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Friday, March 27, 2009

The New Ponzi!

How the plan would work
The Treasury's ambitious program would revolve around five steps:
A bank decides what pool of assets they would like to sell.
After determining that it would be willing to leverage the pool, the FDIC will conduct an auction. For instance, mortgages with $100 face value would be bought for $84.
Of the $84, the FDIC would provide guarantees for $72 of financing, leaving $12 of equity.
The Treasury would then provide 50% of the equity financing. In this example, Treasury would invest $6 and the private investor would contribute the other $6.
The private investor would manage the servicing of the asset pool using managers approved by the FDIC.
Let’s make a small comparison. Most remember Enron and its rise and fall, don’t we. Well the rise of Enron stock was based upon the good news of many energy contracts and projects that Enron was arbitrarily valuing. (of course there were no contracts or projects in reality, but it sure looked good on paper). A week or so ago the Dow was tumbling and Citibank went below $1, yet two days later Citibank publicly came out and projected a profit in Q1 2009, imagine one of the largest Banks which had the biggest pool of so called toxic assets (government speak for Liabilities or debt) was somehow going to be profitable in the first quarter. On this speculative announcement the market went on a small bull run (even fantasy tends to make the market rise). This is stage one just as Enron would report new contracts to get the employees buying more stock so the price could rise.

This week the Secretary of the Treasury releases the above plan to release the banks from the toxic assets they are holding. For those of you who have ever taken accounting in school you understand how absurd this entire exercise is. These so called toxic assets have zero value as they are totally illiquid. To call them assets at all is a major leap or basically an accounting manipulation. They are LIABILITIES or DEBT. But let’s play along with the government because of course they are looking out for us. Now, remember at this stage Enron had no assets either only phantom assets on paper, but that stock price sure looked good. So back at the treasury, the plan is to print 1 trillion dollars as a future debt to back these toxic assets which in reality have no value. But wait it gets better because now the government is going out to the investor (private market) the same group that this government wants to raise taxes on and punish for success, to invest and buy some of these assets. In order to attract that investor the Bank can pick which baskets of assets it wants to pawn off and simply place an arbitrary value to these so called assets. Now for you accounting students out there don’t you wish you could take your balance sheet and attach an arbitrary value to your most expensive liabilities and then sell them to investors and magically turn losses into gains so your balance sheet becomes rich with profit! Enron couldn’t even do this. But wait it gets better, after the private investors put up real capital the government will back the investment of said assets (liabilities) with paper debt which will be paid back by the same private investors in the form of future taxation. Of course this tax bill will be spread to all citizens in the future for what would probably have to be decades at the minimum and possibly a century. (PS don’t think that Congress didn’t run the trial balloon of a 90% tax as this is probably just about the correct rate to pay off this ridiculous debt structure)

(PS we all know what happened to Enron, this is just a much bigger version)

After this is all done the Banks walk away clean, with renewed balance sheets and increased stock value. Of course the investors have just sucked up all of the Banks losses both in real and future dollars. Now if this isn’t Bank robbery I don’t know what is. It really does get better however, as this entire Ponzi scheme is being perpetrated to get the Banks back to the business of lending. So, after the American consumer takes on all the debt of the Banking industry (all those losses) the Banks will be kind enough to lend us more money! Talk about incredible gall, this one takes the proverbial cake.

You don’t have to be a student of economics or accounting to understand a scam when it presents itself. The government is playing 3 card monti and just like a corner hustler the public is the mark. Bernie Madoff would be a better choice for Secretary of the Treasury as he really understands how these scams work. Of course this scam is the largest in the history of mankind (even bigger than Social Security) and will leave the biggest trail of lies, deceit and utter destruction.

The unintended consequence of this monumental mistake with money is the ultimate destruction of the US dollar. Once our currency becomes useless the debt that we sell becomes useless. No debt to sell to unsuspecting suckers (China etal…) and the country has no economy to speak of. This is what happened to Enron. Just like in the Wizard of OZ our leaders want is to disregard that little man behind the curtain. On the way to the devaluation of the dollar are some other pretty ugly events. As the market feasts on the false news and pumped up toxic assets investors begin to speculatively run up the prices of commodities (oil, food such things as everyday staples of living) and this speculative run makes all of our daily necessities of life cost more and more and more. Remember just 6 months ago when speculators ran oil up to 100 dollars a barrel and poor consumers like us had to pay $4 a gallon for the over inflated value of gas? Well, on the news of the Ponzi scheme from the Secretary of the Treasury Oil shot up to $54 a barrel or a 22% gain in one day. Next domino is energy, as the administration wants to find alternate forms of energy (never mind that oil is a speculative gold mine) they decide to tax the oil, natural gas and electricity providers (remember this tax is necessary to fund the debt from the Ponzi scheme enacted by the Secretary of the Treasury) which in turn is passed on to the consumer (you and me). When this happens your utility bills will increase by approx 200% if we’re lucky. So now we pay more for gas, food and utilities not to mention the entire tax bill for the banks plus the tax bill for the utility concerns. If you haven’t figured it out yet we pay all the debt and the increased bills created by the legislators who were attempting to improve our lives.

In the final picture we will be back to horse and buggy and candles. We would be better off if the government was run by the Quakers or Amish; at least there would be a justification for us living in the 1800’s.

Of course all this can be stopped, yet to will take strong grass roots efforts and the active commitment of every American citizen. Just as our founding fathers were able to relieve themselves of a corrupt and excessive government, we need to demand TERM LIMITS and also find leaders from a third and forth party. If the two political parties will not have a reasonable movement towards a moderate form of governing then we the people need to create the government in the middle. Remember that this was created to be a government of the people and by the people. Somewhere along the way we became a government of the privileged. If you don’t believe our government is simply the privileged just look at the last Presidential campaign or even a congressional campaign. More money was spent in the Presidential campaign then is in the entire economy of some mid sized nations. In fact the Inauguration party spent more money than third world nations have in their own GDP. Something is wrong when you have to raise 10’s of millions just to be a local government leader. This leads to corruption and the abuse of power. Money is buying power and power is abusing the American citizen.

Term Limits will put a stop to most of this. This will lead to a more even playing field and it will assure that leaders serve the interests of their constituents before leaving office swiftly. Shorter term in office also makes it incredibly difficult for corrupt lobbyists or interests groups to control a legislator. With the consistent flow of new leaders and new ideas the power corruptors can’t get their claws in the leaders. This cuts across party lines, just think of the former Strom Thurmond and Ted Kennedy as examples of how non term limits can effect our government. In fact I will stress that you get on the Term Limits campaign now as there has already been a minor movement towards lifting any term limits (Mayor Bloomberg in NY got the Courts to over turn the term limits attached to his office in order for him the run for a 3rd term). The next thing you will be hearing is the movement to lift term limits on the Presidential office. Within the next 24 months you will be hearing this kind of talk.

Let’s start a grass roots movement for TERM LIMITS, and if the legislators don’t sign on simply provide term limits yourself with your vote. Should the legislators fight term limits (as they have been doing) simply don’t re-elect any incumbents. This is the simplest form of term limits, vote for the non-incumbent. This will also assure a balance of power and keep us from the disaster of one party rule (this is not good regardless of party), we should never be stuck with one party rule as it endangers the welfare of our country.

So on the heels of this great Ponzi scheme let’s start our own grand scheme and hold our leaders and future leaders to full accountability, total responsibility and most importantly clear transparency.

Karl Schilling
www.advocacy.bz