FINANCIAL HEROIN
David Chu
by David Chu (9-20-08)
Author of NO Foreclosures!
Heroin, according to the handy Apple dictionary on my iMac, is “a highly addictive analgesic drug derived from morphine, often used illicitly as a narcotic producing euphoria.”
[I wouldn’t know as I don’t even smoke. OK, unlike one of your former presidents, I did inhale 2 puffs when I was a teenager and it almost killed me as I coughed and coughed!]
What does “analgesic” mean? Well, according to my trusty Apple dictionary again, it means “acting to relieve pain.”
What happened during the financial week of September 15, 2008 is that the United States government, with the not-so gentle prodding of the U.S. Treasury and the Federal Reserve (financial rescue and bailout tag team extraordinaire), acted to preserve the “integrity” of the financial markets by injecting “financial heroin,” otherwise known as free money and its evil twin sister called easy credit, into the financial markets!
[If the U.S. government gave you $1 million dollar for free, you would be euphoric too!]
So, there you have it: what happened last week according to my dandy Apple dictionary!
Henceforth, free money and easy credit shall be known as “financial heroin”, a highly addictive “acting to relieve financial pain” drug derived from an equally highly addictive printing press call the Federal Reserve [under the direction of “Helicopter” Ben who hasn’t seen a depression that he couldn’t simply bail out by printing more free money and creating more easy credit for his Wall Street friends], often used illicitly [by the U.S. Treasury under the direction of a former CEO and chairman of Goldman Sachs who shall remain anonymous to protect what he is doing as he is trying his very best to rescue his competitors on Wall Street while trying not to look like he is being too selective in so doing] as a narcotic producing market euphoria [like the stock market surges that occurred on Thursday and Friday!]
Seriously, what happened last week on Wall Street and in Washington, D.C. is really fascinating to watch and read, and for those who truly understand what money and credit really are, it was like watching an unbelievably breathtaking horror scene from a Quentin Tarantino flick (viz. the massacre at the Japanese restaurant in Kill Bill 1).
You know that you shouldn’t be watching such senseless and gratuitous scenes of mayhem and wanton destruction, but morbid curiosity takes you over and you just can’t stop watching. It’s like a massive highway accident involving two dozen cars and trucks. You are entirely fascinated by what’s going on. It’s highly addictive, like watching soap operas or taking heroin for example!
There were at least three important scenes from last week’s episode of “Financial Heroin” that need a bit of explaining and, more importantly, highlighting.
To Hell and Back!
So read a news headline in the Drudge Report linked to a Yahoo news article.
It may have felt like a NDE (near death experience) for the managers of money market funds as one of their own, Reserve Primary Fund, fell through the floor.
It didn’t take long for money market investors to take out $210 billion from money market funds, with the majority of these withdrawals coming at the announcement that one of their own had “broken the buck.”
Reserve Primary Fund is the money market mutual fund whose parent corporation helped to invent this category of investments. The fund’s financial assets recently fell 65 percent and, last week, it fell below $1 a share in net asset value. It was mainly because of its losses in Lehman Brothers debt that it was holding. This phenomenal has rarely happened before in the history of money market funds. But when it does, the fund is said to have “broken the buck.”
So to the rescue came the U.S. Treasury to bail out yet another sector of the financial market, the money market funds that are home to approximately $3.5 trillion of deposits from investors, a lot of them like you live on Main Street.
On Friday, the U.S. Treasury said it would use $50 billion (yah right!) of the taxpayer’s money (where the Treasury is getting this money from when the U.S. is running almost $1 trillion of deficit each year is hard to fathom) to bail out any and all money market funds whose asset values fall below $1 per share.
The U.S. Treasury said in a new policy statement on Friday: “For the next year, the U.S. Treasury will insure the holdings of any publicly offered eligible money market mutual fund -- both retail and institutional -- that pays a fee to participate in the [Treasury] program."
Not to be outdone, the Federal Reserve is going to lend out even more money directly to financial banks and other financial institutions so that they could buy, as another Yahoo news article states, “certain assets from money market funds.”
Wonder what those “certain assets” are? How about the toxic debts issued by Bear Sterns, Lehman Brothers, Merrill Lynch, and the rest of the apple dumpling gang on Wall Street?
