Thursday, December 16, 2010
Should Hank Paulson Be In Jail?
Any discussion of whether Paulson committed unlawful actions as Treasury Secretary needs to start with Tarp.
As the New York Times wrote last year:
In retrospect, Congress felt bullied by Mr. Paulson last year. Many of them fervently believed they should not prop up the banks that had led us to this crisis — yet they were pushed by Mr. Paulson and Mr. Bernanke into passing the $700 billion TARP, which was then used to bail out those very banks.Indeed, Congressmen Brad Sherman and Paul Kanjorski and Senator James Inhofe all say that the government warned of martial law if Tarp wasn't passed:
That is especially interesting given that the financial crisis had actually been going on for a long time, but - instead of dealing with it - Paulson and the rest of the crew tried to cover it up and pretend it was "contained", and that it was obvious to world leaders months earlier that it was not a liquidity crisis, but a solvency crisis (and see this).
Bait And Switch
The Tarp Inspector General has said that Paulson misrepresented the big banks' health in the run-up to passage of TARP. This is no small matter, as the American public would have not been very excited about giving money to insolvent institutions.
And Paulson himself has said:
During the two weeks that Congress considered the [Tarp] legislation, market conditions worsened considerably. It was clear to me by the time the bill was signed on October 3rd that we needed to act quickly and forcefully, and that purchasing troubled assets—our initial focus—would take time to implement and would not be sufficient given the severity of the problem. In consultation with the Federal Reserve, I determined that the most timely, effective step to improve credit market conditions was to strengthen bank balance sheets quickly through direct purchases of equity in banks.So Paulson knew "by the time the bill was signed" that it wouldn't be used for its advertised purpose - disposing of toxic assets - and would instead be used to give money directly to the big banks?
Senator McCain also says that Paulson pulled a bait-and-switch:
Even the New York Times called Paulson a liar in 2008:Sen. John McCain of Arizona ... says he was misled by then-Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke. McCain said the pair assured him that the $700 billion Troubled Asset Relief Program would focus on what was seen as the cause of the financial crisis, the housing meltdown.
"Obviously, that didn't happen," McCain said in a meeting Thursday with The Republic's Editorial Board, recounting his decision-making during the critical initial days of the fiscal crisis. "They decided to stabilize the Wall Street institutions, bail out (insurance giant) AIG, bail out Chrysler, bail out General Motors. . . . What they figured was that if they stabilized Wall Street - I guess it was trickle-down economics - that therefore Main Street would be fine."
“First [Paulson’s Department of Treasury] says it has to have $700 billion to buy back toxic mortgage-backed securities. Then, as Mr. Paulson divulged to The Times this week, it turns out that even before the bill passed the House, he told his staff to start drawing up a plan for capital injections. Fearing Congress’s reaction, he didn’t tell the Hill about his change of heart.What tax breaks is the Times talking about? The article explains:
Now, he’s shifted gears again, and is directing Treasury to use the money to force bank acquisitions. Sneaking in the tax break isn’t exactly confidence-inspiring, either.”
A new tax break [pushed by Treasury], worth billions to the banking industry, that has only one purpose: to encourage bank mergers. As a tax expert, Robert Willens, put it: “It couldn’t be clearer if they had taken out an ad.”Paulson insisted on a "get out of jail card" in the Tarp bill. Specifically, the bill includes the following provision:
Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.Whether or not that would shield Paulson from the false statements he made before the bill was passed - e.g. why Tarp was needed, and what would happen if it didn't pass - is a separate question.
Moreover, Tarp is just one of Paulson's shenanigans as Treasury Secretary. And Paulson's acts as head of Goldman Sachs are beyond the scope of this essay.
Financial Analyst: This Is The First Recession Since the End of the FIRST World War Where Government Help Isn't Trickling Down to the American People
Banking expert Christopher Whalen (hailed by Nouriel Roubini as one of the leading independent analysts of the U.S. banking system) told the American Enterprise Institute that this is the first recession going back at least to the end of the first World War where government assistance has not trickled down to Main Street and ordinary Americans.
Why?
Because the banks are keeping the money and not loaning it back out:
Buy why aren't the banks loaning the money back out?
As I've repeatedly explained, the government has given the big banks many trillions in bailouts and subsidies.
However, as I wrote in October 2008:
The banks are not "going to lend a nickel until the economy turns", and yet it is impossible for the economy to turn until the giant banks are broken up.Many people (including me) have been warning that the banks will keep hoarding cash no matter how much money the feds give them.
Now, even the banks themselves are admitting it.
As the New York Times writes in an article entitled "Banks Are Likely to Hold Tight to Bailout Money":
"Will lenders deploy their new-found capital quickly, as the Treasury hopes, and unlock the flow of credit through the economy? Or will they hoard the money to protect themselves?
John A. Thain, the chief executive of Merrill Lynch, said on Thursday that banks were unlikely to act swiftly. Executives at other banks privately expressed a similar view.
'We will have the opportunity to redeploy that,' Mr. Thain said of the new capital on a telephone call with analysts. 'But at least for the next quarter, it’s just going to be a cushion.'
***
Lenders have been pulling back on credit lines for businesses, mortgages, home equity loans and credit card offers, and analysts said that trend was unlikely to be reversed by the government’s money.
Roger Freeman, an analyst at Barclays Capital, which acquired parts of the now-bankrupt Lehman Brothers last month [said] 'My expectation is it’s quarters off, not months off, before you see that capital being put to work.' ”
And another Times article includes the following quote:
“It doesn’t matter how much Hank Paulson gives us,” said an influential senior official at a big bank that received money from the government, “no one is going to lend a nickel until the economy turns.” The official added: “Who are we going to lend money to?” before repeating an old saw about banking: “Only people who don’t need it.”The banks are going to sit on the cash, not loan it out. So can everyone please stop saying that the bailouts were necessary to increase liquidity?
Moreover - as confirmed by the head of the Bank of England, the world's leading living monetary economist, economists Nouriel Roubini, James Galbraith, Robert Kuttner, financial analysts such as Chris Whalen and Marshall Auerbach, and many others - the big banks are insolvent, and have been insolvent since 2008 at the latest.
