Please Respond Immediately Forthwith In Confidence

Dear American:

I cordially correspond today to request you to support an urgent secret business relationship with a transfer of funds of great magnitude which is most seriously important.



I am Ministry of the Treasury of the Republic of America. My country has had crisis that has caused urgent need for large transfer of funds of 800 billion USD. If you would assist me in this transfer, it would be most profitable to you.



I am working with Mr. Phil Gramm, lobbyist for UBS, who (God willing) will be my replacement as Ministry of the Treasury in January. As a former U.S. congressional leader and the architect of the PALIN / McCain Financial Doctrine, you may know him as the leader of the American banking deregulation movement in the 1990s. As such, you can be assured that this transaction is 100% safe.



This is a matter of great urgency. We need a blank check. We need the funds as quickly as possible. We cannot directly transfer these funds in the names of our close friends because we are constantly under surveillance. My family lawyer advised me that I should look for a reliable and trustworthy person who will act as a next of kin so the funds can be transferred. For this inconvenience you will be rewarded with grand fees of 1/1,000,000th of 1% of possible profits due to off shore laundering of skim funds due to reprinting of said funds.



Please reply with mother's maiden name, routing and account numbers of all of your bank account, IRA, 401K, pension funds, gold and silver accounts, serial numbers of any weapons you own, and college fund accounts and those of your children and grandchildren to wallstreetbailout@treasury.gov so that we may transfer your commission for this transaction. After I receive that information, I will respond with detailed information about safeguards that will be used to protect the funds.



Please Respond Immediately Forthwith In Confidence.



Yours Faithfully and Sincerely,

Minister of Treasury Paulson

h/t Melina and Richard.



Now, let's get real.


Here's Ian Welsh.

Firedoglake

Chris Dodd Stares Down Paulson

So there was "Goldman" Hank, holding a gun on the economy and staring Congress down. "Give me the 700 billion, or the economy gets it!" he threatened. For two days it looked like he was going to get away with it, 700 billion dollars to spend on the Wall Street gang, the boys who'd already shot the economy up so bad it was in danger of bleeding to death.

Then Marshal Dodd came swinging through doors, shotgun in hand, and said "not so fast Hank. Put the gun down, and back away from the economy. We're going to do this my way."

For a moment calm reigned, then from off one side came a high pitched squeak, "you just put down that gun Dodd," said Bush as he leveled his blunderbuss "the Veto" at Dodd, "and you let my good friend Hank walk away with the money or I'll use this gun." He swivelled and instead of aiming it at Dodd, put its muzzle right against the economy's head. "I'll do it. Don't think I won't! I've killed an economy before!"

Hand still on the trigger, Dodd glanced over at Reid. The old man's fighting days, some said, were long gone. Dodd hoped Reid had one big fight left in him. If he didn't, the economy was done, and Paulson would get away, scot-free.

So yeah, the Dodd plan. Good plan. Buying up mortgages for 15% less than the current market value of the house, then reissuing a clean mortgage to homeowners helps the banks while still giving them a slight haircut (but only slight, odds are home prices will drop more than 15% before the slide is over.) It helps homeowners stay in their houses. It sets a market price so that banks know what mortgages are worth and thus what the derivatives based on houses are worth. And giving the mortgages bought to the FDIC, one of the few agencies that Bush didn't cripple, is genius.

Giving the government stock equal to the value of any bailout for the company is also only fair. If they get bailed out, taxpayers should have a chance to get their money back. If they don't like that, well, beggars, and they are beggars, shouldn't be choosers.

There's more...

If that wasn't enough, Ian kicks it again.

Firedoglake

What the Dodd Bill Needs To Be Complete

As much as I think the Dodd bill is a significant improvement over the Paulson power grab, and I do, it is missing a number of important things.

First, as Kay Hagan points out, the review portion seems to be missing teeth. If the review board doesn't like what the Secretary is doing, what can it do about it? Also, she's right that it needs to meet once a week, not once a month. This crisis is moving too fast for once a month.

Second, there doesn't seem to be any provision for paying for this beyond praying it'll eventually pay for itself. I don't see any good reason not to add in Bernie Sanders suggestion of a 10% surcharge tax on the Americans who earn over a million a year. They're the ones who benefited from the last 8 years, who benefited from the policies which caused this disaster, they're the ones who should pay to clean up the mess.

