. This is like owning a gold mine. When I read that, I was the only guy in the equity world who almost had an [obscenity deleted].”

On July 19, 2007, the same day that Federal Reserve Chairman Ben Bernanke told the U.S. Senate that he anticipated as much as $100 billion in losses in the subprime-mortgage market, FrontPoint did something unusual: It hosted its own conference call. It had had calls with its tiny population of investors, but this time FrontPoint opened it up. Steve Eisman had become a poorly kept secret. Five hundred people called in to hear what he had to say, and another 500 logged on afterward to listen to a recording of it. He explained the strange alchemy of the C.D.O. and said that he expected losses of up to $300 billion from this sliver of the market alone. To evaluate the situation, he urged his audience to “just throw your model in the garbage can. The models are all backward-looking.

The models don’t have any idea of what this world has become…. For the first time in their lives, people in the asset-backed-securitization world are actually having to think.” He explained that the rating agencies were morally bankrupt and living in fear of becoming actually bankrupt. “The rating agencies are scared to death,” he said. “They’re scared to death about doing nothing because they’ll look like fools if they do nothing.”

On September 18, 2008, Danny Moses came to work as usual at 6:30 a.m. Earlier that week, Lehman Brothers had filed for bankruptcy. The day before, the Dow had fallen 449 points to its lowest level in four years. Overnight, European governments announced a ban on short-selling, but that served as faint warning for what happened next.

At the market opening in the U.S., everything—every financial asset—went into free fall. “All hell was breaking loose in a way I had never seen in my career,” Moses says. FrontPoint was net short the market, so this total collapse should have given Moses pleasure. He might have been forgiven if he stood up and cheered. After all, he’d been betting for two years that this sort of thing could happen, and now it was, more dramatically than he had ever imagined. Instead, he felt this terrifying shudder run through him. He had maybe 100 trades on, and he worked hard to keep a handle on them all. “I spent my morning trying to control all this energy and all this information,” he says, “and I lost control. I looked at the screens. I was staring into the abyss. The end. I felt this shooting pain in my head. I don’t get headaches. At first, I thought I was having an aneurysm.”

Moses stood up, wobbled, then turned to Daniel and said, “I gotta leave. Get out of here. Now.” Daniel thought about calling an ambulance but instead took Moses out for a walk.

Outside it was gorgeous, the blue sky reaching down through the tall buildings and warming the soul. Eisman was at a Goldman Sachs conference for hedge fund managers, raising capital. Moses and Daniel got him on the phone, and he left the conference and met them on the steps of St. Patrick’s Cathedral. “We just sat there,” Moses says. “Watching the people pass.”

This was what they had been waiting for: total collapse. “The investment-banking industry is [obscenity deleted],” Eisman had told me a few weeks earlier. “These guys are only beginning to understand how [obscenity deleted] they are. It’s like being a Scholastic, prior to Newton. Newton comes along, and one morning you wake up: ‘Holy [obscenity deleted], I’m wrong!’ ” Now Lehman Brothers had vanished, Merrill had surrendered, and Goldman Sachs and Morgan Stanley were just a week away from ceasing to be investment banks. The investment banks were not just [obscenity deleted]; they were extinct.
 
Not so for hedge fund managers who had seen it coming. “As we sat there, we were weirdly calm,” Moses says. “We felt insulated from the whole market reality. It was an out-of-body experience. We just sat and watched the people pass and talked about what might happen next. How many of these people were going to lose their jobs. Who was going to rent these buildings after all the Wall Street firms collapsed.” Eisman was appalled. “Look,” he said. “I’m short. I don’t want the country to go into a depression. I just want it to [obscenity deleted] deleverage.” He had tried a thousand times in a thousand ways to explain how screwed up the business was, and no one wanted to hear it. “That Wall Street has gone down because of this is justice,” he says. “They [obscenity deleted] people. They built a castle to rip people off. Not once in all these years have I come across a person inside a big Wall Street firm who was having a crisis of conscience.”

Truth to tell, there wasn’t a whole lot of hand-wringing inside FrontPoint either. The only one among them who wrestled a bit with his conscience was Daniel. “Vinny, being from Queens, needs to see the dark side of everything,” Eisman says. To which Daniel replies, “The way we thought about it was, ‘By shorting this market we’re creating the liquidity to keep the market going.’ ”

“It was like feeding the monster,” Eisman says of the market for subprime bonds. “We fed the monster until it blew up.”

About the time they were sitting on the steps of the midtown cathedral, I sat in a booth in a restaurant on the East Side, waiting for John Gutfreund to arrive for lunch, and wondered, among other things, why any restaurant would seat side by side two men without the slightest interest in touching each other.

There was an umbilical cord running from the belly of the exploded beast back to the financial 1980s. A friend of mine created the first mortgage derivative in 1986, a year after we left the Salomon Brothers trading program. (“The problem isn’t the tools,” he likes to say. “It’s who is using the tools. Derivatives are like guns.”)

When I published my book, the 1980s were supposed to be ending. I received a lot of undeserved credit for my timing. The social disruption caused by the collapse of the savings-and-loan industry and the rise of hostile takeovers and leveraged buyouts had given way to a brief period of recriminations. Just as most students at Ohio State read Liar’s Poker as a manual, most TV and radio interviewers regarded me as a whistleblower. (The big exception was Geraldo Rivera. He put me on a show called “People Who Succeed Too Early in Life” along with some child actors who’d gone on to become drug addicts.) Anti-Wall Street feeling ran high—high enough for Rudy Giuliani to float a political career on it—but the result felt more like a witch hunt than an honest reappraisal of the financial order. The public lynchings of Gutfreund and junk-bond king Michael Milken were excuses not to deal with the disturbing forces underpinning their rise. Ditto the cleaning up of Wall Street’s trading culture. The surface rippled, but down below, in the depths, the bonus pool remained undisturbed. Wall Street firms would soon be frowning upon profanity, firing traders for so much as glancing at a stripper, and forcing male employees to treat women almost as equals. Lehman Brothers circa 2008 more closely resembled a normal corporation with solid American values than did any Wall Street firm circa 1985.

The changes were camouflage. They helped distract outsiders from the truly profane event: the growing misalignment of interests between the people who trafficked in financial risk and the wider culture.

I’d not seen Gutfreund since I quit Wall Street. I’d met him, nervously, a couple of times on the trading floor. A few months before I left, my bosses asked me to explain to Gutfreund what at the time seemed like exotic trades in derivatives I’d done with a European hedge fund. I tried. He claimed not to be smart enough to understand any of it, and I assumed that was how a Wall Street C.E.O. showed he was the boss, by rising above the details. There was no reason for him to remember any of these encounters, and he didn’t: When my book came out and became a public-relations nuisance to him, he told reporters we’d never met.

Over the years, I’d heard bits and pieces about Gutfreund. I knew that after he’d been forced to resign from Salomon Brothers he’d fallen on harder times. I heard later that a few years ago he’d sat on a panel about Wall Street at Columbia Business School. When his turn came to speak, he advised students to find something more meaningful to do with their lives. As he began to describe his career, he broke down and wept.

When I emailed him to invite him to lunch, he could not have been more polite or more gracious. That attitude persisted as he was escorted to the table, made chitchat with the owner, and ordered his food. He’d lost a half-step and was more deliberate in his movements, but otherwise he was completely recognizable. The same veneer of denatured courtliness masked the same animal need to see the world as it was, rather than as it should be.

We spent 20 minutes or so determining that our presence at the same lunch table was not going to cause the earth to explode. We discovered we had a mutual acquaintance in New Orleans. We agreed that the Wall Street C.E.O. had no real ability to keep track of the frantic innovation occurring inside his firm. (“I didn’t understand all the product lines, and they don’t either,” he said.) We agreed, further, that the chief of the Wall Street investment bank had little control over his subordinates. (“They’re buttering you up and then doing whatever the [obscenity deleted] they want to do.”) He thought the cause of the financial crisis was “simple. Greed on both sides—greed of investors and the greed of the bankers.” I thought it was more complicated. Greed on Wall Street was a given—almost an obligation. The problem was the system of incentives that channeled the greed.
 
But I didn’t argue with him. For just as you revert to being about nine years old when you visit your parents, you revert to total subordination when you are in the presence of your former C.E.O. John Gutfreund was still the King of Wall Street, and I was still a geek. He spoke in declarative statements; I spoke in questions.

But as he spoke, my eyes kept drifting to his hands. His alarmingly thick and meaty hands. They weren’t the hands of a soft Wall Street banker but of a boxer. I looked up. The boxer was smiling—though it was less a smile than a placeholder expression. And he was saying, very deliberately, “Your…[obscenity deleted]…book.”

I smiled back, though it wasn’t quite a smile.

“Your [obscenity deleted] book destroyed my career, and it made yours,” he said.

I didn’t think of it that way and said so, sort of.

“Why did you ask me to lunch?” he asked, though pleasantly. He was genuinely curious.

You can’t really tell someone that you asked him to lunch to let him know that you don’t think of him as evil. Nor can you tell him that you asked him to lunch because you thought that you could trace the biggest financial crisis in the history of the world back to a decision he had made. John Gutfreund did violence to the Wall Street social order—and got himself dubbed the King of Wall Street—when he turned Salomon Brothers from a private partnership into Wall Street’s first public corporation. He ignored the outrage of Salomon’s retired partners. (“I was disgusted by his materialism,” William Salomon, the son of the firm’s founder, who had made Gutfreund C.E.O. only after he’d promised never to sell the firm, had told me.) He lifted a giant middle finger at the moral disapproval of his fellow Wall Street C.E.O.’s. And he seized the day. He and the other partners not only made a quick killing; they transferred the ultimate financial risk from themselves to their shareholders. It didn’t, in the end, make a great deal of sense for the shareholders. (A share of Salomon Brothers purchased when I arrived on the trading floor, in 1986, at a then market price of $42, would be worth 2.26 shares of Citigroup today—market value: $27.) But it made fantastic sense for the investment bankers.

From that moment, though, the Wall Street firm became a black box. The shareholders who financed the risks had no real understanding of what the risk takers were doing, and as the risk-taking grew ever more complex, their understanding diminished. The moment Salomon Brothers demonstrated the potential gains to be had by the investment bank as public corporation, the psychological foundations of Wall Street shifted from trust to blind faith.

No investment bank owned by its employees would have levered itself 35 to 1 or bought and held $50 billion in mezzanine C.D.O.’s. I doubt any partnership would have sought to game the rating agencies or leap into bed with loan sharks or even allow mezzanine C.D.O.’s to be sold to its customers. The hoped-for short-term gain would not have justified the long-term hit.

No partnership, for that matter, would have hired me or anyone remotely like me. Was there ever any correlation between the ability to get in and out of Princeton and a talent for taking financial risk?

Now I asked Gutfreund about his biggest decision. “Yes,” he said. “They—the heads of the other Wall Street firms—all said what an awful thing it was to go public and how could you do such a thing. But when the temptation arose, they all gave in to it.” He agreed that the main effect of turning a partnership into a corporation was to transfer the financial risk to the shareholders. “When things go wrong, it’s their problem,” he said—and obviously not theirs alone. When a Wall Street investment bank screwed up badly enough, its risks became the problem of the U.S. government. “It’s laissez-faire until you get in deep [obscenity deleted],” he said, with a half chuckle. He was out of the game.

It was now all someone else’s fault.

He watched me curiously as I scribbled down his words. “What’s this for?” he asked.

I told him I thought it might be worth revisiting the world I’d described in Liar’s Poker, now that it was finally dying. Maybe bring out a 20th-anniversary edition.

“That’s nauseating,” he said.

Hard as it was for him to enjoy my company, it was harder for me not to enjoy his. He was still tough, as straight and blunt as a butcher. He’d helped create a monster, but he still had in him a lot of the old Wall Street, where people said things like “A man’s word is his bond.” On that Wall Street, people didn’t walk out of their firms and cause trouble for their former bosses by writing books about them. “No,” he said, “I think we can agree about this: Your [obscenity deleted] book destroyed my career, and it made yours.” With that, the former king of a former Wall Street lifted the plate that held his appetizer and asked sweetly, “Would you like a deviled egg?”
 
Until that moment, I hadn’t paid much attention to what he’d been eating. Now I saw he’d ordered the best thing in the house, this gorgeous frothy confection of an earlier age. Who ever dreamed up the deviled egg? Who knew that a simple egg could be made so complicated and yet so appealing? I reached over and took one. Something for nothing. It never loses its charm. 

 

If you are a Christian and have had discussions on the ‘mark of the beast’ and how only those with the ‘mark’ will be able to buy and sell at some point in the future, you have probably wondered how this could happen.  How could anyone really gain financial control of the entire world?  If you are not a Christian, chances are that you have heard about this ‘mark’ and its control over the world’s financial system and have rejected this as being completely ridiculous – how could anyone control the world’s financial system?  If you throw in the popular Christian interpretations of end time prophecies – that one future ruler of the world will somehow unite the world’s government, the world’s religion and the world’s financial system – all within a period of 7 years – it becomes almost unbelievable.  How could someone – anyone – do all of this within a 7 year time period?  If I were not a Christian and had never heard about these things and someone told me that all of these things will happen within 7 years – I would find it very difficult to believe – if not impossible – the world simply does not cooperate this easily.  As you’ve seen in previous posts, Satan’s control of the world’s government and religion is not taking place during 7 years – and financial control of the world is no different. What you will find as you read this post, is that a few men have already gained worldwide financial control – and they did it before you and I were born.  It didn’t take 7 years – it took hundreds of years.  You and I rely on an economic system that has placed us in financial bondage – and most of us don’t even know it.  What you will find, once again, is that our spiritual enemy is much more cunning and deceptive than you have been led to believe.

 

Let’s start this with a simple question – do you know how our money is created?  Whether you are wealthy or poor, highly educated or not – chances are this question causes you some concern – because you really don’t know the answer.  Most people (and I was included) would say that the United States creates our own money through the U.S. Treasury – correct?  No.  It did until the early 20^th Century.  It is correct that the U.S. Mint and the Bureau of Engraving and Printing (agencies of the U.S. Government) create the hard currency we use, but the U.S. Treasury is not responsible for creating and managing our money supply.  Who then, is responsible for creating and managing our money supply?  A private corporation - The Federal Reserve Banking System.

 

If the U.S. Government needs $20 billion in hard currency (paper and coins), the Federal Reserve creates this $20 billion out of nothing (there is nothing of value that backs our currency), the U.S. Mint and the Bureau of Engraving and Printing creates the paper and coin currency and the U.S. Government gives the Federal Reserve an IOU for $20 billion in exchange.  The U.S. Government then pays interest on this $20 billion.  On the surface, it may seem to you that this is logical – what’s wrong with the U.S. Government paying a private bank/corporation to print our money?  Actually, there is a whole lot wrong with it.  This is what I’m going to explain in this post. 

 

We’ve seen how physical currency is created and added to our economy, but physical currency – coins and paper – makes up less than 5% of the overall dollars in circulation in the world.  The other 95% is made up of all of the electronic dollars in checking accounts, savings accounts, CD’s, money market accounts, etc.  How is this money created?  The majority of our money is created by private banks.  This is where things get interesting.

 

If you have purchased a home, then you know that you apply for and receive a mortgage to pay for your home.  The question then becomes – where does the bank get the money to pay for your home?  If you are like most Americans (and I was certainly included in this group), you assume that this money somehow comes out of the bank’s profits or from deposits made at the bank.  It seems logical, but this isn’t what happens.  By authority of the bank’s charter, it has the ability to create the dollars needed for your home.  In the same manner that the Federal Reserve creates money out of nothing, your bank once again creates money out of nothing and places the dollars needed into your account.  The funds are then used to pay for your home.  I know what you’re thinking – this is the most ridiculous thing you’ve ever heard, there’s no way this is what happens.  You’d be wrong.  In our current monetary system (commonly referred to as a Fractional Reserve System), your act of signing for debt - creates money.  Every time someone signs for an auto loan, home loan, home equity loan, etc. – money is created.  This is how money is created in our system.  In our current monetary system, money is not created from value, money is created from debt.  It doesn’t matter if our money is created because the U.S. Government needs hard currency or if it is created through bank loans, the only way money is created in our current system is through debt.  Get ready - because this leads to some very interesting analysis.

