The Economic Crisis

Here is an excerpt from Charles R. Morris' book, The Trillion Dollar Meltdown....

...There are relatively few "names," or underlying companies, that are deeply traded, several hundred at most. And a relatively small number of institutions, basically the global banks, investment banks, and credit hedge funds, do most of the trading. In effect, they've built a huge Yertle the Turtle-like unstable tower of debt by selling it back and forth among themselves, booking profits all along the way. That is the definition of a ponzi game. So long as a free-money regime forestalled defaults, the tower might wobble, but stayed erect. But small disturbances in any part of the structure can bring the whole tower down, and the seismic rumblings already in evidence portend disturbances that are very large.

...The liberal crackup of the 1970s...is also important for how it was resolved. In one of the great episodes of American public service, Paul Volcker addressed the problems head-on, wrung inflation out of the economy, restored the international position of the dollar, and cleared the field for the economic booms of the 1980s and 1990s.

Contrast Volcker's behavior with that of the Japanese when their own asset bubble imploded in the late 1980s--a debacle also proportionally on the same scale as our current one, and much more like it in detail. There was no Japanese Volcker. Instad of addressing their problems, the tight network of incumbent politicians and bankers concealed them. And nearly twenty years later, Japan still has not recovered.

The American financial sector today is far more powerful than it was in the 1970s. And to date, its response to the looming crisis has been, overwhelmingly, to downplay and to conceal. That is a path to turning a painful debacle into a decades-long tragedy.

"Btw--that deal is ridiculous. We should not be rating it."

"We rate every deal. It could be structured by cows and we would rate it."

-email between two analysts at S&P regarding a deal they were being asked to examine.

Even if it staves off disaster, the bail-out will cause huge problems. It creates moral hazard: such a visible security net encourages risky behaviour. It may politicise lending.

Governments will need to minimise these risks. They should avoid rewarding the bosses and shareholders of the rescued banks. They must not steer loans to politically important sectors. And they should. Run the banks on a commercial basis with the explicit aim of getting out of the banking business as quickly as possible (and at a profit).

Finance needs regulation. It has always been prone to panics, crashes and bubbles. Because the rest of the economy cannot work without it, governments have always been heavily involved.

Without doubt, modern finance has been found seriously wanting. Some banks seemed to assume the markets would be constantly liquid. Risky behaviour garnered huge rewards; caution was punished. Even the best bankers took crazy risks. For instance, by the end of last year Goldman sachs, by no means the most daring, had $1 trillion of assets teetering atop $43 billion of equity. Lack of regulation encouraged this gambling. Financial innovation in derivatives soared ahead of the rule setters. Somehow the world ended up with $62 trillion-worth of credit-default swaps (CDSS), none of them traded on exchanges. Not even the most liberal libertarian could imagine that was sensible.

The macro economic condition that set up the crisis stemmed in part from policy choices: the Federal Reserve ignored the housing bubble and kept short-term interest rates too low for too long. The emerging world's determination to accumulate reserves, especially China's decision to hold down its exchange rate, sent a wash of capitol into America. There was something of a perfect storm in which policy mistakes combined with Wall street's excesses.

Heavy regulation would not inoculate the world against future crises. Two of the worst in recent times, in Japan and South Korea, occurred in highly rule-bound systems. What's needed is not more government but better government.

Indeed, history suggests that a prejudice against more rules is a good idea. Too often they have unintended consequences, helping to create the next disaster.

Sadly, another lesson of history is that in politics economic reason does not always prevail....

Capitalism is at bay, but those who believe in it must fight for it. For all its flaws, it is the best economic system man has invented yet.

If you are interested in the scorched earth potential of financial derivatives, this blog post from David Haas is a must-read.  It does an exceptional job of explaining the linkage that exists between speculative paper and the lack of trust that currently afflicts our banking system.  It also explains why our executive branch has so quickly called an international summit of the G7 to deal with the problem....