Next, the bill (Section 10) allows for insurance of money market funds but doesn't appear to require that if they fail anyway, they be taken over by the FDIC. This needs to be a bedrock principle, if you blow up your business, the government gets it, you don't get to keep it when in a free market you'd be bankrupt.

I also don't see any real re-regulation of the industry in this bill. That needs to occur, and it needs to be in the bill, because once Wall Street has their bailout they will fight against being properly regulated tooth and nail. This needs to include very strict rules not allowing the use of default insurance any more, getting rid of most different types of swaps, regulations limiting the use of securitization and limits on how debt in general can be sold. (In particular, debt should probably not be able to be sold more than once, and originators should be forced to keep at least half on their books to avoid them selling stuff they know is crap.)

Dodd needs to add an organization which has the right to regulate banks. This needs to be in badly.

There's more...

Call your Senator. They flat out ignore emails and there isn't time to write. CALL. Call today.

Look, I know we ask you sometimes to write or call about this or that. THIS IS THE NEXT 20 YEARS OF YOUR LIFE, FOLKS.

FUCK the Presidential elections. Fuck the Supreme Court.
DIS DA REVOLUTION, MAN.

Right fracking now.

Thirty, forty years, some of us have waited. Here it is. Today. RIGHT NOW.
We screw this up, we are slave fucking labor working for the MAN.
I mean the words I'm using.

Get on the phone.
Call your friends.
Call your family.
Call everyone you know.

Tell them to tell their Senators and Congressman...

HOLD THE LINE. Do not give an inch to the Republicans.
No one fucking inch.

• Support Dodd's plan.
  
• They broke it. They lose control of what happens now.
• No unelected official in charge.
  
• The government owns what it pays for.
• Middle-class people get their mortgages relieved also.
• Bankruptcy Judges can grant mortgage relief.
  
• People over $1 million can pay a 10% surcharge -- they've been making millions on our labor, fair is fair.
• Congress has oversight ongoingly. End of discussion.
• Screw up, go to jail. This is not "get out of jail free" boys. It's save the country, not you.
  
• And no fucking golden parachutes for CEOs, no way, no how.
• Make them pay.

HOLD THE LINE...
Or your grandchildren will still be paying these Republican crooks.
Pick up the phone -- make the call.

There's more...

Oil: Less Speculation, $200/bbl, Risk Premium, and Sources.

In my previous entry "Drill Here. Drill Now. Pay Less." More Conservative Bullshit., I discussed some of the basic memes that are out there about our current relationship with petrochemicals, including the idea that speculation was at the root of the current price shock, whether the price shock is directly related to "liberal politicians" (as Newt Gingrich has suggested), oil and food, oil supply and demand, and alternatives.

Because I have a family history in the 'awl bidness' and a couple of groups I'm involved with, and because any rational person wants to understand why the world is the way it is, I try to keep up with current ideas and trends in the petrochemical world and how they effect the rest of the world.

Here are a few of the sources I read. If you are interested in what's happening, you should read them too:

Dedicated Oil Sources
The Oil Drum: Discussions about Energy and Our Future
Royal Dutch Shell plc.com
Vancouver Peak Oil Executive

Generalized Economics Sources
Paul Krugman
Brad Delong
Marginal Revolution
Paul Kedrosky

What's Changed Recently?
One thing that has changed is that the generalized economics blogosphere appears to be coming down even harder against the idea that oil is a bubble or that speculation is responsible for much of the price shock. Part of that is because "a bubble" is very poorly defined (and usually after the fact) and that "speculation" is so incredibly vague as to be almost meaningless. Technically, anyone who buys a stock or currency or any commodity in order to make money selling it later is a speculator.

Another thing that has changed is that the meme of $200/bbl oil seems to be gaining traction. A quick Google turns up more than 12 million hits. Goldman Sachs suggested the idea in March, but there were other* mentions before that. Now the conversations are happening everywhere. Deutsche Bank is warning that $200 oil would "break the back of the global economy". Call options on oil at $200 (December) are up almost 40% since the end of April.

