Sunday, September 21, 2008

The Mother of all Frauds

This is a repost of Karl Denninger's Market Ticker blog:

I'm speechless.

Let's disassemble this monster piece by piece.

First, this is a de-facto nationalization of the entire banking, insurance, and related financial system. Specifically:
"(3) designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them;"

That's right - every bank and other financial institution in the United States has just become a de-facto organ of the United States Government, if Hank Paulson thinks they should be, and he may order them to do virtually anything that he claims is in furtherance of this act.

This might include things like demanding that a bank or other financial institution sell him its paper, even if it forces that firm to collapse and be assumed by the FDIC!

You didn't buy any bank stocks last week did you?
"(a) Authority to Purchase.—The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States."

This, at first blush, would seem to indicate that only American firms would be covered. Nothing is further from the truth. If the Chinese wish to unload some of their purchased toxic sludge they merely sell it to, oh, Goldman Sachs for 40 cents on the dollar and then Goldman sells it to the Treasury for 50. This, under the black letter of the law here, is perfectly legal, which means that one must assume that Paulson will in fact foist off all the bad paper on world markets that was originally based on a mortgage in the United States, while allowing his banker buddies here to loot the taxpayer by acting as an intermediary in the transaction!
"(2) entering into contracts, including contracts for services authorized by section 3109 of title 5, United States Code, without regard to any other provision of law regarding public contracts;"

Contracts can (and presumably will) be "no bid, no solicitation" and given to whomever Secretary Paulson favors, without regard to the public interest or normal competitive bidding processes. Must be nice to be a "Friend of Hank."
"In exercising the authorities granted in this Act, the Secretary shall take into consideration means for—

(1) providing stability or preventing disruption to the financial markets or banking system; and

(2) protecting the taxpayer."

Notice which comes first.
"(c) Sale of Mortgage-Related Assets.—The Secretary may, at any time, upon terms and conditions and at prices determined by the Secretary, sell, or enter into securities loans, repurchase transactions or other financial transactions in regard to, any mortgage-related asset purchased under this Act."

Having bought these securities for any price Mr. Paulson would like (and he can compel institutions to sell at his demanded price as noted above!) he can then sell those assets at any price he wishes, to anyone he wishes. It certainly is nice to be a "Friend of Hank", and it most certainly sucks if you're not.
"The Secretarys authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time"

This is clever and nobody in the mainstream media has figured it out.

If you think the cost of this bill is $700 billion, you're wrong. The cost is actually infinite and the entire bill constitutes a giant money-laundering scheme.

Paulson can (and presumably will) buy up to $700 billion of these "assets", then sell them. Let's say he decides to buy them at 60 cents on the dollar and sell them for 10. You, the taxpayer, will eat the fifty cents, for an immediate cost of $350 billion dollars.

Having done so, he is then authorized to do so again, since the $700 billion is no longer on the government's balance sheet.

In fact, he can do this without limit, other than possibly due to the federal debt ceiling, which of course Congress will raise any time we get close to it. Oh yeah, this bill does that right up front too. No need to bother with it the first time around.

Folks, $700 billion isn't even close to the total cost of this monster.

If Paulson and his successor decide to, they could literally cycle all $5.3 trillion of Fannie and Freddie's debt through this scheme, potentially sticking the taxpayer for 20% or more of the total, plus as much private debt on various bank balance sheets as they can manage to nationalize until (and possibly beyond) the point where the bond market tells him to go to hell.

Bottom line: This bill gives Paulson the ability to nationalize an UNLIMITED amount of private debt and force YOU AND YOUR CHILDREN to pay for it.
Sec. 8. Review.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

If you are a bank, investor, or other entity who is forcibly gang-raped by Secretary Paulson due to his actions as "King" (crowned by Congress) under this law, you are unable to seek redress in the courts or by administrative action.

The claim is that this is intended to "promote confidence and stability" in the financial markets.

It will do no such thing.

It will instead strike terror into the hearts of investors worldwide who hold any sort of paper, whether it be preferred stock, common stock or debt, in any financial entity that happens to be domiciled in the United States, never mind the potential impact on Treasury yields and the United States sovereign credit rating.

I predict that if this passes it will precipitate the mother and father of all financial panics, although exactly when the "short bus" riders who inhabit the equity market will figure it out remains to be seen.

If they have an IQ larger than their shoe size it will commence at 9:30:01 AM Monday morning, although given history and the lack of intelligence displayed by the crooning media market euphoria may continue until the first couple of firms are dismantled by Paulson's newly-crowned Kingly powers with the scraps handed out to his favored few.

The best part of this outrageous fraud is that those who get bent over the table can't even sue - their only recourse will be the (literal) deployment of pitchforks and torches.

That Paulson and Bernanke circulated this document, irrespective of what actually gets reported out onto the floor of the House and Senate (if anything) tells you everything you need to know about his intentions and the safety of your financial assets in the United States markets.

That this "proposal" hasn't resulted in Congress calling for both Bernanke and Paulson to resign for their blatant attempt to crown Paulson King tells you everything you need to know about Congressional integrity as well.

My advice: Don't be caught with any stock or debt instruments linked to a United States financial firm in your portfolio past 9:30 AM Monday morning.

Oh, and if you want an alternative that will actually work?

Here it is.

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