Connecting the dots on the credit crisis: Qui bono?

[Hannah Bell]

Just some facts that might be connected...add on...& correct any errors...



1. Who's responsible for the demise of Glass-Steagall?

Contrary to prevailing opinion, neither Clinton nor Congress seem to be primarily responsible. According to this timeline, it was big banks who lobbied for loosening of restrictions - in particular, Citicorp, J.P. Morgan, Chase Manhattan (now JPMorgan Chase) and Bankers Trust (now merged with Deutsche Bank).

And it was the Fed, mostly under the tenure of Alan Greenspan, who loosened them, making the final 1999 Congressional vote more or less the acknowledgement of a fait accompli:

http://www.pbs.org/wgbh/pages/frontline/shows/wallstreet/weill/demise.html



2. What precipitated the crisis?

So far as I can tell, the downturn in real estate markets: there's been a steady drumbeat of bad news since. Yet - supposedly, non-performing/foreclosed real estate is a small fraction of total mortgages - less than 5%. (I had a link but lost it, if someone could fill in...). Thus, simply by paying off non-performing loans, if this is the root of the problem, it could be ended at relatively low cost - certainly less than the cost of the war in Iraq/Afghanistan, for example.

But there's more...



3. What about derivatives?

Wall Street wrote a bunch of derivatives on real estate & who knows what, setting up a chain of dominoes. The top three players were Morgan-Chase, Citi, & Bank Of America. In fact, Morgan alone is said to hold about 1/2 of them.

http://www.occ.treas.gov/ftp/release/2008-74a.pdf (p. 22)

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=389&topic_id=4144089&mesg_id=4144089

This is reputedly the source of the fear in the credit markets: the fear that corps have this stuff on their books, so aren't credit-worthy.

Thus, supposedly, the change in the LIBOR...



4. What's the LIBOR?

http://www.investopedia.com/terms/l/libor.asp.

"An interest rate at which banks can borrow funds...from other banks in the London interbank market...derived from a filtered average of the world's most creditworthy banks' interbank deposit rates for larger loans with maturities between overnight and one full year. The LIBOR is the world's most widely used benchmark for short-term interest rates. It's important because it is the rate at which the world's most preferred borrowers are able to borrow money. It is also the rate upon which rates for less preferred borrowers are based...Countries that rely on the LIBOR for a reference rate include the United States, Canada, Switzerland and the U.K."

So, supposedly the LIBOR is rising & credit freezing up, banks won't lend to each other, & thus the economy - including your paycheck - is also endangered.

http://www.bloomberg.com/apps/news?pid=20601082&sid=aBxs213UjqjA&refer=canada

Thus the supposed need for a bailout. But...



5. Who sets the LIBOR, again?

"a filtered average of the world's most creditworthy banks"

Well, which banks? So far as I can tell, these:

http://www.bba.org.uk/bba/jsp/polopoly.jsp?d=145&a=13777&artpage=all

Notice some of the names: JPMorgan Chase, Bank of America & Citi, as well as other leading players in derivatives like HSBC. These are the "most credit-worthy" banks?

No, they're the BIGGEST international banks. Not necessarily the same thing. But because they have rate-setting power, they have the power to affect the fate of everyone else.

So this is why the frantic pleas from DUers, politicians, pundits: "Credit is freezing up! We need a bailout to save the economy, pronto!" But...



6. How's the bailing-out been managed so far?

There seems to be some good evidence it's been managed to benefit some, & destroy others. So far, JP Morgan-Chase, Citi, & Goldman Sachs seem to be among the winners - though with those derivative overhangs, it's not clear why.

Here are a few relevant threads & articles:

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=389&topic_id=4151446&mesg_id=4151446

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=389&topic_id=4152306&mesg_id=4152306

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=389&topic_id=4151446&mesg_id=4152743

http://www.vanityfair.com/politics/features/2008/08/bear_stearns200808?currentPage=1

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=132&topic_id=7256498&mesg_id=7256498



Qui's bono-ing?