Mike Larsen writes: When I was a kid, black holes fascinated me. The idea that you could have an area of space so massive Ö so dense Ö that it could suck in and absorb ANYTHING that got too close — even light — seemed ludicrous. Like pure science fiction. But they’re real. These days, black holes aren’t so fascinating. But unfortunately, they are very, very real. And they keep popping up throughout the financial sector Ö

The Federal Reserve and Treasury Department keep coming up with new whiz-bang “solutions” to deal with these black holes. They keep opening up Washington’s checkbook, allowing our tax dollars (or newly minted ones) to spiral toward their center. But every time they do, another market or institution implodes somewhere else. Suddenly, there is a new, giant money-sucking black hole to focus on!

In fact, I see three right now that are opening up — and that could torpedo the markets and the finances of our nation Ö

Black Hole #1 — Federal Home Loan Banks following Fannie, Freddie, private banks over a cliff?

Unless you follow the banking industry closely, you probably haven’t heard of the Federal Home Loan Banks. But the FHLBs are vitally important as a source of funding for U.S. banks both large and small. There are 12 of them spread around the country — in Atlanta, Boston, Chicago, Cincinnati, Dallas, Des Moines, Indianapolis, New York, Pittsburgh, San Francisco, Seattle, and Topeka. You’ve probably never heard of Federal Home Loan Banks. But after the federal government, they’re the biggest borrowers in the country!

FHLBs sell debt into the capital markets to raise money, using their AAA ratings to borrow cheaply. …

The FHLBs own billions and billions of dollars worth of mortgage backed securities. Those securities have plunged in value. So just like their banking customers, FHLBs are facing potentially huge write-downs on their portfolios. …

Black Hole #2— Insurance industry’s capital and surplus cushions are eroding fast Ö

It’s not just the banks that are in trouble. The insurance industry is taking a pounding, too. Losses on residential mortgage securities, commercial real estate investments, and other holdings are hammering capital levels throughout the sector. The insurers are also getting hit because they guaranteed minimum returns on variable annuities — and the market subsequently tanked.

Take the life insurance sector Ö The industry’s so-called statutory surplus, or difference between assets and liabilities — plunged 24%, or $76.8 billion, last year to $237.3 billion, according to research firm Conning & Co. In an effort to rescue their collapsing balance sheets, some insurance firms are trying to get government bailout money by buying up teeny-tiny thrifts and banks.

For example, Lincoln National, an insurance firm with $173 billion in assets, is purchasing the miniscule Newton County Loan & Savings of Indiana (total assets: $7 million). That transaction could give Lincoln access to $3 billion in TARP assistance. But that’s mere peanuts compared to what the ultimate cost may be Ö

Black Hole #3— Pension funding picture deteriorates dramatically Ö

Then there’s the dismal picture for the nation’s pension funds. States, corporations, municipalities Ö they’ve all promised benefits to retirees based on assumptions about the returns for various asset classes. But those returns are being blown to smithereens, causing funding shortfalls of epic proportions. The PBGC is $11 billion in the red. And with so many companies in bankruptcy, it may need a government bailout to rescue failed pension plans. The PBGC is $11 billion in the red. And with so many companies in bankruptcy, it may need a government bailout to rescue failed pension plans.

The consulting firm Mercer recently estimated that the pension funds of big U.S. companies are underfunded to the tune of $409 BILLION! At the end of 2007, they were running a $60 billion surplus. That huge swing could drive up corporate borrowing costs and drive down corporate earnings.

It could also lead to reduced business investment as companies are forced to divert money from equipment and facilities budgets to their pension funds. Advisory firm Watson Wyatt recently estimated that U.S. corporations will have to boost pension fund contributions to $111.2 billion in 2009 from $50.5 billion last year.

Now it’s true that the government-backed Pension Benefit Guaranty Corporation (PBGC) insures the basic benefits for more than 29,000 plans. But with so many companies falling into bankruptcy these days, it’s increasingly likely the insurance premiums the PBGC receives won’t be enough to cover its obligations. The agency was already running a deficit of more than $11 billion as of September 30. And that number is poised to rocket higher. (01/17/09)
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Ilargi writes:
On Monday, Martin Luther King Day, US stock markets will be closed. The
next day, Obama will be inaugurated as the 44th President of the USA.
And the markets will be open on that day. Obviously, the expectations
are that the optimism involved will lead to solid market gains. But
today, after Bank of America’s new US government funding, and Citi’s
announced break-up -which will enable it to dump toxic assets, while
there were some profits in the morning, bank stocks started plummeting
around noon. There may be optimism, but there certainly is no
confidence. Or belief for that matter. Looking out over the rapidly
deteriorating financial landscape, and the newly reported giant bank
bail-outs, I doubt I’m the only one to start considering the
possibility that Obama may wind up going into the history books as the
man who bankrupted America. …

None of the $8+ trillion so far
thrown at the US economy has helped that economy one bit. It has merely
helped to -temporarily- hide losses at institutions , and to allow the
richest part of the nation to get out without much damage. For the
(wo)man in the street, things have only gotten worse, and a lot, even
if (s)he doesn’t yet realize that. But once the rich have covered their
positions, there’ll be no more reason to hide anything. Tellingly, US
mortgage rates are at historical lows, but sales are still going down.
There’s more than one part of the country where foreclosure sales make
up the majority of the total housing market.

What is being
presented as daring efforts to save the economy and get people working
and spending again, will in reality turn out to be biggest ever drama
for the American people, and the most daring crime against them in the
history of the nation. As for “get people working”, it is becoming
clear that unemployment will rise to levels no-one dared mention until
recently, apart from a few such as me. To wit: Circuit City just
announced the loss of another 30.000 jobs. As for the spending, people
will have much less to spend in the years that lie ahead than they have
in generations.

Barack Obama has only one answer to the
trillions in public funds wasted in the past year and a half: he pushes
Double or Nothing. America has become a country that has in its
entirety adopted the philosophy and lifestyle that have established its
darkest (that’s why they need the bright lights) and seediest corners:
Las Vegas and Atlantic City. For all the talk of redemption and
salvation, there is only one real religion that governs the US: the
dual deity of money and gambling. As many who’ve walked the shadier
alleys in Vegas can tell you, that is the sort of belief system that
you can rely on to deliver you into bankruptcy. It’s one religion that
holds the promise of a certain outcome. And it’s all America has left. (01/17/09)
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