 

If you’re thinking this through, then you’re beginning to feel very uncomfortable – and you should.  Even though it may seem strange to you that our money is created by debt, it might initially seem like this could work – that our economy has – and will continue to – function under this system.  There’s one very big problem inherent in this system.  If you’ve seen the movie ‘The Matrix’, then you remember that the massive computer simulation in the movie had a flaw in the program – an anomaly that over a long period of time would eventually crash the system.  We have the same type of ‘anomaly’ in our current economic system that over time – will have the same result.  What is the ‘anomaly’ in our system?  Interest.  When you take out a loan for $200,000 to pay for your home, is this all you need to pay back?  Of course not.  You must pay the $200,000 plus interest.  The total amount of money you will pay back with interest will be more than $400,000 if you have a 30 year fixed rate (around 6%) and don’t pay it off early.  Remember, our money is created from the principle, not the principle plus interest.  So, you bought a house for $200,000, and as a result, added $200,000 to our total money supply of dollars.  Do you see the problem?  If our money is only created from the principle payment, where do we get the money to pay interest?  This is where things really start to get interesting.

 

Let’s look at another example. Let’s say that the total debt (new debt – retired debt) created in a given year in the United States is $1 trillion dollars.  Based on our current system, $1 trillion dollars would then be added to our money supply.  As I mentioned above, because this is debt, the total actually owed is much higher – let’s say the total debt actually owed is $2 trillion.  So, we have created $2 trillion in liabilities that must be repaid, but we’ve only created $1 trillion dollars in the system to pay this debt.  Do you see the problem?  We never add enough money into our economy to pay for the debt. Our debt continues to rise and our money supply continues to rise – but the money supply can never equal the total amount owed.  What this means is that we can never pay off our debt under our current monetary system.

 

Let’s make it really simple.  If you and I each owe $100 and there’s only $150 in currency available to us – one of us isn’t going to have enough to pay our debts.  It’s a catch-22 that we cannot get out of.  In our current system, there will always be a certain percentage of people and businesses that cannot get enough money to pay their bills, debts, etc.  It’s mathematically impossible for everyone to have enough money to pay what they owe.  We can talk all day about why certain businesses fail (poor management, supply and demand, changing markets, etc), why businesses and people go bankrupt, but the bottom line is this - if there’s not enough money in our economy to pay for all outstanding debts, it doesn’t matter what we do, how we manage our budgets, we will never pay off our debts as a nation – never.  Of course I’m talking about our nation as a whole.  Individually, we can make good financial decisions and manage our money in a prudent manner, but on a national level, we are in a never ending cycle of ever increasing debt – personal debt, corporate debt, government debt, etc.  If our system never changes, it is mathematically impossible for us to ever pay off our national debt. 

 

I now find it interesting when I hear our President or members of Congress debating ‘fiscal irresponsibility’ or when I hear our leaders talking about reducing our national debt.  The truth is that all of us – our Government included – must continue to create debt in order to keep our economy from crashing.  The meter is always running on the current interest (which is now enormous). In order to keep creating additional money to pay for our ever increasing debt, we must create more debt to create more money.  I know what you’re thinking – this has to be the most ridiculous economic system ever devised.  It’s actually quite ingenious – when you realize why it exists.  We’ll examine this more later.

 

Since our money is created from debt, as our debts increase – our money supply increases.  The only thing that has prevented this system from collapsing years ago is due to the lag time we have to pay back the interest on our loans.  We are not required to immediately pay back the principle plus interest.  Although this system seems to have worked for a very long time, we’re going to see that it cannot continue forever.  You will see that it’s mathematically impossible for our economic system to continue without eventually collapsing.

 

If this hasn’t blown your mind yet, consider what would happen if we paid off all of our debt – personal debt (home loans, auto loans, etc), corporate debt and Government debt.  Since debt equals money in our system, if there is no debt, there would be no money!  I know – it keeps getting more ridiculous.  Your mind wants to reject this outright.  This is crazy!  Unfortunately, it’s the truth.  Our entire economy is based on the creation of debt.  Without debt, our economy would crash completely.  You now know the real reasons why we are all always fighting to get enough money to pay our bills and debts (there’s not enough money in the system for all of us).  You now know why we consistently have a steady stream of people and businesses that file for bankruptcy (there’s never enough money in our economy), why inflation has dramatically reduced the buying power of the dollar in the past few decades (our money supply is always increasing – it never stabilizes), why the total volume of dollars in the world economy has sky-rocketed in recent decades (leading to a decline in the value of the dollar – worldwide) and why we’re always being bombarded with loan offers (home, auto, home equity, etc), credit cards, etc.  Without debt, we have no economy.  How is this possible you ask?  Why would anyone allow this to happen?  How did this happen?  The most important question that you should be asking yourself is this – if we are creating so much debt, who are we indebted to?  What you will find later in this post is that this is all very deliberate – it’s not by chance.  There is a plan at work here – and it’s evil.  The honest truth is that every person in the United States has been placed in financial bondage since 1913 – and most don’t even know it.  Have I mentioned how deceptive our spiritual enemy is?  Keep reading.

 

I mentioned earlier that our current banking system is referred to as a Fractional Reserve System.  Basically, this means that banks can issue loans for much more money than they have on hand.  It depends on the type of account, but as an example, let’s say that the Federal Reserve sets the reserve requirement at 9:1 (or a 10% reserve ratio).  The Federal Reserve Board of Governors also has the power to change this ratio within limits set by law.  This means that for every dollar that a bank has held in ‘reserve’ at the Federal Reserve, it can lend out 9 times that amount.  Let’s say that a new bank holds approximately $1,111 dollars at the Federal Reserve.  It can then lend up to $10,000 dollars (9 x $1111 = $10,000). Money on reserve at the Fed is sometimes referred to as ‘super’ money – since the banks get to multiply its volume. The bank then loans this $10,000 to you for a new car.  You pay the car seller who then deposits the money in their checking account.  Their bank (this is a closed loop system – it doesn’t matter which bank receives the deposit) then takes the $10,000 – adds $1,000 of it to their reserves (the same 9:1 reserve ratio – reversed) – and loans out $9,000 to someone else who then deposits the money in their checking account.  Their bank takes the $9,000 – adds $900 to their reserves (9:1 reserve ratio) – and loans out $8,100 to someone else.  At this point, the original reserve of $1,111 has generated $27,100 in new money ($10,000 + $9,000 + $8,100).  If we do the math and continue to carry this through (and everyone deposits their money in a bank – not in a mattress), then this original reserve of $1,111 generates just under $100,000 of currency in our economy.  It’s like a huge game of musical chairs – as long as we’re creating money from debt, the music doesn’t stop playing.  Also remember – the original reserve deposit at the Fed ($1,111) was money created by debt – it has no value.  Some types of accounts in this system only require a 20:1 or 30:1 reserve ratio and some accounts do not require a reserve at all.  Should anyone be surprised that we always have inflation? 

 

What happens when the Federal Reserve changes the reserve ratio?  Is this significant?  Absolutely.  Let’s examine this more closely.  If the current ratio is 9:1 and the Fed changes this to 5:1 – what impact does this have?  If you’re a bank that has loaned millions of dollars at a ratio of 9:1, and have planned future loans around this ratio, what happens to you if the ratio changes to 5:1 (the reserve requirement increases)?  If you don’t have additional reserves to meet the new requirement - you instantly become under-capitalized.  Here’s a simple example: if a bank has a reserve of $1,000 and plans to make a loan of $9,000 – it can no longer make the loan if the reserve ratio is reduced to 5:1.  At 5:1, the reserve requirement on $9,000 would be $1800.  The real world result is – the bank must generate significantly more capital to increase its reserves or stop lending in order to meet the new reserve requirement. 

 

What should we learn from this?  Most of us know that the Federal Reserve has the power to raise and lower interest rates and therefore, has the power to raise and lower overall prices within our economy.  What most people don’t realize is that they also have the power to raise and lower the total volume of dollars in our economy.  If they raise the reserve requirement (requiring banks to have more reserves at the Fed), banks will lend less money and since our money is based on the creation of debt, less money is created.  If this happens, the gap between the amount owed within our economy (interest never stops accumulating) and the amount of money to pay the debt – widens.  We are often told that this is used to fight inflation – inflation that is caused by this system of money creation through debt.  The truth is that an increase in the reserve requirement results in even less money in the overall economy to pay back debt – which could easily lead to a recession or depression.  This is the continual game central banks around the world play every day – more money in the economy means economic growth, but higher inflation – reducing the money supply reduces inflation, but will also cause economic growth to slow or contract. 

 

The following chart shows the impact of the reserve ratio on our money supply.  It’s easy to see that as the reserve amount required is lowered, the amount of money generated increases significantly.  The reverse is also true – as the reserve required by the Fed is raised, the amount of money generated decreases.

 

 

 

What really happens when our money supply contracts?  Periods of recession or depression.  What we’re consistently told is that periods of economic growth and periods of economic contraction are unavoidable, when the truth tells us something different.  The Federal Reserve has the power to create periods of growth (increased money supply coupled with low interest rates) and periods of contraction (reduced money supply coupled with higher interest rates).  How are we told to categorize these periods of growth and contraction?  This is the ‘business cycle’.  While everyday business transactions certainly affect our overall economy – there is nothing that private business or individuals can do that will overcome the debt based economic system we’ve been placed under. 

 

You have also learned why the current credit ‘crunch’ is being referred to as a ‘crisis’.  What happens if banks reduce lending and consumers reduce taking on more debt?  Less money is created in the system – and a vicious cycle starts.  Wall Street refers to this as ‘de-leveraging’.  We’re going to explore the real reasons this happens.  Before we look closely at what is going on today, let’s examine another problem with our current economic system.  We have discussed how our economy must continue to grow in order for debt creation to continue in order to create additional money in order to pay the debt – a never-ending cycle of debt creation.  The question becomes – can this continue forever?

 

If you were to ask people about economic growth, some will know that our economic (GDP – Gross Domestic Product) growth rate typically averages about 3% (annually) in recent years.  Most of us assume this is a linear growth rate.  A linear growth rate looks like this:

 

 

 

The problem is that our economic growth rate is not linear.  As an example, let’s assume that the current overall value of our economy is $100.  If our economy grows 3% this year, then the overall value at the end of this year is $103.  If our economy grows an additional 3% next year, will the overall value of our economy be $106 at the end of next year?  No.  Since we grew our economy 3% this year, next year’s growth will be 3% of $103 and the total value of our economy at the end of next year will be $106.09 ($103*.03 + $103).  Our economy does not grow linearly, it grows exponentially.  What this means is that 3% growth this year is actually more growth than 3% last year since our growth is compounded annually.  This is what exponential growth looks like:

 

 

You are probably starting to feel uncomfortable, because you are beginning to see where this is going.  In theory, this growth rate remains relatively low for a given period of time – but as you can see, as each year’s growth compounds on the previous year, overall growth begins to accelerate rapidly at a given point in time.  A simple example of this phenomenon can be seen in the growth of a company.  A company that plans to grow 10% with annual revenues of $10 million only needs to grow $1 million.  A company that plans to grow 10% with annual revenues of $10 billion needs to grow $1 billion.  As growth compounds upon itself, the system requires ever more resources to grow the same amount (%).

 

In our current economic system that relies on continual growth to stave off a collapse, we must continually burn through more and more natural resources to keep the system going.  In a theoretical world, this exponential curve continues on to infinity.  Is this possible in a finite world with finite resources?  Of course not.  If we take a logical look at our economic system, mathematics tells us one of two things must happen to our current system.  The first scenario is that we burn through all of our resources and the system collapses.  We can certainly see the beginning of this from a global perspective.  As more economies around the world have instituted the same economic system as ours, we are seeing more and more concern that natural resources (oil, forests, water, etc.) are being depleted at an alarming rate – demand is outstripping supply – adding to inflationary pressures.  Although this is certainly possible in our distant future, since we are much farther along the exponential curve than other economies in the world, there is a much more likely scenario for the United States. 

 

The second scenario is that our current system collapses under the weight of the debt it has created.  If the rate of debt increases much more quickly than the rate of the supply of money in the system, eventually the amount of money in the system will not be able to support the increased debt.  There will not be enough money to make interest payments, pay utilities, buy consumer goods and create additional money.  As the exponential curve gets steeper and steeper – it will be more and more difficult to grow our economy, while supporting the existing debt in the system.  At some point, since we live in the real world, our monetary system will collapse under the weight of its debt – long before we burn through all of our resources. 

 

Before we get too far into this – let’s ask a question.  Where are we on this exponential curve?  If we look at trends of some of the most widely used economic indicators, can we determine if we should be worried about imminent collapse?   As you will see, we have reason to be concerned.

 

Let’s start by looking at our debt.  The following is a graph of our nation’s federal debt:

 

 

 

Does this look linear or exponential?  You don’t have to be a mathematician to see the answer.

 

The following is a different look at our national debt that calculates the debt as a percentage of GDP:

 

 

We hear politicians and economists talk about how there’s nothing to worry about since our debt remains in line with past years - as a percentage of GDP.  The problem is that they are only focusing on the amount of debt as a % of GDP in a given year and not the effect of our cumulative debt. As we’ll soon see, what is even more important is the ratio of debt to the money supply.

 

We also have much more debt than just the federal debt.  The following chart shows total debt over time (state, federal, personal, corporate).  Once again, we see an exponential curve.

 

 

What about our money supply?  We should expect to see the same trend – and we do.

 

 

 

 

 

Hard currency appears to be somewhat linear, but it’s an illusion.  If we reduce the scale (since hard currency is such a small percentage of the total money supply), we see the same trend:

 

 

Since the Federal Reserve stopped publishing M3 (total amount of dollars in circulation) money supply data in 2006, a couple of economists have worked to re-create it.  The next graph was created by John Williams at shadowstats.com.  Take note of how the year over year growth of our money supply has steadily increased since early 2005.  Also note how the rate of growth is beginning to slow since the beginning of 2008. (I originally wrote this post in early 2008 - I have updated the graph below to show money supply growth through the first few months of 2009 - you can see how the current credit 'crisis' is affecting money supply growth).

 

 

I believe we’re going to see our money supply growth continue to slow since we are now at the point that we cannot create enough new money (through debt) to support the existing debt. If we’re not able to create enough new money (through debt) each year to service the interest on the existing debt – the system begins to collapse (loan defaults & bankruptcies begin to increase).  The world tells us that our economy is ‘maturing’, which is why our economy’s growth is slowing.  The truth, as you see, is much different.  We are beginning to see the very real signs of an economy on the brink of collapse under the weight of its monetary system.  We’ll talk about these signs later in this post.

 

Let’s continue by viewing inflation.  Once again, we hear the world tell us that inflation is running at a rate of 3% a year and we all accept this as normal – and we forget that this rate is compounded year after year.  If we see our money supply increase at such a fast pace, we should expect to see inflation also rise at an exponential rate – and we do.

 

 

Now you know why cars that once cost $3,000 now cost $30,000 or a loaf of bread that once cost $0.25 now costs $2.50.  Prices increase as the volume of money in the system increases.  More people with more money to spend places upward pressure on prices for everything – cars, fuel, food, natural resources, etc.  As money supplies throughout the world increase at an exponential rate, we see inflation skyrocketing across the globe.  More on this below.

 

What about other economic indicators?  We see the same trend.

