Think of this as Volume 12, Number 10 of A-Clue.com, the online newsletter I've written since 1997. Enjoy.
A quiet economic war is now being fought and the future of Europe hangs in the balance.
As with much of the Cold War this struggle is mostly happening in secret. Unlike the Cold War (until, as my son would note, the end) this war is economic, not military.
At the center of the struggle is AIG. Reporters here are desperate to find out "who are the AIG counter parties?" That is, who holds the other end of the trade on the phony insurance AIG gave to Big Shitpile, without collateral -- the black sinkhole into which the world economy is rapidly falling.
In his testimony to the Senate this week, Treasury Secretary Tim Geithner refused to answer the question. Some facts are leaking out, but these are mainly the names of American banks that are already getting government aid.
Here is what Geithner can't say. Europe. Banks in both Eastern and Western Europe were heavy buyers of Big Shitpile, lured into thinking they were getting AAA paper rather than junk by the AIG insurance.
Why was this done? My guess is that the Bush Administration was covering up the real costs of Iraq by creating a housing bubble, and that the bonds were also meant to create a "co-dependence" in Europe tieing those governments to U.S. policies. Pushing these bonds overseas helped increase the supply of free capital here for housing, and the AIG "insurance" made these deals look safe.
In fact, AIG was running a Ponzi scheme that made Bernie Madoff look like a two-bit grifter. Instead of putting up capital against its "insurance" AIG just pocketed the proceeds. Rather than price this insurance against the real risk of default AIG ignored its own underwriting rules. Was it done out of greed or under political pressure? I don't know. My guess is a little of both, along with "honest" patriotism -- your government asks and you act.
Why can't Geithner admit to this? Because, as we saw with Citicorp, which crashed as the government pumped its books with capital, the market will act on knowledge by running away from the counter-parties. So we keep Estonia, Hungary and the rest afloat on the sly, and we're forced by circumstances to bail everyone else out as well.
The danger is that this is a hole that can't be filled. Estimates of the value of mortgages at risk on this crap range from $2.5-7 trillion. At its height Credit Default Swaps were a $70 trillion business.
That's the real reason the President is going to Europe. All this springtime in Paris talk is a cover.
But wait. It gets worse.
Who is on the other side if these transactions fail? Russia.
It doesn't make sense for Russia to be threatening (again) to cut off gas to Europe based on the low current price of gas. It makes no sense for Western Europe to be expanding its gas ties to Russia as it proves it's an unreliable supplier. And it makes absolutely no sense for Turkey to stall on providing an alternative supply scenario except growing Russian power.
Despite Russia's investment losses its raw materials make it economically strong compared with everyone else. Look at a map of the U.S. recession. It's just like a map of the 1973 oil shock. We're weak on the coasts and in the Midwest, strongest in the oilpatch and the grain belt.
That's what Obama has to counter. He has to demonstrate that Europeans still love America, or love it again. This exerts pressure on Europe -- especially Germany -- to join the President in filling the economic hole AIG left, and to keep silent about it. My guess is he'll be asking western bankers to take a haircut on their AIG insurance payments in order to keep eastern Europe from going back into Russia's orbit. Most of what was inside the old Soviet Union is lost already.The Secretary of State is either out of the loop or just dissembling.
In this, as in everything else, Republicans are being deliberately obstructionist, even disloyal. The Bush dead-enders seem to look to President Obama as southerners looked to Lincoln. What's left of the GOP are Whigs, and it increasingly looks like an Obama success here will leave the Republicans as dead as the Whigs.
Because eventually all of this is going to come out. It will come out either in celebration or tears. We either hold things together or we lose Europe to the Russkies.
All this is taking place against a ticking time bomb, namely the continuing collapse of the U.S. housing and jobs markets, against which those AIG "insurance" policies were written. The mortgage help in the President's plan is meant to repay and stabilize the loans that are at the bottom of all this. The stimulus is meant to provide income that props up the mortgage payments. That work has to be accelerated even while Obama goes to Europe, even while we keep shoveling money into the unending maw that is AIG, even as everyone keeps silent on what's really going on.
At some point we need to bring to justice the people behind all this. I know. But the President has decided that day must wait until the crisis is past, that show trials now would be counter-productive, since it would bring the total AIG exposure to light and risk a European collapse.
No wonder the man's going gray.
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