Living in the American Mafia State

In the late winter of 2008, a strong whiff of millenarianism had already crept into American public life. As voters flocked to the primaries in startling numbers, many Democrats became convinced that the Second Coming lay just around the corner. By contrast, sentiment among Republicans was more somber, if equally chiliastic: they quaked at prospects of a dire Last Judgment on the administration of President George W. Bush in the November presidential election. Partisans of both parties also harbored fears of Armageddon in the Middle East, if for very different reasons. Still, on that classical day of reckoning, the Ides of March, when the Four Horsemen of the Apocalypse suddenly appeared over the offices of the giant brokerage firm of Bear Stearns in lower Manhattan, almost everyone was astounded.

"Too Big To Bail: The 'Paulson Put,' Presidential Politics, and the Global Financial Meltdown"; Thomas Ferguson and Robert Johnson, International Journal of Political Economy (spring 2009)

The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government-a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF's staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we're running out of time.

"The Quiet Coup", Simon Johnson, The Atlantic Monthly, May 2009

As the two quotations at the top of this issue of The IRA suggest, the United States is suffering from twin maladies, insolvency in our financial sector and an equally powerful political dysfunction in Washington. As we said of Mexico two decades ago, Americans now live in a Mafia State that is beyond control. Our political class is entirely captive of Wall Street, the result of decades of corruption and moral decay. Our nation's capital is controlled by a criminal gang that masquerades as an elected government. And we must wait 18 months for the next election to thrown the scoundrels out.

While the rest of the global economy outside of the financial sector is basically sound, the excesses of the financial markets now threaten the entire world with deflation and prolonged economic decline. And yet the leaders of the financial sector are continuing to pretend that they have done nothing wrong. As Simon Johnson writes in The Atlantic:

But there's a deeper and more disturbing similarity: elite business interests-financiers, in the case of the U.S.-played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.

Like most Americans, we are angry at this state of affairs, but also a little sad. Watching the unfolding breakdown of the financial markets, we are reminded that most of the people who work in the markets are not part of the problem. It is the leaders of the largest firms and their clients in Washington who are to blame. We have dozens of resumes coming to our offices every week, but not nearly enough unemployed large bank CEOs.

No wonder that Fed Chairman Bernanke and Treasury Secretary Tim Geithner persist in their idiotic position that toxic subprime assets have true "values" of 80% of par. As we told the clients of IRA's institutional Advisory Service earlier this week:

Based on our projections and channel checks, we think that maybe the Fed staff got it wrong and put down the likely loss rate instead of the fanciful LT recovery rate embraced by Bernanke, Geithner and Summers. Truth is, the LT recovery or "Loss Given Default" (LGD) rate experience of 20-30% (which are the LT LGD rates used by Moody's, S&P for internal loss rate projections) are holding true in this cycle as in previous economic downturns and may actually be optimistic compared with the actual realized loss.

With most of the RES and CRE collateral we see in the channel trading in the 30s, it is only a matter of time before the markets force Bernanke, Geithner and Summers to abandon their desire to subsidize the large, insolvent banks and finally embrace liquidation. As we told our friend David Kotok at Cumberland Advisers, just remember to buy the bonds, not the equity, no matter what investment situation you may be considering during most of 2009. In the current environment, be a creditor, not a shareholder.

And don't forget, Q1 earning season starts in just a week's time. That's when we hear about the stellar profits at Citigroup (NYSE:C) and the rest of the US banking complex. And that's when the wheels will start to again fall of the wagon in Washington regarding the finncial crisis.

As global deflation proceeds, those with cash shall be king. Organization that have cash to use for acquisitions or asset purchases will feast in the coming weeks and months, providing new material upon which to base profits and shareholder value. We are already seeing distressed commercial properties in New York trading below 50% of the last valuation. How can Bernanke, Summers & Geithner ignore the falling assets prices in the marketplace?

And there are literally dozens of CRE properties in New York and the surrounding area that will be going into foreclosure and liquidation this year, perhaps even in Q2 2009. That sound you hear in the distance is the dinner bell ringing for cash investors.