 

Government Spending:

 

Government Revenues:

 

 

 

Commercial Bank Credit:

 

 

 

 

Total Revolving Credit:

 

 

Total Consumer Credit:

 

 

These are all interesting, but the most important graph will show us the rate of increase of our debt and the rate of increase of our money supply.  If we see a widening gap between the two, then we know that the system is beginning to break down as the rate of increase in debt (new debt – retired debt + interest) is outpacing the money supply used to create and service the debt.

 

 

 

 Sobering isn’t it?  What you are seeing is a system on the brink of total collapse.  With no way to pay our debts (since money is created by debt), this was inevitable at some point.  Even though our money supply is also on an exponential curve, it cannot (mathematically) keep up with the runaway debt.  We are nearing the end of an inevitable cycle.  A cycle that ends with the economic collapse of the United States.  As I mentioned earlier, this would not be a surprise to the men who created the system in the U.S. in 1913, nor is it a surprise to the men who are controlling the system today.

 

What about the rest of the world?  Can’t they continue to finance our debt?  Won’t this help delay our collapse?  What you are about to see is that every major world economy also has a Central Bank – and therefore is on the same exponential curve as us.  At some point, the entire world system will be unable to sustain itself unless the entire system changes.  We’ll just take a look at money supplies of some of the world’s biggest economies.  As you view these graphs, also take note of the total amount of Euros (European Union) in circulation compared to the amount of dollars in circulation.  If you consider that there are trillions more dollars in circulation throughout the world compared to pounds and euros and also consider the massive amount of U.S. debt – it shouldn’t surprise anyone that the overall value of the dollar is declining against the world’s major currencies.

 

Global Money Supply:

 

 

 

European Union:

 

 

Australia:

 

 

New Zealand:

 

 

India:

 

 

In addition, in recent months China’s money supply (M1+M2) has been growing at a 16-18% annualized rate.  So, it’s easy to see that the same insane economic/monetary system has been instituted the world over.  The question is – why?  Before we answer this, let’s take a look at what is going on in the U.S. economy today.

 

Let’s think about what we would expect to see if the economic system of the United States begins to collapse due to this monetary system.  As the amount of total debt continues to increase faster than the money supply, we would expect the number of personal and corporate bankruptcies to continue to increase.  As global inflation also continues to increase prices on a broad range of products and commodities (due to increases in money supplies the world over), we would expect this to also negatively affect individuals and corporations in America.  We would also expect to see those of us with the lowest cash reserves to be affected first.  Are we seeing these things?  Absolutely.  We see them everyday in our news.  The current ‘credit crisis’ began when subprime borrowers began defaulting on their home loans.  Now, we see that the number of Alt-A and Prime borrowers falling behind on their mortgages is also increasing.  Home prices are now decreasing across the nation as a result.  How does this affect the money supply?  If a homeowner defaults on a loan, the bank must ‘foreclose’ and take a loss on its books.  The bank then must sell the home – but sell it in a depressed housing market.  If the home was originally purchased for $100,000; and the bank can only get $75,000 now - based on what we now know about how money is created - you can see how the money supply will begin to be affected in a very big way.  As home prices decline, the amount of money generated from the home loans from consumers also declines.  As banks tighten credit due to the rising defaults, the vicious cycle continues – fewer loans and lower prices equals less money created (thanks to this debt based monetary system).  Less money created means less money to loan and less money to buy things – and the exponential money creation cycle from debt begins to reverse itself. It’s also easy to see that falling housing prices and falling housing sales are not the only problem here – all of the suppliers, subcontractors, etc. are also affected.  The rapid increase in the money supply generated by private banks that we’ve seen over the past decade is beginning to slow significantly.  But as you know, this isn’t all that’s happening.

 

You’ve watched as the value of CDO’s (Collateralized Debt Obligations), CLO’s (Collateralized Loan Obligations), SIV’s (Structured Investment Vehicles) and other derivatives are now plunging in value resulting in huge write-offs for banks.  As foreclosures have risen, the value of the bonds created from these mortgages have plunged in value – even those bonds based on ‘prime’ mortgages.  All of these things are reducing the money supply.  If you have an investment that you thought was worth $100, but now is only worth $60 on the open market, your access to money has been substantially reduced.  Auction rate securities, once thought as safe as cash, now can’t be sold – there are no buyers.  What you are seeing are the cracks beginning to form in the dam. 

 

What is the Federal Reserve doing?  Basically, they are trying to plug the holes by injecting money into our economy to delay the inevitable.  Money creation through the private banking system is faltering, so someone has to step in or something catastrophic is going to happen.  As the process has accelerated, not only are banks slowing their lending to consumers, they have also significantly reduced lending to each other.  In order to get the capital they need, many banks are now borrowing more money directly from the Federal Reserve discount window.  Remember, the Fed isn’t giving the money away; banks are borrowing this money from a private corporation.  We can see the impact from the current credit crisis from the graph below.

 

 

(Courtesy of Bloomberg)

 

We see this problem developing with the money supply, but there is one area of our financial system that has yet to suffer a significant drop in value – the stock market.  It’s been very volatile, but has not really suffered a prolonged decrease in value.  Think about this – what happens when financial conditions worsen, people can’t pay their bills/debts, all other investments have significantly declined in value and there’s only one remaining large source of wealth remaining?  People will sell their stocks to survive.  There’s an obvious problem with this – if a large number of people start selling – what happens?  Prices drop significantly.  Since stocks are one of the most volatile investments in the world, the coming decline in the stock market will, in all probability, be much worse than the current decline in value of CDOs/SIVs, Auction Rate Securities and other bonds.  One thing is for certain, it’s not a matter of if, but when this will happen.

 

 

 

 

Take a look at the above graph of the Dow Jones Industrial Average (Share volume is also shown).  Look familiar?  Once again, we see an exponential curve.  The DJIA is shadowing both our debt and our money supply.  Why?  Think about how the world tells us to invest.  We’re constantly told that stocks offer the best long term returns.  If you only look at stock returns over the past 30 years – this would appear to be good advice (if you ignore the possibility of something negative happening tomorrow).  The problem is that there are two very good reasons why the stock market has continued to increase over this time period – and they have nothing to do with the stock market itself.  As money has increased exponentially over the past 30 years – more and more liquidity has been placed in the hands of investors.  What is another consequence of this exponential money growth?  Inflation has also increased exponentially.  We have more and more money in a system where inflation is eroding the value of this money.  In this situation, everyone is trying to at least maintain the value of their money – by trying to earn a return higher than the inflation rate.  So, we see more and more people investing more and more money into risky investments (stocks, hedge funds, CDO’s, SIV’s, Auction-Rate Securities, etc.) in an attempt to outrun the inflation rate. 

 

There’s also another problem that no one in the mainstream media is discussing.  We assume that our inflation rate has been approximately 1%-5% in recent years because this is what our government tells us.  The problem is that since the early 1980’s, the government has changed the way it measures inflation.  I won’t go into details here (please watch Chris Martenson’s video for further information on how our government has changed how it calculates inflation and other economic data:  http://www.chrismartenson.com/fuzzy_numbers).  The truth is that the actual annual consumer inflation rate has been between 8%-12% over the past 10 years – which means that you would need to average an annual return of around 10% over the past 10 years just to break even.  The current rate of inflation is closer to 13% and increasing - not 5% as we’ve been told (I have updated the graph in 2009 to show how the current crisis is causing deflationary pressures).

 

 

 

If we also consider the impact that the actual inflation rate has on real GDP (inflation is subtracted from nominal GDP to calculate real GDP) – we see why businesses and consumers are telling us that we’re in a recession – while our government tells us that our economy is still growing.  The current state of our economy starts to make sense when we see inflation in double digits and negative GDP for several quarters.

 

 

Do you know people who have lost their jobs recently?  Wonder why it’s difficult to find a job right now?  It’s because the current unemployment rate is closer to 13% - not the 5% that we’ve been told (I have updated the graph in 2009 to show the continuing impact of the current recession/depression - real unemployment is now approaching 20%).   The government selectively removes ‘discouraged workers’ from total unemployment in order to calculate the lower rate.  It’s simply a way for our government to manipulate the data to show more favorable percentages.

 

 

 

What is going to happen to the stock market as our money supply growth continues to slow, GDP continues to contract, inflation continues to increase, housing prices continue to fall and more people lose their jobs?  The stock market will, once again, shadow our money supply straight down as the system collapses.  We’re beginning to see how this is affecting the stock market today.  The market has been extremely volatile as earnings reports from companies seem to contradict government economic data.  When it becomes clear to everyone that we’re in serious trouble – we’re going to see a mass exodus from stock markets worldwide.

 

If you’re wealthy, you may feel somewhat secure that you’ve got a nice nest egg to see this through.  Where is your money?  It’s most likely in dollar currency in the system – checking/savings accounts, money market funds, stocks, bonds, 401(k)’s, retirement accounts, etc.  What happens if it’s not just a segment of the system that collapses, but the entire system?  It won’t matter what you have - $5 or $5 million – your wealth will vanish before your eyes.  We are facing a far worse scenario than 1929.  From 1929 through 1933, our money supply contracted approximately 30% after a period of money supply expansion in the 1920’s.  As you can see from the money supply trends in previous charts, we have also been through a period of significant money supply expansion from 1995 until 2007.  It appears that 1929 was a trial run for what will happen in the near future to us. 

 

Was wealth destroyed during the Great Depression?  No.  Wealth was transferred.  If you read the biographies of some of the great bankers of that era (J.P. Morgan and others), you will see that the majority of them did not have their money in stocks.  Earlier in 1929, they moved their investment holdings to cash and gold.  For them, the crash of 1929 was not a catastrophe, it was a buying opportunity. A buying opportunity they created.  The price of assets dropped dramatically during this time - and guess who happened to have the cash on hand to buy assets at depressed values? 

 

Until now, you’ve probably thought that we’re all playing by the same rules – we’re not.  This really isn’t about money – it’s about power and control of the world.  It’s about a ruling elite enslaving humanity on a worldwide scale.  A ruling elite given power by the world’s spiritual ruler.  Now you know a little more about why the Lord has warned us.  He warned us that this beast would be deceptive and would deceive the whole world – and you’re beginning to see why.  When God tells us in His Word that something in our future will be deceptive on a worldwide scale – it’s a warning we should heed.

 

This leads us to why our monetary system exists.  In 1913, the battle for the control of the United States banking system was lost – and the Federal Reserve Bank was created.  The name of this private corporation should tell us all we need to know – it’s a lie.  It’s a bank that is not Federal and there are no reserves.    The truth is that this ingenious monetary system was created by some highly intelligent men for one purpose – global power.  Whoever controls interest rates and the volume of money in a nation controls the nation (and ultimately the world).  In a world focused on money and the pursuit of money, whoever controls our money has the power – absolute power.  These men created a monetary system that forever places our nation in debt and one that can be manipulated by them for their purposes.  What is going to happen when markets collapse? Guess who, once again, will be there to acquire depressed assets? 

 

As I’ve said before, this was inevitable.  If you give a banking system, in our evil world, the ability to control the money supply and the ability to charge interest on the money they create, the bankers will slowly, over time, exchange worthless money (paper and electronic fiat currency) for real assets – gold, silver, land and property.  If you view this from a spiritual standpoint, you begin to understand why Jesus told us that building the foundation of your life on the things of this world is not wise.  As has happened before, and will happen again, wealthy people of this world will see the foundation of their lives (money) slowly sift away through their fingers.  Our wealth is an illusion.  Satan has offered wealth and power to many in this nation and they have gladly accepted.  They are about to witness what happens when you do a deal with the devil.  Take him on by yourself and sooner or later – he’s going to find a way to get his tentacles into you.  What happens when wealth is taken away from people who are focused on wealth?  It’s not pretty.  How do we overcome?  As I’ve said before, and will continue to say until I leave this world – you will not overcome this world and its ruler until you humbly ask forgiveness from God.  Until you acknowledge your sins and truly believe the Lord’s promise of salvation through His Son, you will never get free of the world.  You will always be susceptible to the world’s many disappointments.  When you truly repent and are born again, what happens in the world no longer matters because you know the Lord and the Lord stands with you – until the end.

 

At some point you’ve probably wondered how on earth this monetary system has survived until now.  If you read the many quotes throughout recent history from bankers, world leaders, economists and tycoons about central banks – and really pay attention to what they’re saying - it’s no secret that those in power knew what was happening (I have listed many of these quotes on my website).  Why hasn’t anyone stopped this madness?  It’s not hard to figure out – fear.  If you attain a position of power and are told to look the other way or face the consequences – what do you do?  Most people in the world will gladly take the money and power….and look the other way.  Why place my life at risk when I can continue living this nice lifestyle by not rocking the boat?  Yes – I said that by standing against this beast – you place your life at risk.  I’m not saying this merely to make a hypothetical point.  Take a look at this list.  These men had three things in common.

 

Abraham Lincoln

James Garfield

John F. Kennedy

 

All were Presidents of the United States.  Each man spoke out against the issuance of money by anyone other than our Government and made it clear who they were targeting with these comments – and all were assassinated.  Lincoln refused to attain loans from the European banks to finance the Civil War (he was offered loans at 24%+ interest) and instead had the U.S. Treasury issue its own money.  JFK gave a speech in 1961 about a worldwide ‘monolithic and ruthless conspiracy’ which is ‘a system that has conscripted vast human and material resources into the building of a tightly knit, highly efficient machine that combines military, diplomatic, intelligence, economic, scientific and political operations’.  I have added a link to the speech on my website. (Here’s the link:  http://www.youtube.com/watch?v=C4cqSXtj9ak)  JFK even had the audacity in the summer of 1963 to give the U.S. Government the authority to, once again, create its own money via Executive Order 11110 (based on a Silver standard).  The U.S. Treasury actually began to print its own money in 1963….but as we all know, this didn’t last long. 

 

As you read the quotes below, notice carefully what these men are telling us.  They didn’t realize it at the time they made these statements, but each one of them learned about and then commented on – one of the beasts of Revelation 13.  Some of them paid the ultimate price for doing so.  The Lord doesn’t arbitrarily label something a ‘beast’ without reason.  He uses the term ‘beast’ to tell us who and what we’re dealing with – an organization that will kill, steal and destroy anyone and anything in its path – anything that opposes it.  This beast obeys its father – the father of lies and deceit who walks in complete darkness.  There is only one way in this world that you and I can oppose this beast and survive – by standing with and obeying the Lord. 