The Crushing Potential of Financial Derivatives

Published on 12-10-2008

Source: Market Oracle

George Soros, one of the world's foremost investor-speculators, has said many times that he stays away from financial derivatives because "no one understands them". In the world of finance, derivatives might be comparable to the theoretical study of linear particle acceleration in nuclear physics. Such theories appear to be "understood" mainly based on current assumptions accepted in academic circles, often with little provable working knowledge of how such currently-held theories might ultimately manifest themselves over the long run in the real world. The problem with assumptions is that they generally change%u2026often sooner than we think.

Some might consider financial derivatives to be a form of "Russian Roulette" that's played for fun and extreme levels of short-run profit by a very small number of financial elites and academics. As you'll see, these high-stakes games are played at the potential risk of total destruction of all the functioning financial systems on Earth. Perhaps this is why Warren Buffett repeatedly calls them "financial weapons of mass destruction" or something similar.

I have a great deal of respect for the opinions of both Mr. Soros and Mr. Buffett and it is my intention to show you; 1. Why they feel as they do about derivatives and 2. the potential scale of the threat posed by derivatives and other similar forms of "financial innovation".

To help gain a "big picture" understanding of derivatives markets, one must start with a diagram. Here's one I created to help lay the groundwork to convey my understanding:

The "Stable Model" shown above shows that there is room for derivatives on the macroeconomic scene as long as they are kept on a very short leash and used for their intended purpose which is, solely, to help producers manage the risks of dramatic changes in markets they depend upon for raw materials used in production. A prominent example of this is the commodities futures markets.

Traditionally, commodities futures were used by companies like Kellogg's Cereal as a form of "insurance" to help them manage the risk of major price fluctuations in the grains they use to make breakfast cereal. By purchasing a futures contract to guarantee the future delivery price of the grains they needed to make cereal for the consumer marketplace, they could be certain that they could maintain relative price stability at the retail level (benefiting consumers) and still operate with the profit they would need to stay in business and serve the market.

In the early 1980's, derivatives began to appear that were of a strictly financial nature. The reasoning behind their regulatory approval was that producers of financial "products" and services also needed to have similar types of "insurance" to protect them against future risks and uncertainties - just like the non-financial operators had. The main selling point was, of course, that these financial futures contracts would help financial companies to stabilize their operations and provide powerful tools to manage their risks from fluctuating markets and future uncertainties, as well. Unfortunately, these sophisticated tools that were originally intended to help firms manage risk grew into potent vehicles for leveraged speculation%u2026 and this is where the systemic problems we're facing today originated.

During the 1990's, more and more firms (financial and non-financial alike) began realizing they could make tremendous profits trading in financial vehicles. Many firms made more money trading than they did in their core manufacturing businesses. Word spread and firms of all kinds across all industries began bringing in experienced traders and setting them up with computerized trading operations or they employed the services of outside money managers and hedge funds to do the job for them. Either way, with the seemingly endless expansion of financial opportunity brought about by the rapidly globalizing markets, companies feared they would look foolish to shareholders if they weren't participating in this leveraged gamesmanship. And why not? Everyone else seemed to be doing it, so they should too.

The first major threat to the global "casino" came in 1998 with the collapse of Long Term Capital Management (LTCM). LTCM was a highly-leveraged, computer-based trading firm whose ingenious program authors had not fully considered the possibility that a "statistically unlikely" series of events could occur in a short span of time and wipe them out. A series of such events (East Asian collapse, Russian financial crisis, etc.) did occur, bringing down LTCM and the failure of LTCM was, singlehandedly, large enough to destabilize the entire global financial system. At that time, governments banded together to stabilize the financial system and in doing so created the world's first example of a firm being "too big to fail".

Once the "too big to fail" precedent had been firmly established, the structured finance and derivatives industry was off and running, emboldened by the fact that they'd proven governments could be relied upon for bailouts of massive, yet risky ventures pursued by financial firms in the future. The bigger the venture, the bigger the risk, the more likely it would be insulated from ultimate failure by government bailout or intervention with taxpayer money. This is what's commonly known as MORAL HAZARD in industry parlance.

