The US financial system continues it's slow motion collapse. Last weekend it was Fannie Mae and Freddie Mac. This weekend it's Lehman Brothers. What's next weekend? Washington Mutual? If they make until then. The Ponzi schemes continue to unravel. Why is no one going to jail?

Last Ditch
by Jim Kunstler

Why do the big deals always happen over the weekends? So the big boyz in government and finance can take off their neckties when they bargain with each other? So the markets will be closed and unable to register a response one way or another? So the shrinking fraction of the US public that pays attention to anything besides Nascar and pornography won't catch the news Saturday evening? This weekend's big deal was the US government taking over the "government sponsored enterprises" (GSEs) Fannie Mae and Freddie Mac that guarantee trillions of dollars in mortgages. The "guarantee" is supposedly accomplished by converting bundles of mortgages from the banks and loan companies that originate them (that make the contracts with the buyers of houses) into bonds that can be sold downstream. Risk was theoretically dispersed among the holders of these bonds. This all seemed to work during the long stable period when our cheap oil economy was chugging along, and house prices maintained a consistent relationship with incomes, and people paid their mortgages dependably. The whole system ran like a reliable machine -- like a Chrysler slant-six engine! Until the cheap oil age came to an end. Then, all parts of the system shook apart. It was the end of cheap oil that catalyzed the housing collapse and, by extension, the current huge financial crisis. But the run up to it was like a bounce off a high diving board into an empty pool. The bounce came around 2001 when it became apparent that the US standard-of-living could not be maintained on incomes in a post-cheap-oil economy. The trauma of 9/11 prompted a new and utterly insane consensus to form that the US standard of living could be switched over from income to massive debt. All the normal brakes against irresponsible lending and borrowing came off -- embodied in Alan Greenspan's absurd statement that it was a good time to assume an adjustable rate mortgage when interest rates were at a historic low -- meaning they could only be adjusted upwards. Why hold Greenspan responsible? Because he was at the apex of the authority vested with establishing norms, and he shoved our behavior into the realm of the recklessly abnormal, and he should have known better.

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Freddie and Fannie Bail-Out: Our Foreign Masters Have Spoken

The top five foreign holders of Freddie and Fannie long-term debt are China, Japan, the Cayman Islands, Luxembourg, and Belgium. In total foreign investors hold over $1.3 trillion in these agency bonds, according to the U.S. Treasury's most recent "Report on Foreign Portfolio Holdings of U.S. Securities." China alone holds $376 billion in bond holdings. Unless I am misreading something, foreign central banks will be protected, including China's...and the America taxpayer will foot that bill.

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Comrades Bush, Paulson and Bernanke Welcome You to the USSRA (United Socialist State Republic of America)

The now inevitable nationalization of Fannie and Freddie is the most radical regime change in global economic and financial affairs in decades. For the last twenty years after the collapse of the USSR, the fall of the Iron Curtain and the economic reforms in China and other emerging market economies the world economy has moved away from state ownership of the economy and towards privatization of previously stated owned enterprises. This trend was aggressively supported the United States that preached right and left the benefits of free markets and free private enterprise. Today instead the US has performed the greatest nationalization in the history of humanity. By nationalizing Fannie and Freddie the US has increased its public assets by almost $6 trillion and has increased its public debt/liabilities by another $6 trillion. The US has also turned itself into the largest government-owned hedge fund in the world: by injecting a likely $200 billion of capital into Fannie and Freddie and taking on almost $6 trillion of liabilities of such GSEs the US has also undertaken the biggest and most levered LBO (“leveraged buy-out”) in human history that has a debt to equity ratio of 30 ($6,000 billion of debt against $200 billion of equity). So now Comrades Bush, Paulson and Bernanke (as originally nicknamed by Willem Buiter) have now turned the USA into the USSRA (the United Socialist State Republic of America). Socialism is indeed alive and well in America; but this is socialism for the rich, the well connected and Wall Street. A socialism where profits are privatized and losses are socialized with the US tax-payer being charged the bill of $300 billion.

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Is there an exit strategy?
The idea that the world's largest economies are merely facing a short-term panic looks increasingly strained

A year into the global financial crisis, several key central banks remain extraordinarily exposed to their countries' shaky private financial sectors. So far, the strategy of maintaining banking systems on feeding tubes of taxpayer-guaranteed short-term credit has made sense. But eventually central banks must pull the plug. Otherwise they will end up in intensive care themselves as credit losses overwhelm their balance sheets. The idea that the world's largest economies are merely facing a short-term panic looks increasingly strained. Instead, it is becoming apparent that, after a period of epic profits and growth, the financial industry now needs to undergo a period of consolidation and pruning. Weak banks must be allowed to fail or merge (with ordinary depositors being paid off by government insurance funds), so that strong banks can emerge with renewed vigour. If this is the right diagnosis of the "financial crisis", then efforts to block a healthy and normal dynamic will ultimately only prolong and exacerbate the problem. Not allowing the necessary consolidation is weakening credit markets, not strengthening them. The United States Federal Reserve, the European Central Bank, and the Bank of England are particularly exposed. Collectively, they have extended hundreds of billions of dollars in short-term loans to both traditional banks and complex, unregulated "investment banks". Many other central banks are nervously watching the situation, well aware that they may soon find themselves in the same position as the global economy continues to soften and default rates on all manner of debt continue to rise.

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Lehman Brothers May Need a Miracle to Survive

The Wall Street firm that started the U.S. cotton trade before the Civil War and financed the railroads that built a nation might soon fade into history. Just days after Lehman Brothers Chief Executive Richard S. Fuld tried to pitch Wall Street on a plan to save the firm by shrinking it, he's in complicated negotiations with potential buyers that may see the company sold piecemeal as soon as Sunday night, analysts said. "Nothing short of a miracle can save Lehman as is," said Anthony Sabino, professor of law and business at St. John's University. "It is highly unlikely Lehman will be in existence on Monday morning."

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Talks Continue in Effort to Rescue Lehman

The fate of Lehman Brothers, the beleaguered investment bank, hung in the balance on Sunday as Federal Reserve officials and the leaders of major financial institutions continued to gather in emergency meetings trying to complete a plan to rescue the stricken bank.

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