 

“The very word secrecy is repugnant in a free and open society – and we are, as a people, inherently and historically, opposed to secret societies, to secret oaths and to secret proceedings.” –JFK

 

 

“We are opposed around the world by a monolithic and ruthless conspiracy that relies primarily on covet means for expanding its sphere of influence – on infiltration instead of invasion – on subversion instead of elections – on intimidation instead of free choice.  It is a system that has conscripted vast human and material resources into the building of a tightly knit, highly efficient machine - that combines military, diplomatic, intelligence, economic, scientific and political operations. Its preparations are concealed, not published.  Its mistakes are buried, not headlined.  Its dissenters are silenced, not praised.  No expenditure is questioned, no secret is revealed.”  -JFK

 

“I am asking your help in the tremendous task of informing and alerting the American people.” –JFK referring to the worldwide conspiracy mentioned above

 

“Whoever controls the volume of money in our country is absolute master of all industry and commerce….and when you realize that the entire system is very easily controlled, one way or another, by a few powerful men at the top, you will not have to be told how periods of inflation and depression originate.”  -James A. Garfield

 

“The Government should create, issue and circulate all the currency and credits needed to satisfy the spending power of the Government and the buying power of consumers.  By the adoption of these principles, the taxpayers will be saved immense sums of interest.  The privilege of creating and issuing money is not only the supreme prerogative of government, but it is the government’s greatest creative opportunity.” -Abraham Lincoln

 

“We are grateful to the Washington Post, the New York Times, Time Magazine and other great publications whose directors have attended our meetings and respected the promises of discretion for almost forty years.  It would have been impossible for us to develop our plan for the world if we had been subject to the bright lights of publicity during those years.  But, the world is now more sophisticated and prepared to march towards a world government.  The supranational sovereignty of an intellectual elite and world bankers is surely preferable to the National auto-determination practiced in past centuries.” –David Rockefeller in an address to Trilateral Commission Meeting, 1991

 

"If the American people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will
grow up around them (around the banks), will deprive the people of their property
until their children will wake up homeless on the continent their fathers conquered." –Thomas Jefferson

 

"Capital must protect itself in every way... Debts must be collected and loans and mortgages foreclosed as soon as possible. When, through a process of law, the common people have lost their homes, they will be more tractable and more easily governed by the strong arm of the law applied by the central power of leading financiers. People without homes will not quarrel with their leaders. This is well known among our principle men now engaged in forming an imperialism of capitalism to govern the world. By dividing the people we can get them to expend their energies in fighting over questions of no importance to us except as teachers of the common herd." -J.P. Morgan

 

"We shall have World Government, whether or not we like it. The only question is whether World Government will be achieved by conquest or consent." –James Paul Warburg (Chairman of the Council on Foreign Relations, speaking before the U.S. Senate, 1950)

 

"The real truth of the matter is, as you and I know, that a financial element in the large centers has owned the government of the U.S. since the days of Andrew Jackson. History depicts Andrew Jackson as the last truly honorable and incorruptible American president." –Franklin D. Roosevelt

 

"[The task is to] covertly lower the standard of living, the whole social
structure, of America so that we can be merged with all other nations." –Rowan Gaither (President of the Ford Foundation, 1954)

 

“I am myself persuaded, on the basis of extensive study of the historical evidence, that... the severity of each of the contractions - 1920-21, 1929-33, and 1937-38 - is directly attributable to acts of commission and omission by the Reserve authorities and would not have occurred under earlier monetary and banking arrangements.'' –Milton Friedman (Nobel Prize-winning economist, economic advisor to President Ronald Reagan)

 

"Since I entered politics, I have chiefly had men's views confided to me privately. Some of the biggest men in the U.S., in the field of commerce and manufacturing, are afraid of somebody, are afraid of something. They know that there is a power somewhere so organized, so subtle, so watchful, so interlocked, so complete, so pervasive, that they had better not speak above their breath when they speak in condemnation of it." –Woodrow Wilson

 

"A great industrial nation is controlled by its system of credit. Our system of credit is privately concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men who, even if their action be honest and intended for the public interest, are necessarily concentrated upon the great undertakings in which their own money is involved and who necessarily, by very reason of their own limitations, chill and check and destroy genuine economic freedom."  -Woodrow Wilson

 

"We have restricted credit, we have restricted opportunity, we have controlled development, and we have come to be one of the worst ruled, one of the most completely controlled and dominated, governments in the civilized world--no longer a government by free opinion, no longer a government by conviction and the vote of the majority, but a government by the opinion and the duress of small groups of dominant men." –Woodrow Wilson

 

"This Act (the Federal Reserve Act, Dec. 23rd 1913) establishes the most gigantic trust on earth. When the President (Woodrow Wilson) signs the Bill, the invisible government of the Monetary Power will be legalized... The worst legislative crime of the ages is perpetrated by this banking and currency Bill." –Charles A. Lindbergh Sr. (Congressman and father of the famous aviator)

 

"The most wonderful thing of all is that the distinguished Lutheran and
Calvinist theologians who belong to our order really believe that they see in it (Illuminati) the true and genuine sense of Christian Religion. Oh mortal man, is there anything you cannot be made to believe?" - Adam Weishophf upon establishing his "Order of the Illuminati", on May 1, 1776

 

"It is ironical that the only nation which affirmatively expresses a dependence upon and belief in Almighty God in its birth certificate, should now be in mortal combat for its very existence with a godless conspiracy intent upon conquering the world, and reverting human society to the hazards and indignities of the Dark Ages." –Loyd Wright (Former President of the American Bar Association, 1961)

 

"From the days of Spartacus, Weishophf, Karl Marx, Trotski, Belacoon, Rosa Luxenburg, and Ema Goldman, this world conspiracy has been steadily growing. This conspiracy played a definite recognizable role in the tragedy of the French revolution. It has been the mainspring of every subversive movement during the 19th Century. And now at last this band of extraordinary personalities from the underworld of the great cities of Europe and America have gripped the Russian people by the hair of their head and have become the undisputed masters of that enormous empire." –Winston Churchill, 1920

 

"The real menace of our Republic is the invisible government which like a giant octopus sprawls its slimy legs over our cities, states and nation. At the head is a small group of banking houses generally referred to as 'international bankers.' This little coterie... run our government for their own selfish ends. It operates under cover of a self-created screen...[and] seizes...our executive officers... legislative bodies... schools... courts... newspapers and every agency created for the public protection." –John Hylan (Mayor of New York, 1918-1925)

 

"The sovereignty fetish is still so strong in the public mind, that there would appear to be little chance of winning popular assent to American membership in anything approaching a super-state organization. Much will depend on the kind of approach which is used in further popular education." (Council on Foreign Relations, 1944)

 

If you spend some time studying these international bankers who have instituted this debt based monetary system worldwide, you will find that at the top echelon of power there are approximately 300 names.  These are the same 300 families who own stock in the Federal Reserve of the United States and all of the other central banks the world over. These are the people who wield the world’s real power from the shadows and provide the wealth and power needed to infiltrate the world’s monetary and political systems.  These are the people the Lord describes in Revelation 13 – this ‘beast out of the earth’.   

 

If you continue to study how they have gained this power, you will be led back in time to the early 1690’s to the founding of the Bank of England – the world’s first central bank.  And if you continue to search for the truth, you will find that all roads on this journey eventually lead to one name – Rothschild.  The world will tell you that the Rothschild’s banking empire has been reduced to a ‘niche’ bank – catering mainly to very wealthy investors.  The truth is that they control approximately 70%-80% of the world’s wealth from the shadows.  If I had told you this at the beginning of this post, you would have probably rejected this statement outright.  Now you know how it’s possible – they print the world’s money and exchange it for the world’s real assets.  As I mentioned at the beginning, it’s really an ingenious plan – when you realize why it was created.  It’s evil, but ingenious.  The Rothschilds and every member of these ‘elite’ families would tell you that this plan was devised by them for their purposes – but we know the truth.  The Lord has told us Satan’s plans – they’re simply obeying the one they serve.

 

We now see how the world’s financial system has been overtaken by a few very powerful men.  If we take what we know and think about the ‘mark of the beast’, we realize that control of the world’s financial system isn’t enough to satisfy the prophecies about the ‘mark’.  Controlling the world’s financial system is one piece of the puzzle, but something else is needed – enforcement.  Everyone throughout the world will be ‘forced’ to accept the mark. These powerful men need a way in which to deceive us into believing that humanity needs protecting – and now we know why the Lord tells us in the book of Revelation about ‘miraculous signs’ used by this beast.  The beast creates these ‘signs’ to strike fear among us – fear that will eventually drive humanity to give over its freedom to the beast – and Satan.  We’ve seen many of these ‘signs’ already, but they are only the beginning.

 

When it comes to spiritual deception, you are beginning to see just how blind we really are in this world when we walk away from our Creator.  We focus on the things in the world – money, careers, cars, houses, addictions, stuff, etc. – and we forget about the subtle things that are missing from our lives.  Some of these things are big picture – How did we come into being?  Why are we here?  Does God really exist?  If He exists, why can’t I see Him?  Can I really know God - personally?  Where do I go when I die?  Am I really alone in this fallen world?  How can I get free of this mess?  Other questions are smaller picture, but would also lead us to the truth if we would just slow down for awhile and think about what we’re consistently told in this world and compare it to God’s truth – could someone really consolidate the world’s government, world’s religion and world’s financial system within 7 years?  If God has allowed His children to experience pain and suffering throughout human history in order to strengthen them in this world, why would He change now? Sometimes it’s a very simple question that leads us to some very important answers – how is our money created?  Think about how many times in your life – friends, parents, teachers, professors – someone has explained our monetary system to you.  Never?  You’re not alone – and there’s a reason it’s being hidden.  If I were to ask 1000 Americans today what is the greatest threat to our nation’s sovereignty – how many do you think would respond - ‘the war on terror’?  My guess is that 99% of us would agree that ‘the war on terror’ is our greatest threat.  Our spiritual enemy has created a perceived threat – while his true ‘beasts’ gain control of the world through deceptive means – subversion, infiltration and intimidation.  Again, an ingenious plan – and not of this world.  The only way to overcome it is to obey the One spiritual being that Satan cannot deceive, intimidate or overcome – our Father in heaven. 

 

The truth is that never before, in the history of the United States, have we faced a greater threat to our national sovereignty as we do now – never.  We are facing an enemy that is much more intelligent and powerful than you and I - an enemy that has not used brute force against us, but works in the shadows to deceive and infiltrate.  At times in the past I would think about the book of Revelation and wonder how the people of the world could ever allow themselves to be subjected to an evil world government.  I simply didn’t want to believe it was possible and I, like most people today, disregarded the Lord’s warnings about how this beast would deceive the whole world.  Now that I’ve humbled myself and know the truth, I listen to this beast talk to us everyday through corporate, governmental, banking and religious leaders – leaders of the United States.  It’s no longer a mystery.  Their plan has almost come to fruition.  At some point, you might think that all hope is lost – that they are too powerful and the plan is too far along.  How can we possible stop this?  I’m not fearful of these things because I know that God could see this coming since the creation of the world – and I don’t need to figure out what to do on my own.  I will simply continue to seek the Lord’s will for me – His plan, not mine.  What you are about to see throughout the world is that God is going to go on the offensive – and he’s going to do it with you and me.  Now is not the time for weak people with weak ministries to proclaim a weak message.  Now is the time to allow ourselves to be strengthened spiritually.  Now is the time to stand in the face of overwhelming odds – and succeed. 

 

At different times in your life you have probably felt that something wasn’t quite right.  You could ‘sense’ it, but you couldn’t ‘see’ it.  You couldn’t really explain it, but you knew that there was something not quite right about the world you live in.  The economy is up – the economy is down.  Life is good – life is not so good.  Chaos seems to rule the world.  It’s like we’re walking on very thin ice that is constantly cracking – about to give way.  You are now beginning to understand that there is a method to the madness.  When the world chose death over life, sin over righteousness – when we chose to believe lies instead of the Truth – this was the inevitable result.  What gets the true Christian through all of this is that this isn’t the end – it’s only the beginning – and we’re not alone.  The end is glorious for us – end of story.

 

You’ve seen me reference the movie ‘The Matrix’ and how many aspects of the movie are similar to the spiritual battle being waged in the world.  I’m going to end this post with some dialog from the movie because it certainly relates to most of us.  The following scene takes place right before Neo learns the truth about his world.

 

Morpheus: I imagine that right now, you're feeling a bit like Alice. Hmm? Tumbling  

down the rabbit hole?
Neo: You could say that.
Morpheus: I see it in your eyes. You have the look of a man who accepts what he sees because he is expecting to wake up. Ironically, that's not far from the truth. Do you believe in fate, Neo?
Neo: No.
Morpheus: Why not?
Neo: Because I don't like the idea that I'm not in control of my life.
Morpheus: I know *exactly* what you mean. Let me tell you why you're here. You're here because you know something. What you know you can't explain, but you feel it. You've felt it your entire life, that there's something wrong with the world. You don't know what it is, but it's there, like a splinter in your mind, driving you mad. It is this feeling that has brought you to me. Do you know what I'm talking about?
Neo: The Matrix.
Morpheus: Do you want to know what it is?
Neo: Yes.
Morpheus: The Matrix is everywhere. It is all around us. Even now, in this very room. You can see it when you look out your window or when you turn on your television. You can feel it when you go to work... when you go to church... when you pay your taxes. It is the world that has been pulled over your eyes to blind you from the truth.
Neo: What truth?
Morpheus: That you are a slave, Neo. Like everyone else you were born into bondage. Into a prison that you cannot taste or see or touch. A prison for your mind.

 

I finally found a video that does an excellent job of explaining our monetary system in simple terms.  I recommend that you watch it to get a better understanding of what I have discussed here.  The video was created by Paul Grignon and is only 47 minutes long.  It’s available on Google Video at:  http://video.google.com/videoplay?docid=-9050474362583451279&q=paul+grignon&ei=kmAsSL70C5CUrgL0r72aCg .  I have used a couple of Paul’s examples in this post.

 

http://johngilmore.org/

 

OCTOBER 15, 2008

 

While the World Is Listening, Brown Touts Global Oversight

By ALISTAIR MACDONALD

Wall St. Journal

 

LONDON -- As the British bank-bailout plan becomes a model for Europe and the U.S., U.K. Prime Minister Gordon Brown is using his new platform as financial statesman to push what he sees as the next step: a global system of financial supervision.

Getty Images

From left, U.K. Prime Minister Gordon Brown with Justice Secretary Jack Straw and Environment Secretary Hilary Benn in a cabinet meeting Tuesday at 10 Downing Street

Risk from financial markets has become global but the way to supervise financial institutions and their products hasn't, and needs to be, Mr. Brown says. "You can't deal with the problems of global financial markets within national systems of regulation," he said at a news briefing.

Among other measures, Mr. Brown wants to empower international bodies including the International Monetary Fund to monitor global markets and act as early-warning systems.

Mr. Brown first proposed the idea after the Asian financial crisis in 1998, when he was Treasury chief under Prime Minister Tony Blair, and returned to it after the start of the credit crisis last year.

Mr. Brown said Tuesday that progress has been slow.

Though he may now have the attention of other leaders, getting them to act is more difficult. Moreover, warnings from central banks ahead of the credit crunch that there was too much leverage in the system were ignored. And the IMF's current global financial stability reports get little traction.

But in the U.K., Mr. Brown's handling of the credit crisis is lifting his popularity from its historic lows. He has a lot of ground to cover: his Labour Party trailed the rival Conservative Party by a wide margin in opinion polls before this week.

Mr. Brown needs to call an election by 2010.

The U.K. leader's bailout approach -- injecting capital to bolster bank balance sheets as well as guaranteeing loans to unfreeze lending markets -- got its strongest endorsement Tuesday when the U.S. took similar steps.

Mr. Brown and his team looked for other options to help the country's banks after concluding that the massive amounts of liquidity that central banks had been pumping into the system weren't addressing the central problem that banks didn't trust each other so they weren't lending, Mr. Brown said.

"We defined the problem as the strengthening of our banks with more capital so they could deal with any bad assets," coupled with a need to guarantee some of their lending, he said. Taking stakes in banks also meant the government could dictate tough terms because taxpayers are footing the bill, he has said.

"I am very pleased that a large number of countries across the world, from Australia and New Zealand, to Sweden, to the euro area have moved towards the proposals that seem to me to be now the common ground for the way forward," he said.

While Mr. Brown calls for greater global supervision, the U.K.'s markets regulator, the Financial Services Authority, was criticized for failing to spot and react to the risks associated with some of the country's banks. Now, Mr. Brown's increased credibility and the fresh urgency of the global crisis may move it along.

"We need an effective global early-warning system for the world economy to alert us to the risks ahead. We need globally accepted and supervised standards of regulation applied equally in all countries. We need stronger arrangements for cross-border supervision of global firms," Mr. Brown said.

He talked with President George W. Bush on Tuesday about the crisis. Mr. Brown said he will push global regulation at the European Council meeting Wednesday, and he said he has talked to Chinese, Australian and other leaders this week about the idea.

An IMF spokesman didn't return calls seeking comment.

Write to Alistair MacDonald at alistair.macdonald@wsj.com

 

We’re now beginning to see all of these ‘unintended’ consequences of the recent bailouts.  Here’s a question you should be asking yourself – what if they’re not ‘unintended’?  What if the ‘problems’ (mentioned in the article below) developing daily are part of a plan?  Let’s summarize some of these unintended consequences.