This new philosophy was a speculator's dream and it rocketed around the globe at the speed of light gathering eager new participants and "hot" capital wherever it went. According to my understanding, here's what it did to the global financial structure - mainly between 1996 and 2007 - leading us to the "edge of the abyss" that we are peering into today:

Now, I promised to help put the size of the problem we're facing into perspective for you and I'm going to switch gears and attempt to do that. To begin, let's consider the total productive capacity of the all the world's economies combined - the Gross World Product. To provide a credible figure, I'm going to use the one from the U.S. Central Intelligence Agency (CIA) which monitors this type of thing as an ordinary part of their operations. We'll assume they know what they're talking about and report genuine figures we can trust. The CIA says the estimated 2007 Gross World Product totaled $65.61 trillion dollars . The figure I'm citing is found on this CIA page:

ANNUAL GROSS WORLD PRODUCT (Official Exchange Rate)

In the business world, we would view the "total value of all goods and services produced and sold" as being the "gross sales" of a business. Gross sales generally has little bearing on "net profit" and perhaps even less relationship with the "total capital" of a business. Gross sales cannot be spent by the business. Only net profit can be spent or added to the capital base. Where businesses incur costs in producing goods for sale, countries consume or deplete resources and also incur costs.

Another measure of the world's wealth is the CIA's reported total of "Direct Foreign Investment" - where nations (and their citizens) have invested abroad in other nations' shares and industries. These worldwide investments totaled $14 trillion at the end of 2006 .

Finally, we can look at the CIA's "Total Market Value of All Publicly Traded Shares" or TMV. TMV is the total value of all shares of stock issued and (presumably) outstanding that is available to trade on all of the world's stock exchanges. This total would probably be a pretty close approximation of the world's capital base which the CIA reported at $53.51 trillion as of the end of 2006 . With world markets having price collapsed during much of 2008, it's likely that recent TMV figures, if available, would be smaller than $53 trillion.

With what I've laid out so far, if I were a stock analyst reviewing the entire world economy as if it we

"I think you have a Goldman Sachs chief of staff to the president and the Goldman Sachs secretary of the Treasury. And they convinced the president that the American people ought to send $700 billion to Wall Street."

-Newt Gingrich

Financial Times Published: September 21 2008 17:57

Last week saw the demise of the shadow banking system that has been created over the past 20 years. Because of a greater regulation of banks, most financial intermediation in the past two decades has grown within this shadow system whose members are broker-dealers, hedge funds, private equity groups, structured investment vehicles and conduits, money market funds and non-bank mortgage lenders.

Like banks, most members of this system borrow very short-term and in liquid ways, are more highly leveraged than banks (the exception being money market funds) and lend and invest into more illiquid and long-term instruments. Like banks, they carry the risk that an otherwise solvent but liquid institution may be subject to a self-­fulfilling and destructive run on its ­liquid liabilities.

But unlike banks, which are sheltered from the risk of a run - via deposit insurance and central banks' lender-of-last-resort liquidity - most members of the shadow system did not have access to these firewalls that ­prevent runs.

A generalised run on these shadow banks started when the deleveraging after the asset bubble bust led to uncertainty about which institutions were solvent. The first stage was the collapse of the entire SIVs/conduits system once investors realised the toxicity of its investments and its very short-term funding seized up.

The next step was the run on the big US broker-dealers: first Bear Stearns lost its liquidity in days. The Federal Reserve then extended its lender-of-last-resort support to systemically important broker-dealers. But even this did not prevent a run on the other broker-dealers given concerns about solvency: it was the turn of Lehman Brothers to collapse. Merrill Lynch would have faced the same fate had it not been sold. The pressure moved to Morgan Stanley and Goldman Sachs: both would be well advised to merge - like Merrill - with a large bank that has a stable base of insured deposits.

