The U.S. Financial System Is Effectively Insolvent - The BAILOUTS Won't Stop The Ship From Sinking

[Orwellian_Ghost]

The U.S. Financial System Is Effectively Insolvent
Nouriel Roubini, 03.05.09, 12:01 AM EST


For those who argue that the rate of growth of economic activity is turning positive--that economies are contracting but at a slower rate than in the fourth quarter of 2008--the latest data don't confirm this relative optimism. In 2008's fourth quarter, gross domestic product fell by about 6% in the U.S., 6% in the euro zone, 8% in Germany, 12% in Japan, 16% in Singapore and 20% in South Korea. So things are even more awful in Europe and Asia than in the U.S.



First, note that most indicators suggest that the second derivative of economic activity is still sharply negative in Europe and Japan and close to negative in the U.S. and China. Some signals that the second derivative was turning positive for the U.S. and China turned out to be fake starts. For the U.S., the Empire State and Philly Fed indexes of manufacturing are still in free fall; initial claims for unemployment benefits are up to scary levels, suggesting accelerating job losses; and January's sales increase is a fluke--more of a rebound from a very depressed December, after aggressive post-holiday sales, than a sustainable recovery.



News and banks analysts' reports suggested that Goldman Sachs (nyse: GS - news - people ) got about $25 billion of the government bailout of AIG and that Merrill Lynch was the second largest benefactor of the government largesse. These are educated guesses, as the government is hiding the counter-party benefactors of the AIG bailout. (Maybe Bloomberg should sue the Fed and Treasury again to have them disclose this information.)

But some things are known: Goldman's Lloyd Blankfein was the only CEO of a Wall Street firm who was present at the New York Fed meeting when the AIG bailout was discussed. So let us not kid each other: The $162 billion bailout of AIG is a nontransparent, opaque and shady bailout of the AIG counter-parties: Goldman Sachs, Merrill Lynch and other domestic and foreign financial institutions.

So for the Treasury to hide behind the "systemic risk" excuse to fork out another $30 billion to AIG is a polite way to say that without such a bailout (and another half-dozen government bailout programs such as TAF, TSLF, PDCF, TARP, TALF and a program that allowed $170 billion of additional debt borrowing by banks and other broker-dealers, with a full government guarantee), Goldman Sachs and every other broker-dealer and major U.S. bank would already be fully insolvent today.



http://www.forbes.com/2009/03/04/global-recession-insol...

[Nictuku]

1. We are in big trouble

[FreakinDJ]

2. Will it is an "Opinion piece" but why do they call him "Dr Doom"

just asking

[readmoreoften]

4. Because he predicted this crash for a long time and everyone "pooh pooh'd" him.

[inna]

9. your question is answered here:

http://www.nytimes.com/2008/08/17/magazine/17pessimist-...

[inna]

10. here's Roubini's commentary; note that he objects to being characterized as a "pessimist"...

The New York Times has published a long article/profile about me – available online here – that appears in print on their glossy Sunday Magazine.

The article is a very friendly and sympathetic portrait of my views. I would take issue only with the characterization of myself as being a “perma-bear” or “perpetual pessimist”. For one thing I ended up a realist rather than a pessimist about the current economic and financial crisis; things are turning out even worse than I initially predicted.

Also, while very pessimistic about the U.S. and global financial outlook in the short run, I expect that the global economy can grow at a sustained rate in the medium term and that the integration of China, India and other emerging market economies in the global economy is a very important and positive trend over time. So, yes there is doom and gloom over the short term; but the medium term horizon will be brighter for the global economy if and when the mess of the current financial and economic crisis is fixed. Still, as i have recently argued - and as reported at the end of the New York Times article - this U.S. crisis may be the sign of the beginning of the long run decline of the American Empire.

http://www.rgemonitor.com/roubini-monitor/253363/new_yo...

[roamer65]

27. Roubini is a realist.

Most people cannot handle reality.

[FreakinDJ]

12. Without being too cocky - so did a lot of folks at DU

in 2003 - 2004

It was plain as day the Bush "Ownership Society" was fabricated on thin air and the entire US economy was being floated on paper from 2002 on. If not for "Paper Values" allowing what I was calling "The Re-Fi Economy" we would have flattened out in 2001.

Honestly - I thought Fund managers coupled with the new bankruptcy laws would have been buying up much more property and turning them into REITs by now - but there is still time.

[peacetalksforall]

3. Isn't Goldman-Sachs thee foremost connected firm to Cheney-Rumsfeld-Bush?

[earth mom]

5. Yikes!

[inna]

6. holy shit! rec #7 NT

[girl gone mad]

7. I'm glad someone else posted this.

I almost put it here yesterday, but I've posted so much gloomy economic news lately that I'm starting to feel like Debbie Downer. lol..

[TBF]

8. K&R n/t

[AllentownJake]

11. More bad news coming other than what he said

The FDIC is virtually broke, the government is going to have to pump money into there otherwise people are going to start literally stuffing mattresses again.

Also there is this little thing called the Pension Guarentee Corporation, lot of pension assets tied up in the stock market. At the end of the fiscal year every company is required to file their unfunded pension liability. Companies that did the right thing and had over funded pensions are going to be required to pump assets into their pension funds to make up for the stock market losses. Companies that weren't that responsible are going to have pensions declared insolvent and the pensions will be taken over by the Guarentee Corp after the companies declare bankruptcy. You know what that means more money pumped into there.

China, Japan, and other countries are only going to stand by so long and hold their dollars, the situations going on in their countries are only going to make them quicker to pull the trigger when they realize all the US is doing right now is printing more money and devaluing our currency. Big hit is going to be taken when that happens.

Not to mention you have people who were retired now looking for jobs because they've lost half the assets they had. More competition for fewer jobs.