Remember, more and more "surprises" of fraudulent actions by the banks keep popping out. First it was falsely rating investments and financial instruments, then it was robosigning and fraudulent mortgage backed securities. Each time a new "surprise" pops out, the banks will incur many billions more in additional liabilities. The government refuses to prosecute any of the big fish for their biggest unlawful actions (see this and this), so the mess never gets cleaned out.
Instead, the big banks and the government know there is a lot more garbage coming down the pike (and so are terrified of leaks), and the banks hunker down and sock away any money the government gives to them to try to ride out future hurricanes which they know are coming. Why do they know they are coming? Because they know there are lots more skeletons in the closet, and that whistleblowers will eventually talk about them in deposition or through anonymous leaks.
So the big banks are hoarding all money they can beg from the government (or else crazily speculating with it trying to make their bonuses). But lending it to Main Street? No way, Jose (I know that borrowers are trying to repair their balance sheets and so demand for loans has declined. But that's only part of the story).
Moreover, as crazy as it sounds, the Federal Reserve is intentionally ensuring that the banks don't use the money we're giving them to lend to Main Street, under the guise of fighting inflation.
Of course, there has never been a recession before whether such a high percentage of the government's assistance went to foreign banks.
Finally, government policy is worsening the unemployment crisis.
So there is no mystery as to why assistance from the government isn't trickling down to Main Street.
Wednesday, December 15, 2010
Head of Bank of England Said In March 2008 That We Have a SOLVENCY - Not a Liquidity - Crisis
On Monday, the Guardian reproduced a Wikileaks cable dated March 17, 2008, stating:
SUBJECT: BANKING CRISIS NOW ONE OF SOLVENCY NOT LIQUIDITY
SAYS BANK OF ENGLAND GOVERNOR***
Since last summer, the nature of the crisis in financial markets has changed. The problem is now not liquidity in the system but rather a question of systemic solvency, Bank of England (BOE) Governor Mervyn King said at a lunch meeting with Treasury Deputy Secretary Robert Kimmitt and Ambassador Tuttle.
***
Systemic Insolvency Is Now The Problem
King said that liquidity is necessary but not sufficient in the current market crisis because the global banking system is undercapitalized due to being over leveraged.
Top economists such as Anna Schwartz, James Galbraith, Nouriel Roubini and others have pointed out since 2008 that the Federal Reserve, U.S. government, and virtually all of the central banks and governments of the world are approaching the financial crisis completely wrong, as they are treating it as a liquidity crisis, when it is really a solvency crisis. See this, this and this.
The fact that the head of the one of the world's most powerful central banks told the Deputy Treasury Secretary and American Ambassador to England that the economic crisis was a solvency - not liquidity - crisis, shows that this was hardly a renegade visionary insight.
You restructure insolvent institutions. You don't prop them up with temporary liquidity.
As many top experts have said for years, we must let insolvent banks fail; if we don't, the insolvent banks will drag down the economies of their host countries and put them into sovereign debt crises.
Reagan's OMB Director: Bush Tax Cuts "The Biggest Fiscal Mistake in History" ... Extending Them Won't Stimulate the Economy
Ronald Reagan gave big tax cuts to the wealthy.
So it is dramatic that Reagan's director of Office of Management and Budget - David Stockman - calls the Bush tax cuts "the biggest fiscal mistake in history".
Specifically, Stockman told Dylan Ratigan that Bush's advisers forecast a $5 trillion surplus over 10 years. But "two unfunded wars and a Fed engineered housing bubble later", we're in a $ 5 trillion cumulative deficit. So Bush made a $10 trillion mistake.
Stockman said extending the Bush tax cuts won't stimulate the economy, the fact that the tax cut extensions will expire on the eve of the 2012 elections will panic politicians and force them to renew them yet again, and that "we're destroying the economy on Uncle Sam's credit card.
Tuesday, December 14, 2010
Most Driven Into Debt by Medical Bills HAVE Health Insurance
Between 2000 and 2003, seven in ten adults who were driven into debt by medical expenses had insurance at the time.Similarly, as of 2009:
More than 2.2 million California adults report having medical debt, and two-thirds of those incurred the debt while insured, according to the authors of "The State of Health Insurance in California (SHIC)," a comprehensive new report from the UCLA Center for Health Policy Research.And as the Washington Post pointed out last year:
Why is this happening?Sixty-two percent of all bankruptcies filed in 2007 were linked to medical expenses, according to a nationwide study released today by the American Journal of Medicine. That's nearly 20 percentage points higher than that pool of respondents reported were connected to medical costs in 2001.
Of those who filed for bankruptcy in 2007, nearly 80 percent had health insurance.
Above and beyond the fact that health insurers nickel and dime everyone by trying to exclude necessary medical care from coverage (you've heard the horror stories), there are two additional reasons:
(1) People think that they are covered, and so authorize more health care than they would if they knew in advance that they would have to pay for it out of their own pocket;As an interesting historical sidenote, the Nixon administration helped to launch the whole HMO concept. Specifically, as Michael Moore told Democracy Now last month:
and
(2) People are underinsured, and can't afford to buy an adequate level of insurance for their needs.
[My researcher] found this Watergate tape—has nothing to do with Watergate, it’s one of the Nixon tapes—at the Archives, National Archives, where Nixon and Ehrlichman are discussing whether or not to support this HMO concept. And Ehrlichman says to Nixon, "You’re going to love this, because this is private enterprise. This isn’t like some freebie thing." Nixon goes, "Oh, I like that. Tell me about it." And then Ehrlichman says, "Well, this is how it’s going to work, these HMOs. They’re going to make more money by providing less care. The less care they give them, the patients, the more money the company makes." Nixon goes, "Ooh, not bad!" And it’s all there on tape.In the same interview, former top Cigna health insurance executive Wendell Potter confirmed to Democracy Now, "I do know that tape".
Note: The effect of the new health care bill on this issue is beyond the scope of this essay.
Monday, December 13, 2010
Failing to Prosecute Wall Street Fraud Is Extending Our Economic Problems
Bill Gross, Nouriel Roubini, Laurence Kotlikoff, Steve Keen, Michel Chossudovsky and the Wall Street Journal all say that the U.S. economy is a giant Ponzi scheme.
Virtually all independent economists and financial experts say that rampant fraud was largely responsible for the financial crisis. See this and this.
But many on Wall Street and in D.C. - and many investors - believe that we should just "go with the flow". They hope that we can restart our economy and make some more money if we just let things continue the way they are.