The third stage was the collapse of other leveraged institutions that were both illiquid and most likely insolvent given their reckless lending: Fannie Mae and Freddie Mac, AIG and more than 300 mortgage lenders.

The fourth stage was panic in the money markets. Funds were competing aggressively for assets and, in order to provide higher returns to attract investors, some of them invested in illiquid instruments. Once these investments went bust, panic ensued among investors, leading to a massive run on such funds. This would have been disastrous; so, in another radical departure, the US extended deposit insurance to the funds.

The next stage will be a run on thousands of highly leveraged hedge funds. After a brief lock-up period, investors in such funds can redeem their investments on a quarterly basis; thus a bank-like run on hedge funds is highly possible. Hundreds of smaller, younger funds that have taken excessive risks with high leverage and are poorly managed may collapse. A massive shake-out of the bloated hedge fund industry is likely in the next two years.

Even private equity firms and their reckless, highly leveraged buy-outs will not be spared. The private equity bubble led to more than $1,000bn of LBOs that should never have occurred. The run on these LBOs is slowed by the existence of "convenant-lite" clauses, which do not include traditional default triggers, and "payment-in-kind toggles", which allow borrowers to defer cash interest payments and accrue more debt, but these only delay the eventual refinancing crisis and will make uglier the bankruptcy that will follow. Even the largest LBOs, such as GMAC and Chrysler, are now at risk.

We are observing an accelerated run on the shadow banking system that is leading to its unravelling. If lender-of-last-resort support and deposit insurance are extended to more of its members, these institutions will have to be regulated like banks, to avoid moral hazard. Of course this severe financial crisis is also taking its toll on traditional banks: hundreds are insolvent and will have to close.

The real economic side of this financial crisis will be a severe US recession. Financial contagion, the strong euro, falling US imports, the bursting of European housing bubbles, high oil prices and a hawkish European Central Bank will lead to a recession in the eurozone, the UK and most advanced economies.

European financial institutions are at risk of sharp losses because of the toxic US securitised products sold to them; the massive increase in leverage following aggressive risk-taking and domestic securitisation; a severe liquidity crunch exacerbated by a dollar shortage and a credit crunch; the bursting of domestic housing bubbles; household and corporate defaults in the recession; losses hidden by regulatory forbearance; the exposure of Swedish, Austrian and Italian banks to the Baltic states, Iceland and southern Europe where housing and credit bubbles financed in foreign currency are leading to hard landings.

Thus the financial crisis of the century will also envelop European financial institutions.

The writer, chairman of Roubini Global Economics (www.rgemonitor.com), is professor of economics at the Stern School of Business, New York University

This OpEd from Bloomberg's Michael Lewis captures what is transpiring with the federal bailout far better than any other I've seen.  

Warren Buffet's sudden infusion of  $5 billion into Goldman Sachs Group (thereby gaining his own mass-stake), was followed by the great sage's characterization that the current crisis on Wall Street is "an economic Pearl Harbor."   Furthermore, Buffett said, "...there's no Plan B for this.''  

If there was ever a case of a shiny stainless steel pot calling the kettle black, this may well be one of the most dramatic examples on Wall Street in recent memory. 

In fact, there is a Plan B, Mr. Buffett-- and it's a very good one.  Simply stated:  begin raising interest rates now to stem inflation, restore faith in the U.S. dollar, begin repaying our $4 Trillion deficit and investing in U.S. infrastructure.  It's pretty simple--but it requires political courage to do it.   A quality that is woefully lacking in Washington these days....

Here is Michael Lewis' OpEd:

Sept. 24 (Bloomberg) -- Anyone who caught even a sliver of yesterday's hearings in the U.S. Senate on the proposed Treasury bailout of the mortgage-backed securities market knows that the current financial crisis is far from over. Suddenly all sorts of previously unthinkable catastrophes seem possible.