 

1. Investors are selling Fannie and Freddie bonds and buying bonds issued by large U.S. banks since the banks are now backed by the U.S. government.  No one should be surprised that investors would take higher yields with implied government guarantees in this chaotic environment.  So – we see investors flocking to big bank bonds and out of the bonds that are not backed by the government.  No Surprise.  What long term effects will this have on Fannie and Freddie?  Will the government continue to back them and how will they back them?  What happens to the housing market if it doesn’t?
2. The U.S. government will be forced to issue new debt (Treasuries) to pay for these bailouts.  This will drive up interest rates – including mortgages.  What will happen to the crippled housing market when you throw in much higher interest rates?  Nothing good.  As the article below mentions – we’re already starting to see this.  Last week the 30 yr mortgage rate increased to 6.75% from 6.05%.
3. Last month the Federal Reserve moved to support short-term commercial paper since this market was frozen.  What happened? Investors are not dumb.  Not surprisingly, they invested in the commercial paper backed by the Fed and pulled away from short-term debt not backed by the Fed.  Who is getting hurt by this?  Corporations and European Banks.
4. The Fed’s efforts to unfreeze the short-term debt markets coupled with the FDIC’s efforts to stop bank withdrawals (increased insured amount to $250K from $100K) has led many money market fund managers to stay out of the short term debt markets – especially commercial paper.  They are worried that Americans and corporations will favor simple bank accounts over their funds.  Money market funds have historically contributed vast amounts of money to the commercial paper market – without them, the commercial paper market will remain largely frozen – where many companies and banks finance short-term obligations.  Soon after these efforts, you’ll notice the Fed began offering money directly to corporations (they have not done this since the Great Depression). 

 

So, if we again strip away all of the government/Federal Reserve rhetoric we see what is really happening.  On the surface, it appears that our leaders are doing whatever they can to help the situation.  If we take a close look at what is really happening, we see something else.  We see these ‘bailouts’ increasing the U.S. debt by enormous amounts, we see interest rates rising significantly and we see normal short-term funding drying up.  Do these efforts actually help or hurt the housing market?  Higher interest rates will certainly hurt the housing market.  Can the U.S. support trillions more debt?  As you’ve seen me explain before – the answer is no.  Sooner or later this is going to get very, very bad.  Is it good for corporations and banks to borrow directly from the Fed?  They are providing ‘solutions’ that are causing our government, corporations and banks to borrow even more from them.  Do we really need to be even more indebted to a cartel of international bankers?  As I’ve said before, we will not be able to get out of their grip until our monetary system changes. 

 

The truth is that central banks the world over are negatively impacting the world’s economy.  Their ‘solutions’ are simply accelerating the problems.  As I’ve said before, I believe that a plan is at work here – and it certainly doesn’t benefit us.

 

jg – October 16, 2008

 

October 16, 2008

 

Crisis Reverberates in Credit, Stock Markets

U.S. Efforts to Aid Debt Arena Cause Unintended Upshots

By LIZ RAPPAPORT and SERENA NG

Wall St. Journal

Government efforts to heal the credit markets are having unintended consequences that are roiling different sectors of the market and adding to anxiety among investors, who already are worried about the impact of a possible recession on U.S. companies.

Barely two days after the Treasury announced plans to buy stakes in U.S. banks and the Federal Deposit Insurance Corp. said it would provide guarantees on bank debt for three years, investors are making unexpected shifts.

Wednesday, bonds issued by mortgage providers Fannie Mae and Freddie Mac sold off sharply, even though these companies have government backing behind their debt. Traders said hedge funds were forced to sell as they deleverage, and investors were selling some Fannie and Freddie bonds -- known as agency debt -- and shifting money into bonds issued by large U.S. banks. These bank bonds boast higher yields and also would benefit from implied government guarantees, making them appear relatively safe in the eyes of risk-averse investors, for now.

The difference between yields on two-year Fannie Mae bonds and Treasury notes rose 0.25 percentage point Wednesday to 1.5 percentage points. That gap was less than a single percentage point when the government said in early September that it would place Fannie and Freddie under conservatorship.

The bonds issued by Citigroup Inc., Goldman Sachs Group Inc. and Bank of America Corp. gained over the last two days.

Investors have begun "to realize how potent the new FDIC-backed bank paper could be," said Jim Vogel, an analyst at FTN Financial, who recently noted that there is some debate over how explicit the government's guarantee of Fannie Mae- and Freddie Mac-backed debt is.

The agency debt's selloff is the latest unexpected market response to Federal Reserve and Treasury attempts over the past few weeks to plug the financial system's holes. The bailout plans may force the U.S. to issue new government debt that could drive up interest rates on mortgages, undermining efforts to rescue the housing market, the very problem that started it all.

Also, last month, the Fed moved to backstop short-term debt called asset-backed commercial paper, which led investors to pull away from the other half of the short-term debt market because it had no government guarantee. This debt was issued largely by corporations and European banks.

Not long after, the government's move to provide more insurance for bank deposits caused some money managers to change the way they allocate their funds.

"Things are moving so fast, it's hard for anyone to know what is going on," said Jim Goulding, manager at Chicago trading firm GH Traders LLC.

While Treasurys remain popular now, because of a flight-to-quality trend that feeds off their safety, another unintended impact may be in the wings. The bailout plans will result in massive new issuance of U.S. Treasurys, sold to pay for it all. This likely would dilute the Treasury bond market, drive down prices, push up yields and cause mortgage rates to rise.

A miniature version of this happened this week. The average 30-year mortgage rate, which is based off of the 10-year Treasury rate, rose to 6.75% Wednesday from 6.05% Oct. 6, as the 10-year Treasury yield rose, according to HSH Associates.

"You have unintended consequences that spark government actions, that create other unintended consequences," said David Kotok, chairman at money managers Cumberland Advisors.

The Fed's efforts to unlock the short-term markets also have had meddlesome effects. The FDIC may have stopped the flood of withdrawals from banks when it agreed to insure deposits in accounts up to $250,000, up from $100,000, but this has led many money-market fund managers to stay out of the short-term debt markets, particularly for commercial paper. They worry that cash-strapped Americans and corporate treasurers will favor simple bank accounts over their funds even though they pay slightly higher returns.

Money-market fund managers are traditionally large participants in the commercial-paper market, where companies and banks finance near-term obligations.

The managers remain uncomfortable investing in debt that matures in more than a day. They still are holding on to large cash positions in case they are hit with redemption requests from investors.

The government's plan isn't a "panacea for money markets," said Alex Roever, fixed-income strategist at J.P. Morgan Chase & Co.

In mid-September, when the Fed agreed to lend to U.S. banks with asset-backed commercial paper as collateral, the move was intended to unlock the market and help mutual funds sell the debt to banks in order to meet investor redemptions.

In the weeks following the Fed move, some commercial-paper brokers lamented that the Fed's implied backstop for the asset-backed commercial-paper market caused investors to favor the higher yielding asset-backed debt over unsecured commercial paper issued by many corporations and European banks.

The imbalance squeezed European banks already having trouble funding themselves, and the Fed ultimately had to step in again to offer short-term loans directly to companies and banks.

Write to Liz Rappaport at liz.rappaport@wsj.com and Serena Ng at serena.ng@wsj.com

OCTOBER 21, 2008

Volcker Makes a Comeback as Part of Obama Brain Trust

By MONICA LANGLEY

NEW YORK -- At 81 years old, former Federal Reserve chairman Paul Volcker is getting a second chance to shape his legacy with a presidential hopeful more than 30 years his junior.

Mr. Volcker has emerged as a top economic adviser to Sen. Barack Obama during a presidential campaign dominated by a global financial crisis. Their growing bond is paying dividends for each man.

Mr. Volcker delivers gravitas and credibility to Sen. Obama, people in the Obama camp say, as well as ideas and approaches to the economic crisis. "Volcker whispering in Obama's ear will make even Republicans comfortable, because he's a hero of the right and a supporter of a strong dollar," says John Tamny, a supply-side economist and Republican.

On Tuesday, Mr. Volcker is scheduled to appear on the campaign trail with Sen. Obama for the first time. At a round-table discussion with voters in Lake Worth, Fla., he'll "give his view on the state of the economy and the credit markets, and what needs to be done to fix them," says one campaign adviser. Longtime Fed watchers are amused that Mr. Volcker, known for his muttered statements during Fed meetings in the 1980s, will be in a political role on the stump.

For Mr. Volcker, a connection with Sen. Obama could help burnish his record as Fed chairman. The cigar-chomping central banker from 1979 to 1987, he received blame for driving up interest rates and tipping the U.S. into the deepest recession since the Great Depression. But Mr. Volcker is just as well known for taming the runaway inflation of that era. His stock has risen in recent months as his gruff warnings about the risks of deregulating the financial sector have come to look prescient. His successor's reputation, meanwhile, has come under a cloud. Alan Greenspan is under criticism that the low interest rates and deregulatory ideology of his tenure contributed to today's crisis.

With nearly every day presenting a fresh financial emergency, Sen. Obama has persuaded Mr. Volcker, who travels the globe for economic meetings and occasionally disappears on fly-fishing trips, to be at the ready; Mr. Volcker now keeps a cellphone on him at all times. And though he still doesn't own a computer (his assistant prints out emails for him), he's gotten used to Sen. Obama's rapid-fire messages sent from a BlackBerry device.

The Obama-Volcker relationship continues to evolve, campaign advisers say. At the start, Sen. Obama sought advice from Mr. Volcker and other outside voices through his economic adviser, Austan Goolsbee, a 39-year-old University of Chicago professor. But starting with the demise of Bear Stearns Cos. in March and continuing today, Sen. Obama speaks directly and often with Mr. Volcker about the intricacies of the financial crisis and possible solutions. They've become "collaborators," as one aide puts it.

For example, when the U.S. Treasury put forth a plan to set up a $700 billion rescue fund to buy up toxic assets, Sen. Obama quickly backed it on the advice of Mr. Volcker. Like other prominent economists, Mr. Volcker also advocated early on for the recapitalization of banks. On this advice, Sen. Obama proposed direct equity infusions in banks in his frequent conference calls with Treasury Secretary Henry Paulson. The idea, initially rejected by Mr. Paulson, was finally proposed last week by the administration, in an effort to get banks lending again to businesses and each other.

Sen. Obama's team of economic advisers includes two former Treasury secretaries, Robert Rubin and Lawrence Summers, and in some decisions, Mr. Volcker doesn't reign supreme. The candidate's latest proposal, for example, a $60 billion stimulus package, was initially fought by the former Fed chief on the grounds that Americans were already overspending. Moreover, he is unlikely to take a long-term role in any Obama administration.

Paul Volcker, delivering a lecture last week in Singapore, where he warned that the U.S. and Europe are facing recession from the financial crisis.

But for now, and going into the campaign's final weeks, aides say Sen. Obama is increasingly relying on Mr. Volcker. His staff now routinely reviews policy proposals and speeches with Mr. Volcker. Conference calls and face-to-face meetings of the Obama economic team are often reorganized to accommodate his schedule. When the team discusses the financial crisis, "The most important question to Obama: What does Paul Volcker think?" says Jason Furman, the campaign's economic-policy director.

The two men have developed an ease with each other, say aides, even as their styles appear to differ: Sen. Obama, who tends to use the Socratic method from his law-school training, examines all points of view and debates them. With a more formal and direct demeanor, Mr. Volcker likes to go straight to solutions.

In last week's final presidential debate, after Republican John McCain raised questions about his rival's ties, Sen. Obama said, "Let me tell you who I associate with. On economic policy, I associate with Warren Buffett and former Fed Chairman Paul Volcker...who have shaped my ideas and who will be surrounding me in the White House."

Some Democrats have speculated that, if elected, Sen. Obama could name Mr. Volcker to a post, possibly even as Treasury secretary, for a limited time. Banking and Wall Street executives are pushing the two campaigns to name a new secretary shortly after the election to reassure markets during the transition. The Obama campaign wouldn't comment on possible appointments.

"I just want to be helpful, because I believe Sen. Obama -- in his person, in his ideas and in his ability to understand and articulate both our needs and our hopes -- brings the strong and fresh leadership we need," Mr. Volcker said in an interview in New York. Mr. Volcker wouldn't provide details of his policy suggestions or his personal relationship with Sen. Obama.

After leaving the Fed 20 years ago, Mr. Volcker stopped smoking cigars, became a professor at Princeton University and spent more time fly-fishing. His corner office overlooking Fifth Avenue is filled with photographs and statues of fish, as well as a pillow inscribed: "Work is for people who don't know how to fish."

Following a stint as chairman of a boutique investment-banking firm, Mr. Volcker largely steered clear of joining any Wall Street companies. He set up his own office in Rockefeller Center, where he consults for companies and governments. He has served on a few corporate boards, such as UAL Corp., Prudential Insurance Co. of America and Nestlé SA. He also participated on commissions including the United Nations committee to investigate corruption in its oil-for-food program, and an inquiry launched by Swiss banks to determine which accounts belonged to Holocaust victims.

The bond between Messrs. Obama and Volcker started with a dinner invitation. In June 2007, Mark Gallogly, co-founder of Centerbridge Partners, a New York private-investment firm, and an early supporter of Sen. Obama, invited a dozen financial executives to meet the senator, including Goldman Sachs Group Inc. President Gary Cohn, Merrill Lynch & Co. President Greg Fleming and Mr. Volcker.

Along with the invitation, Mr. Volcker received from Mr. Gallogly a "briefing package" containing some speeches by Sen. Obama and news articles about him. Mr. Volcker also read the two books written by the senator.

In the private dining room at a Capitol Hill restaurant, Mr. Gallogly seated Mr. Volcker directly across from Sen. Obama, who at the time was considered a long shot to win the Democratic nomination over Sen. Hillary Clinton. Returning late that night on a flight to New York, Mr. Volcker told the group he was "genuinely impressed" with the Illinois senator.

That message was eventually passed along to Sen. Obama's advisers in New York, Michael Froman, a friend from Harvard Law School and a Citigroup Inc. executive, and Jenny Yeager, a fund-raiser. Ms. Yeager told Obama headquarters in Chicago that Mr. Volcker seemed "interested" in the candidate, but in two months no one had followed up with the ex-central banker for fund raising or anything else.

When Sen. Obama's economics adviser, Mr. Goolsbee, heard about Mr. Volcker's interest, he immediately got excited. "Paul Volcker is a legend! We don't want to use his contacts for money, we want to pick his brain," he recalls saying to a campaign operative.

Starting in late summer 2007, Mr. Goolsbee had regular discussions with Mr. Volcker. He incorporated Mr. Volcker's ideas, including his early concern that the housing downturn would snowball into a larger financial crisis, into Sen. Obama's policy positions. In a September 2007 speech at Nasdaq, Sen. Obama predicted that because of oversight lapses and abusive practices that cause the public to doubt financial results, "the markets will be ravaged by a crisis in confidence."

In early January 2008, when Sen. Clinton was pounding her rival over his lack of experience and stature, Sen. Obama phoned Mr. Volcker to ask for his endorsement. (At that time, billionaire investor Warren Buffett had refused to take sides between the Democratic contenders, saying he would support whoever got the nomination.) Mr. Volcker, a long-time Democrat who had mostly stayed out of partisan politics, agreed, and wrote out his statement in longhand.

The presidential candidate's first big economic address took place in March at Cooper Union in New York. Mr. Volcker's fingerprints were evident in the speech. The onetime central banker had long been vigilant about strong regulatory oversight; as Fed chairman he rejected big banks' attempts to repeal Depression-era laws to engage in more risky practices like investment banking. New financial institutions and instruments have since led to the repeal or relaxation of those laws, and Mr. Volcker told Sen. Obama that the U.S. regulatory structure must be strengthened and updated for the 21st century.