But the assumption that a system built on fraud can continue without crashing is false.
In fact, top economists and financial experts agree that - unless fraud is prosecuted - the economy cannot recover.
Fraud Leads to a Break Down in Trust and Instability in the Markets
As Alan Greenspan said recently:
Fraud creates very considerable instability in competitive markets. If you cannot trust your counterparties, it would not work
Similarly, leading economist Anna Schwartz - co-author of the leading book on the Great Depression with Milton Friedman - told the Wall Street journal in 2008:
"The Fed ... has gone about as if the problem is a shortage of liquidity. That is not the basic problem. The basic problem for the markets is that [uncertainty] that the balance sheets of financial firms are credible."
So even though the Fed has flooded the credit markets with cash, spreads haven't budged because banks don't know who is still solvent and who is not. This uncertainty, says Ms. Schwartz, is "the basic problem in the credit market. Lending freezes up when lenders are uncertain that would-be borrowers have the resources to repay them. So to assume that the whole problem is inadequate liquidity bypasses the real issue."
***
Today, the banks have a problem on the asset side of their ledgers -- "all these exotic securities that the market does not know how to value."
"Why are they 'toxic'?" Ms. Schwartz asks. "They're toxic because you cannot sell them, you don't know what they're worth, your balance sheet is not credible and the whole market freezes up. We don't know whom to lend to because we don't know who is sound. So if you could get rid of them, that would be an improvement."
And economics professor and former Secretary of Labor Robert Reich wrote in 2008:
The underlying problem isn't a liquidity problem. As I've noted elsewhere, the problem is that lenders and investors don't trust they'll get their money back because no one trusts that the numbers that purport to value securities are anything but wishful thinking. The trouble, in a nutshell, is that the financial entrepreneurship of recent years -- the derivatives, credit default swaps, collateralized debt instruments, and so on -- has undermined all notion of true value.
Robert Shiller - one of the top housing experts in the United States - said recently that failing to address the legal issues will cause Americans to lose faith in business and the government:
Shiller said the danger of foreclosuregate -- the scandal in which it has come to light that the biggest banks have routinely mishandled homeownership documents, putting the legality of foreclosures and related sales in doubt -- is a replay of the 1930s, when Americans lost faith that institutions such as business and government were dealing fairly.
Nobel prize-winning economist Joseph Stiglitz says about the failure to prosecute Wall Street fraud:
The legal system is supposed to be the codification of our norms and beliefs, things that we need to make our system work. If the legal system is seen as exploitative, then confidence in our whole system starts eroding. And that's really the problem that's going on.
***
I think we ought to go do what we did in the S&L [crisis] and actually put many of these guys in prison. Absolutely. These are not just white-collar crimes or little accidents. There were victims. That's the point. There were victims all over the world.
***
Economists focus on the whole notion of incentives. People have an incentive sometimes to behave badly, because they can make more money if they can cheat. If our economic system is going to work then we have to make sure that what they gain when they cheat is offset by a system of penalties.
Wall Street insider and New York Times columnist Andrew Ross Sorkin writes:
“They will pick on minor misdemeanors by individual market participants,” said David Einhorn, the hedge fund manager who was among the Cassandras before the financial crisis. To Mr. Einhorn, the government is “not willing to take on significant misbehavior by sizable” firms. “But since there have been almost no big prosecutions, there’s very little evidence that it has stopped bad actors from behaving badly.”Economics professor James Galbraith says:***
Fraud at big corporations surely dwarfs by orders of magnitude the shareholders’ losses of $8 billion that Mr. Holder highlighted. If the government spent half the time trying to ferret out fraud at major companies that it does tracking pump-and-dump schemes, we might have been able to stop the financial crisis, or at least we’d have a fighting chance at stopping the next one.
There will have to be full-scale investigation and cleaning up of the residue of that, before you can have, I think, a return of confidence in the financial sector. And that's a process which needs to get underway.
No wonder Galbraith says that economists should move into the background, and "criminologists to the forefront".
Failure to Stop Fraud and Prosecute Criminals Causes a Loss of Trust in Government, Which Makes Government Less Effective
As Shiller stated in the quote above, the failure of government officials to stop fraud and prosecute the financial fraudsters has caused a lack of trust in government itself.
A psychologist wrote an essay published by the Wharton School of Business arguing that restoring trust is the key to recovery, and that trust cannot be restored until wrongdoers are held accountable:
According to David M. Sachs, a training and supervision analyst at the Psychoanalytic Center of Philadelphia, the crisis today is not one of confidence, but one of trust. "Abusive financial practices were unchecked by personal moral controls that prohibit individual criminal behavior, as in the case of [Bernard] Madoff, and by complex financial manipulations, as in the case of AIG." The public, expecting to be protected from such abuse, has suffered a trauma of loss similar to that after 9/11. "Normal expectations of what is safe and dependable were abruptly shattered," Sachs noted. "As is typical of post-traumatic states, planning for the future could not be based on old assumptions about what is safe and what is dangerous. A radical reversal of how to be gratified occurred."
People now feel more gratified saving money than spending it, Sachs suggested. They have trouble trusting promises from the government because they feel the government has let them down.
He framed his argument with a fictional patient named Betty Q. Public, a librarian with two teenage children and a husband, John, who had recently lost his job. "She felt betrayed because she and her husband had invested conservatively and were double-crossed by dishonest, greedy businessmen, and now she distrusted the government that had failed to protect them from corporate dishonesty. Not only that, but she had little trust in things turning around soon enough to enable her and her husband to accomplish their previous goals.
"By no means a sophisticated economist, she knew ... that some people had become fantastically wealthy by misusing other people's money -- hers included," Sachs said. "In short, John and Betty had done everything right and were being punished, while the dishonest people were going unpunished."
Helping an individual recover from a traumatic experience provides a useful analogy for understanding how to help the economy recover from its own traumatic experience, Sachs pointed out. The public will need to "hold the perpetrators of the economic disaster responsible and take what actions they can to prevent them from harming the economy again." In addition, the public will have to see proof that government and business leaders can behave responsibly before they will trust them again, he argued.