Not to be left out of this highway accident, the current resident of the White House proclaimed:
"Our system of free enterprise rests on the conviction that the federal government should interfere in the marketplace only when necessary. Given the precarious state of today's financial markets - and their vital importance to the daily lives of the American people - government intervention is not only warranted, it is essential."
How is that for “our free enterprise” system? Free money and easy credit for our Wall Street friends! All in the name of helping the daily lives of the “little people”!
The leaders on the other side of Pennsylvania Avenue got into this rescue act as well--not to look like they didn’t know what they are doing--by speaking a few choice words of wisdom and everything should be fine, as one of them confessed:
"I've never been in a more sobering moment in my 28 years with the language that was used - careful language - by the financial leaders of the . . . country," Senate Banking Committee Chairman Christopher Dodd, the Democrat Senator from Connecticut, told reporters on Friday (who recently received a very special V.I.P. loan from Countrywide that he never bothered to report to the Senate Ethics Committee as is required by law).
Which ”financial leaders” is the senator from
And you know who uses “careful language”? Lawyers certainly do. Politicians, many of them who also happen to be lawyers, use it when necessary which is all the time: “It depends on what the meaning of the word ‘is’ is.” And, of course, crooks use it when they are caught and need to hire lawyers to bail them out!
Last week, the financial crooks on Wall Street were caught between a rock (total collapse of their corporations--unacceptable to the shareholders and executives of these corporations) and a hard place (total government bailout--unacceptable to most if not all American people without some nice patriotic cover story on why they should be the ones holding the toxic financial bags as it were).
So they went and got some help from the political crooks in Washington, D.C. to bail them out. And boy, did their crook friends on Pennsylvania Avenue come out and bail them out with hundreds of billions of taxpayer’s money (which really don’t exist yet) and--this is extremely important, so listen up!--with economic, financial and political language that would make even the most “bleeding heart” liberal feel just a bit unpatriotic if she didn’t support “saving the global financial markets”!
Come on! What’s more patriotic and “American apple pie” than saving the financial derrière of AIG, WaMu, JPM, Citi, et al. now by destroying the economic and financial future of your children and your children’s children later?
It’s the derivatives, stupid!
Ellen Brown probably wrote the most important article last week telling the American people what really happened.
You can find her article linked on my www.noforeclosures.info website in the right column of the “News” webpage for Sept. 19, 2008.
What has been happening with the taxpayer’s bailouts of Bear Sterns, AIG, Reserve Primary Fund, and many more yet to come is the prevention and suppression of the inevitable blowups in the quadrillion dollar “derivatives” market which is totally unregulated and unreported in the corporate mainstream media.
The blaming of the financial market’s problems on the little people and the subprime mortgages is just a smoke screen perpetrated by the corporate mainstream media for their corporate masters on Wall Street and Pennsylvania Avenue: to cover up the real financial mess caused by these unregulated and unreported derivatives.
The following is taken from a footnote in my ebook, NO Foreclosures!
Derivatives are very complex financial instruments that are intended to spread financial risks and whose values are derived from the underlying factors and/or assets, such as the movement of interest rates, the failure of a corporation’s bonds, the price and availability of rice in the future, etc. The most common types of derivatives are futures, options, forwards, and swaps. The types of derivatives that are valued in the trillions of dollars are totally unregulated by any national or international governmental agencies. These are called “Interest Rate Contracts” (78.9 percent of the total notional value of all U.S. derivatives at the end of 2007), “Foreign Exchange Contracts” (10.1 percent), “Credit Derivatives” (8.8 percent), “Equity Contracts” (1.5 percent), and “Commodity/Other” (0.6 percent). The total notional value of all
Brown’s article (“It’s the derivatives, stupid!”) explains this further:
Something extraordinary is going on with these government bailouts. In March 2008, the Federal Reserve extended a $55 billion loan [you got that right, it wasn’t the $29 billion advertised in the corporate mainstream media but $55 billion!] to JPMorgan to “rescue” investment bank Bear Stearns from bankruptcy, a highly controversial move that tested the limits of the Federal Reserve Act. On September 7, 2008, the U.S. government seized private mortgage giants Fannie Mae and Freddie Mac and imposed a conservatorship, a form of bankruptcy; but rather than let the bankruptcy court sort out the assets among the claimants, the Treasury extended an unlimited credit line to the insolvent corporations and said it would exercise its authority to buy their stock, effectively nationalizing them. Now the Federal Reserve has announced that it is giving an $85 billion loan to American International Group (AIG), the world’s largest insurance company, in exchange for a nearly 80% stake in the insurer . . . .
