There is no simple way to create markets for the collateralized debt obligations (CDOs) on the banks' books. Trade can only happen when you can discern a price and parties think they will benefit. The bank or hedge fund cannot value these assets correctly in the interbank market because they can't be sure the other party is not going to fail. This results in a price that is far away from where it normally would be quoted. A clearing house takes away much of the risk, leaving only the market risk of the CDO. Better pricing of these CDOs will save taxpayers billions of dollars, since in any auction you will be buying and selling at a more efficient market price.
Who doesn't want the independent clearing house solution? Investment banks of New York. Over 30% of their revenue comes from proprietary trading. They reap massive profits in the over-the-counter (OTC) marketplace. They also would have to spend money to hold positions in the clearing house. This will limit their operations and profitability. Additionally, they are afraid because the clearing house would have access to all kinds of information that the banks deem sensitive. If that information were leaked, it could compromise a bank's competitive position. The New York banks will try to establish a clearing house that they control. They would keep the market fuzzy and to themselves. A bank-controlled clearing house would be a license to steal. This would be like the fox watching the hen house. It will be only a matter of time before we blow up again.
First of all, we already have an organization which, to a great extent, is supposed to be monitoring the financial sector, limiting the damage caused by bad moves there -- and despite that we had the Great Depression, other crises and scandals, and now this. So, now they propose more regulation and perhaps a reorganization -- a "new world economic order".
Kind of like 9/11 -- we had government agencies that had information that something was up, including some surprising particulars, but despite that, the terrorist attack succeeded literally against all odds. No one was ever held accountable or punished, we just had more regulation -- that "Patriot Act" -- and a reorganization -- the Directorate of Central Intelligence became the Directorate of National Intelligence.
We now return to Who's Behind the Economic Collapse?; we repeat the last paragraph that was quoted in the previous post, and continue with the next two paragraphs:
The growing suspicion that the financial meltdown is a "generated crisis" has been fed by statements from President Bush himself that illegal financial activities were taking place. On September 18, when he made a public statement about the growing economic problems, Bush announced that the Securities and Exchange Commission (SEC) was stepping up its enforcement actions "against illegal market manipulation."
By whom or what? The President didn't say.
The next day, September 19, Bush appeared in the Rose Garden with Paulson, SEC chairman Christopher Cox, and Federal Reserve chairman Ben Bernanke. Bush declared, "The SEC is also requiring certain investors to disclose their short selling, and has launched rigorous enforcement actions to detect fraud and manipulation in the market. Anyone engaging in illegal financial transactions will be caught and persecuted [sic]." Again, what was Bush talking about?
The only ones who will be "persecuted" -- and for my usage, I am spelling it correctly -- will be those whistleblowers who come forward to tell us what is really going on; consider the Sibel Edmonds case in connection with 9/11 to see what I am talking about.
Continuing with Who's Behind the Economic Collapse?:
For its part, on the same day, the SEC announced "a sweeping expansion of its ongoing investigation into possible market manipulation in the securities of certain financial institutions." The SEC declared, "Hedge fund managers, broker-dealers, and institutional investors with significant trading activity in financial issuers or positions in credit default swaps will be required, under oath, to disclose those positions to the Commission and provide certain other information."
But no details were provided. Don't voters have the right to know whether these illegal activities were being conducted for political purposes?
Almost as secretive were Treasury Secretary Paulson's maneuvers. He produced a quick three-page proposal to make himself a virtual financial dictator without judicial oversight or review. Then just as quickly it was secretly altered so that he would have the authority to bail out banks in China and other foreign countries.
A "financial dictator without judicial oversight or review" -- now surely we would not expect that from this White House?
For those interested in some of the fascinating details about Paulson's extremely close relationship with China, which may have provoked the financial crisis and stands to benefit from it, the October issue of Bloomberg Markets is a good place to start. It notes that Paulson was sworn in as secretary in July 2006 and that by September he was announcing "creation of the first U.S.-China Strategic Economic Dialogue." Paulson, the magazine reports, has a relationship with Chinese leaders and has traveled to China at least 70 times in his career. It reports that he personally had $25 million worth of holdings in a Goldman Sachs fund whose sole asset was a stake in the Industrial & Commercial Bank of China.
Goldman Sachs, a "full-service global investment banking and securities firm," is "the leading underwriter of Chinese equity securities and M&A [merger and acquisition] advisor in China," its website declares.
"Managing the U.S. relationship with China is an increasingly important part of the Treasury secretary's job," Bloomberg Markets says. "During the Fannie and Freddie crisis, Paulson used his credibility with Chinese leaders to reassure them that the U.S. mortgage companies weren't in jeopardy." Paulson is quoted as saying that "I clearly talked with the Chinese through this. They've worked with me enough that they knew I wouldn't say it unless I believed it."
Why was this necessary? Chinese institutions own more than $30 billion of Fannie Mae and Freddie Mac paper, the magazine reports.
On September 7, of course, the U.S. Government, under Paulson's direction, took control of Fannie Mae and Freddie Mac, putting the U.S. taxpayers on the hook for $5 trillion of mortgages. But Paulson's statement made no mention of the Chinese investments. Instead, he talked about protecting financial markets and U.S. taxpayers.
About a week and a half later the demands came for more taxpayer money for Wall Street, and the national economic crisis was well underway.
Rep. Scott Garrett, Republican of New Jersey, is leading the Congressional effort to find out how Paulson's proposal was developed and by whom. He wants to know what went on behind "closed conference room doors" in the U.S. Government.
Equally significant, on September 23, Paulson's former firm, Goldman-Sachs, received an infusion of $5 billion from Warren Buffett, a major Obama financial backer and booster.
The former Goldman Sachs CEO "does not act or sound much like a conservative Republican to the GOP remnant at the Treasury," noted Robert Novak in an October 2007 column. Novak reported that Paulson had "marched to his own drummer" by naming Eric Mindich, chairman of Eton Park Capital Management, to head the Asset Managers' Committee of the President's Working Group on Financial Markets. "A former Goldman Sachs colleague of Paulson's, Mindich is a top-level Democratic fundraiser," Novak noted. "He was in Sen. John Kerry's inner circle for the 2004 presidential campaign and backs Sen. Barack Obama for 2008."
Then, during the current crisis, Paulson appointed another former Goldman Sachs banker, Neel Kashkari, to run the new "Office of Financial Stability" and buy bad loans and distressed securities.
Talk about a revolving door of cronyism....
But, to whose political benefit does this happen?
Stay tuned for Part 3.