The total collapse of the global financial system is one thing -- everyone at Davos in January saw that coming. But the shrinkage of the Goldman Sachs Group Inc. bonus pool is another. Whatever else the Treasury achieves it must know that if the employees of Goldman suffer any sort of pay cut, it will be judged to have failed. And our country may never recover.

Last year Goldman paid its employees $20 billion, 44 percent of the firm's revenue. Chief Executive Officer Lloyd Blankfein took home $68.5 million, and many otherwise ordinary human beings took home $10 million or more.

This inspired young people everywhere, many of whom may have privately wondered whether it was still worth their time to become investment bankers. Torn between a future in, say, the law and the manufacture of mezzanine CDOs they sucked up their courage and plunged onto Wall Street. And thank God for that: We needed the best and the brightest to get us into this mess, and we'll need the best and the brightest to get us out of it.

Therein lies the problem: If they see Goldman's salaries and bonuses declining, who among the best and the brightest will be induced to join Goldman?

Goldman's Pain

To its credit the government has thus far done pretty much all it can to prevent any suffering inside the firm. Its extreme sensitivity to Goldman's pain is the only way to explain its actions thus far. But its approach has been crude; it has been using a sledgehammer to do a scalpel's job. For instance, by banning the short-selling of shares in the amazing number of Wall Street-related companies that America apparently can't live without (Moody's Corp.?), it may have prevented Goldman from being driven out of business. Certainly, the ban caused Goldman's share price to fall less than it otherwise would have.

But this wise policy ignores the fact that Goldman Sachs, perhaps more than any other financial firm, makes a lot of money from the short-selling of Wall Street-related stocks -- by enabling its hedge-fund clients to do it.

Bold Strokes

Goldman needs any revenue it can get its hands on right now. A wiser policy would have been to disallow the short-selling of Goldman's shares alone, and let the other 925 financial-related companies collapse. Goldman was already well-positioned to devour little pieces of Lehman Brothers Holdings Inc. and American International Group Inc. If other firms were allowed to suffer a bit more, Goldman would consume their juiciest bits too, and become stronger for it. (Come to think of it, Goldman should just get it over with and buy Moody's so it can rate its own securities.) Perhaps its share price might cease to fall.

This points to what amounts to a character flaw inside the Securities and Exchange Commission: fear of the bold stroke. Clearly it wasn't enough to ban the short sale of Goldman's shares, as those shares resumed their downhill journey. What's needed is a broader ban on pessimism of any sort. Worrisome newspaper articles, whispered conversations, mildly skeptical thoughts, anything that might adversely affect Goldman's share price: all these, too, must be outlawed.

Paulson's Payday

Lately, for instance, I have heard several hedge-fund managers gossiping about Treasury Secretary Hank Paulson. One of the things they say is that, in leaving Goldman for government service, Paulson made the greatest trade of his life. Not only was he required to sell his half-billion dollars in Goldman stock near the high, but also, as Treasury Secretary, he was exempt from capital-gains taxes. By getting out of Goldman while the getting was good, the guy may have doubled his net worth.

These hedge-fund managers are the very same people who just a few days ago were shorting Goldman's shares and now have nothing better to do with their time than gossip about an esteemed Goldman alumnus. Shame on them. Their idle chit-chat is just the sort of negativity our government needs to ban.

But I don't want to dwell on the government's failure. As I say, so far they've done a pretty good job making sure no one at Goldman Sachs suffers so much as a scratch on his person. I want to look to the future.

Poker Game

The Treasury has proposed using $700 billion of taxpayers' money to buy the shaky investments created by the likes of Goldman Sachs and sold to customers. This is good, for many obvious reasons, and one less obvious one, too. Obviously, it has slowed the market's desire to put Goldman out of business. It also offers Goldman a place to stuff its bad investments at prices well above market levels.

But the Treasury plan also creates this wonderful hidden opportunity for Goldman Sachs to make a killing, and thus preserve its bonus pool for a long time to come.

