Chapter I of The End of Corporations
“Just a minute ago, carried away by his rationalistic chimera and his intoxication by prosperity, the citizen proclaimed money as void illusion .There was no more money but goods. The yell that now echoes from one end of the world to the other is, “there are no more goods but money!” And just as the doe craves for fresh water, his soul roars for money, the only wealth.”
Karl Marx. Capital, Volume I
The crisis broke out on 9th of August, (1) when the French bank BNP Paribas announced that their fund had run out of money. This announcement was preceded by serious events such as when the Mortgage New Century was withdrawn from the Exchange because of lack of solvency and an alleged accounting offense, bankruptcy of the Bear Steams hedge funds, of the German IKB and of National City Home Equity.
On that day the generalised bankruptcy soared throughout the entire capitalist system and triggered a chain progress of bankruptcies of multinationals and investment banks. Even if many warned against existing misbalance in economy, no economist, no ruler or civil servant wrote about it nor foresaw the course or the magnitude of the crisis that went rampant as from that moment.
The crisis was the outcome of the fall of the irrecoverable sub- prime loans that began beating banks and investment funds mercilessly and then it spread on to all the papers, debts and assets and derivatives of the world. The entire world financial system collapsed at different pace and varying unevenness.
This compelled central banks and the Federal Reserve (Fed) and the European Central Bank (ECB), the bank of Japan and the Bank of England, which , as if they were following Walter Baguehot’s advise, (2) began with bailouts. Since the beginning of the crisis, the intervention of the Central Banks became chronic and the bailouts a permanent maneuver. Immediately, interbank credit, one of the most important capitalist institutions, went bankrupt.
American President asserted, “the foundation of American economy are still solid” but the bank did not pay attention to him and did not lend any more money to each other did so reluctantly, at very high rates of interest due to mutual distrust. Bank of England saved Northern Rock, whose clients withdrew 3 billion euros in one weekend, the Swiss bank UBS announced loss for $ 3.4 billion, Merrill Lynch for $ 7.9 The British bank, Barclays lost assets for 1.9 billion euros and the Citygroup for $3.1 billion.
The Swiss insurer, Swiss RE, announce loss for 733 million euros. The British bank, Royal Bank of Scotland (RBS) quoted bad debts for 1.7 billion euros. In Spain their own estate bubble collapsed. The banks of Island and Ireland sank. The second investment bank in the USA, Morgan Stanley, reported losses for $ 9 billion and the sale of 10% of its hare to Chinese government. The rate of interest, expression of the rate of profit, collapsed at the beginning of the crisis and still remains at almost zero.
The bankruptcy of interbank credit, of credit in general and of the collapse of the rates of interest affected the process of circulation of capitals, as vital for capitalism to function as blood circulation is for human organism. By means of bailouts, central banks tried to reanimate the process of circulation of capitals, but the damage was immense and required enormous operations to stop them from growing.
Year 2007 closed with serious unrest of the process of amplified reproduction and circulation of capitals, and this cleared the path for the infarcts that took place in the capitalist system in 2008. This was the year when the heart of capitalism collapsed, because between March and September, banks of investment began to collapse. Bank of Investment Bear Stearns, which has survived the Wall Street crack of 1929, collapsed in March. I was the “most admired” in the rankings of Fortune; it was in debt for billions and a leverage ratio of 35.5 to 1. Several managers had to face criminal charges and the Fed granted a loan to JP Morgan to buy Bear.
The crisis of sub- prime papers kept on accruing. The Association of American Mortgage Banks revealed that the number of unpaid was 6 million contracts for $ 6 billion. The prices of living quarters dropped 8.9%, the greatest fall in the last 20 years. Mortgage Bankers Association spoke of a social gravity unprecedented in the history of USA; evictions of families who lost their homes broke all records in history. After the bankruptcy of Bear, the greatest bailout in history of the USA carried out with State funds, when the gigantic mortgage conglomeration – Fannie Mae and Freddie Mac were bailed out. Fannie May is the popular name of the National Federal Mortgage Association., created in 1938 when Roosevelt was in the office. Freddie Mac is the Federal Corporation of Residential Mortgage Loans created in 1970. Between both of them, they handled a volume of $ 5 billion, equivalent to the Gross Domestic Product of Latin America with over 50% of the mortgages in the country.
The bankruptcy of the two giants of mortgage credit threatened Sovereign Bank Pimco, the greatest operator of fixed income funds in the world. The State of China, numerous Central Banks and Sovereign Funds of Investments linked to the mortgage colossuses because they have receivables in papers of the USA foreign constituted by Treasury Bonds and Fannie and Freddie. Yu Yongding, Counselor of the People’s Bank of China – Chinese central bank – warned. “If the government allows for the Fannie and Freddie to go bankrupt and international investors are not adequately compensated, the consequence would be catastrophic“ (The Privateer, 8/08). (3)
Bush invested thousands million dollars in the purchase of Fannie and Freddie shares defending the interests of entrepreneurs from USA and the world. The multimillionaire bailout plan was drafted by the president of Federal Reserve, Ben Bernanke, in charge of the Federal Housing Finance Agency (FHFA), James Lockhart, deputy directors of both mortgage institutions and the Treasury Secretary, Henry Paulson. The peace gained by the intervention in Freddy Mac and Fannie Mae lasted one week.
On 15th September an economic earthquake took place: The Lehman Brothers investment bank went bankrupt. This institution had survived the Civil War and the Great Depression but now it was riddled with debts and had lost 73% of its value. Its fall was so great that many regard this date as the beginning of the crisis. That fall of Lehman was a severe blow to world trade, because they emitted hundreds of thousands of millions of short term debts, a fundamental pinion in trade at short term loans are: 30 – 60 and 90 days.
Lehman papers acted as lubricant and fuel of trade, but without Lehman they nosedived. World trade stopped dead and is still finding it difficult to recover. According to information by World Trade Organization (WTO) in their report for 2008: “the months that followed last September have seen world production and trade come tumbling down: first in the developed economies and then in the developing countries.” By the end of 2008, world trade shrank by 40%.
After the Lehman collapse, there came the collapse of American International Group (AIG), the greatest insurance in the world, following the collapse of their CDS (credit default market) market derived from credit risk, AIG offered counselling in sophisticated techniques for tax evasion, because the conglomerate is closely related to offshore financial centres or “fiscal paradise” (4) The USA took over almost 80% of the AIG shares and Nouriel Roubini commented ironically, “…The USA is now world’s greatest insurance company… socialism for the rich… Wall Street, the place where profits are privatized and losses are socialised”.
To continue reading buy the book clicking here