A Pending U.S. Workout?

Can you see it on the horizon? I can.

The workout that is taking place in Greece and in Italy, where popular democracy has been suspended and new heads of state have been installed by the banks, could eventually arrive in the U.S.

Granted European parliamentary democracy makes the pretense of keeping up democratic appearances so much easier.

Mr. Papademos, Greece’s new Prime Minister, was formerly employed by the E.U. central bank, and Mr. Monti, Italy’s new Prime Minister, does have strong ties to Goldman Sachs (neither were popularly elected); and both bankers/technocrats/prime ministers received the blessing of the E.U.’ central banker, former Goldman alum, Mario Draghi.

So how did Europe get here and what does it bode for the U.S.? Greece and Italy are mired in debt, and in both countries the “bond vigilantes” (read: banks, hedge funds, private equity, mutual funds and wealthy individual investors) have driven swaps spreads and state bond yields to the breaking point. The “breaking point” is where interest on the national debt takes up such a large portion of the government budget that states must engage in either fiscal austerity or default. Fiscal austerity is paid for by the 99%. And default threatens the 1%. Default also triggers credit default swaps, and the equivalent to economic Hiroshima or Nagasaki in Athens or Rome. The contagion then spreads to Northern Europe/Deutsche Bank, and across the pond to the corner of Wall and Broad.

To buy more time, and to postpone economic Armageddon, the banks and Germany are presently engaged in something called a workout in Greece and Italy. Now for the uninitiated, a “workout” is a “come to Jesus/Yahweh/Muhammad moment,” where bank(s) and creditor meet and all kinds of nastiness ensues. In the private sector, assets might be sold off to repay bank loans, labor cut, new management installed, and the bank may install "friends" on the board of directors. Debt might even be “voluntarily” restructured. That’s if things go nicely. An alternative to the aforementioned is bankruptcy, Chapters Seven or Eleven. And although the popular press hasn’t picked up on it yet, a workout is exactly what is happening in Greece and Italy right now…. The banks have effectively installed their own men in the key positions in government to workout on state finances.

And as with the private sector, the workout solutions in government are not dissimilar: raise taxes (preferably upon the middle class), cut spending and social services, sell off state assets to the connected bidder (privatize), and stack government with bankers or banker friendly politicians.

So as to avoid a write down or a default, the banks want to squeeze every last drop out of fiscal policy. Think of private equity/shadow banking buying out a company on Friday, popping champagne corks on Saturday night, and handing out pink slips to employees on Monday morning. Choose your analogy.

And the banks will do everything in their power to insure that they win, and that the creditor, in this case the public sector – the government/democracy/taxpayer – takes the hit before they do. It’s the banker’s code! After all, the creditor borrowed the money, and no matter how many financial artifices of war were deployed against said creditor/government/taxpayer, or no matter how usurious the terms, the creditor must pay.

The fact that many of these troubled governments presently under fire for their profligate ways, the U.S. included, bailed out the banks and continue to do so, repeatedly, is an entirely separate matter, as far as the banks are concerned.

In the eyes of the bank, whether it be John Q. Public maxing out his credit card, a major corporation who borrowed one too many hundreds of millions in the face of an economic downturn, or the Sovereign Government of Greece, who hid its fiscal intemperance via advisors from Goldman Sachs and the use of CDS and swaps… they are viewed all the same. They are all freaking dead beats!

Again, how does the public and private sector get here? The parallels are not dissimilar for the private and public sector. It is usually financial mismanagement, combined with rotten timing. The quote from Mr. Wolfe’s banker -the man with the Death’s Head suspenders – the workout artiste - says it best: “This is one of the worse cases of corporate mismanagement… one of the grosses violations of fiduciary obligations…. I’ve ever seen… And in my job I look down the gullet of mismanagement and malfeasance every day.”