Think of Wall Street as a poker game and Goldman as the smartest player. It's sad when you think about it this way that so much of the dumb money on Wall Street has been forced out of the game. There's no one left to play with. Just as Goldman was about to rake in its winnings and head home, the U.S. government stumbles in, fat and happy and looking for some action. I imagine the best and the brightest inside Goldman are right this moment trying to figure out how it uses the Treasury not only to sell their own crappy assets dear but also to buy other people's crappy assets cheap.

At any rate, it won't take long for Goldman Sachs to figure out how to make that $700 billion work for Goldman Sachs. This you can trust them to do. After all,

This extremely compelling article from the Huffington Post's Jason Linkins, who raises a red flag about a little-known provision of the Trillion Dollar Federal bailout plan, is provided here in its entirety.  Required reading.
 

A critical - and radical - component of the bailout package proposed by the Bush administration has thus far failed to garner the serious attention of anyone in the press. Section 8 (which ironically reminds one of the popular name of the portion of the 1937 Housing Act that paved the way for subsidized affordable housing ) of this legislation is just a single sentence of thirty-two words, but it represents a significant consolidation of power and an abdication of oversight authority that's so flat-out astounding that it ought to set one's hair on fire. It reads, in its entirety:

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

In short, the so-called "mother of all bailouts," which will transfer $700 billion taxpayer dollars to purchase the distressed assets of several failed financial institutions, will be conducted in a manner unchallengeable by courts and ungovernable by the People's duly sworn representatives. All decision-making power will be consolidated into the Executive Branch - who, we remind you, will have the incentive to act upon this privilege as quickly as possible, before they leave office. The measure will run up the budget deficit by a significant amount, with no guarantee of recouping the outlay, and no fundamental means of holding those who fail to do so accountable.

Is this starting to sound familiar? Robert Kuttner cuts through much of the gloss in an article in today's American Prospect:

The deal proposed by Paulson is nothing short of outrageous. It includes no oversight of his own closed-door operations. It merely gives congressional blessing and funding to what he has already been doing, ad hoc. He plans to retain Wall Street firms as advisors to decide just how to cut deals to value and mop up Wall Street's dubious paper. There are to be no limits on executive compensation for the firms that get relief, and no equity share for the government in exchange for this massive infusion of capital. Both Obama and McCain have opposed the provision denying any judicial review of decisions made by Paulson -- a provision that evokes the Bush administration's suspension of normal constitutional safeguards in its conduct of foreign policy and national security. [...]

The differences between this proposed bailout and the three closest historical equivalents are immense. When the Reconstruction Finance Corporation of the 1930s pumped a total of $35 billion into U.S. corporations and financial institutions, there was close government supervision and quid pro quos at every step of the way. Much of the time, the RFC became a preferred shareholder, and often appointed board members. The Home Owners Loan Corporation, which eventually refinanced one in five mortgage loans, did not operate to bail out banks but to save homeowners. And the Resolution Trust Corporation of the 1980s, created to mop up the damage of the first speculative mortgage meltdown, the S&L collapse, did not pump in money to rescue bad investments; it sorted out good assets from bad after the fact, and made sure to purge bad executives as well as bad loans. And all three of these historic cases of public recapitalization were done without suspending judicial review.

Kuttner's opposition here is perhaps the strongest language I've seen used, pushing back on this piece of legislation, in any publication of repute, and even here, Section 8 is not cited by name or by content. McClatchy Newspapers also alludes to Section 8 with concern, citing the "unfettered authority" that Paulson would be granted, and noting that the "law also would preclude court review of steps Paulson might take, something Joshua Rosner, managing director of economic researcher Graham Fisher & Co. in New York, said could be used to mask previous illegal activity." Jack Balkin also gives the matter the sort of attention it deserves on his blog, Balkinization.