Government regulators know this - or at least pay lip service to it - as well. For example, as the Director of the Securities and Exchange Commission's enforcement division told Congress:
Recovery from the fallout of the financial crisis requires important efforts on various fronts, and vigorous enforcement is an essential component, as aggressive and even-handed enforcement will meet the public's fair expectation that those whose violations of the law caused severe loss and hardship will be held accountable. And vigorous law enforcement efforts will help vindicate the principles that are fundamental to the fair and proper functioning of our markets: that no one should have an unjust advantage in our markets; that investors have a right to disclosure that complies with the federal securities laws; and that there is a level playing field for all investors.
If people don't trust their government to enforce the law, government will become more and more impotent in addressing our economic problems. If government leaders take action, the market will not necessarily respond as expected. When government leaders make optimistic statements about the economy, people will no longer believe them.
Trying to Cover Up the Truth Extends Financial Crises
Elizabeth Warren, William Black and others say that attempting to cover up the truth extended Japan's financial problems into an entire "Lost Decade".
As Joseph Stiglitz said about Wall Street fraud:
So the whole strategy of the banks has been to hide the losses, muddle through and get the government to keep interest rates really low.
***
As long as we keep up this strategy, it's going to be a long time before the economy recovers ....
Pam Martens - who worked on Wall Street for 21 years - writes:The massive losses by big Wall Street firms, now topping those of the Great Depression in relative terms, have yet to be adequately explained. Wall Street power players are obfuscating and Congress is too embarrassed or frightened to ask, preferring to just throw money at the problem and hope it goes away. But as job losses and foreclosures mount and pensions and 401(k)s shrink, public policy measures to address the economic stresses require a full set of unembellished facts...
To the extent that the government tries to cover up - instead of openly discuss - financial fraud, it will only extend America's economic malaise.
It was four years after the crash of 1929 before the major titans of Wall Street were forced to give testimony under oath to Congress and the full magnitude of the fraud emerged. That delay may well have contributed to the depth and duration of the Great Depression. The modern-day Wall Street corruption hearings in Congress ... must now resume in earnest and with sworn testimony if we are to escape a similar fate.
Failing to Prosecute Fraud Encourages Financial Players to Take Bigger and More Blatantly Illegal Actions
Nobel prize winning economist George Akerlof has demonstrated that failure to punish white collar criminals - and instead bailing them out- creates incentives for more economic crimes and further destruction of the economy in the future. Joseph Stiglitz, Professor Black, and many others agree. See this, this and this.
It was largely fraud which brought down the financial system in 2008. Unless we prosecute the fraudsters, they will do even bigger, stupider and more blatantly illegal things in the future which will lead to even bigger crises.
Failure to Prosecute Fraud Exacerbates the Sovereign Debt Crisis
The governments of the world have spent trillions trying to paper over the fraud and prop up the big, insolvent banks, instead of forcing them to restructure and forcing bondholders and shareholders to take a haircut.
A study of 124 banking crises by the International Monetary Fund found that propping up banks which are only pretending to be solvent drives up the costs to the country:
Existing empirical research has shown that providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often abuse forbearance to take unproductive risks at government expense. The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred in the absence of forbearance.
Cross-country analysis to date also shows that accommodative policy measures (such as substantial liquidity support, explicit government guarantee on financial institutions’ liabilities and forbearance from prudential regulations) tend to be fiscally costly and that these particular policies do not necessarily accelerate the speed of economic recovery.
***
All too often, central banks privilege stability over cost in the heat of the containment phase: if so, they may too liberally extend loans to an illiquid bank which is almost certain to prove insolvent anyway. Also, closure of a nonviable bank is often delayed for too long, even when there are clear signs of insolvency (Lindgren, 2003). Since bank closures face many obstacles, there is a tendency to rely instead on blanket government guarantees which, if the government’s fiscal and political position makes them credible, can work albeit at the cost of placing the burden on the budget, typically squeezing future provision of needed public services.
The American banks and government have certainly pretended that all of the big banks are solvent. As ABC wrote in October 2009:
The Treasury Department and the Federal Reserve lied to the American public last fall when they said that the first nine banks to receive government bailout funds were healthy, [the special inspector general for the Troubled Asset Relief Program] states in a new report released today.Similarly, the stress tests were a complete and utter sham.
The government has given the giant banks huge amounts in loans and guarantees based upon their false representations about their financial health. The Fed has larded up its balance sheet with toxic assets from the banks.
Debt levels are also getting dangerously close to the level that they become a drag on the economy. See this and this. When Keynesian economists argue that debt does not harm the economy, they are talking about debt incurred to pay for stimulus and productive things for the economy. But throwing trillions at the giant banks - who are mainly using the money to gamble - is not stimulus. It helps the executives of the big banks and their shareholders and bondholders, but not the broader economy.
Indeed, attempting to prop up big, insolvent banks is preventing stimulus from getting out into the economy.
Fraud Causes Growing Inequality, Which Undermines the Economy
Growing inequality is very harmful to our economy. Indeed, if wealth is concentrated in too few hands, the "poker game" ends, as one or two fat cats are left with all of the chips. See this, this, this and this.
Fraud benefits the wealthy more than the poor, because the big banks and big companies have the inside knowledge and the resources to leverage fraud into profits. Joseph Stiglitz noted in September that giants like Goldman are using their size to manipulate the market. The giants (especially Goldman Sachs) have also used high-frequency program trading (representing up to 70% of all stock trades) and high proportions of other trades as well). This not only distorts the markets, but which also lets the program trading giants take a sneak peak at what the real traders are buying and selling, and then trade on the insider information. See this, this, this, this and this.
Similarly, JP Morgan Chase, Bank of America, Goldman Sachs, Citigroup, and Morgan Stanley together hold 80% of the country's derivatives risk, and 96% of the exposure to credit derivatives. They use their dominance to manipulate the market.
Fraud Increases the Severity of Boom-Bust Cycles
More and more people - such as the Bank of International Settlements and Barons - are saying that bubbles inevitably lead to busts, thus destabilizing the economy.
Professor Black says that fraud is a large part of the mechanism through which bubbles are blown.
Without strong laws against fraud, bubble after bubble will be blown, guaranteeing that the financial system cannot be stabilized in any fundamental sense.
Failure to Prosecute Fraud Is Worsening the Housing Crisis
Finally, failure to prosecute mortgage fraud is arguably worsening the housing crisis. See this and this.
So trying to ignore the fraud will not work.
Saturday, December 11, 2010
The Economy Cannot Recover Until the Big Banks Are Broken Up
A lot of people still haven't heard that the economy cannot recover until the big banks are broken up.