Translation: Last year was only the beginning.

[FourScore]

13. Roubini is brilliant.

Thanks for posting this, OG!

[Pavulon]

14. Sky is falling..ack

that is all.

[gristy]

15. 2nd derivative is falling sharply?

So the 3rd derivative is negative? Oh, lord, where does is all end???? What's the 4th derivative doing?????

[leftstreet]

16. Check out this Deck Chair from the Titanic

Sweet!

K&R

[anaxarchos]

17. It's important because Roubini broke ranks...

He is one of the most prominent members of the Harvard/Yale/Fed/IMF/World Bank mafia. His PHD adviser was Jeffrey Sachs. Larry Summers was his mentor at Harvard. He worked for both Clinton's Council of Economic Adviser's and for Treasury. He was senior adviser to Timothy Geithner when Geithner was in Clinton's treasury. He is a full fledged member of the club.

"I’ve found that credit losses could peak at a level of $3.6 trillion for U.S. institutions, half of them by banks and broker dealers. If that’s true, it means the U.S. banking system is effectively insolvent because it starts with a capital of $1.4 trillion. This is a systemic banking crisis... The problems of Citi, Bank of America and others suggest the system is bankrupt. In Europe, it’s the same thing."
http://bloomberg.com/apps/news?pid=20601087&sid=a746r_1...

Roubini was the most prominent economist predicting the present economic crisis in 2006 and his future outlook is very bleak. According to him, the recession will not bottom out for two to three years, 2009 will be worse than 2008, and 2010 is likely to be even worse, and the recovery, when it comes, will be very flat.

[roamer65]

25. Delete.

[inna]

29. here's one of my fave Roubini pics....

it's a natural size, printable, cuttable, lovable... Roubini Halloween mask!

for the record, i happen to be a big fan, so... i downloaded and printed the image.... and almost went to Halloween as Roubini. (changed my mind at the last moment.)

[anaxarchos]

32. I would be very frightened if someone in a Roubini mask...

...showed up at my door. At least the normal Halloween monsters can be reasoned with, even if their logic is off-beat. Roubini? Not so clear.

[inna]

35. are you serious??

you really think he's just full of shit??

any evidence/reasons why??

[anaxarchos]

36. No... I'm not.

I think he is mostly right and he's more honest than the rest of that crew. Moreover, he seems terminally outspoken (which is good).

I don't have much in common with WB/IMF/Fed/Treasury types, though. They make me feel icky.

[Greyhound]

18. For the hundredth time, now is the time for bold action, nothing else will work.

The planes have crashed and what they're doing now is like rushing hundreds of engineers into the World Trade Center towers to brace them after they started to fall.

Wall Street will just have to face the fact that they've committed suicide, it's too late. Bury the bodies, have a wake, and get back to the real business of rebuilding our real economy.

[CoffeeCat]

19. My book!

I have a first edition of that Titanic book, and it's signed by a Titanic survivor.

...but I digress.

[TBF]

20. I guess if things get really bad you could always sell it - if there's anyone

left with any money to buy it!

Sounds cool though - my mom has some first editions I'm hoping to inherit one day

[No.23]

30. The ship is sinking; we're on it; and, they're taking our money...

from within our pockets...

placing it in the pockets of the crew...

who will have access to some lifeboats...

that we won't.

A simpler analogy cannot be drawn.

[demodonkey]

34. My Grandmother bought that book; the $$ was to go to the Titanic survivors....

...on my bookshelf now, and one of my favorite reads (and many times re-reads.) Compelling first-hand stories, collected right after the disaster. And a fascinating look into a long-ago time.

[Kolesar]

21. If the Financial System is insolvent, then who must "eat the losses" at the time of reckoning?

Investors in these odd products at the banks made a bad choice. Will we see pension funds, union funds, and insurance companies take big write-downs?

[Tierra_y_Libertad]

22. The bankers and politicians don't mind "Spreading the Poverty".

[TBF]

24. In fact they're quite adept at spreading it far away from themselves. n/t

[ljm2002]

33. "Spreading the Poverty"...

...I like it! You should forward that phrase to a few of the media like Keith O., Rachel Maddow, etc., and also some financial people like Max Keiser.

Because we keep hearing the "Spreading the Wealth" meme, and it is utterly sickening, when you see the rich and the super-rich are still looting us as the economy sinks. Let's hear it from the other side of the coin for a change.

We really need to learn to use sound bites, this is a good one IMO.

[slipslidingaway]

23. K&R....

someone else said this on the air at the end of September when the bank bailout bill was being discussed.

[roamer65]

26. JP Morgan Chase is the "13th" Federal Reserve district. District "M-13", basically.

Therefore, it will left alone. It is the Federal Reserve's conduit to the private financial sector.

All others will be nationalized, eventually.

[DemocracyInaction]

28. Two Things

Couple decades ago it was all over for America--the "empire" was gone, blah, blah because the Japanese were killing us economically. We would never recover. We were done and Japan would rule the world. Then they collapsed and we went on to "bubbles", pretty bubbles (obviously never learning a thing)...ahhh, but our empire did rise again. Secondly, one thing that is making the financial boys happy is that whether the stock market claws up or falls bad, the dollar is still the "currency of default" to the world. Yup, even they are surprised at it. That means that the world feels the only thing with strong value left is this country (of course, the world could be fucking drunk for all I know)...

[inna]

31. "the "currency of default"

"Secondly, one thing that is making the financial boys happy is that whether the stock market claws up or falls bad, the dollar is still the "currency of default" to the world."


ironically, it's possible that we actually might do exactly that... DEFAULT. on the debt.


but of course, we still have the most powerful - by far - military in the world, that alone must count as something...