For the public sector this means, simply: Politicians have over promised on public services and social programs (or failed to reign in the costs of those programs by conducting fair and honorable negotiations with the vendors for government programs, say Big-Pharma), underfunded their liabilities, low balled taxes to appease the rich (or in the case of Greece haven’t even bothered to collect taxes), and presto… you have massive amounts of government debt, that the bankers assume is bullet proof and/or are all too happy to fund. Besides, aside from interest payments, the bankers clean up on the issuance of government debt with fees and commissions, arbitrage generates more fees, and so does CDS, swaps and hedges, which insures government debt or allows gambling against same. The bankers also assume, when it’s convenient, that world governments will not default, and can always raise revenue or print additional monies. Always.

Yes, having a little debt or venture capital is all good, when the economy is rocking, the birds are singing, and demographic trends favor your government. But when the advanced economies budgets are shredded by bank bailouts and the resulting chaos, central banks who pushed the pedal to the metal on printing presses, the birds are dying, and demographic trends are sucking the state dry…. Well, it’s no time to be beholden to the banker, because bankers don’t do sob stories.

If you are a winter enthusiast, don’t worry about climate change and it’s impact upon ice and snow… why just stop by any Wall Street bank branch, and look into that banker’s heart and soul and find a veritable winter wonderland. ‘Tis the Season!

But I digress, because as flinty and as cold as a banker might be as an enabler, there’s always the enabled. And in the case of the United States of America, the Republican Party “pimped” the nation out to Wall Street, through mismanagement of state finances for the last thirty years. The GOP, or certainly their laissez faire ideology, did it to us. Starting with Reagan, the Republicans gave us the credit card economy, they took the governors off the economic engine of capitalism (by stripping away bank regulation), they floored the printing presses at the Fed (courtesy of the Maestro), and they removed all fiscal sanity with monolithic tax cuts for those who could most afford to pay, the rich. A neo-gilded age was born, complete with excesses that F. Scott Fitzgerald never dreamed of. Western governments were overrun with newly minted plutocrats, bankers, and plutocratic wannabes, complete with Bunga-Bunga parties. Of course, the bankers were there all along, right by the side of the GOP - dispensing campaign contributions and whispering sweet nothings, like ‘the economy will roll forever, the good times will last forever, the U.S. is strong - it can always pay down its debt at some future date.’ Shortly after the 2008 crash…the mother of all fiscal hangovers kicked in, and now the mirror that reflects the state of the union is fractured… not that many heads of state from that era want to look into the mirror.

When’s the last time this country heard profound wisdom from former President Bush (W)? Surely, Mr. Bush has ideas on how to cure the nation‘s ills. No? Or how about the former VP, the man without a pulse, who said deficits don’t matter?

Democracies perish when special interests learn they can vote themselves public largess, and many advanced economies/democracies have often become nations of special interests. This is why strong democratic government with strong government leadership is so important, and the word “NO” is the most powerful word in the English language. Ultimately, to rein this fiscal mess in and remove the bankers from the seats of government, there needs to be real reform on taxation, but just as importantly, on the supply side of the government equation. That is to say, if America wants to get its fiscal house in order, we need leadership who is willing to offend very wealthy and powerful special interests, who provide government services: that would be doctors, hospitals, big pharma, defense contractors, and bankers, just for starters.

Failure to do so may just mean that we see a President Blankfein in our lifetimes. Ah, his hair is not right, make it Prime Minister Dimon.

As this blog has stated previously, J.M.H. will take a tax and spend Liberal, over a borrow and spend Republican any day. Both parties favor big government… the difference between the two parties lies in whom the respective parties believe should be the beneficiary of government largess: the Democrats favor the people, the Republicans favor the Three Bs: banks, big oil, and billionaires. At least with the Democrats, you get fiscal responsibility and you pay as you go. With Republicans you get massive debt and the Wall Street cartel's frosty embrace.  I call it a death grip.

Finally, there are some who say that the solution is to turn on the printing presses. But we have already seen this movie. Piling debt on top of more debt, w/out real fiscal reform just buys a little more time and a lot more agony. Ultimately, this global train wreck we are all witnessing has a date with destiny.

And Destiny, she’s been stood up and she’s pissed!