But virtually all independent economists and financial experts say that it is vital to break up the giant banks, including:
- Nobel prize-winning economist, Joseph Stiglitz
- Nobel prize-winning economist, Ed Prescott
- Former chairman of the Federal Reserve, Alan Greenspan
- Former chairman of the Federal Reserve, Paul Volcker
- Former Secretary of Labor Robert Reich
- Dean and professor of finance and economics at Columbia Business School, and chairman of the Council of Economic Advisers under President George W. Bush, R. Glenn Hubbard
- Former chief IMF economist and economics professor Simon Johnson (and see this)
- President of the Federal Reserve Bank of Kansas City, Thomas Hoenig (and see this)
- President of the Federal Reserve Bank of Dallas, Richard Fisher (and see this)
- President of the Federal Reserve Bank of St. Louis, Thomas Bullard
- Deputy Treasury Secretary, Neal S. Wolin
- The President of the Independent Community Bankers of America, a Washington-based trade group with about 5,000 members, Camden R. Fine
- The Congressional panel overseeing the bailout (and see this)
- The head of the FDIC, Sheila Bair
- The head of the Bank of England, Mervyn King
- The leading monetary economist and co-author with Milton Friedman of the leading treatise on the Great Depression, Anna Schwartz
- Economics professor and senior regulator during the S & L crisis, William K. Black
- Leading British economist, John Kay
- Economics professor, Nouriel Roubini
- Economics professor, James Galbraith
- Economist, Marc Faber
- Professor of entrepreneurship and finance at the Chicago Booth School of Business, Luigi Zingales
- Economics professor, Thomas F. Cooley
- Economist Dean Baker
- Economist Arnold Kling
- Former investment banker, Philip Augar
- Chairman of the Commons Treasury, John McFall
- Leading bank analyst, Chris Whalen
Why do these experts say the giant banks need to be broken up?
Well, small banks have been lending much more than the big boys. The giant banks which received taxpayer bailouts have been harming the economy by slashing lending, giving higher bonuses, and operating at higher costs than banks which didn't get bailed out.
As Fortune pointed out, the only reason that smaller banks haven't been able to expand and thrive is that the too-big-to-fails have decreased competition:
So the very size of the giants squashes competition, and prevents the small and medium size banks to start lending to Main Street again.Growth for the nation's smaller banks represents a reversal of trends from the last twenty years, when the biggest banks got much bigger and many of the smallest players were gobbled up or driven under...
As big banks struggle to find a way forward and rising loan losses threaten to punish poorly run banks of all sizes, smaller but well capitalized institutions have a long-awaited chance to expand.
And as I noted in December 2008, the big banks are the major reason why sovereign debt has become a crisis:
The Bank for International Settlements (BIS) is often called the "central banks' central bank", as it coordinates transactions between central banks.
BIS points out in a new report that the bank rescue packages have transferred significant risks onto government balance sheets, which is reflected in the corresponding widening of sovereign credit default swaps:
The scope and magnitude of the bank rescue packages also meant that significant risks had been transferred onto government balance sheets. This was particularly apparent in the market for CDS referencing sovereigns involved either in large individual bank rescues or in broad-based support packages for the financial sector, including the United States. While such CDS were thinly traded prior to the announced rescue packages, spreads widened suddenly on increased demand for credit protection, while corresponding financial sector spreads tightened.In other words, by assuming huge portions of the risk from banks trading in toxic derivatives, and by spending trillions that they don't have, central banks have put their countries at risk from default.
A study of 124 banking crises by the International Monetary Fund found that propping banks which are only pretending to be solvent hurts the economy:
Existing empirical research has shown that providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often abuse forbearance to take unproductive risks at government expense. The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred in the absence of forbearance.
Cross-country analysis to date also shows that accommodative policy measures (such as substantial liquidity support, explicit government guarantee on financial institutions’ liabilities and forbearance from prudential regulations) tend to be fiscally costly and that these particular policies do not necessarily accelerate the speed of economic recovery.
***
All too often, central banks privilege stability over cost in the heat of the containment phase: if so, they may too liberally extend loans to an illiquid bank which is almost certain to prove insolvent anyway. Also, closure of a nonviable bank is often delayed for too long, even when there are clear signs of insolvency (Lindgren, 2003). Since bank closures face many obstacles, there is a tendency to rely instead on blanket government guarantees which, if the government’s fiscal and political position makes them credible, can work albeit at the cost of placing the burden on the budget, typically squeezing future provision of needed public services.Now, Greece, Portugal, Spain and many other European countries - as well as the U.S. and Japan - are facing serious debt crises. We are no longer wealthy enough to keep bailing out the bloated banks. See this, this, this, this, this and this.
Indeed, the top independent experts say that the biggest banks are insolvent (see this, for example), as they have been many times before. By failing to break up the giant banks, the government will keep taking emergency measures (see this and this) to try to cover up their insolvency. But those measures drain the life blood out of the real economy.
And by failing to break them up, the government is guaranteeing that they will take crazily risky bets again and again, and the government will wrack up more and more debt bailing them out in the future. (Anyone who thinks that Congress will use the current financial regulation - Dodd-Frank - to break up banks in the middle of an even bigger crisis is dreaming. If the giant banks aren't broken up now - when they are threatening to take down the world economy - they won't be broken up next time they become insolvent either. And see this. In other words, there is no better time than today to break them up).
Moreover, Richard Alford - former New York Fed economist, trading floor economist and strategist - recently showed that banks that get too big benefit from "information asymmetry" which disrupts the free market.
Indeed, Nobel prize-winning economist Joseph Stiglitz noted in September that giants like Goldman are using their size to manipulate the market:
"The main problem that Goldman raises is a question of size: 'too big to fail.' In some markets, they have a significant fraction of trades. Why is that important? They trade both on their proprietary desk and on behalf of customers. When you do that and you have a significant fraction of all trades, you have a lot of information."
Further, he says, "That raises the potential of conflicts of interest, problems of front-running, using that inside information for your proprietary desk. And that's why the Volcker report came out and said that we need to restrict the kinds of activity that these large institutions have. If you're going to trade on behalf of others, if you're going to be a commercial bank, you can't engage in certain kinds of risk-taking behavior."