Click here to read the entire issue of The Institutional Risk Analyst, including the interview with Rurban Financial (NASDAQ:RBNF) CEO Ken Joyce.

Comments

[castlegard05:]

I've always thought of Bank issued Credit Cards being the new Mafia - the way they can ruin your credit if you don't pay on time reminds me of Mafia like operations.

Mar 30 05:23 AM

[James Wilson:]

Sub prime Lenders overvalued propertys by 30 % + 5 % fees.

So the toxic assets should be revalued at 0.65 sold or refinanced.

Mar 30 05:56 AM

[socrateazz:]

Interesting! You think the bankers are a sign of the mob! I think The mob morphed into government. At least the Democrat side. I have talked with Democrats who justify election cheating because the Republicans do it! I know some people who represent both parties and it is interesting what their views seem to be on that subject. Democrats seem to think everybody cheats, the secret is to not get caught. The Republicans seem to think all are ethical, and others would not act unethical so do not act unethically or you might get caught. So if you are caught and you are Democrat, it is because everybody does it...I will still vote for you. If you are Republican most other republicans will not vote for you. So all an opponent needs to do is invent some problem with you at the right timing and you will sink like a rock. Fortunanty most Democrat leaders are so egotistic they tend to concentrate on appearing great to the populus

Mar 30 06:38 AM

[Christopher...:]

Actually the politicians in DC are the Mob. The banksters are the owners of these criminals.

Mar 30 06:42 AM

[Christopher...:]

Here's one of my Mexico rants from the WSJ in 1992. I used to kick the stuffin out of Carlos Salinas for being the head of "the perfect dictatorship." See below. Made the Bolsa drop 5% in a single day. ;)

www.rcwhalen.com/pdf/w...

Now we are the leading example of the Mafia State.

Mar 30 06:47 AM

[RTF 360:]

Mr Whalen,
As I'm sure you already know, the New York Times Editorial board is calling for a full Congressional investigation and open hearings on CDS,CDO, MBS and the financial meltdown.
Do you think anything meaningful will happen ?
Looking forward to seeing you on television again.

"Without an investigation, the reform effort will be at best, hit or miss, and at worst, a charade. Congress should start now to gear up for an investigation, using as its model the 1930s Pecora inquiry into the stock market crash, or the Watergate hearings of the 1970s. The investigation should not be performed by outside experts, like the 9/11 commission, whose report Congress is free to accept or reject. It should be part of the Congressional process and include an investigator with subpoena power and the right to participate in the questioning of witnesses, as well as to prep lawmakers for the hearings.

A real investigation might serve as a channel for the public anger now used by politicians to score quick populist points on television without tackling the real issues."
"If the United States is going to have meaningful reform of its out-of-control financial system, new rules will only be a first step."

www.nytimes.com/2009/0...

Thank you for all your fine work

Mar 30 08:30 AM

[Econ 101:]

RTF 360-

Why would we put the fox(es) in charge of the hen house? Why would congress provide a real investigation of the problem when they are the problem? Have you watched Barney Frank hold hearings? Those are just publicity stunts esp with the way the media fawns upon him and his ilk.

congress is the biggest criminal organization the world has ever known, both parties are corrupt and dysfunctional. We need a third party that can actually read the Constitution.

Mar 30 09:52 AM

[jeeper:]

Econ 101 has it right. Congress is as toxic as the assets the banks are hiding.

But why do we have the Congress we have? Because 'The American People' voted them in and keep re-voting them in. Congress is a reflection of the voters. That's why we're really screwed. Nothing will change in DC until we the people change.

Mar 30 10:11 AM

[Leftfield:]

At least if they are investigating, Congress won't be grandstanding about MLB and Roger Clemens. That was their big agenda just over a year ago even though economic tremors had grown stronger throughout 2007.

Plenty has been written or said since the 80's about the "ownership society" with stock ownership spread throughout so much of society we would be entrepreneurial and make smart business decisions. Greenspan would go on about productivity miracles and savings gluts of capital just foaming at the mouth to make our lives better.

