Three Easy Pieces: The Dollar, Paulson & Carlyle Capital By Mike Whitney

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By Mike Whitney
03/16/08 “ICH

The Bedraggled Greenback

So far, so bad. On Wednesday, crude-futures topped $110 for the first time, the dollar slipped to $1.55 per euro, and gold zoomed to a new high of $1,000 per ounce. Yikes. The dollar has been shoved off a cliff and no one knows where it will land. Last week, the G-7 nations announced that if “irrational” prices movements persisted, they would “collectively take suitable measures to calm the financial markets.” Their statement was taken to mean that foreign central banks will secretly intervene in the currency markets to stop the dollar from crashing. But can they do it? Only the Fed can raise interest rates and the market is betting that Bernanke will slash another 75 basis points at its next meeting. That ought to send the sinking greenback to Davey Jones Locker in a hurry.

The dollar has plunged from $.87 on the euro in 2002 to $1.55 on March 12, 2008; losing nearly half its value since Bush took office. And there’s no sign of a turnaround. Henry Paulson’s “strong dollar” policy is a load of malarkey. The Fed has been pummeling the dollar for the last six years. Why stop now? They’ve already said they want a cheap dollar to increase exports; now they’ve got it, along with $110 oil and $6 per gallon milk. Any other bright ideas? Now, living standards will fall, prices will soar, and the public wil get restless. No country ever devalued its way to prosperity, but that doesn’t mean we can’t be the first. Just look at Zimbabwe; there’s a success story, right?

The plan to debase the currency is as loony as invading Iraq and the country will pay dearly for it.

Recently, the Wall Street Journal broke down the relationship between the dollar and oil and revealed the ugly truth; that consumers are getting gouged at the pump because of Bush’s policies not Saudi greed:

“Since 2001 the dollar price of oil and gold have run almost in tandem. The price of gold has risen 240% since 2001, while the price of oil has risen 270%. That means that if the dollar had remained “as good as gold” since 2001, oil today would be selling at about $30 a barrel, not $100. Gold has traditionally been a rough proxy for the price level, so the decline of the dollar against gold and oil suggests a US monetary that is supplying too many dollars”.” (“Oil and the Dollar” Wall Street Journal)

There it is in black and white. Bush’s dollar policy has taken us where Bin Laden never could; the edge of ruin. The consumer is getting clobbered, the country is slipping into recession, and the greenback is hanging by a thread. Thanks, George.

According to Bloomberg News the dollar has bounced back slightly from its historic lows at $1.56 per euro on the news of possible intervention by foreign banks. But what a humiliation. The dollar is like Blanche Dubois in “A Streetcar Named desire” who “Always depended on the generosity of strangers”. Pretty soon, foreign lenders will get tired of America’s reckless behavior and let the dollar shrink to the size of a peso. Why would they care? For now, Japan and the European Central Bank still think the US can be cajoled into acting like a responsible adult and put the ship of state and its currency back on course. But, they’re dreaming. There’s not an adult in the entire Bush administration. Foreign exporters will have to slow production as demand decreases. We’re headed into a defaltionary slump and there’s no longer any doubt about it. Bernanke is planning to ride interest rates into the ground just to prove that his nutty Depression-aversion theories have some merit. But, guess what? They don’t. In less than a year the greenback will be worth less than a hand-D-wipe.

According to Bloomberg News: Goldman Sachs Group Inc. and Morgan Stanley said coordinated action by policy makers to stem the currency’s slide is increasingly likely. In intervention, central banks buy and sell currencies to influence exchange rates. (But) Sentiment remains overwhelmingly dollar negative, though preliminary technical factors warn that a broader period of dollar consolidation may be at hand.

So, the banksters are planning on are rigging the currency markets. What else is new? But do they ever think “outside the box”, like doing something honest for a change? Not likely. This is their system and they run it the way they like. Period. But the fate of the poor greenback is out of the Fed’s control no matter what the banks do. As the housing bust continues, the credit crisis will worsen and the US will begin a protracted recession. That means that foreign capital will seek other markets where the growth potential is stronger. Bye, bye “purple mountains majesty”. When foreign investment packs up and leaves, the dollar will follow the stock market straight into the fish-tank.

Glub, glub.

There’s another reason to believe the dollar won’t rebound, too, that is, that Fed chairman Bernanke is deliberately undercutting the dollar to stimulate the economy. Bernanke believes that we are presently in a deflationary recession, which is more serious than a normal downturn in the business cycle. If that is the case then he is probably following a strategy which he mapped out during his time as an academic.

“It’s worth noting that there have been times when exchange-rate policy has been an effective weapon against deflation,” Bernanke said, citing the 40 percent devaluation of the dollar against gold enacted in 1933 to 1934. “The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly. Monetary actions can have powerful effects on the economy.”

This quote suggests that Bernanke will continue to cut rates and debase the currency in an effort to shorten the looming recession. Unfortunately, there are roughly $6 trillion in US dollar-backed assets around the world which could be quickly dumped on US shores if Bernanke goofs up and foreign holders of USDs start selling their paper on the open market. That would trigger a round of Wiemar-like hyperinflation in the homeland that would terminate the dollar’s position as the world’s reserve currency as well as America’s role as the global superpower. Let’s hope that Professor Bernanke knows how to tip-toe his way through the mine-field or the whole economy could get a unwelcome jolt.