The giants (especially Goldman Sachs) have also used high-frequency program trading which not only distorts the markets - making up more than 70% of stock trades - but which also lets the program trading giants take a sneak peak at what the real (that is, human) traders are buying and selling, and then trade on the insider information. See this, this, this, this and this. (This is frontrunning, which is illegal; but it is a lot bigger than garden variety frontrunning, because the program traders are not only trading based on inside knowledge of what their own clients are doing, they are also trading based on knowledge of what all other traders are doing). Goldman also admitted that its proprietary trading program can "manipulate the markets in unfair ways".
The giant banks have also allegedly used their Counterparty Risk Management Policy Group (CRMPG) to exchange secret information and formulate coordinated mutually beneficial actions, all with the government's blessings.
Again, size matters. If a bunch of small banks did this, manipulation by numerous small players would tend to cancel each other out. But with a handful of giants doing it, it can manipulate the entire economy in ways which are not good for the American citizen.
In addition, as everyone from Paul Krugman to Simon Johnson has noted, the banks are so big and politically powerful that they have bought the politicians and captured the regulators. So their very size is preventing the changes needed to fix the economy.
Friday, December 10, 2010
This Week in the Gulf
Here are this week's updates on the Gulf:
Click through Florida Oil Spill Law's summaries to go to original articles.Former Chairman of the Joint Chiefs of Staff: White House Cabinet Member Suggested Killing an American Service Man to Justify War
On Monday, former chairman of the Joint Chiefs of Staff General Hugh Shelton told told Jon Stewart that a Clinton cabinet member proposed letting Saddam kill an American pilot as a pretext for war in Iraq:
This might seem, at first glance, like just an odd, one-off suggestion.
However, as reported by the New York Times and other newspapers, George W. Bush also suggested to Tony Blair that a U.S. plane be painted in United Nations colors so that - if Saddam shot it down - it would create a casus belli. As the Times wrote in 2006:
The memo [confirmed by two senior British officials as being authentic] also shows that the president and the prime minister acknowledged that no unconventional weapons had been found inside Iraq. Faced with the possibility of not finding any before the planned invasion, Mr. Bush talked about several ways to provoke a confrontation, including a proposal to paint a United States surveillance plane in the colors of the United Nations in hopes of drawing fire ....And it's not just the current war in Iraq. As I've previously pointed out, war is always sold to it's people by artificially demonizing the enemy:
Countries need to lie about their enemies in order to demonize them sufficiently so that the people will support the war.
That is why intelligence "failures" - such as the following - are so common:
- The U.S. Navy's own historians now say that the sinking of the USS Maine -- the justification for America's entry into the Spanish-American War -- was probably caused by an internal explosion of coal, rather than an attack by the Spanish.
- It is also now well-accepted that the Gulf of Tonkin Incident which led to the Vietnam war was a fiction (confirmed here).
- And two lies were used to justify the 1991 Gulf War: the statement that Iraqis murdered Kuwaiti babies and the statement that a quarter of a million Iraqi troops were massed on the border with Saudi Arabia (see also this article)(technically, the statement about Kuwaiti babies did not come from the U.S. government, but from a public relations firm hired by the government).
And governments from around the world have admitted that - for many years - they have used false flag incidents to sell their people on the wars they wish to launch.
For example:
- A major with the Nazi SS admitted at the Nuremberg trials that - under orders from the chief of the Gestapo - he and some other Nazi operatives faked attacks on their own people and resources which they blamed on the Poles, to justify the invasion of Poland. Nazi general Franz Halder also testified at the Nuremberg trials that Nazi leader Hermann Goering admitted to setting fire to the German parliament building, and then falsely blaming the communists for the arson
- The CIA admits that it hired Iranians in the 1950's to pose as Communists and stage bombings in Iran in order to turn the country against its democratically-elected prime minister
- Israel admits that an Israeli terrorist cell operating in Egypt planted bombs in several buildings, including U.S. diplomatic facilities, then left behind "evidence" implicating the Arabs as the culprits (one of the bombs detonated prematurely, allowing the Egyptians to identify the bombers, and several of the Israelis later confessed) (and see this and this)
- The former Italian Prime Minister, an Italian judge, and the former head of Italian counterintelligence admit that NATO, with the help of the Pentagon and CIA, carried out terror bombings in Italy and other European countries in the 1950s and blamed the communists, in order to rally people’s support for their governments in Europe in their fight against communism. As one participant in this formerly-secret program stated: "You had to attack civilians, people, women, children, innocent people, unknown people far removed from any political game. The reason was quite simple. They were supposed to force these people, the Italian public, to turn to the state to ask for greater security" (and see this)(Italy and other European countries subject to the terror campaign had joined NATO before the bombings occurred)
- As admitted by the U.S. government, recently declassified documents show that in the 1960's, the American Joint Chiefs of Staff signed off on a plan to blow up AMERICAN airplanes (using an elaborate plan involving the switching of airplanes), and also to commit terrorist acts on American soil, and then to blame it on the Cubans in order to justify an invasion of Cuba. See the following ABC news report; the official documents; and watch this interview with the former Washington Investigative Producer for ABC's World News Tonight with Peter Jennings. Official State Department documents show that - only nine months before - the head of the Joint Chiefs of Staff and other high-level officials discussed blowing up a consulate in the Dominican Republic in order to justify an invasion of that country. (While the Joint Chiefs of Staff pushed as a serious proposal for Operation Northwoods to be carried out, cooler heads fortunately prevailed; President Kennedy or his Secretary of Defense Robert McNamara apparently vetoed the plan)
- The South African Truth and Reconciliation Council found that, in 1989, the Civil Cooperation Bureau (a covert branch of the South African Defense Force) approached an explosives expert and asked him "to participate in an operation aimed at discrediting the ANC [the African National Congress] by bombing the police vehicle of the investigating officer into the murder incident", thus framing the ANC for the bombing
- An Algerian diplomat and several officers in the Algerian army admit that, in the 1990s, the Algerian army frequently massacred Algerian civilians and then blamed Islamic militants for the killings (and see this video; and Agence France-Presse, 9/27/2002, French Court Dismisses Algerian Defamation Suit Against Author)
- According to the Washington Post, Indonesian police admit that the Indonesian military killed American teachers in Papua in 2002 and blamed the murders on a Papuan separatist group in order to get that group listed as a terrorist organization.