Government has been a striking and increasingly threatening model of the anti-productivity miracle. Static, gargantuan and growing, profoundly deluded about Main St., they serve only the narrow interests of their clients.

The economy they're saving is that of their cronies who are the biggest failures and bloodsuckers of all time. There are few signs of life from a shell-shocked population who were long ago complicit in ignoring the Constitution for short-term gain and reelected incumbents last time. I hope that small beginnings such as this forum can spark changes that can give us hope.

Mar 30 10:23 AM

[Allan Frain:]

If there is one thing that Congress no longer has the gall to do is excoriate MLB. Beyond that their capacity for the ridiculous is, if anything, greater.


On Mar 30 10:23 AM Leftfield wrote:

> At least if they are investigating, Congress won't be grandstanding
> about MLB and Roger Clemens. That was their big agenda just over
> a year ago even though economic tremors had grown stronger throughout
> 2007.
>
> Plenty has been written or said since the 80's about the "ownership
> society" with stock ownership spread throughout so much of society
> we would be entrepreneurial and make smart business decisions. Greenspan
> would go on about productivity miracles and savings gluts of capital
> just foaming at the mouth to make our lives better.
>
> Government has been a striking and increasingly threatening model
> of the anti-productivity miracle. Static, gargantuan and growing,
> profoundly deluded about Main St., they serve only the narrow interests
> of their clients.
>
> The economy they're saving is that of their cronies who are the biggest
> failures and bloodsuckers of all time. There are few signs of life
> from a shell-shocked population who were long ago complicit in ignoring
> the Constitution for short-term gain and reelected incumbents last
> time. I hope that small beginnings such as this forum can spark changes
> that can give us hope.

Mar 30 01:12 PM

[Pilm:]

About the only thing congress is qualified to do it hold hearings on MLB and other sports cheaters, at least in these instances, they don't have a conflict of interest. When they hold hearings on Big Oil, Big Banks, Big Brokerages, Bit etc, they are all conflict of interests since all these contribute to congressional re-election campaigns. On the positive side, having the Big wigs come to DC allows them to save the cost of a stamp in delivering their brides ... er, contribution checks!

Mar 30 01:48 PM

[PainfullyAware:]

With the advent and implementation of "Electronic Voting" there is little chance of reform. These machines have never been "Secure" and have a range of flaws that make accuracy a lucky prospect. Germany has outlawed their use in their country - One should ask why we allow them in the USA.

If the factions argue to the point of a near stalemate then the tipping of the scales is almost imperceptible. Very few of the incumbent cartel will be removed while the "Electronic Count" is still in place.

The Corprotocracy Continues.

Mar 30 01:51 PM

[Smalltownba...:]

What do you think? Should they reward you for paying late?


On Mar 30 05:23 AM castlegard05 wrote:

> I've always thought of Bank issued Credit Cards being the new Mafia
> - the way they can ruin your credit if you don't pay on time reminds
> me of Mafia like operations.

Mar 30 09:22 PM

[johnbee:]

Money lenders have always been money lenders despite the fancy names they like to give themselves for PR purposes. Shakespeare didn't trust them as we know from Shylock in the Merchant of Venice, neither did Cicero 2000 years before or Jesus in the Temple 500 years after him, or more recently Abraham Lincoln. When the credit treadmill the world is on stops revolving those that are on it fall back on those below and few will remain unless the wheel can turn again. The "Mafia" have shot themselves in the foot this time and if they somehow survive the gangrene by getting the people to borrow their childrens' money, as now proposed by Obama, those remaining need dispose of them once and for all if our children are ever to find peace of mind in this world.

Mar 31 07:14 AM

[RTF 360:]

Just a coincidence....none of these things are related

www.youtube.com/watch?...

www.theatlantic.com/do...
seekingalpha.com:80/ar......
www.reuters.com/articl......
www.youtube.com/watch?...

Dr. Paul Craig Roberts , former Asst Secy of the U.S. Treasury .......on Geithner & Goldman Sachs

Jul 09 09:16 PM