With Mr. Volcker sitting in the front row, Sen. Obama told the audience at Cooper Union that the current financial-regulatory framework must be "revamped." He faulted deregulation for the growing economic crisis. "Our free market was never meant to be a free license to take whatever you can get, however you can get it."

Once Sen. Obama became the expected Democratic nominee in June, and the economy became the central campaign issue, his chats with Mr. Volcker picked up. Mr. Goolsbee would get emails from Sen. Obama's traveling aide Reggie Love or his senior strategist David Axelrod with the message: "BO wants to call Volcker. What's his number again?"

In the past two months, financial crises have come one after another, picking up speed with the federal government's July effort to bolster big mortgage insurers Fannie Mae and Freddie Mac. As the contagion from the subprime mortgages and risky mortgage credit swaps threatened to topple other institutions, Sen. Obama asked for "emergency meetings" with his economic team, about a dozen advisers including Mr. Volcker and Mr. Buffett.

At the first group meeting in Washington in late July, Sen. Obama said he wanted to hear from each adviser on the worsening economic downturn and asked Mr. Volcker to go first. "The very health of the credit markets is at stake," Mr. Volcker said, according to one attendee. He urged strong action to restore confidence, particularly in the U.S. banking system.

When Sen. Obama raised the prospect of a package of spending and tax measures to "stimulate" the economy, Mr. Volcker disapproved. "Americans are spending beyond their means," he told the group. A stimulus package would delay the belt-tightening and savings needed, he added, proposing instead better regulation and assistance to banks.

Laura Tyson, economics adviser for President Bill Clinton and a professor at University of California, Berkeley, disagreed. "Americans can't help but spend beyond their means because they've had no income growth while their costs on gas and food have skyrocketed." She suggested spending money to rebuild infrastructure and create jobs. Even as some others agreed with Ms. Tyson, Mr. Volcker didn't budge. Sen. Obama delayed putting out a new stimulus package, but stressed that he wanted to find the "right balance" of possible assistance.

When the bailout bill became a political football and the markets seized up, Sen. Obama called the second in-person meeting of his financial team on Sept. 26 in Miami. Mr. Volcker initially said he would have to call in because he was leaving for Europe that day. Sen. Obama, according to campaign aides, called him with a personal plea.

The next morning, the senator seated Mr. Volcker beside him, an arrangement that was photographed by the media entourage covering the campaign. Mr. Volcker told the group he had changed his mind about an economic-stimulus package due to the global recession, but he couldn't stay to hear the discussion about the approach because he had to catch a plane to Europe.

In the past two weeks, with the stock market's drastic volatility and weak economic indicators, Sen. Obama presented his $60 billion package, which contains tax cuts and spending to provide public-works jobs to struggling Americans.

On Monday, Fed Chairman Ben Bernanke endorsed the idea of another stimulus package, giving a boost to Democratic lawmakers who are considering one. But congressional Republicans have so far shown little interest in a second spending bill.

February 10, 2009

 

Here’s another article that relates to the article above.  This is an article from the Loose Change website.  I encourage you to research these things on your own. 

 

jg

 

Obama’s Trilateral Commission Connections, Council on Foreign Relations Sellouts and Wartime Military/National Guard Draft Re-Instatement Issues that the Republicans Don’t Even Talk About

 

By Patrick Wood, Editor
The August Review, Global elite research center

January 30, 2009

[Ed. note: For clarity, members of the Trilateral Commission appear in bold type.]

As previously noted in Pawns of the Global Elite, Barack Obama was groomed for the presidency by key members of the Trilateral Commission. Most notably, it was Zbigniew Brzezinski, co-founder of the Trilateral Commission with David Rockefeller in 1973, who was Obama’s principal foreign policy adviser.

The pre-election attention is reminiscent of Brzezinski’s tutoring of Jimmy Carter prior to Carter’s landslide election in 1976.

For anyone who doubts the Commission’s continuing influence on Obama, consider that he has already appointed no less than eleven members of the Commission to top-level and key positions in his Administration.

According to official Trilateral Commission membership lists, there are only 87 members from the United States (the other 337 members are from other regions). Thus, in less than two weeks since his inauguration, Obama’s appointments encompass more than 12% of Commission’s entire U.S. membership.

Is this a mere coincidence or is it a continuation of dominance over the Executive Branch since 1976? (For important background, read The Trilateral Commission: Usurping Sovereignty.)

• Secretary of Treasury, Tim Geithner
• Ambassador to the United Nations, Susan Rice
• National Security Advisor, Gen. James L. Jones
• Deputy National Security Advisor, Thomas Donilon
• Chairman, Economic Recovery Committee, Paul Volker
• Director of National Intelligence, Admiral Dennis C. Blair
• Assistant Secretary of State, Asia & Pacific,  Kurt M. Campbell
• Deputy Secretary of State, James Steinberg
• State Department, Special Envoy, Richard Haass
• State Department, Special Envoy, Dennis Ross
• State Department, Special Envoy, Richard Holbrooke

There are many other incidental links to the Trilateral Commission, for instance,

Secretary of State Hillary Clinton is married to Commission member William Jefferson Clinton.

Geithner’s informal group of advisors include E. Gerald Corrigan, Paul Volker, Alan Greenspan and Peter G. Peterson, among others. His first job after college was with Henry Kissinger at Kissinger Associates.

Brent Scowcroft has been an unofficial advisor to Obama and was mentor to Defense Secretary Robert Gates.

Robert Zoelick is currently president of the World Bank.  The World Bank Group is comprised of five agencies that make loans or guarantee credit to 177 member countries. Its stated aim is to help countries reduce poverty by making long-term loans to governments for large-scale projects such as dams or pipelines, or to back economic reform programs. However, World Bank loans have often had very negative effects on countries putting them in situations of precarious debt and setting conditions on which countries can receive loans, conditions which often have a devastating impact on the lives of citizens
Laurence Summers, White House Economic Advisor, was mentored by former Treasury Secretary Robert Rubin during the Clinton administration.

There are many other such links, but these are enough for you to get the idea of what’s going on here.

Analyze the positions

Notice that five of the Trilateral appointees involve the State Department, where foreign policy is created and implemented. Hillary Clinton is certainly in line with these policies because her husband, Bill Clinton, is also a member.
What is more important than economic recovery? Paul Volker is the answer.
What is more important than national intelligence? Gen. James Jones, Thomas Donilon and Adm. Dennis Blair hold the top three positions.

What is more important than the Treasury and the saving of our financial system? Timothy Geithner says he has the answers.

The State Department is virtually dominated by Trilaterals: Kurt Campbell, James Steinberg, Richard Haass, Dennis Ross and Richard Holbrooke.

This leaves Susan Rice, Ambassador to the United Nations. The U.N. is the chosen instrument for ultimate global governance. Rice will help to subvert the U.S. into the U.N. umbrella of vassal states.

Conflict of interest

Since 1973, the Commission has met regularly in plenary sessions to discuss policy position papers developed by its members. Policies are debated in order to achieve consensuses. Respective members return to their own countries to implement policies consistent with those consensuses.

The original stated purpose of the Trilateral Commission was to create a “New International Economic Order.” Its current statement has morphed into fostering a “closer cooperation among these core democratic industrialized areas of the world with shared leadership responsibilities in the wider international system.” (See The Trilateral Commission web site)

U.S. Trilateral members implement policies determined by a majority of non-Americans that most often work against the best interests of the country.

“How,” you say?

Since the administration of Jimmy Carter, Trilaterals held these massively influential positions:

• Six out of eight World Bank presidents, including the current appointee, Robert Zoelick
• Eight out of ten U.S. Trade Representatives
• President and/or Vice-President of every elected administration (except for Obama/Biden)
• Seven out of twelve Secretaries of State
• Nine out of twelve Secretaries of Defense

Is this sinking in? Are you grasping the enormity of it?

Endgame is at hand

For the Trilateral crowd, the game is about over. The recent reemergence of original members Henry Kissinger, Zbigniew Brzezinski, Brent Scowcroft and Paul Volker serves to reinforce the conclusion that the New International Economic Order is near.

The Trilateral Commission and its members have engineered the global economic, trade and financial system that is currently in a state of total chaos.

Does that mean that they have lost? Hardly.

In the article Chorus call for New World Order, they are using the crisis to destroy what remains of national Sovereignty, so that a New World Order can finally and permanently be put into place.  Sovereignty is the principle that the state exercises absolute power over its territory, system of government, and population.  Accordingly, the internal authority of the state supersedes that of all other bodies.

Conclusion on Obama’s Trilateral Commission Connections

The Obama presidency is a disingenuous fraud. He was elected by promising to bring change, yet from the start change was never envisioned. He was carefully groomed and financed by the Trilateral Commission and their friends.
In short, Obama is merely the continuation of disastrous, non-American policies that have brought economic ruin upon us and the rest of the world. The Obama experience rivals that of Jimmy Carter, whose campaign slogan was “I will never lie to you.”

When the Democrat base finally realizes that it has been conned again (Bill Clinton and Al Gore were members), perhaps it will unleash a real political revolution that will oust Trilateral politicians, operatives and policies from the shores of our country.

If the reader is a Democrat, be aware that many Republicans and conservatives are still licking their wounds after finally realizing that George Bush and Dick Cheney worked the same con on them for a disastrous eight years of the same policies!

A who’s who guide to the people poised to shape Obama’s foreign policy.

U.S. policy is not about one individual, and no matter how much faith people place in President-elect Barack Obama, the policies he enacts will be fruit of a tree with many roots. Among them: his personal politics and views, the disastrous realities his administration will inherit, and, of course, unpredictable future crises. But the best immediate indicator of what an Obama administration might look like can be found in the people he surrounds himself with and who he appoints to his Cabinet. And, frankly, when it comes to foreign policy, it is not looking good.

Obama has a momentous opportunity to do what he repeatedly promised over the course of his campaign: bring actual change. But the more we learn about who Obama is considering for top positions in his administration, the more his inner circle resembles a staff reunion of President Bill Clinton’s White House. Although Obama brought some progressives on board early in his campaign, his foreign policy team is now dominated by the hawkish, old-guard Democrats of the 1990s. This has been particularly true since Hillary Clinton conceded defeat in the Democratic primary, freeing many of her top advisers to join Obama’s team.

“What happened to all this talk about change?” a member of the Clinton foreign policy team recently asked the Washington Post. “This isn’t lightly flavored with Clintons. This is all Clintons, all the time.”

Amid the euphoria over Obama’s election and the end of the Bush era, it is critical to recall what 1990s U.S. foreign policy actually looked like. Bill Clinton’s  boiled down to a one-two punch from the hidden hand of the free market, backed up by the iron fist of U.S. militarism. Clinton took office and almost immediately bombed Iraq (ostensibly in retaliation for an alleged plot by Saddam Hussein to assassinate former President George H.W. Bush). He presided over a ruthless regime of economic sanctions that killed hundreds of thousands of Iraqis, and under the guise of the so-called No-Fly Zones in northern and southern Iraq, authorized the longest sustained U.S. bombing campaign since Vietnam.

Under Clinton, Yugoslavia was bombed and dismantled as part of what Noam Chomsky described as the “New Military Humanism.” Sudan and Afghanistan were attacked, Haiti was destabilized and “free trade” deals like the North America Free Trade Agreement and the General Agreement on Tariffs and Trade radically escalated the spread of corporate-dominated globalization that hurt U.S. workers and devastated developing countries. Clinton accelerated the militarization of the so-called War on Drugs in Central and Latin America and supported privatization of U.S. military operations, giving lucrative contracts to Halliburton and other war contractors. Meanwhile, U.S. weapons sales to countries like Turkey and Indonesia aided genocidal campaigns against the Kurds and the East Timorese.

The prospect of Obama’s foreign policy being, at least in part, an extension of the Clinton Doctrine is real. Even more disturbing, several of the individuals at the center of Obama’s transition and emerging foreign policy teams were top players in creating and implementing foreign policies that would pave the way for projects eventually carried out under the Bush/Cheney administration. With their assistance, Obama has already charted out several hawkish stances. Among them:

– His plan to escalate the war in Afghanistan;

– An Iraq plan that could turn into a downsized and rebranded occupation that keeps U.S. forces in Iraq for the foreseeable future;

– His labeling of Iran’s Revolutionary Guard as a “terrorist organization;”

– His pledge to use unilateral force inside of Pakistan to defend U.S. interests;

– His position, presented before the American Israel Public Affairs Committee (AIPAC), that Jerusalem “must remain undivided” — a remark that infuriated Palestinian officials and which he later attempted to reframe;

– His plan to continue the War on Drugs, a backdoor U.S. counterinsurgency campaign in Central and Latin America;

– His refusal to “rule out” using Blackwater and other armed private forces in U.S. war zones, despite previously introducing legislation to regulate these companies and bring them under U.S. law.

Obama did not arrive at these positions in a vacuum. They were carefully crafted in consultation with his foreign policy team. While the verdict is still out on a few people, many members of his inner foreign policy circle — including some who have received or are bound to receive Cabinet posts — supported the invasion and occupation of Iraq. Some promoted the myth that Saddam had weapons of mass destruction. A few have worked with the neoconservative Project for the New American Century, whose radical agenda was adopted by the Bush/Cheney administration. And most have proven track records of supporting or implementing militaristic, offensive U.S. foreign policy. “After a masterful campaign, Barack Obama seems headed toward some fateful mistakes as he assembles his administration by heeding the advice of Washington’s Democratic insider community, a collective group that represents little ‘change you can believe in,’” notes veteran journalist Robert Parry, the former Associated Press and Newsweek reporter who broke many of the stories in the Iran-Contra scandal in the 1980s.

 

October 24, 2008

 

There is so much bad news right now it’s impossible to keep track of it all.  If you are still debating whether this is a crisis and whether the stock market can go any lower – I assure you – it is a crisis and world markets will go lower.  We haven’t yet seen the stampede – but there are many, many people around the world who are inching closer to the door.  The same problems exist throughout the world. We are watching a slow motion train wreck – that is rapidly picking up speed.

 

The following excerpts were taken from Articles in the Wall St. Journal over the past 2 days:

 

“A new wave of fear seized investors and trading floors around the world Friday, resulting in an across-the-board drop in stocks.  The Dow Jones Industrial Average was recently down 352.26 points, or 4.1%, at 8338.89, hurt by declines in all 30 of its blue-chip components. The S&P 500 tumbled 4% to 871.64. All its sectors traded lower, led by energy, off 6.3%, and technology, off 7%. Health care, a traditional investor haven, saw more modest losses and was down 2.1%.  The selling was prompted in part by signs that economies around the world are beginning to crack.”

“Disappointing corporate earnings and intensifying recession worries slammed Asian stock markets Friday, leading to drops of 10.6% in South Korea and 9.6% in Japan and capping a tough week for the region's investors.  Asian markets slumped across the board, with Mumbai down 9.4% intraday and Hong Kong ending 8.3% lower. Singapore was down 8.7% near the end of the trading day.”

“European shares tumbled Friday as fears of a long and deep recession grew, with the auto sector slumping after profit warnings from Renault and Peugeot-Citroen as well as weak results from Swedish truck maker Volvo.  The pan-European Dow Jones Stoxx 600 Index dropped below 200 for the first time since mid-2003, falling 8.4% to 191.21. Among regional markets, the U.K. FTSE 100 Index dove 8.4% to 3746 and the German DAX Xetra Index dropped 9.1% to 4109.48. The French CAC 40 index was down 8.8% at 3021.26.”