- The well-respected former Indonesian president also admits that the government probably had a role in the Bali bombings
- As reported by BBC, the New York Times, and Associated Press, Macedonian officials admit that the government murdered 7 innocent immigrants in cold blood and pretended that they were Al Qaeda soldiers attempting to assassinate Macedonian police, in order to join the "war on terror".
- Former Department of Justice lawyer John Yoo suggested in 2005 that the US should go on the offensive against al-Qaeda, having “our intelligence agencies create a false terrorist organization. It could have its own websites, recruitment centers, training camps, and fundraising operations. It could launch fake terrorist operations and claim credit for real terrorist strikes, helping to sow confusion within al-Qaeda’s ranks, causing operatives to doubt others’ identities and to question the validity of communications.”
- United Press International reported in June 2005:
U.S. intelligence officers are reporting that some of the insurgents in Iraq are using recent-model Beretta 92 pistols, but the pistols seem to have had their serial numbers erased. The numbers do not appear to have been physically removed; the pistols seem to have come off a production line without any serial numbers. Analysts suggest the lack of serial numbers indicates that the weapons were intended for intelligence operations or terrorist cells with substantial government backing. Analysts speculate that these guns are probably from either Mossad or the CIA. Analysts speculate that agent provocateurs may be using the untraceable weapons even as U.S. authorities use insurgent attacks against civilians as evidence of the illegitimacy of the resistance.
- Quebec police admitted that, in 2007, thugs carrying rocks to a peaceful protest were actually undercover Quebec police officers
- At the G20 protests in London in 2009, a British member of parliament saw plain clothes police officers attempting to incite the crowd to violence
There are many other instances of false flag attacks used throughout history proven by the historical evidence. See this, this and this. The above are only some examples of governments admitting to using false flag terror.
Thursday, December 9, 2010
I Won't Invest Another Penny Until the Criminals Who Caused the Financial Crisis Are Safely in Jail
Here's an idea for a bumper sticker:
I Won't Invest Another Penny Until the Criminals Who Caused the Financial Crisis Are Safely in Jail
Can you imagine how much pressure would be put on the government to start real prosecutions if a million of us put that on our cars and elsewhere?
Stand up and show that we have leverage ... put it on your car, flyers, posters and freeway blogs.
And a reader named Jeff just sent me the following idea for a bumper sticker:
Austerity and prosecution for the bankers.
Austerity for the government including the military.
Then we can talk about austerity for the rest of us.
Pentagon Papers Whistleblowers Call for a New 9/11 Investigation
The main players in releasing the Pentagon Papers were Daniel Ellsberg and Senator Mike Gravel.
Ellsberg is, of course, the former military analyst and famed whistleblower who smuggled the Pentagon Papers out of the Rand Corporation.
Senator Gravel is the person who read the Pentagon Papers into the Congressional Record. This act made the papers public record, so that they could not be censored by the government.
Ellsberg and Gravel are receiving a lot of media attention right now for their support of Wikileaks.
But little attention has been paid to Ellsberg and Gravel's support for a new 9/11 investigation.
Ellsberg says that the case of a certain 9/11 whistleblower is "far more explosive than the Pentagon Papers". (Here's some of what that whistleblower says.)
He also said that the government is ordering the media to cover up her allegations about 9/11.
And he said that some of the claims concerning government involvement in 9/11 are credible, that "very serious questions have been raised about what they [U.S. government officials] knew beforehand and how much involvement there might have been", that engineering 9/11 would not be humanly or psychologically beyond the scope of those in office, and that there's enough evidence to justify a new, "hard-hitting" investigation into 9/11 with subpoenas and testimony taken under oath (see this and this).
Senator Gravel has long supported a new 9/11 investigation. Gravel told the Daily Caller this week:
Individuals in and out of government may certainly have participated with the obviously known perpetrators of this dastardly act. Suspicions abound over the analysis presented by government. Obviously an act that has triggered three wars, Afghan, Iraqi and the continuing War on Terror, should be extensively investigated which was not done and which the government avoids addressing.
Other high-level whistleblowers have alleged a cover-up as well.
For example, Air Force Colonel and key Pentagon official Karen Kwiatkowski - who blew the whistle on the Bush administration's efforts to concoct false intelligence about Iraqi weapons of mass destruction - wrote (page 26):
I have been told by reporters that they will not report their own insights or contrary evaluations of the official 9/11 story, because to question the government story about 9/11 is to question the very foundations of our entire modern belief system regarding our government, our country, and our way of life. To be charged with questioning these foundations is far more serious than being labeled a disgruntled conspiracy nut or anti-government traitor, or even being sidelined or marginalized within an academic, government service, or literary career. To question the official 9/11 story is simply and fundamentally revolutionary. In this way, of course, questioning the official story is also simply and fundamentally American.Indeed, Ellsberg and Gravel join a long list of high-level former officials in the government and intelligence services - including many well-known whistleblowers - who have publicly demanded a new investigation.
And see this.
Zillow: U.S. Home Prices Will Lose $1.7 Trillion This Year
First Case-Shiller called a double dip in home prices.
Then Roubini said that the United States “real estate market, for sure, is double dipping”, and and predicted that banks could face another $1 trillion in housing-related losses.
Now Zillow is forecasting that U.S. home values are poised to drop by more than $1.7 trillion this year.
I'm not sure what the exact numbers are, but this looks like it's going to be grim.
Wednesday, December 8, 2010
Secretary of the Navy Hatches Brilliant Plan to Sell More Gulf Seafood and Transport Oil to the War Zone
An unknown quantity of Gulf seafood is tainted with oil and/or dispersant. See this, this, this, this, this, this, this, this, this, this, this, this, this, this, this and this.
Some have speculated that Gulf seafood would be quietly sold to makers of cat and dog food, to avoid public scrutiny.
But the Secretary of Navy has a different idea - force the good men and women in our armed services to eat it.
As the Times Picayune reported yesterday:
Navy Secretary Ray Mabus, who doubles as President Barack Obama's point man on Gulf Coast oil spill recovery, is pressing America's armed services to consume as much Gulf seafood as possible.
Navy Capt. Beci Brenton said Monday that Mabus has talked with Secretary of Defense Robert Gates and the secretaries of the Air Force and Army, and his staff has talked to the Defense Commissary Agency, which operates a worldwide chain of stores for military personnel, making the point "that we should be buying Gulf Coast seafood."
