Busted: Bankers and The Global Economy

February 8, 2009

Toxic Debt Bailout by Wall Street?

bailout-can-of-wormsWall Street was instrumental in producing the global economic crisis as well as the economic crisis at home. Now the Obama administration is looking for private investment to bail out U.S. banking with a U.S. Federal Guarantee. In exchange for a guaranteed bottom dollar value on toxic derivatives and bank assets, the federal government wants to entice buyers like private investors and investment entities: hedge funds, private equity funds, insurance companies and the like.

The federal government has stubbornly insisted that toxic banking instruments that have brought the global economy crashing down still maintain some value and will increase in value some day. In the bailout last year, the federal government paid almost double the estimated value of toxic debts purchased from banks. The value of securities and toxic debt tied to subprime mortgages and other dubious loans has plunged as the financial crisis has intensified. To avoid similar criticism in the future, the federal government wants to establish guarantees for investment. The Obama administration is depending on Timothy Geitner to get the job done with a workable approach.

In a federal bailout, toxic asset valuation is questionable at best, raising political questions about whether purchase prices are fair to both banks and taxpayers. The system is ‘too big too fail.’ As toxic assets remain on the bank balance sheets, they continue to decline in value, producing more multi-billion dollar losses for banks. Bank securities are complex and hard to evaluate. There is little information about which assets are owned by each bank. To make matters worse, banks have refused to cooperate with outside buyers. The Obama administration expects that federal investment guarantees will be a good short-term fix that is worth the risk of declining assets even though the U.S. taxpayer will be left holding the bag. The government stands ready to absorb losses at a base value, while providing some of the financing for the purchases as an incentive.Transparency is still the #1 issue behind the whole idea making the actual workability of any plan questionable.

Lap dog economists are finally admitting that the U.S. doesn’t have a functioning banking system, a measured requirement for a future ‘self-sustaining capitalist economy.’ The lack of trust has destroyed the system. The government hopes to restore that trust. As far as a functioning banking system, lap dog economists and government specialists haven’t determined that the American people can’t continue to borrow their way to economic health with stagnant wages, job losses and inflated prices. The credit bubble for the U.S. economy has burst with the result that millions of formerly prosperous Americans no longer can qualify for loans. Now, the Feds are hoping on investors to make the difference. ~ E. Manning

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