By Greg Hunter’s USAWatchdog.com
In April of this year former Fed Chief Paul Volcker described the problems facing the economy as the “mother of all crises.” That was a critical and amazing statement, not just because of the implications of what was said but, more importantly, by who said it. It almost seemed over the top at the time, but now everyday everyone from Wall Street to Main Street is wondering just how bad the economy will get and when it will bottom. It seems every week there is a new and even bigger crisis. This week the GSE’s Fannie and Freddie are being talked about in terms of when not if they will be taken over by the government. This is big folks because these two GSE’s hold half the mortgages in America…a staggering amount of more than 5 trillion dollars. The cost of the bailout according to the Congressional Budget Office is anywhere from 0 to 100 billion dollars. Wow!!! What a spread in price! That estimate leads me to believe that the CBO just does not really have a handle on the answer.
In another crisis, last week the Attorney General of New York and others announced the beginning of settlements to force almost all the big financial institutions to buy back hundreds of billions in “Auction Rate” securities. These “securities” were supposed to be as safe and liquid as a money market account but as NY AG Andrew Cuomo has said they were anything but safe and liquid. Cuomo has fined the biggest players in the brokerage and banking business hundreds of millions of dollars in penalties. In some cases State AG Cuomo alleged out right fraud. These folks are lucky no one is going to jail over this problem.
And let’s not forget the recurring nightmare of the continuous bank and brokerage write offs and losses due to the sub prime crisis, aka the over the counter derivative or securitized debt. This kind of securitized debt is unprecedented in history. The total amount ranges from 500 to 1000 trillion dollars. During the last decade almost every debt was packaged into a bond or security and sold. The masters on Wall Street “securitized” everything it could get its hands on: sub prime to prime mortgages, car loans, student loans and credit card debt just to name a few. This kind of debt was supposed to be a financial innovation and according to Alan Greenspan and others needed no regulation. This means there are no standards and no guarantees and plenty of other not so nice characteristics of this kind of “security.” These “securities” in most cases were sold as triple A rated or equal to a U.S. Treasury and that means “riskless.” So far those “riskless” mortgage backed securities and others have caused an estimated 500 billion in losses for the banks and brokerages. According to Nouriel Roubini, Professor of Economics at New York University, the tab for this credit crisis will cost the Banks and brokerages at least 1 trillion dollars and as much as 2 trillion dollars before it is over. Maybe that’s why former Chief of Economics at the International Monetary Fund and Harvard Professor Kenneth Rogoff predicted this week that, “We’re not just going to see mid-sized banks go under in the next few months … “We’re going to see a whopper … one of the big investment banks or big banks.” Given this backdrop, it is no wonder Treasury Secretary Paulson and Fed Chief Bernanke are floating ideas about ways to let even large and systemically important institutions go bankrupt if they are insolvent.
So, my 5 questions to Ben Bernanke are as follows:
1.) If the housing market continues to sink in the next few years, could it cost more than 100 billion dollars to bailout Fannie and Freddie?
2.) What do you think the bailout of Fannie and Freddie mean to the balance sheet and credit rating to the United States of America?
3.) Given the huge loses the banks and brokerages still face, should there be regulation in the securitized debt market?
4.) Should the rating agencies that gave triple A ratings to worthless debt be investigated?
5.) What are the criteria you will use to let a systemically important institution fail? (In other words, which companies will you let fail and which will you bailout?)
To Ben Bernankes credit, he did not cause these problems. He walked into a mess largely caused by his predecessor. Unfortunately, Bernanke is left to deal with this “mother of all crises.”