I have friends who served in Iraq and Afghanistan, and the thought of folks in our armed services being fed Gulf seafood angers me.
Of course, the U.S. considers oil to be a national security issue, and the government spends a lot of money to get oil over to the various war theaters.
Indeed, BP is the main contractor supplying oil to the U.S. military.
The cynical might argue that Secretary Mabus is being callous in allowing our good service men and women to eat tainted seafood.
But maybe Secretary Mabus has an ingenious plan to cheaply transport BP oil into Iraq and Afghanistan: shipping Gulf seafood to commissaries and mess halls, and then having the troops march on their stomachs and transport the oil out into the field.
Yes, the last sentence is parody.
Department of Justice "Crackdown" On Wall Street Is Just a P.R. Stunt Targeting Small-Time Crooks
Alan Greenspan, William Black, James Galbraith, Joseph Stiglitz, George Akerlof, Chris Whalen and many other economists and financial experts all say that the economy cannot truly recover unless those who committed fraud are prosecuted.
So we should be ecstatic that the Justice system is finally prosecuting fraud, right?
As the Washington Post notes:
At a news conference headlined by Attorney General Eric H. Holder, authorities unveiled "Operation Broken Trust," a collection of unrelated criminal and civil cases involving Ponzi schemes, foreign currency frauds, investment scams and other market cons.
The announcement drew attention to President Obama's Financial Fraud Enforcement Task Force, a group of agencies working to hold accountable people and companies accused of financial wrongdoing during difficult economic times. The task force has struggled to pursue high-profile prosecutions connected to the financial crisis of 2007-09.
Authorities said the operation involved 343 defendants facing criminal charges and 189 facing civil charges, though some will be counted in both categories. The cases represent more than $8.3 billion in investor losses and 120,000 victims.
***
"With this operation, the Financial Fraud Enforcement Task Force is sending a strong message," Holder said. "To anyone operating or attempting to operate an investment scam: Cheating investors out of their earnings and savings is no longer a safe business plan. We will use every tool at our disposal to find you, to stop you and to bring you to justice."
The schemes often targeted communities, churchgoers and the vulnerable, including the elderly, a blind man and the bereaved family of a recently deceased man, Holder and other law enforcement officials said.
That may sound impressive at first.
But $8 billion divided by 343 (the number of criminal prosecutions) only averages around $24 million per prosecution, which is small potatoes given that financial fraud by the big banks has cost the country trillions.
As Andrew Ross Sorkin writes in the New York Times:
Update:Bloomberg's Jonathan Weil obtained the list of criminal prosecutions from the Department of Justice, and confirmed that the DOJ statistics on prosecutions are fudged, and notes that none of the big fish are being prosecuted. Weil concludes:To hear Eric H. Holder Jr. tell it, the Justice Department is aggressively cracking down on financial fraud.
***
It all sounded quite important, and the program’s slogan is pretty catchy. But after you get past the pandering sound bites, a question comes to mind: is anyone in the corner offices of Wall Street’s biggest firms or corporate America’s biggest companies paying any attention to Mr. Holder’s “strong message”?
Of course not. (I actually called some chief executives after Mr. Holder’s news conference, and not one had heard of Operation Broken Trust.)
That’s because in the two years since the peak of the financial crisis, the government has not brought one criminal case against a big-time corporate official of any sort.
Instead, inexplicably, prosecutors are busy chasing small-timers: penny-stock frauds, a husband-and-wife team charged in an insider trading case and mini-Ponzi schemes.
“They will pick on minor misdemeanors by individual market participants,” said David Einhorn, the hedge fund manager who was among the Cassandras before the financial crisis. To Mr. Einhorn, the government is “not willing to take on significant misbehavior by sizable” firms. “But since there have been almost no big prosecutions, there’s very little evidence that it has stopped bad actors from behaving badly.”
***
Fraud at big corporations surely dwarfs by orders of magnitude the shareholders’ losses of $8 billion that Mr. Holder highlighted. If the government spent half the time trying to ferret out fraud at major companies that it does tracking pump-and-dump schemes, we might have been able to stop the financial crisis, or at least we’d have a fighting chance at stopping the next one.
Shawn J. Chen, a partner in the Washington office of Cleary Gottlieb Steen & Hamilton, called the announcement by Mr. Holder “a public relations push more than anything else.” Mr. Chen went so far as to suggest that the number of cases Mr. Holder cited as evidence of the department’s crackdown were somewhat fictional.
“It’s hard to believe that they built up all these cases in the past four months,” since the task force was created, Mr. Chen said, suggesting it was more likely that Mr. Holder counted every case that had anything to do with financial fraud and put them all under the Operation Broken Trust umbrella.
By all outward appearances, it seems the Justice Department either doesn’t want to prosecute systemically important frauds, or doesn’t know how. Or maybe it’s both.
It wasn’t always this way. More than a thousand felony convictions followed the savings-and-loan scandal of the 1980s and early 1990s. Some of the biggest kingpins, such as Charles Keating of Lincoln Savings & Loan, went to jail. With this latest financial crisis, there’s been no such accountability.
Operation Broken Trust may be a fitting name. Unfortunately it’s for all the wrong reasons. The public already knows not to trust the government. Flimflam P.R. stunts such as this one at least offer us a useful reminder of why.
China: U.S. In Worse Shape than Europe | Rogers: "Britain is totally insolvent"
Reuters notes:
Li Daokui, an academic member of the central bank's monetary policy committee, said that U.S. bond prices and the dollar would fall when the European economic situation stabilized. "For now, market attention is still on Europe and for the coming 6-12 months, it will not shift to the United States," Li said, when asked about U.S. President Barack Obama's plan to extend tax cuts for all Americans. "But we should be clear in our minds that the fiscal situation in the United States is much worse than in Europe. In one or two years, when the European debt situation stabilizes, attention of financial markets will definitely shift to the United States. At that time, U.S. Treasury bonds and the dollar will experience considerable declines."
Of course, economic historian Niall Ferguson has been warning of U.S. debt for years.
Not to be outdone, Jim rogers said:
Greece is insolvent, Portugal has a liquidity problem, Spain has a liquidity problem, Belgium has been cooking the books for a long time, Italy has been cooking the books for a long time and the UK is totally insolvent.
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