“Tempting as it is to ascribe the heavy sell-off in blue-chip European stocks Friday to fear and panic, there is one good fundamental reason why the stock market rout continues. Recent robust revenue growth for Europe's biggest companies has come largely from emerging markets, after years of heavy investment in new capacity and purchases of local rivals.  Macroeconomic data tell the story of corporate Europe's emerging-market push. EU exports to China, India and Southeast Asia rose 56% to 228 billion euros between 2000 and 2007, with China and India accounting for 44% of that total.  But now emerging-market bets are off. The credit crunch has caught up with developing economies with big current deficits and open financial markets with sickening speed. It's created a widespread crisis, from Argentina and Hungary to the Persian Gulf and South Korea. Suddenly, the engine of double-digit topline growth for many European companies seems to be about to stall.  That's why investors Friday wiped out nearly a fifth of the value of banks such as HSBC, Barclays, Societe Generale and UniCredit, all of whose emerging-market business has helped them do relatively well through the credit crunch. That business now looks like an extra liability.”

“Russia's currency fell to a new two-year low despite billions being spent by Moscow to prop it up, and the country's fast-shrinking mountains of reserves and oil revenues threatened to reduce its credit rating, a key marker of its recent resurgence. The new wave of problems -- coming on top of a stock market fall of 70% from its May peak -- highlights how quickly the global financial crisis has reversed Russia's fortunes. Worried about the turmoil, Russians have hurriedly taken to converting their ruble savings into dollars and euros, driving street exchange rates even lower than the official one.”

“Underscoring the growing impact of the global financial crisis on Latin America, central banks in Mexico and Brazil deployed billions of dollars of reserves on Thursday to stem steep currency declines that are testing the region's hard-won economic stability.  The simultaneous moves provided a snapshot of a region caught off-guard by the swiftness and depth of currency plunges prompted by the U.S. financial crisis. Now, policy makers are scrambling to reduce the potential for economic wreckage, seeking to reduce volatility as their currencies lurch toward new postcrisis levels. "These are exceptional times, and they call for exceptional measures," says Paulo Leme, a senior Goldman Sachs economist who follows Latin America.”

“South Korea's stock market and currency took another beating Friday amid mounting global fears at the toll that recession will take even in countries like this one, which is unlikely to tumble into negative growth. The benchmark Kospi Index fell 10.6% to below 938.75, its lowest level since July 2005. The close also marked the Kospi's first dip below 1,000 since then and its worst week on record, in which it finished down 20.5% for the week and is off 35.2% so far this month.  Meanwhile, the South Korean won plunged to 1,424 per U.S. dollar, its lowest level since June 1998 and down 33.8% against the dollar this year. And the Bank of Korea reported that South Korea's third-quarter gross domestic product expanded at a seasonally adjusted 0.6%, the weakest level in four years.”

“On Wednesday, it was Hungary's turn to take desperate measures. As the financial shock that began in the U.S. reached deeper into emerging markets, Hungary's central bank took the dramatic step of raising interest rates by a steep three percentage points in order to prevent a run on its currency.  Its move came as Belarus and Pakistan said Wednesday they are seeking large infusions of aid from the International Monetary Fund, while Ukraine suggested it is close to getting one. The Brazilian and Argentine stock markets each fell about 10% Wednesday, outpacing a steep drop in U.S. stocks. The growing rout in emerging markets is dashing hopes that developing nations would prop up world economic growth at a time when the U.S. and Western Europe are experiencing the worst financial instability in decades. Instead, many emerging markets are the world economy's new problem children.”

“German banks have bled billions of euros in the U.S. subprime-mortgage debacle. Now they face another potentially big bill from a costly misadventure in Iceland. The Icelandic bet is the latest illustration of how German banks -- including once-sleepy regional lenders -- ranged far and wide in recent years in search of yield to escape stiff competition and low profit margins on their home soil. By June of this year, before Iceland's spectacular financial meltdown, German financial institutions had lent $21.3 billion to Icelandic borrowers, according to the Bank for International Settlements. That was well over a quarter of all foreign lending in Iceland, and roughly five times as much as Britain, the next-largest creditor country. Iceland's three largest banks -- and the country's main debtors -- collapsed this month, plunging the country into crisis. Kaupthing Bank, Iceland's biggest, missed a coupon payment this week on 50 billion yen ($512 million) of bonds in Japan, heightening default concerns.”

“The Icelandic government is likely to ask the International Monetary Fund for financial help over the weekend, as the country's foreign-exchange market remains dysfunctional and questions mount over Iceland's near-term debt obligations, a key government official told Dow Jones Newswires Friday. Financial markets worry about the government's ability to meet debt obligations as Iceland drastically shakes up its financial system. The Icelandic Financial Supervisory Authority, or FME, confirmed that the principal of a $750 million corporate bond from nationalized Glitnir Banki Hf. that matured Wednesday went completely unpaid. FME spokeswoman Kate Hill said the FME, the government and advisers are in the process of sorting out Icelandic bank assets and liabilities.”

“China's government is racing to make sure one of the world's biggest housing booms doesn't turn into a bust. How the swoon in housing plays out in coming months may largely determine how severe the nation's economic slowdown during the global financial crisis will be -- and how acute the world-wide repercussions of the slump will be, as China's demand for construction materials declines. While housing bubbles around the world have burst, China's market has been seen as different because its surge in home building has been driven less by financial leverage than by real demand from a rapidly urbanizing population. Anywhere from 15 million to 20 million people move to Chinese cities each year. But sales of new housing in China have plummeted in recent months as buyers have been spooked by a deteriorating economy and weakening prices.”

“The U.K. economy slumped in the third quarter amid the global financial crisis, becoming the latest developed nation to experience an economic contraction.  The Office for National Statistics said Friday that the economy contracted a far-bigger-than-expected 0.5% in the third quarter, compared with zero growth in the second quarter. It is the first time the economy has contracted since the second quarter of 1992 and the biggest drop since the fourth quarter of 1990.”

“Transportation companies are reporting sharply lower freight volumes, a sign that the pipelines of global commerce have begun to slow.  Goods shipped by truck, train and ship have all fallen off in volume, and freight companies are now forecasting a slump as the credit crisis slows manufacturing and puts the brakes on consumer spending. Shipping companies are considered a barometer of economic health, which makes the current downturn particularly worrisome.”

“At the same time, the median U.S. home price was $191,600 in September, down 9.0% from $210,500 one year ago. That $191,600 median price is the lowest since April 2004. The median price in August this year was $203,100.”

“Employers grappling with the financial crisis and a slowing economy are accelerating and broadening job cuts in multiple industries, potentially deepening the economic downturn.  Xerox Corp., General Motors Corp. and bottler Coca-Cola Enterprises Inc. disclosed new job cuts Thursday, following layoff announcements earlier in the week by Chrysler LLC, Merck & Co. and Yahoo Inc., among others. The economic slowdown, previously concentrated among housing- and finance-related employers, is spreading to once-sheltered sectors like health care and technology.”

“Chrysler LLC told employees Friday it will cut 25% of its white-collar jobs next month.  In a letter to employees, Chief Executive Robert Nardelli said the cuts are necessary because of the deep downturn in the economy and the tightening credit situation, which are choking off auto sales.  Mr. Nardelli said the company is facing the "most difficult economic period any of us can remember."

“Despite the darkening outlook for the U.S. economy, few banks have taken extra precautions to protect against sharply higher bad-loan losses…. Additions to loan-loss reserves are an expense on the income statement. As a result, moves to beef them up could crush banks' earnings power.”

“Denmark's central bank Friday raised its key policy rate for the second time this month to prop up the country's struggling currency as the global financial crisis continues to wreak havoc. Danmarks Nationalbank said it increased its key lending rate and the interest rate for certificates and deposits to 5.5% from 5% "as a result of continued intervention to support the Danish krone."

“In a matter of weeks, the tempest in global markets has undone years of hard-won gains by emerging economies. Over the past month, borrowing costs for governments in emerging markets have ballooned to levels that haven't been seen in six years, and they continued to rise Thursday. Investors are especially frightened of countries with financing needs and weakening economic fundamentals that could tip into a deeper crisis, like some in Eastern Europe. But even countries with comparatively solid balance sheets are seeing their outlook darken as access to credit tightens and global economic growth slows sharply.”

“European central bankers signaled interest rates are likely to head lower as the financial crisis nudges Western Europe closer to recession.”

“Eager to rein in a dramatic slide in oil prices, OPEC decided Friday to make a deep cut in oil production, taking 1.5 million barrels a day off global markets as it embarks on the challenging task of managing prices amid a potential global recession.”

“Driven by once insatiable demand from China and other developing countries, service center owners and metal dealers built vast stockpiles of scrap steel, aluminum, copper and nickel, expecting prices to continue rising.  But in the last six weeks, scrap steel prices have fallen nearly 60% to about $400 a ton. Prices for aluminum scrap has dropped 33%, copper 25% and nickel about 15%. Peter Marcus, metals analyst for World Steel Dynamics, says, "We aren't near the bottom yet."

“Liz Claiborne Inc. slashed its 2008 earnings view and said it is curtailing capital spending amid slumping sales. The apparel retailer also said it will post a third-quarter loss due to restructuring charges.  Liz Claiborne, like other retailers, is struggling as consumers cut back on discretionary spending due to the weakening economy. The company warned that it may cut its outlook further if the deterioration in demand continues.”

“Samsung Electronics Co. said its third-quarter net profit fell 44% as its major divisions recorded smaller operating profits simultaneously for the first time since mid-2005.  Samsung's semiconductor business, for years its biggest profit contributor, experienced the sharpest decline and was barely profitable because of a prolonged cycle of tight pricing for memory chips used in computers and other gadgets. Profits in its cellphone and flat-panel-display units also tightened. Samsung expects the fourth quarter, usually the best for electronics makers, to be "an even more challenging period," said Chu Woo-sik, the company's investor-relations chief. He cited rising component costs and the effect that the global economic slowdown would have on consumer purchases of electronics.”

“Microsoft Corp. reported a 2% increase in fiscal first-quarter net income on a 9% rise in revenue, and lowered its financial forecasts for the rest of the year because of the gloomy economy.”

“Citing the global economic turmoil and a strengthening yen, Sony Corp. sharply lowered its outlook for its fiscal year ending March 2009, a blow to the company whose nascent recovery was already looking fragile. The Tokyo-based electronics giant warned that the deteriorating business climate could force the company to scale back capital spending, close plants and cut jobs to shore up profit.”

“Amazon.com Inc. reported a 48% increase in profit and a 31% revenue jump for the third quarter, but issued a cautious projection ahead of the key holiday season.  The revised sales outlook comes just three months after the Seattle-based Internet retailer had raised its revenue forecast for the year, showing how quickly the consumer spending environment has declined. Amazon shares fell more than 13% after hours on the news.”

“Gannett Co.'s third-quarter net income slid 32% as the media company grappled with slumping advertising sales and higher newsprint prices. Gannett, which publishes 85 daily newspapers and operates 23 television stations, posted net income of $158 million, or 69 cents a share, down from $234 million, or $1.01 a share, a year earlier.”

“Credit Suisse Group, one of the few banks to skirt massive credit losses, said in-house bets contributed to a third-quarter loss, signaling the challenges banks face in navigating volatile markets. The bank said 2.43 billion Swiss francs ($2.09 billion) in write-downs on mortgage securities and unsold buyout loans, as well as a 1.7 billion franc trading loss, left it with a 1.3 billion franc net loss for the quarter. The results sting CEO Brady Dougan, who has been steering pretty successfully through the credit crunch. Mr. Dougan called the results "clearly disappointing."

“The shift is being echoed across Silicon Valley, where executives at startups—which form the foundation of the tech economy—are now deferring expansion projects, taking voluntary pay cuts, delaying hiring plans and slashing expenses. The shift is a turnabout for the region's young companies, which have traditionally focused on go-go growth by grabbing customers early and being first to market with new technologies.  The change is being spurred by the souring economy and market gyrations, which have hit startups' main source of funding: venture capital.”

“College seniors may have more trouble landing a job next spring than recent graduates, as employers trim their hiring outlooks in response to the slowing economy and financial-sector turmoil. Employers plan to hire just 1.3% more graduates in 2009 than they hired this year, according to a survey by the National Association of Colleges and Employers. That's the weakest outlook in six years and reflects a sharp recent downturn. Just two months ago, a survey by the same group projected a 6.1% increase in hiring.”

jg

As I mentioned in a post a few weeks ago – we are going to see more and more articles like this that tell us the world needs to make a global change to the current financial system – that is failing.  I expect that out of these ‘summits’ – we’ll see suggestions for consolidating currencies, much more structured regulatory agencies and overall financial control consolidated into some type of world financial ‘authority’.  We are watching the beginning of the end of free markets and free enterprise.

 

 

OCTOBER 25, 2008

A 21st-Century Bretton Woods

Success at global finance summit hinges on China's willingness to play role once taken by U.S.

By SEBASTIAN MALLABY

Wall St. Journal

 

There wasn't much to see in Bretton Woods in July 1944, when delegates from 44 countries checked into the sprawling Mount Washington Hotel for the United Nations Monetary and Financial Conference. Almost a million acres of New Hampshire forest surrounded the site; there were free Coca-Cola dispensers, but few other distractions.

In this scene of rustic isolation, 168 statesmen (and one lone stateswoman, Mabel Newcomer of Vassar College) joined in history's most celebrated episode of economic statecraft, remaking the world's monetary order to fend off another Great Depression and creating an unprecedented multinational bank, to be focused on postwar reconstruction and development.

At the Final Plenary, a sea of black-tied delegates gave a standing ovation to British economist John Maynard Keynes, whose intellect had permeated the three weeks of talks. Lord Keynes paid tribute to his far-seeing colleagues, who had performed a task appropriate "to the prophet and to the soothsayer."

The Bretton Woods conference has acquired mythical status. To economic-history buffs, it's akin to the gathering of the founding fathers at the constitutional convention. To politicians anxious to make their marks upon the world, it's a moment to be richly envied. The recent calls from British Prime Minister Gordon Brown and French President Nicolas Sarkozy for a new Bretton Woods conference, to which the Bush administration has acceded, have caused TV crews to descend upon the old hotel, which has undergone a $50 million facelift. But Bretton Woods revivalism is nothing new. Indeed, it's a long tradition.

After the onset of the Latin debt crisis in 1982, U.S. Treasury Secretary Donald Regan floated the idea of a new Bretton Woods to steady the hemisphere's currencies. The following year, reeling from three devaluations of the franc, French President Francois Mitterrand declared, "The time has really come to think in terms of a new Bretton Woods. Outside this proposition, there will be no salvation." Mitterrand persisted in this grandiloquence over the next two years. He finally quieted down in 1985, when Margaret Thatcher dismissed his proposal as "generalized jabberwocky."

In the wake of the emerging-market crises of 1997-98, Bretton Woods nostalgia broke out again -- this time in post-Thatcher Britain. "We should not be afraid to think radically and fundamentally," Tony Blair opined. "We need to commit ourselves today to build a new Bretton Woods for the next millennium." The precise content of Mr. Blair's millennial ambition was, shall we say, vague. But no fellow leader was rude enough to say so.

Among acts of international economic statesmanship, perhaps only the Marshall Plan has been invoked more frequently. There have been calls for a Marshall Plan for postcommunist eastern Europe, a Marshall Plan for Africa, a Marshall Plan for the inner cities. Indeed, anybody wanting Washington to splurge finds Marshall exceedingly convenient.

But Bretton Woods has a richer and more rarefied cachet. It was about reordering the international system, not just mobilizing money for an enlightened cause. And whereas the Marshall Plan was an example of the unilateralism for which the U.S. is known, the Bretton Woods conference was a triumph of multilateral coordination. It featured countries as diverse as Honduras, Liberia and the Philippines (Keynes spoke disdainfully of a "most monstrous monkey-house"), though it did not include South Korea or Japan, important voices in today's economic summitry.

