In the recent, unexpected move to nationalize mortgage giants Fannie Mae and Freddie Mac, Treasury Secretary Paulson made an unexpected extra effort to protect several billion dollars in lower level debt that would not normally be protected under such circumstances. This debt was held by foreign, largely Chinese investors. Meanwhile hundreds of small community banks, some already battered by the real estate crisis, lost $10 to $15 billion in preferred stock of the two, according to The Wall Street Journal.
Banks must legally keep a certain percent of their assets in “safe” reserve to protect themselves from loan loss. Many small, community banks invested in Fannie Mae and Freddie Mac preferred shares in order to meet this requirement. These are not Wall Street bigwigs, but smaller banks that are the backbone of local communities across the nation. It was a generally accepted, even encouraged, policy to have them invest in these supposedly government guaranteed entities.
The fact is Paulson personally stepped in to include the government safety net over bonds owned by Chinese investors, while causing a heavy blow to hundreds of small banks. If the takeover had been structured like the AIG bailout, the preferred shareholders like these small banks would have been protected, but inexplicably Paulson basically wiped out the value of these assets while personally protecting foreign bondholders.
Most of these banks will survive, but the best case scenario is they will reduce local lending just when the economy needs it most. The worst case, probably for dozens, is that they will not be able to survive this blow on top of other recent losses, like the real estate crisis. For instance, if a bank loaned to several local home building companies that have since gone out of business, they would already be in a weakened state.
I can only guess why Paulson would value protecting Chinese investors over our own small banks, but no scenario imaginable is positive. He must go.
First it came with the surprise nationalization of the Fannie Mae and Freddie Mac, the two giant mortgage insurers. The assumption announced to the population was it would cost up to $200 billion, but since they own a combined total of $5 trillion in USA mortgages, and failure rates are continuing to rise, not just on subpar loans but across the board, but let’s just hold our breadth and assume $200 billion for now.
That fiasco, which still has a lot of detail not in the light of day, was nearly the equivalent of half the deficit for this entire year, but was just the start.
Next was the AIG fiasco, and per The Wall Street Journal, their senior leadership truly had no concept of how many tens of billions they needed. First it was $20 billion, next $40 billion, whoops $60 billion and so on. The final tab was $85 billion, though again no one can really give us a specific accounting of why the biggest insurance company in the country, and indeed a flagship of American industry across the globe is suddenly facing this shortfall. The culprit vaguely cited is the mortgage situation hurting their credit rating, but surely it must go much deeper than that. I will do blog updates as actual facts become available. On the face of it, I think I can say as someone in the business world for twenty years, we are dealing with what could only be called criminal incompetence.
Then we are greeted by the mother of all bailouts – Paulson not just proposes, but appears to be getting support to rapidly ram through a $700 billion fund to buy bad loans and securities. No one seems to know the details, besides Paulson and his minions and they are not talking. Yet momentum seems to be ridding towards allowing this massive, budget busting monstrosity. For example, will every bank be able to dump bad loans onto this fund until it runs out, or is there some standard or limitation? Maybe it is necessary, but they are not yet putting the facts on the table for the citizens of this country to review and understand, so how can we know? One thing is certain – pushing something completely new of this magnitude without details through and without our ability to review it is a recipe for a huge fiasco.
In total, these three add up to a trillion in cost to our citizen taxpayers, and does not even include the Bear Stearns fiasco. Speaking of our citizenry, how does a trillion dollars stake up? A trillion dollars divided by the population end up being roughly $1 million per 300 citizens including everyone, even children, or about $3500 each for every single individual (yes, I realize that includes folks that do not pay taxes, so the real amount per taxpayer would be much higher).
Because the government does not actually show a liability until it borrows that dollar or gets an invoice, this does not “officially” quadruple this year’s national budget deficit, but it might as well if it goes through, because that is the reality of the real cost.
Yes, we need the financial system stabilized, but we also do not have a blank check. These issues alone will help impair our future ability to borrow as a nation at low rates, meaning we will eventually have to pay much more interest to borrow from foreigners, and goodness knows what fiasco is coming next. We are putting our nation at risk.
Watch for updates in the future as I try to drill into the truth on these issues, and please let me know what you learn or think, and join me in contacting your congressman.
