Vol. 72/No. 40      October 13, 2008

While legislators were considering the bill, two of the largest U.S. commercial banks—Washington Mutual and Wachovia—collapsed. Congress is considering a new version of the bill.

The filing for bankruptcy by investment bank Lehman Brothers September 15, noted the Wall Street Journal, “sparked a chain reaction that sent credit markets into disarray. It accelerated the downward spiral of giant U.S. insurer American International Group Inc. and precipitated losses for everyone from Norwegian pensioners to investors in the Reserve Primary Fund, a U.S. money-market mutual fund that was supposed to be as safe as cash.”

“As fear spread,” wrote Robert Samuelson in a Washington Post column, “financial institutions grew wary of dealing with each other because no one knew who was solvent and who wasn’t.”

The U.S. rulers hope that handing massive amounts of money to the banks will unclog the credit freeze gripping U.S. banks and the world financial system.  
 
Not a mistaken policy
However, the financial crisis is not the result of a mistaken policy, poor regulation, or a temporary loss of confidence, but of the capitalists pouring money into all kinds of financial paper in the hopes of making huge profits, which they cannot get from investing in production and new factories. They blew up giant debt balloons that are rapidly deflating. The best they can do is temporarily stave off their immediate problems. As the crisis deepens it will eventually lead to massive layoffs that will impact millions of working people.

The $700 billion bailout bill would have authorized the treasury secretary to purchase any assets from any bank at a price set by the Treasury. The Treasury would receive nonvoting shares of stock in financial institutions receiving bailout funds.

The bill said that if the government does not regain all of its money after five years, the president would be required to submit a plan for recovering the money “from entities benefiting from the program.” The government also promised to approve “reasonable” adjustments on mortgages it took over.

Republican and Democratic Party presidential candidates John McCain and Barack Obama respectively announced September 28 that they supported the plan. Some 40 percent of Democratic Party legislators and two-thirds of Republicans voted against the plan, hoping this would aid their reelection prospects in November. Several of them cited the bailout’s unpopularity among working people.

Even $700 billion may not be enough. “A broad range of borrowers, not just mortgage holders, are now starting to default on their debt,” noted an article in Australian Business. “About 2.4 percent of payments on credit cards are more than 90 days overdue, according to the Federal Deposit Insurance Corporation, the highest level since 1991.”

Banks have reported about $400 billion in bad credit, but this could exceed $1.5 trillion as banks write off bad loans not only from mortgage-related securities but consumer loans, credit cards, and student loans, economist Nouriel Roubini at the Stern School of Business at New York University told the New York Times.

Over the last few days in September six governments in Europe committed about $160 billion to bail out large financial institutions. These included Bradford & Bingley in the United Kingdom, Fortis in Belgium, Hypo Real Estate Group in Germany, Dexia Bank in France and Belgium, and Glitnir Bank in Iceland.  
 
Largest bank failure in U.S. history
The collapse of Washington Mutual is the largest bank failure in U.S. history. It occurred after bank customers withdrew $16.7 billion in deposits in 10 days, 9 percent of the $188 billion total bank deposits.

After Washington Mutual’s stock fell to 45 cents in after-hours trading September 25, the Federal Deposit Insurance Corp. (FDIC) seized control of the bank and then immediately sold it to J.P. Morgan Chase for $1.9 billion. J.P. Morgan Chase plans to write down $31 billion in “toxic assets” it acquired while taking control of Washington Mutual’s $307 billion in assets, reports the Journal.

The FDIC, which insures deposits of up to $100,000, could have had its funds virtually wiped out if it had to cover insured deposits at Washington Mutual and Wachovia. The Senate is proposing to raise the insurance limit to $250,000 through 2009.

“Emergency federal funding of the FDIC could swell the cost of government rescues of failed financial institutions to more than $400 billion—not including the $700 billion general Wall Street bailout now under discussion in Congress,” said Bloomberg news.

Of the total $7 trillion held in U.S. branches of all FDIC member banks, 37 percent is not insured.
 
 
Related articles:
‘Workers need to take political power’
Róger Calero, socialist presidential candidate, speaks out on capitalist crisis
How capitalists created today’s crisis on Wall Street  
 
 
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