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The Conspirators:
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by Al Martin














by Al Martin

Wall Street Cheers Bailout by U.S. Taxpayers

(4-7-08) The Federal Reserve has engineered a bailout of the failed Bear Stearns bank using JPMorgan Chase in a move that is widely perceived as “corporate welfare” or “Wall Street socialism.” While U.S. homeowners continue to suffer due to the widespread mortgage debacle, Wall Street is being rescued from its risky and speculative deals by the Fed itself in a bailout package, which has effectively become the stealth nationalization of the banking industry in America.

      Meanwhile, last week, equity markets continued their 3-week rally despite increasingly bearish economic news flows. On Friday, April 4, the March unemployment data showed job losses of 80,000, with total first quarter job losses of 238,000, which was substantially more than expected. It is now clear through admissions made by numerous Fed governors that the nation has entered a recession in the first quarter of 2008 and that this recession is going to be much deeper than the Bullish Media Shills on CNBC and Bloomberg would lead us to believe. Despite these dire reports, domestic equities continued to rally.

      Last week, we heard the Congressional testimony from Fed Chairman Ben Bernanke that the U. S. taxpayer funded bailout of Bear Stearns is not the no-risk deal that Bernanke said it was going to be in the beginning.

      For instance, we discovered last week that the $30 billion dollars in so-called short term lending facilities given to JPMorgan in order to accommodate the takeover of Bear Stearns as well the management of Bear Stearns’ so-called book (their inventory of securities, including all the toxic and virtually worthless derivatives) which the Fed said it is prepared to roll over for years is not the risk-free deal to the taxpayers that Bernanke originally promised.

      Bernanke originally said that this deal, when it was first announced three Sundays ago, would be such that U. S. taxpayers would be at no risk because the $30 billion dollars of collateral that JPMorgan is pledging from Bear Stearns’ book were all triple A, liquid securities. Now we are finding out that the securities in question are not AAA, and that in fact most of them are junk, for which no underlying market currently exists.

      This has forced the Fed to alter the deal itself. Instead of extending the original 90-day short term financing package, the Fed is now saying that it will be necessary to extend this financing far longer, because the Fed is taking into its inventory collateral that isn’t worth anything currently and whose future value is also highly suspect.

      What we further learned that was a surprise last week, which oddly enough was flushed out of Bernanke by Republican members, was that this deal that the Fed made with JPMorgan was a non-recourse deal on JP Morgan’s assets.

      A non-recourse deal means that the Fed, in extending this loan, has no further recourse beyond this collateral against JPMorgan. That was yet another surprise. In other words, it could be characterized as a future gift from the U.S. taxpayers.

      The chain of liability then is very simple. It doesn’t make any difference to Bear Stearns or JPMorgan, because JPMorgan is now going to own what is left of Bear Stearns, by effectively owning and controlling its book. Where the liability exists for the taxpayers is the $30 billion in financing that the Fed is providing to JPMorgan in order to “manage” Bear Stearns’ book.

      What Bernanke meant by “manage” is to oversee the gradual liquidation of that book, so that semi-worthless securities did not have to be sold at what they are actually worth now. The Fed then is playing a shell game by telling U. S. taxpayers that these securities are likely to be more valuable in the future -- when in fact they are not.

      In other words, the Fed talks out of both sides of its mouth. The bulk of these instruments from Bear Stearns are so-called private-label mortgage CMOs (Collateralized Mortgage Obligations) which supposedly were AAA and now we discover that they are not.

      This is the CMO paper which is at the very heart of the subprime crisis. So how can the Fed say that the market will become more liquid for this paper when the Fed is maintaining the most bearish projections of anybody on the street in terms of where real estate is going over the next 12 months? It is the Fed that claims that foreclosure rates, which continued to rise to fresh records with every passing month, will worsen substantially.

      Indeed, the Fed says that foreclosures will increase another 30% by the end of 2008 from the record levels at which they already stand. The Fed itself is predicting that median housing prices will decline another 15% before a bottom is reached. How can the Fed then say that CMO private-label mortgage paper, and the market for such paper, is going to become healthier?

      Is this initial $30 billion the beginning of a bottomless pit?

      Of course it is not a bottomless pit as far as JPMorgan is concerned, although another thing we found out this week which was yet another Bernanke lie, is that the Fed originally said in this deal that it wouldn’t extend any more than $30 billion, and that was it.

      Now we see the Fed saying that it may be prepared to extend more if needed. But it is not the Fed that makes that determination. It is JPMorgan that makes that determination. While JPMorgan’s total liability in this deal is only $1 billion dollars. That is all they are on the hook for.

      They guaranteed the first billion of the $30 billion dollar Fed loan. The U. S. taxpayers guaranteed the other $29 billion against a book of securities with a current face value of $36.3 billion dollars, whose last bid value in the marketplace was no more than $9.7 billion dollars. What I am talking about is the last known bid value. The reason why that has to be emphasized is because 90% of the pledged collateral currently has no market value, because there are no liquid markets being maintained in those securities.

      Now the reason why equity markets are rallying despite increasingly bearish economic news flows and falling corporate profits is this notion that the Fed will come to the rescue of any and all Wall Street firms that are threatened. In fact Bernanke said it outright again last week. He has essentially made an open-ended commitment to bail out any corporation that is threatened by subprime, high yield, muni, or GSE paper, all of which continue to decline in value.

      The Fed already has 40% of its entire net worth committed to these so–called monthly TAF and SuperTAF auctions, which are supposed to be providing liquidity. That was the original concept of these auctions -- to provide liquidity to street firms who had books full of securities that had become illiquid.