But elsewhere, the conversation is muted. The debate over whether Congress is going to pass the Paulson bailout package, or pass the Paulson bailout package really hard seems to have boiled down to a discussion of time and concessions. The White House has made it clear that they want this package passed yesterday. Congressional Democrats seem to be of different minds on the matter, with some pushing back hard, and others content to demand a small dollop of turd polish to make the package seem more aesthetically pleasing, at which point, they'll likely roll over and pass the bill. Neither candidate, John McCain or Barack Obama, seem all that amenable toward the bailout, but neither have either demonstrated that they are willing to risk their candidacies to do much more than exploit the issue for electoral purposes.

Sunday morning came and went, with Paulson traipsing dutifully from studio to studio, facing nary a question on Section 8. Front page articles in the New York Times, Washington Post, and the Wall Street Journal detail the wranglings, but make no mention of this section of the legislation. On TV, cable news networks are stuck in the fog of the ongoing presidential campaign.

Throughout the coverage, one catches a whiff of what seems like substantive pushback on this power grab, but it largely amounts to a facsimile of journalistic diligence. Most note, in general terms, that the bailout represents a set of "broad powers" that will be granted to the Department of the Treasury. Yet the coverage offsets these concerns through the constant hyping of the White House's overall message of "urgency."

But one cannot overstate this: Section 8 is a singularly transformative sentence of economic policy. It transfers a significant amount of power to the Executive Branch, while walling off any avenue for oversight, and offering no guarantees in return. And if the Democrats end up content with winning a few slight concessions, they risk not putting a stop-payment on the real "blank check" - the one in which they allow the erosion of their own powers.

Over in the Senate, Christopher Dodd has proposed a bailout legislation of his own, which critically calls for "an oversight board that not only includes the chairman of the Federal Reserve and the SEC, but congressionally appointed, non-governmental officials" and would require the President to appoint an "independent inspector general to investigate the Treasury asset program." In Dodd's legislation, Section 8 is effectively stripped from the bill.

Nevertheless, the fact that Section 8 of the Paulson plan seems to strike few as a de facto dealbreaker can and should astound. The failure of Congress to hold the line on this point would be truly embarrassing. But if we make it through this week with nobody in the press specifically informing the public about the implications of this single sentence - in the middle of a complicated bill, in the middle of a complicated time - then right there, you have the single largest media failure of this year.

Fannie Mae CEO Richard Mudd (L) and Freddie Mac CEO Richard Syron (R)

In the wake of our Federal Trillion Dollar Taxpayer Bailout for the country's failed financial institutions, it may be of interest that as hundreds of thousands of jobs for ordinary Americans are now being lost, the millionaires in charge of these failed institutions are being well compensated for their collective failures. 

So, as they say, "FYI"...

Richard Syron, former CEO of Freddie Mac, will reportedly receive an exit package of $15 million.

Daniel Mudd, former CEO of Fannie Mae, will receive an exit package of $14 million.

American International Group (AIG) said it paid a $47 million severance package to former Chief Executive Martin J. Sullivan this past July.  Chief Executive Officer Robert Willumstad many get $7 million after only three months as CEO. 

Lehman Brothers CEO, Richard Fuld's compensation amounts to $354 million dollars over five years, with an annual compensation including salary and stocks believed to be hovering in the $63 million range.

John Thain has been CEO of Merrill Lynch for less than a year. He received a $15 million cash bonus when he signed on with the struggling company. Just last weekend, Thain engineered the sale of the 94-year-old financial services firm to Bank of America. Thain stands to make an estimated $9 million off that deal.

Bear Stearns CEO, James Cayne sold all of his stock and netted a reported $60 million.

For many Americans, the Federal Bailout is an issue that they feel powerless to influence, so why try? The White House has advocated it, Congress has gone along with it, and the Fed is executing it. It's obviously necessary because they said so. Failure, they say, isn't an option... (In fact, it is).

Mostly, I think, the American people feel powerless to influence the bailout because they don't understand it. Nor do they understand their options.