Risk Premium
And a third thing is the risk premium. Risk premium is the amount of the price of oil attributable to various risks around the world. For our purposes, the risk premium is the rise in oil price attributable to the possibility of disruption in oil supply.

We know from previous experience that world events can have significant impacts upon oil prices. The first Gulf War was associated with nearly a doubling of oil prices. The Iranian revolution and accompanying OPEC price increase raised oil prices 20%. The 1973 embargo raised prices 187%, according to the EIA.

Several major possibilities are in the front of people's minds: Nigeria, Iran, Russia.

In Nigeria, MEND has successfully attacked (for the first time) one of the distant offshore platforms. They've also cut pipelines onshore, cutting off 120K bpd. Nigeria supplies about 2400K bpd, so that is only .5%, but the capability begins to worry one.

Iran supplies about 4100K bpd. If the US military becomes more active there, everyone expects at least part of that supply to be cut off (as a significant amount of Iraq's oil extraction capacity has been off the market since the US invasion).

Russia is the second largest extracter of oil after Saudi Arabia at almost 9700K bpd. Their extraction is declining and they are showing signs of resource nationalism, especially in natural gas.

The way risk premiums work is that each oil buyer (consciously or unconsciously) calculates an expected value (EV) for oil in the future. They incorporate their beliefs about the likelihood of a disruption event and the resulting price into that EV, and that informs the price they are willing to pay for an oil futures contract. Various sources suggest that the risk premium right now is between $20 and $50 per barrel, or between 14% and 35% of the price.

Of these, I consider the Iran scenario to be the most worrisome because of volume, but the Nigeria scenario most likely and overall, scariest. In fact, I fear that MEND is showing others how to make significant strikes against the developed nations by disrupting oil supplies. The map at the top of the post links to a dynamic map at NewScientist. Click around. Look at the "Oil pinch points" portion and the Straits of Hormuz and Malacca. It's easy to see Iran disrupting travel through Hormuz, which is only 21 miles wide. Malacca is perhaps of more concern. At 500 miles long, Malacca narrows to only 1.5 nautical miles wide and portions are only 82 feet deep -- shallow enough that some supertankers must use other passages. Despite that, roughly 1/4 of world oil travels through Malacca. In 2003, 1/3 of global piracy attacks were in the strait of Malacca (I note that Wikipedia is not the greatest source).

I can easily see effective disruption of oil transport happening in either Hormuz or Malacca. If 1/4 of world extraction were to be destroyed, embargoed, or even just threatened for a few days, there could be a price spike the likes of which the world has never seen. Sam Bodman, US energy secretary, has indicated that every 1% rise in oil demand means a 20% rise in price. Taking 25% of supply out of the equation would (by his numbers) raise the price of a barrel of oil 500%, or to about $700. I don't see it being quite that bad, but I can easily see a doubling to $280 or even $300. And I have no doubt that re-routing would happen quickly to drop prices back, and that the US Navy would be patrolling the Strait as soon as possible.

But for a few days, we'd find out what Peak Oil really means.

So that's the news. Nothing** suggests that prices are going to drop anytime soon. Conventional wisdom is against it, which may be the only argument for lower prices :-). If political worries smooth over (which seems unlikely while Bush is in office or if McCain is elected), we could see the risk premium drop. That might get us back to $100 oil, but I doubt any better than that. IMO, the most effective weapon we have against high oil prices right now is diplomacy, and I mean that in the archaic sense of talking, not the neocon sense of preparing to attack.


* Yes, I consider that link a joke.

** Actually, I just read one thing. Gasoline usage is dropping in the US, and as a result, oil stocks are rising (that is, the amount of oil stored). We had a bit of a dip in prices last week as a result before they shot back up again. We've seen the basic scenario before: oil price shock lowers economic output, which lowers oil demand, which reduces oil price. But with multiple growing economies in the world demanding oil, it's going to be harder to make this scenario work this time.

Disclosure: I am passively invested in the extraction side of petrochemicals. I do not own stock in or have any active (decision-making) relationship with any company mentioned in the post.

[Updated: 2008.07.01 14:03 PDT to add final ** paragraph about reduced demand in the US possibly lowering prices.]

There's more...