      However, what we are discovering with each passing week, and what Bernanke himself complained about although there is nothing he can do about it, is that the borrowers of this money (Wall Street banks, investment houses, insurance firms, pension firms, etc) are not using the money for what the Fed intended. They are not using it to liquefy their books, even though their inventories have become illiquid. Instead they are just re-lending the money at a daily rate in order to scalp 2 or 3 basis points on loans. Thus Bernanke’s great scheme is doing nothing to address the central problem of illiquid markets.

      How is this playing in Europe and in the Far East? Asian and European markets have more reality than domestic markets. What you see now is that the U.S. domestic equity markets are far ahead of the rest of the world’s markets. They have rallied on a percentage basis much more than Asian or Eurozone markets.

      The significance of that is that U.S. equities are always more susceptible to bubbles, because you have the dumbest investors in the United States. You do not have sophisticated adroit investors in the United States that you have in the rest of the planet.

      So how have the banks in the Far East and Europe reacted to this bailout and the fact that U. S. taxpayers are on the hook? The other central banks on the planet have paid lip service to what the Fed is doing. The Bank of Japan, the ECB, Bank of England, Bank of Switzerland, Bank of Canada, etc. all came in behind the Fed, but they came in with tiny amounts of money. The rest of the world’s banks are coming up with a pittance to liquefy illiquid assets compared to what the Fed is coming up with. The rest of the world’s central banks are just riding on the Fed’s coattails.

      What the Fed has done is to make an open-ended bleed on the U.S. taxpayers. The Fed has made a commitment on their behalf to provide billions, possibly trillions of U. S. taxpayer money to effectively bailout investment banks and other financial institutions currently holding illiquid paper.

      How long can this possibly go on? It can go on for as long as the Fed can finance it and as long as the American people do not understand the nature of their liability. The Fed will continue to do this with varying degrees of backdoor political support.

      Now, although the administration did not want the Bear Stearns deal, nobody in Congress wanted it, they are nonetheless all supporting it. WHY? is the big question.

      The most important issue here is to continue to keep hidden from the American people the extent of the problem and to prevent the American people in their capacity as investors from having a knee jerk reaction – dumping their holdings.

      What we have seen in the last three weeks since the Bear Stearns bailout is that the subprime mess has become worse. We have seen subprime paper markets continue to dry up and fall in value. We have seen the current municipal bond crisis grow worse. Overnight auction failure rates in muni bonds are now reaching 90%. The governors of several states are now saying U. S. municipal securities are effectively worthless.

      Also we have seen the liquidity in the so-called high yield market and junk market continues to fall. We find that possibly 1/3 of all municipal money market funds and bond funds are now illiquid, with the holders of these funds, Joe Sixpack Investor, not even realizing that the funds are illiquid because they are still receiving statements based on a bid that is fictitious, and they don’t know it is illiquid because they have not tried to withdraw any money.

      This is another major catastrophe waiting to happen. In fact U. S. equity prices have entered an absolute fantasyland, compared to current risk, because 1) investors are not aware of the extent of the problems in the debt markets and 2) the U.S. equity markets have completely divorced themselves from underlying economic fundamentals.

      The S&P; 500 closed at a P/E of 20.7 on Friday. That is more than 50% above the 60-year historical average of the index. The importance of this is that in the 29 post-war recessions the S&P; has entered those recessions trading at a discount to its historical average. What we are saying is that there is no comparison. Equity prices are trading so rich relative to the underlying economic environment that there is no historical comparison.

      This could be the Mother of All Speculative Bubbles. And what the Fed has created, although it will specifically deny that this was its intent, is a bubble in domestic equity prices which is unsustainable.

      How is the Fed actually doing this? By removing the fear out of the markets. By saying that it will underwrite and guarantee everything. What the regime then is effectively doing (which is odd in a Bushonian Regime that talks about “free enterprise,” “free markets” and capitalism) is effectively allowing and providing a Socialist Welfare solution to the problem. This is nothing less than a defacto stealth nationalization of the banking industry.

      What this stealth nationalization is accomplishing is a dramatic transfer of more than $2 trillion dollars of worthless securities and the liability that this represents to the U. S. taxpayer.

      So, to all our subscribers, be wary of getting long U. S. equities at current valuations.

      At Insider Intelligence.com we continue to trade the S&P; from the short side on rallies.

      Did you know that the S&P; came out with its projections for the S&P; 500 earnings for Q1 2008 and Q2 08, and did you know that in the four quarters from Q3 07 to the end of Q2 08, those four quarters, the S&P; 500 earnings would have fallen by 50%?

      Yet during the same time, the price earnings ratio (P/E) has increased by 30%.

      The Fed, in concert with the bullish shills in financial media, has led American investors to believe that the peaches-and-cream trucks have arrived. Sorry, but they haven’t.

    * AL MARTIN is an independent economic-political analyst with 25 years of experience as a trader on NYMEX, CME, CBOT and CFTC. As a former contributor to the Presidential Council of Economic Advisors, Al Martin is considered to be a source of independent analysis for financially sophisticated and market savvy investors.

After working as a broker on Wall Street, Al Martin was involved in the so-called "Iran Contra" Affair as a fundraiser for the Bush Cabal from the covert side of government aka the US Shadow Government.

His memoir, "The Conspirators: Secrets of an Iran Contra Insider," (http://www.almartinraw.com) provides an unprecedented look at the frauds of the Bush Cabal during the Iran Contra era. His weekly column, "Behind the Scenes in the Beltway," is published weekly on Al Martin Raw.com, which also publishes a bimonthly newsletter called "Whistleblower Gazette."

Al Martin's new website "Insider Intelligence" (http://www.insiderintelligence.com) will provide a long term macro-view of world markets and how they are affected by backroom realpolitik.



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