Use and Abuse

The bailout money was supposed to pay banks to do their actual job and lend money. There are reports that the money will be used for a new round of bank mergers and acquisitions. Amy Goodman reported on October 28th that "Bank Bailout May Lead to Greater Consolidation".

A similar message came from the other end of the political spectrum, the investment advisers at Money Morning:

Those billions are a virtual lock to set off a merger tsunami in which the biggest banks use taxpayer money to get bigger – admittedly removing the smaller, weaker banks from the market, but ultimately also reducing the competition that benefited consumers and kept the explosion in banking fees from being far worse than it already is. . . .

According to Dealogic, government investments in financial institutions has reached $76 billion this year – eight times as much as in all of 2007, which was the previous record year. And that total doesn’t include the $125 billion the U.S. government is investing in the large U.S. banks as part of its rescue package, the similar amount it may invest in smaller banks, or other deals that the feds are helping engineer (JPMorgan Chase & Co.’s (JPM) buyouts of The Bear Stearns Cos. and Washington Mutual Inc. (WAMUQ) are two such examples).

MM quotes an M&A analyst explaining why: "When it comes to M&A, there’s always a pronounced ‘domino effect.’ Consolidation breeds more consolidation as industry leaders conclude they have to keep acquiring in order to remain competitive.” The crisis hasn't made the drive toward concentration go away: it's made it worse.

Market logics aren't being checked by government money. They are using government money to carry on business as usual. That is of course the point of government efforts, most effectively laid out by Sarkozy in France: reassure the public, but also get market leaders back on their feet, which will mean plowing a lot of weaklings - aka your local regional bank - into the topsoil, fertilizing it with tax dollars, and giving the financial giants a whole new root system.

Money Morning says, invest in a regional bank today, before it gets bought! Especially in the Southeastern US!

The amount of leveraging is so enormous that the bailout money can't stop it. Think of leverage as Hurricane Katrina and the bailout as the New Orleans levees. Here's MM's Keith Fitz-Gerald on the combination of size and the absence of real knowledge about what's sitting out there.

As scores of highly leveraged hedge funds dump billions of dollars worth of holdings at once, they effectively “flood” the markets with whatever the asset is that they are trying to sell. In doing so, they push the values down for the rest of us. For an example, imagine a house in your neighborhood selling for 50% of its appraised value. Upon completion of the sale, all “comparables” in the area, including your own home, will likely take a hit as a result. So it’s in everybody’s interest to keep prices as high as possible.

But nobody can do that when there are more homes than buyers – even in the best neighborhoods.
So when is it going to stop?

We don’t know. No one does. Hedge funds are notoriously secretive in their reporting, so even though there are estimates as to how much they own and (by implication) how much they owe, it’s hard to gain perspective on how much leverage is actually being used. Nor do we really know who holds what asset – especially as it relates to potential liquidations.

Over the weekend, rumors were flying that U.S. Federal Reserve examiners are hounding Citadel Investment Group LLC regarding “counterparty risk” and its exposure to debt. Citadel, naturally, vehemently denies this, but lately where there’s smoke, there’s certainly been the potential for fire.

Then there’s Europe. Despite the fact that many Europeans find it fashionable to blame the whole financial-system meltdown on the United States, mounting evidence suggests they may be the biggest hypocrites of all.

Data from the Bank of International Settlements shows that Western European Banks may hold as much as $4.7 trillion in cross-border bank loans to Eastern Europe, Latin America and emerging Asian markets, which means, as Bloomberg News journalist Tom Cahill described it as “the exposure of continental European banks to a whole set of ‘sub-prime’ nations in the form the former Communist bloc may be the Achilles heel of the European banking system.”

That means that “the elephant in the room is that while public sector debt was held in check by policymakers, private debt as a percentage of GDP exploded, as that was not part of convergence criteria to join the Eurozone."

Secrecy, no public figures, no knowledge - that's the core of all of this.