US credit crisis: passing the buck

Since the last issue of FRFI the Bank of England has tossed $100bn onto the roulette table of finance capital – secured against almost whatever manure the banks want to get off their books. Banks and financial institutions continue to announce write-downs: AIG, the world’s largest insurance insurer, announced a further $9.11bn write-down; bond insurer MBIA revealed a $3.6bn write-down and Fannie Mae announced losses of $4.4bn. All managed to sweeten the pill by announcing plans to raise more credit. Citibank announced it would get rid of $400bn of ‘non-core’ assets. Wall Street loves optimism, so looked on relatively tolerantly as the billions were tossed onto the bonfire. Since the Fed’s sponsored buy-out of Bear Stearns, dealers have begun to assume that it both will step in and can bail them out of any mess. US correspondent STEVE PALMER reports

Some questions
Q: Will it all be over next month?

A: No, this has several years to run – for the reasons why, read on …

Q: Is this the end of capitalism?
A: Sadly, no – or at least, not yet: what we are witnessing is the slow death of credit as a mechanism to stave off the consequences in the imperialist countries of capitalism’s decline. In the process, the underlying crisis will emerge, slashing jobs and living standards. Second, active mass opposition to the crisis has to develop. Finally, opposition has to develop into a real revolutionary movement directed against capitalism, root and branch. Only then is there a real possibility of ending capitalism. Without this, capitalism will drive like a tank over the prostrate working class and reorganise and rebuild itself for another round of capitalist exploitation – if it doesn’t destroy us and the planet in the process.

Q: What’s going to happen next?
A: The following points may help you to understand what to watch for and how things are going to develop.

Are we ‘over the worst’?
First, the ‘we’ here invariably means the capitalists, their banks and their loot – not your average Joe – ‘us’. The US government leapt into action over a weekend in March to stop large chunks of the financial system from toppling over the precipice, throwing $50bn onto the table. Meanwhile, troubled mortgage borrowers have been roasting on a spit for months and months with plenty of verbal assistance, but mere crumbs of real help.

Second, it is quite useless to look to the opinions of the capitalists and their lackeys for any guidance. In fact it seems we’ve been over the worst for the last 18 months. In November 2006, Alan Greenspan, former Chairman of the US Federal Reserve Bank told the New York Times, when asked about the housing market: ‘It looks as though the worst is behind us’. In September 2007, Sam Molinaro echoed: ‘the worst is largely behind us’. Sam was a Chief Financial Officer; by the end of March his job and his bank – Bear Stearns – had disappeared. ‘Over the worst’ … ‘turned the corner’… ‘stopped the bleeding’… ‘bottomed out’ … ‘the correction is behind us’… We’ve heard all the cliches, several times. Many who utter them don’t even realise they are lying.

Massaging the numbers
Most of what we’re told about this crisis, the state of the banks and the write-downs comes from press releases and ‘executive overviews’. But the actual accounts raise more questions than answers. This is because of ingenious categorisation of some securities. For example,* Freddie Mac, the government sponsored enterprise which buys many securitized mortgages, tucked $32.4bn of paper losses into a ‘temporary’ category. This means they don’t have to be counted in the company’s net income or capital. Which is just as well, since the losses are about double the company’s stock market valuation.
This kind of quiet massaging of numbers is going on at many financial institutions. But what gets forced down like this, sooner or later, will get coughed back up. Remember to look shocked when these ‘surprise’ losses start to surface, the fall guys get fired and all the other theatrical antics of bourgeois hypocrisy begin.

It ain’t just subprime …
This crisis has been characterised as a crisis in the ‘subprime’ mortgage market; it is claimed that as soon as the ‘resets’ (raising of payments) have worked their way through, in 2009 everything should bounce back to ‘normal’. First it’s going to take longer than that to work through, since the process of foreclosing on houses, whose ‘owners’ can no longer afford the mortgage, takes somewhere between 9 and 15 months to actually happen, meaning that the consequences of subprime for the housing market are going to continue into 2010. Also, ‘subprimes’ are only the first stage in the mortgage problems. There are another couple of mouthfuls of alphabet soup the money market is going to have to swallow: ‘option ARMs’ and ‘HELOCs’. ‘Option ARMs’ are another variety of adjustable rate mortgage, which start to reset in volume in 2010 through 2012, leading to further losses in derivatives. HELOCs are ‘Home Equity Lines Of Credit’ – loans taken against outstanding equity in homes, secured loans, with a term of 5-25 years. Borrowers can borrow up to a limit, a limit which is now being drastically reduced because the fall in house prices is shrinking the available equity. Some people are finding that they now owe more than the equity in their house. Even if they were able to sell the house, they can’t cover their borrowing. Add to this the increasing inflation (petrol prices at the pump have risen by more than 10% in the last month) and the pressure to default, even for prime borrowers, is going to soar.

It ain’t just mortgages …
The ripples from the crisis continue to spread outwards and turn into waves. In contrast to the relative complacency on Wall Street, a sense of fright, verging on panic, is starting to take over States and municipal organizations which sought finance in the auction-rate market which used to be a cheap source of finance. The rates get periodically reset by an auction and, since this market seized up in January, they have shot up, sometimes to 25% or higher, and borrowers have found that they can only get out by taking a significant ‘haircut’ – penalty loss – of up to 50%. The lawsuits have started to fly; some banks have grudgingly returned some money; others are defiant. Worst of all, citizens are going to be paying the price – cuts in services, higher local and state taxes, deeper borrowing. California has issued ‘pink slips’ – US term for redundancy notices – to 18,000 teachers, further eroding the already poorly functioning public school system.

They’ll fix it, somehow …
No they won’t, because they can’t. What’s going on here is an updated version of ‘pass the parcel’. ‘They’ means the government. What has happened so far is that the US Federal Reserve and the British Bank of England have lent out tens of billions of dollars in exchange for securities of dubious quality – they have assumed the risks, or, at least, some of them, from the banks. They can’t make the risks go away, only pass them on to the working class ‘somehow’. It took the US Federal Reserve about 36 hours and $50bn to stop the financial system collapsing. Yet millions of homeowners have been turning into ex-homeowners over the last year and are still waiting for Congress to vote them any serious relief. So long as they can keep this up, without resistance, capitalism will get through this.

* Jonathan Weil, ‘Freddie Mac suffers bout of temporary insanity’, www.

FRFI 203 June / July 2008


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