Recently I wrote about how the industrial chemical melamine (the same chemical that poisoned thousands of pets in the USA from imported Chinese dog food components) had been found in 22 Chinese dairy food producers of baby food products. There is some relevant follow-up news on this story:
First, according to Bloomberg, it turns out that melamine makes dairy products appear higher in protein than they would be otherwise, so this poison was added intentionally to make the milk used in the baby formula appear to have sufficient protein.
It is unclear at this point whether the chemical was added by farmers, milk distributors, or the dairy companies producing the baby formula. Apparently it is common for farmers in China to dilute the milk with water to make it appear to be more volume, but seems unlikely they would be sophisticated enough to use chemicals. That leaves the Chinese distributors and dairy companies, or likely some combination of the two.
Secondly, the first company involved has now been found to have exported the tainted milk to seven other nations, but it has not been found to have come to the USA as of yet. No word on the 21 other company’s exports, though they include several of China’s largest dairy producers. This company even donated formula to the Chinese earthquake relief effort, as if there was not already enough suffering. Considering there is no one at USA ports or border crossings testing this sort of food product, the implications of this sort of manmade disaster are worrisome.
The number of infants sickened has already climbed into the many thousands, and who knows how many are not reported or are not showing up yet? I sincerely hope they recover, though realistically it looks bad for many.
Melamine, the industrial chemical infamous for the pet food poisoning issue in the USA last year has reared its ugly head again – this time striking China’s most vulnerable citizens in baby formula.
The Chinese government announced the dangerous chemical was found in 22 different producer’s baby formula, including some of their largest, most famous food producers. The surprising degree of wide-spread contamination, even from what are locally considered safe producers, is alarming.
This latest poisoning issue became apparent when dozens of infants had to be treated for kidney stones, which are very rare in young babies. Chinese officials are preparing for a huge increase in the ongoing health needs of the many children that consumed this poison.
Safety concerns are common in China’s very rapidly growing dairy industry. Revenue has grown to nearly $3.5 billion dollars, up nearly 200% from 2003.
There is no evidence that the tainted formula has been exported to America at this point, though supermarkets in places like Hong Kong have been recalling unsafe formula. However, one should always look at the label of food products to make sure they are from countries known to be safe. This writer was surprised to see apple crisp and soy bean snacks in Costco from China, particularly in that the USA produces so many apples and soy beans. No one is checking imported food safety of this type of product at American ports or border stations.
Per this morning’s Wall Street Journal, OPEC agreed in meeting this week to cut production 520,000 barrels a day.
Several members claim a “glut”, but actually it is a pretty obvious effort to keep oil above $100 a barrel, and indeed oil did spike over $3 per barrel Tuesday to close at $103.26.
Potentially more dangerous in the longer term, Russia sent a 20 person delegation and proposed a formal alliance regarding oil production and pricing between OPEC and Russia. OPEC presently produces 40% of the world’s oil, whereas Russia produces 11%. The combined total would give them dangerous control over the energy market. Included in the delegation was the chairman of Russia’s largest oil producer and Russian Prime Minister Putin ally (read crony), so this is a pretty serious effort. The agreement could be signed by this October.
The USA has twin deficit issues that are rapidly draining our wealth and already forcing unheard of massive borrowing – consumer goods mostly from Asia/China and energy.
This situation with OPEC and Russia highlights the very serious energy situation. Take a look at major oil producers, like Iran, Venezuela, Saudi Arabia, and of course Russia. This is where our trillions of dollars have gone. It is no coincidence that this is happening with Russia just as we show support for the democracy of Georgia, who still has Russian tanks in its territory.
However, a much darker future is out there if we do not get this energy (and consumer goods) deficit in order in the next few years. Imagine a world where America is the largest debtor nation (oops, already there), where the economy is declining (there too), where unemployment is surging (strike three?), but now double or quadruple it – America with no ability to influence world freedom, gas at $10 a gallon, unemployment at 10%++.
We are a great people and can this future, but need to act now no matter what Washington is saying – better energy efficiency, conservation, drilling more, ethanol, wind, safe nuclear, etc.
As individuals, I really like my Ford Escape Hybrid, but even laying of the accelerator and making sure tires are properly inflated can make a modest difference in fuel efficiency now.
We need made in USA energy and products able to deal with the future. Americans can make this happen, I have faith, but will we?
Todd Lipscomb
Founder of MadeinUSAForever.com your source for made in USA products.