To understand a problem, you must first define it. And you must assemble facts about the problem.

The stark reality, however, is that in the case of the government's $2+ Trillion bailout, Americans are being denied the opportunity to understand the problem because the facts that would help define it, are being systematically denied to us.

During a series of frantic, late night phone calls that would have otherwise made the Iraq War appropriation look benign by comparison, the Federal Reserve, Congress and the White House created an unprecedented $700 billion Troubled Asset Relief Program (TARP) fund that was transferred to Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson to spend at their own discretion, without any requirement for transparency in how they lend it and who they lend it to.

Paulson and Bernanke testified before Congress in in September they would provide transparency in the $700 billion bailout of the banking system. Four months later, we're seeing the White House and Treasury approve Fed lending well beyond that amount, all-the-while using TARP funds, and extending their lending to bailout programs to those that don't need Congressional approval--the automakers' bailout the most conspicuous among them. How are they authorizing the spending? Just as the scheme started, the approvals are being stamped behind closed doors through a five-member oversight board that includes Paulson and Bernanke...with no public disclosures. What makes the non-disclosures so insidious is how it contrasts so starkly to Paulson and Bernanke's own congressional testimony. This, from Paulson:

"We need oversight...We need protection. We need transparency. I want it. We all want it.''

And this from Bernanke at a joint House-Senate hearing the next day:

"Transparency is a big issue.''

Well, we now know that it was a lie. In fact, transparency has actually been avoided, not sought after. Trying to understand the motivations in keeping such massive government lending secret is not unlike walking through a hall of contorted mirrors. On the record, the Fed and Treasury have said that banks would never agree to take the loans if they were to be publicly released. But the real reason for the secrecy is that there are no publicly known safeguards for the Fed's loans that could even pass as adequate. Simply stated, the collateral is bad, and your government doesn't want you to know just how bad it is. Worse, the government is being bilked by Wall Street for massive private brokerage fees to carry out the bailout, and by the artificially high rates that the Fed is being charged to purchase CDOs and bonds.

As a result, Americans have no inkling where their money is heading or what collateral the banks, mortgage houses, automakers are pledging in return. But did anyone notice the congressional circus when the Big Three arrived on the Hill? The strident demands for a plan to reform themselves before even a cent could be authorized? And did it really matter--they and the UAW knew all along that the White House would bail them out if Congress wouldn't! Where were similar calls with the Wall Street Bailout?

Here's what we do know: according to the Fed's Web site, the Fed has loaned cash and government bonds to banks, that have in turn given the central bank collateral in the form of equities and debt--to include the infamous subprime and structured securities (i.e., collateralized debt obligations). The borrowers have included the now-bankrupt Lehman Brothers, Citigroup and JPMorgan Chase, as well as the barely solvent Goldman Sachs, Bank of America and Morgan Stanley. That does not include the $474 billion in other lending, mostly through the Fed's purchase of Fannie Mae and Freddie Mac bonds.

It's not likely. In a November 6th interview, House Financial Services Committee Chairman Barney Frank said that he believed the Fed's disclosure was sufficient as was the risk that they were taking on. "I talk to Geithner and he was pretty sure that they're OK...If the risk is that the Fed takes a little bit of a haircut, well that's regrettable.''

Frank is also a Democrat. His comments run counter to Barack Obama's September 22nd campaign speech, where he promised to "make our government open and transparent so that anyone can ensure that our business is the people's business.''

Thankfully, at least one media outlet is fighting for the transparency that American taxpayers deserve. Bloomberg News has requested details of the Fed lending under the U.S. Freedom of Information Act and filed a federal lawsuit Nov. 7 seeking to force disclosure. Here is the Bloomberg lawsuit (so you can check on it if you're so inclined): Bloomberg LP v. Board of Governors of the Federal Reserve System, 08-CV-9595, U.S. District Court, Southern District of New York (Manhattan).