“We’ve taken a clear position on this saying a strong dollar is in our nation’s interest,” Henry Paulson

Yesterday, Treasury Secretary Henry Paulson unveiled a number of proposals to address to question of regulation. A great deal of pressure is being put on administration officials to come up with ideas that will avoid another market meltdown like the subprime fiasco. The “President’s Working Group on Financial Markets” made a number recommendations all dealing with the basic issues of transparency, oversight, due diligence, and disclosure. On every issue, the slippery Paulson managed to avoid the idea that the Federal government actually has a role to play in regulating big business. Its funny, really. Here’s Paulson, sitting amid the ruins of the subprime/securitization meltdown that he and his carpetbagging bankster buddies engineered; and he still resists every suggestion that the markets be better policed. It’s mind-boggling.

Here’s a sample of the gibberish that Paulson used to conceal the fact that he really plans to do “nothing at all” and that the crooked sideshow they run on Wall Street will just move to its next shell-game completely unregulated:

“State and federal authorities should coordinate to enforce the rules evenly across all types of mortgage originators…” (Ed. Note: So, where was the Fed and the SEC while all this crappy paper was changing hands, Hank)

“Overseers of institutional investors (for example, the Department of Labor for private pension funds; state treasurers for public pension funds; and the SEC for money market funds) should require investors (and their asset managers) to obtain from sponsors and underwriters of securitized credits access to better information about the risk characteristics of such credits…” (ed note: More official sounding gobbledygook which means: “You probably should tell the investors that they are getting ripped off when they buy worthless subprime garbage from Wall Street hucksters like Paulson)

“Supervisors of global financial institutions should closely monitor the firms’ efforts to address risk management weaknesses, taking action if necessary to ensure that weaknesses are addressed…” (ed note: Oh, Please. The statement presumes that some of the brightest people in the country didn’t know they were wrapping up goose-poop and selling it as Beluga Caviar. The subprime scam was an obvious swindle from the get-go.)

“U.S. banking regulators and the SEC should promptly assess current guidance…and should adopt policies that provide incentives for financial institutions to hold capital and liquidity cushions commensurate with firm-wide exposure…” (Ed note: Here we go again; incentives, incentives, incentives. That’s not how one regulates a pirate’s cove like Wall Street. What’s needed is tasers, truncheons and a 25 ft post and beam gallows on the street in front of the New York Stock Exchange. That’s the only way to get the attention of the crooks who run the banking system)

None of these recommendations will fix the system or provide the oversight needed to save the financial industry from its own self-destructive impulses. The first step is campaign reform so we get the money out of the political system so the captains of industry (the foxes) like G-Sax Paulson are not put in charge of the industry (the hen-house)


The politically-connected Carlyle Capital hedge fund was wheeled into ICU on Thursday unable to make a measly $400 million margin call. Carlyle boasted a $21.7 billion portfolio of AAA-rated residential mortgage-backed securities issued by Freddie Mac and Fannie Mae. So where’s the money?

The fund had leveraged its $670 million in equity to 32 times its value. Now the stock has lost over 90 per cent of its value and has defaulted on $16.6 billion of its debt. About $5.7 billion of the defaulted debt has been sold, the Carlyle Group said Thursday.

What is interesting here is the fact that “$5.7 billion of the defaulted debt has been sold” but Carlyle still couldn’t pay its paltry $400 million margin call? Why?

Is the $5.7 billion the estimated face-value of the Freddie Mac bonds? If that is the case—and I suspect it is—then we have discovered something very important, that even triple A rated mortgage-backed bonds are worthless. That’s a very scary prospect for the many banks, hedge funds, insurance companies, and retirement funds that are currently holding trillions of dollars of these toxic MBS. They could be worth zero, which means we could see a rash of defaults and bankruptcies unlike anything in history.

According to Reuters: “Carlyle Capital shook financial markets last week after it was unable to offer more collateral to protect its $21.7 billion portfolio of residential-mortgage-backed bonds. The banks that had loaned money demanded more collateral, known as a margin call, to cover the gap between the previous value of the securities and their current, lower level.”

Again, this is a very small margin call for a fund of this size that’s loaded with Triple A-rated securities. All we want to know is, what they got paid for their Fannie Mae bonds? How much? But the media is not reporting that critical bit of news.

Reuters offers this one revealing clue in a statement issued by Carlyle:

“Overall, it has become apparent to the company that the basis on which lenders are willing to provide financing against the company’s collateral has changed so substantially that a successful refinancing is not possible.”

Ah-ha! “Refinancing is not possible”. Not possible at any price regardless of the quality or the rating. That is exactly what we wanted to hear.

Guess what; the subprime meltdown just got a whole lot bigger. As the massive cycle of deleveraging continues for the over-extended hedge funds; Triple A assets will be sold for merely pennies on the dollar sending the faltering banking system into a last, lethal swan dive. Good riddance.

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3 thoughts on “Three Easy Pieces: The Dollar, Paulson & Carlyle Capital By Mike Whitney

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