Said the Joker to the Thief

Despite the U.S. Treasury Secretary, and the U.S. President saying that the U.S. economy was in good shape, by July of last year, several things were clear: housing had not bottomed out, the subprime problem was not contained, the banks did not have enough cash, and every official – public or private – who opened his mouth was either a joker or a thief. Bill Bonner explains…

The year of our Lord 2008 died in disgrace. It was tossed in a hasty grave…and mud was thrown on its face as though on a dead dictator. ‘Good riddance’ says practically everyone. But here at The Daily Reckoning, we’re going to miss and mourn it. It may have been the worst year in stock market history, but we can’t remember when we had such a good time. We barely broke a sweat the entire year; never were there more jackasses to laugh at or more con artists to admire. So, today, we hang black crepe…spread tea roses…and bid adieu.

Among the other milestones of 2008 came word that 1 out of 100 adults in the USA was in prison; but as the year progressed, that seemed like hardly enough. Each week brought new evidence that there were still many miscreants who should be behind bars. On January 11, 2008, when one of the nation’s biggest mortgage lenders – Countrywide Financial – went bust. On February 17, Britain’s Northern Rock was nationalized. Still, America’s rulers missed the calamity taking place right under their noses.

"I don’t think we’re headed to a recession," said George W. Bush. "I don’t think I’ve seen any scenario where the American taxpayer needs to be stepping in with more taxpayer dollars," added Henry Paulson. Then, on March 11th, the Treasury Secretary went on to explain that the fallout from sub-prime mortgages was "largely contained." From the report in the Wall Street Journal:

"Paulson, a former chief executive of Goldman Sachs Group, repeated his view that the U.S. economy is fundamentally on sound footing and would dodge a recession."

The very next day, Bear Stearns CEO Alan Schwartz told the world that his firm faced no liquidity crisis. In an exclusive interview with CNBC, he said the nasty rumors were unfounded: "We finished the year, and we reported that we had $17 billion of cash sitting at the bank’s parent company as a liquidity cushion," he said. "As the year has gone on, that liquidity cushion has been virtually unchanged." That same week, SEC Chairman Christopher Cox added that his agency was comfortable with the "capital cushions" at the nation’s five largest investment banks.

Four days later, the cushions seem to have mysteriously disappeared. Bear Stearns, faced bankruptcy brought on by collapsing sub-prime prices. In a desperate measure, the firm sold itself to J.P Morgan the next day for $2 a share – a 98% discount from its high of $171.

But by May things were looking up again. On the 6th of the month, Cyril Moulle-Berteaux, managing partner of Traxis Partners LP, a hedge fund firm, wrote in the Wall Street Journal: "…it is very likely that April 2008 will mark the bottom of the U.S. housing market. Yes, the housing market is bottoming right now."

But by July, several things were clear: housing had not bottomed out, the subprime problem was not contained, the banks did not have enough cash, and every official – public or private – who opened his mouth was either a joker or a thief.

On July 16th Fed Chairman Bernanke told Congress that troubled mortgage giants Fannie Mae and Freddie Mac were "in no danger of failing." The next day, ABC interviewed Fannie Mae CEO Daniel Mudd. Would Fannie Mae need a bailout, he was asked. "I think it’s very unlikely," was the opinion of the top man. " And I think everybody that has described it… [says it’s] a backstop in case things turn out different than everybody predicts."

If anyone knew what was happening in the nation’s housing market, he wasn’t sitting in the CEO’s seat at Fannie or the Fed. By September, things were turning our different than everybody expected. On the 6th, the US government nationalized both Freddie Mac and Fannie Mac, wiping out the shareholders. On the 14th, Lehman Bros. went broke. Lehman’s main man, Dick Fuld, blamed the few people who actually seemed to know what was going on – those who sold the company’s stock: "When I find a short-seller, I want to tear his heart out and eat it before his eyes while he’s still alive." The day after, Merrill Lynch ceased to be an investment bank; it was taken over by the Bank of America. And the following day, the Fed bailed out American International Group Inc in return for 80 percent stake.

But by the middle of September, the financial authorities – who neither saw no evil nor heard any – were on the case. On September 18 the UK Financial Services Authority took the Dick Fuld approach; it banned short-selling financial stocks. The next day, US Treasury Secretary Paulson took aim at the problem he never saw, calling on Congress to ante up $700 billion. Whence cometh the $700 billion figure? "It’s not based on any particular data point, we just wanted to choose a really large number," said a Treasury Department spokeswoman.

Besides who had time to look for data points? "If we don’t do this, we may not have an economy on Monday," said Ben Bernanke to the U.S. Congress. Mr. Bernanke was as wrong about that as about everything else. Monday came. Monday went. The economy never seemed to check its agenda. But then, the U.S. House of Representatives rejected Paulson’s rescue plan and stock markets all over the world crashed. The Dow Jones posted its largest point decline ever. "I believe companies that make bad decisions should be allowed to go out of business," opined George Bush.

By early October, however, the world’s rescuers had their defibrillators plugged in; Congress approved the acquisition of up to $700 billion of Wall Street’s toxic assets and the UK government announced 400 billion pound bank bailout. "We not only saved the world…" began Gordon Brown’s victory speech, before he was drowned out by howls of Tories.

"I got to tell you," said Paulson on November 13th "I think our major institutions have been stabilized. I believe that very strongly. " Two weeks later, America’s largest bank and its largest automaker were on the verge of bankruptcy.

By yearend, the thieves had been blown up by their own debt bombs and the jokers were in control of most of America’s major industries – housing, autos, banking and finance. "…The lack of specifics [in the bailout legislation," explained a Bloomberg report, " gives President-elect Barack Obama plenty of leeway to decide who succeeds and fails…"

And as 2008 began its death rattle, America’s president managed to capture the zeitgeist of the whole remarkable period with just a few flagrantly absurd bon mots: we had to "abandon free market principles to save the free market system" said he.

Au revoir, 2008…sniff, sniff.

Enjoy your weekend,

Bill Bonner
The Daily Reckoning

January 09, 2009

Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of the national best sellers Financial Reckoning Day: Surviving the Soft Depression of the 21st Century and Empire of Debt: The Rise of an Epic Financial Crisis.