Both sides of the Bretton Woods achievement seem alluring today, yet both may be chimerical. The conference rebuilt the economic order by creating a system of fixed exchange rates. The aim was to prevent a return to the competitive devaluations best illustrated by the "butter wars." In 1930 New Zealand secured a cost advantage for its butter exports by devaluing its money; Denmark, its main butter rival, responded with its own devaluation in 1931; the two nations proceeded to chase each other down with progressively more drastic devaluations.

This beggar-thy-neighbor behavior added to the protectionism that brought the world to ruin, and the Bretton Woods answer was simple. In the postwar era, the dollar would be anchored to gold, and other currencies would be anchored to the dollar: No more fluctuating money, ergo no competitive devaluation. To undergird this system, the Bretton Woods architects created the International Monetary Fund, which was far more central to their ambitions than their other legacy, the World Bank. If a country's fixed exchange rate led it into a balance of payments crisis, the IMF would bail it out and so avert devaluation.

Today the idea of another monetary rebirth has much to recommend it. The credit bubble that has wreaked havoc on the world's financial markets has its origins in a two-headed monetary order: Some countries allow their currencies to float, while others peg loosely to the dollar. Over the past five years or so, this mixture created a variation on the 1930s: China, the largest dollar pegger, kept its currency cheap, driving rival exporters in Asia to hold their exchange rates down also. Thanks to this new version of competitive currency manipulation, the dollar-peggers racked up gargantuan trade surpluses. Their earnings were pumped back into the international financial system, inflating a credit bubble that now has popped disastrously.

Persuading China to change its currency policy would be a worthy goal for a new Bretton Woods conference. But currency reform is low on the agenda of the summit that the Bush administration plans to host on Nov. 15. (The administration styles this gathering a "G-20 meeting," ignoring the European talk of a Bretton Woods II.) The British and French leaders who pushed for the meeting want instead to talk about financial regulation -- how to fix rating agencies, how to boost transparency at banks and so on. But many of these tasks require minimal multilateral coordination.

If the Europeans shrink from demanding that China cease pegging to the dollar, it's perhaps because they anticipate the concession that would be asked of them. China isn't going to give up its export-led growth strategy for the sake of the international system unless it gets a bigger stake in that system -- meaning a much bigger voice within the International Monetary Fund and a corresponding reduction in Europe's exaggerated influence. When you strip out the blather about bank transparency and such, this is the core bargain that needs to be struck. Naturally, the Europeans aren't proposing it.

It will be up to the two great powers -- the U.S. and China -- to fashion the deal that brings China into the heart of the multilateral system. Here, too, is an echo of the first Bretton Woods, for underneath the camouflage of a multilateral process there was a bargain between two nations. Britain, the proud but indebted imperial power, needed American savings to underpin monetary stability in the postwar era; the quid pro quo was that the U.S. had the final say on the IMF's design and structure. Today the U.S. must play Britain's role, and China must play the American one.

There's a final twist, however. In the 1940s the declining power practiced imperial trade preferences; the rising power championed an open world economy. When Franklin Roosevelt told Winston Churchill that free trade would be the price of postwar assistance, he was demanding an end to the colonial order and the creation of a level playing field for commerce. "Mr. President, I think you want to abolish the British empire," Churchill protested. "But in spite of that, we know you are our only hope."

Today it is the rising power that pursues mercantilist policies via its exchange rate. China's leadership, which sits atop an astonishing $2 trillion in foreign-currency savings, could trade a promise to help recapitalize Western finance for an expanded role within the IMF. But China may simply not be interested. The future of the global monetary system depends on whether China aspires to play the role of Roosevelt -- or whether it prefers to be a modern Churchill.

Sebastian Mallaby directs the Center for Geoeconomic Studies at the Council on Foreign Relations. He is writing a history of hedge funds.

Another country lining up to support additional oversight of financial markets.  We’ve seen the U.S., Latin America, Europe (Italy, Britain, France, Germany) and now China support a move for more regulation – all within the past 2 weeks.  We’re going to see more and more articles like this in the coming months as the global elite continue to push their agenda forward.

 

 

OCTOBER 27, 2008

China Backs Europe's Push for Oversight

By IAN JOHNSON

Wall St. Journal

BEIJING -- After several days of talks between European and Asian leaders, China apparently has allied itself with Europe in calling for a vigorous system of international regulation.

AFP/Getty Images

Chinese Premier Wen Jiabao answers questions in Beijing on Oct. 25.

In closed-door talks with European leaders Friday and Saturday, senior Chinese officials said they would back Europe's effort to overhaul international regulatory systems, European diplomats present at the meetings said. China most strongly stated its position Friday in a talk between Chinese President Hu Jintao and José Manuel Barroso, president of the European Commission.

Mr. Hu, according to diplomats at the meeting, said China would "actively cooperate" with the EU, which has been pushing an ambitious new system of global oversight. Formal talks on the new overhauls would begin in mid-November in Washington.

"The Chinese said they'd back more vigorous reforms," a senior European diplomat said in an interview. "They rely on the global economy and are afraid it's become very unstable."

Chinese officials had no comment on the closed-door meeting. In public statements, Chinese leaders issued milder endorsements of reforms. At the close of the seventh Asia-Europe Meeting on Saturday, for example, Chinese leaders backed the 45 nations' statement, which expressed "the need to improve the supervision and regulation of all financial actors, particularly their accountability."

Foreign diplomats have been keen to see how China would come down on the issue of regulation. On one hand, China values stability and thus would seem naturally to support regulation. On the other, it likely doesn't want international institutions that curb its sovereignty or constrain its financial flows.

In Brussels, EU officials said they weren't surprised China agreed to side with the EU in pushing for new rules for financial markets. "They want a seat at the table in whatever is going to happen," said an EU official who attended an Oct. 15-16 summit that drafted the EU's plan.

U.S. officials said that the Beijing meetings underscore the importance of President Bush's global economic summit, scheduled for Nov. 15 in Washington after the presidential election. The White House hopes to use the summit to discuss the crisis's underlying causes, analyze responses and develop principles to reform the global financial architecture.

Bush administration officials acknowledged their concerns that some countries could seek to use the financial crisis to move against free trade and promote more centralized economic models. "Whatever else we do, the summit needs to enhance our commitment to free markets and free trade -- the fundamental policies that have increased standards of living," said a U.S. Treasury Department official.

—John W. Miller in Brussels and Jay Solomon in Washington contributed to this article.

Write to Ian Johnson at ian.johnson@wsj.com

 

Now we see that the Treasury is going to buy equity stakes in insurance companies with the bailout money.  To date, not one ‘toxic’ security has been purchased.  The treasury has been given a blank check – and instead of helping homeowners or actually buying distressed securities – they are buying stakes in all types of financial/banking companies.  Why?  I believe they are doing this to gain more control.  The question is – what happens when things begin to get even worse?

 

jg

__________________________________

 

OCTOBER 24, 2008, 2:32 P.M. ET

 

Treasury Considers Stakes in Insurance Companies

By DEBORAH SOLOMON

WASHINGTON -- The Treasury Department is considering taking equity stakes in insurance companies, a sign of how the government's $700 billion program has become a potential piggybank for a range of troubled industries.

The availability of government cash is drawing requests from all corners, with insurance firms, automakers, state governments and transit agencies lobbying for a piece of Treasury's pie. While Treasury intended for the program to apply broadly, the growing requests could rapidly deplete the $700 billion, an amount that initially stunned many as being quite large.

Among those expected to benefit from Treasury's program are insurance firms. Most insurance companies are financially sound but have seen their long-term investments and stock prices hurt by the recent market turmoil.

Treasury wants insurance companies to participate in its program, dubbed TARP, and is considering taking equity stakes in certain firms, according to people familiar with the matter.

For now, however, only certain insurance firms would be eligible for a capital infusion. Under the terms of Treasury's program, insurers would have to have a financial institution holding company that was regulated at the federal level.

Insurers would also be able to sell its bad assets to the government under a separate element of the program.

Write to Deborah Solomon at deborah.solomon@wsj.com

 

October 28, 2008

Plan Could Push Insurers Into Mergers

More Corporate Lending Also Could Be Sparked Under the Government's Rescue Program

By LESLIE SCISM

If the Treasury Department's capital-infusion program for the banking sector expands to insurers, industry consolidation may follow.

Some of the life insurers whose names have emerged as supportive of a widening of the Treasury's $700 billion rescue program, the possibility of which emerged Friday, are considered by ratings firms to be financially healthy and capable of acquisitions. One is New York-based MetLife Inc. Industry analysts say it could be a contender to acquire at least some of the U.S. life-insurance operations of American International Group Inc.

The financial-services conglomerate has said it is trying to sell business units, including these and part of its foreign life-insurance operations, to pay back an $85 billion rescue loan it received last month from the federal government in exchange an 80% equity stake. That rescue, by the Federal Reserve, is separate from the $700 billion Treasury program.

Raising large sums of money for acquisitions is a tough challenge for any financial company right now, with credit markets still tight and stocks beaten down. Analysts say the infusion of low-cost government capital into a potential acquirer could prove crucial for AIG's efforts to strike deals in the months ahead.

A MetLife spokesman said the company wouldn't comment on any potential acquisition plans. An AIG spokesman said: "AIG is moving forward aggressively with its plan to permanently resolve its liquidity problems, sell a number of our world-class businesses and repay the Fed loan. We also continue to evaluate other possible options to restore AIG as a healthy competitor." He declined to elaborate.

Banking-industry analysts interpreted Friday's announcement that PNC Financial Services Group Inc. has agreed to acquire National City Corp. as an indication that the government is using the rescue plan as ammunition to push weak banks into the arms of strong ones. PNC will sell $7.7 billion of preferred shares and warrants to the Treasury Department to finance the stock-and-cash deal.

Colin Devine, a stock analyst at Citigroup Global Markets, said in a note to clients Monday that he anticipates "a wave of M&A activity" among life insurers, with Treasury infusions taking "the form of facilitated deal financing such as" PNC will receive. He rates MetLife a top pick, saying it has a strong capital position and is "uniquely situated" to acquire U.S. units from AIG. MetLife shares rose 3 cents, or 0.11%, to $26.21 Monday.

Meanwhile, Evan Greenberg, chairman of trade group American Insurance Association, said a substantial majority of AIA's members "do not support the inclusion of property-casualty insurers" in the Treasury program and wouldn't participate if it becomes available. Mr. Greenberg, chairman of ACE Group, said AIA members are "well-capitalized." Members include Chubb Corp., Travelers Cos. and W. R. Berkley Corp. Property-casualty carriers tend to have more-liquid investments than life insurers, and their core businesses aren't as volatile as the overall economy because cars, homes and businesses continue to be insured.

One goal of any potential expansion of the Treasury program appears to be trying to ramp up the insurance industry's role as a lender.

On Sunday, New York Life Insurance Co., one of the highest-rated insurers in the U.S., said that Treasury officials recently asked it and others in the life-insurance industry "for help in developing solutions for strengthening the financial system. We agreed to work with other industry leaders and Treasury so we could play a constructive role in helping shape this important discussion." The insurer, which is mutually owned, doesn't require additional capital and hasn't made any decision to accept capital, if offered, a spokesman said.

Write to Leslie Scism at leslie.scism@wsj.com

OCTOBER 28, 2008

U.S. May Offer GM $5 Billion Loan

By DEBORAH SOLOMON and STEPHEN POWER

Wall St. Journal

The U.S. Department of Energy is working to release $5 billion in loans to General Motors Corp., according to a person familiar with the matter, a move that could help ease the way for the auto maker's discussed merger with Chrysler LLC.

GM and Chrysler's majority owner, Cerberus Capital Management LP, have been negotiating a complex deal in which GM would end up owning its smaller Detroit rival, but the parties have struggled to line up financing. The combined entity would need about $10 billion in new equity to cover the cost of laying off workers, closing plants and integrating the two companies, according to people involved in the talks.

The $5 billion would come from the pool of $25 billion in low-interest loans that was approved by Congress and is being administered by the Energy Department. The loans are aimed at helping Detroit retool plants to meet new fuel-efficiency standards. It isn't clear how quickly the money could be made available or whether it would come with strings attached.

Although the loans are supposed to speed the availability of fuel-saving technologies, the money could help steady GM's finances and make it easier for the struggling auto giant and Cerberus to persuade investors to back a deal. Any transaction would involve both Chrysler and GMAC LLC, which loans money for car purchases and other purposes. Cerberus owns 51% of GMAC and GM owns the rest.

Both GM and Chrysler are losing money. Analysts believe each company could start to run short of cash within 12 months.

The auto makers and Michigan's congressional delegation have proposed at least three plans in recent weeks to unlock federal money for a GM-Chrysler merger. One is to seek an equity investment from the government. Another would draw money for the auto makers from the $700 billion Troubled Asset Relief Program, or TARP, set up ostensibly to help financial firms. A third possibility is accelerating the $25 billion in loans that the Energy Department is managing.

On Monday, White House spokeswoman Dana Perino, speaking of GM, Chrysler and Ford Motor Co., said "it's a possibility that they could qualify" for Treasury funds under the $700 billion rescue fund, either through a direct investment or participation in the administration's asset-purchase plan.

Treasury officials, however, are for now playing down that possibility, noting that any immediate federal aid will likely come from the Energy Department.

An Energy Department spokeswoman said Monday the agency is "in the process of developing the rules for the loan program" and that it would be "premature" to set a timetable for when the funds will be available.

The agency has come under criticism from prominent Michigan lawmakers in both parties after initially saying in September it could take "at least six to 18 months or more" to disburse the loans.

—John D. Stoll and Jeffrey McCracken contributed to this article.

OCTOBER 28, 2008

Federal Reserve Starts Lending Plan

By ANUSHA SHRIVASTAVA

Wall St. Journal

The Federal Reserve has kicked off a much-awaited lending program aimed at jump-starting the $1.45 trillion commercial-paper market, but investors say it could take days or weeks before short-term financing for U.S. companies loosens up.

Under its new Commercial Paper Funding Facility, the Fed is offering to lend money to highly rated companies for as long as three months. The goals are to persuade investors to lend to top-tier companies and give borrowers a backstop if funds can't be obtained in the open market.

The program's impact was muted Monday. Fewer companies came to market looking for financing than last week, and most were limited to uncomfortably short overnight loans. Rates rose modestly for debt maturing in 30 days.

"It will be a few more days before we have a good idea on the impact," said Ira Jersey, interest-rate strategist at Credit Suisse.

The test will be whether rates established in the commercial-paper market are lower than the somewhat punitive rates on the Fed's loans, which are intended to be a source of financing in emergencies rather than the first stop for companies seeking funds.

A related indicator of success will be how little companies borrow from the Fed. Data on borrowings will be released Thursdays.

For Monday, the Fed set its rates on three-month commercial paper at 2.88%, including a surcharge. For asset-backed commercial paper, the rate was set at 3.88%. New rates will be set daily.

The few companies looking for three-month loans in the open market Monday -- including heavy issuers American Express Co. and General Electric Co. -- offered to pay rates similar to those set by the Fed, according to Kevin Giddis, head of fixed income at Morgan Keegan.

It isn't clear whether investors agreed to lend at those rates.

GE and American Express have registered for the new program, giving them the option of selling to the Fed. They didn't respond to calls about whether they plan to actually use it. The Fed has said several dozen companies have signed up for its commercial-paper program, but isn't naming them.

Market participants also are waiting for the start-up of another Fed program -- the Money Market Investment Funding Facility -- which is aimed at supporting money-market funds, the single largest group of investors in the commercial-paper market.

This facility will buy commercial paper and other short-term debt from money-market funds, in theory giving them confidence that they can get out of investments if they need to raise cash to cover redemption requests from their own investors.

Money-market funds have shied away from the commercial-paper market since Lehman Brothers collapsed in mid-September. Investors have been more reluctant to take on the new debt companies need to issue to fund basic operating needs such as rent and supplies.

—Kellie Geressy contributed to the report.

Write to Anusha Shrivastava at anusha.shrivastava@dowjones.com