The answer [to why the Fed and the Treasury bailed out Bear Stearns, Fannie, Freddie, and AIG, and not others such as Lehman Brothers] may have less to do with saving the insurance business, the housing market, or the Chinese investors clamoring for a bailout than with the greatest Ponzi scheme in history, one that is holding up the entire private global banking system. What had to be saved at all costs was not housing or the dollar but the financial derivatives industry; and the precipice from which it had to be saved was an “event of default” that could have collapsed a quadrillion dollar derivatives bubble, a collapse that could take the entire global banking system down with it.
So, there you have it! The horrible, naked truth finally comes out--not in the corporate mainstream media.
Law of gravity suspended!
That is the law of financial gravity.
Well, that’s what the SEC (Security Exchange Commission) just did by outlawed short selling for 799 financial stocks last Friday.
Why not do it for all financial stocks (799 is such an odd number!)?
Why not suspend short selling for every stock in the stock market?
Hum.
What is short selling anyway? Good question! I am glad you asked.
Short selling is the opposite of “going long” as they say. Most investors buy a stock believing that it will increase in price in the future, at which time they will sell their stock and pocket the financial difference or gain.
But what about buying a stock or an investment that you know is going down like the Titanic?
Well, then you do something called “short selling.” Short sellers will borrow a stock that they are interested in shorting (to financially gain on a falling stock) from someone or some company who currently owns this stock, and, at the same time, they will sell the borrowed stock in the stock market. Then they will wait until the stock goes down in price when they will go to the stock market again and purchase the same stock at the lower price. Afterwards, they will repay the borrowed stock with the stock they had purchased from the stock market.
Where short sellers realize their financial gain is between the price of the borrowed stock they sold first (high) and the price they paid in the stock market second (low).
This works wonderfully when a stock is going down, but when it goes up, short sellers are up the proverbial creek without a paddle!
Short selling is integral to the proper functioning of the market place and is a legitimate trading practice, because what goes up usually and oftentimes goes down. When it goes down, short sellers provide the financial grease to make that happen.
Otherwise, a stock can only go up in price, right? Well, not quite.
But is this what the SEC wants the market place to do for the 799 stocks it selected to protect?
Hum.
There is something called “naked short selling” whereby the short seller doesn’t even bother to borrow the initial stock. This is an abusive trading practice that was outlawed by the SEC on Wednesday, Sept. 17. In its press release, the SEC stated the following:
The Securities and Exchange Commission today took several coordinated actions to strengthen investor protections against "naked" short selling. The Commission's actions will apply to the securities of all public companies, including all companies in the financial sector. The actions are effective at 12:01 a.m. ET on Thursday, Sept. 18, 2008. . . .
In an ordinary short sale, the short seller borrows a stock and sells it, with the understanding that the loan must be repaid by buying the stock in the market (hopefully at a lower price). But in an abusive naked short transaction, the seller doesn't actually borrow the stock, and fails to deliver it to the buyer. For this reason, naked shorting can allow manipulators to force prices down far lower than would be possible in legitimate short-selling conditions.
Illegal naked short selling, as what was probably done to Bear Sterns and Britain’s HBOS, is something that the SEC should have outlawed a long time ago, but to ban the legitimate practice of short selling for 799 financial stocks seems a bit fishy.
What are the Feds going to do next?
Suspend the law of gravity?
No more falling down?
At least no more financial collapses until the elections are over!
Or maybe, just maybe, they will suspend that “It’s just a goddamned piece of paper!“*
Most Americans call that piece of paper the U.S. Constitution.
Hum.
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* As the current resident of the White House was reportedly heard yelling in the people’s house at the end of 2005:
http://www.capitolhillblue.com/artman/publish/article_7779.shtml