United States Financial Meltdown, A Special Report

A Note to Senator Barack Obama and Senator John McCain And the Voters of America.

In the 1980s, American TIME magazine devoted an entire edition to evaluate whether capitalism was working. I would request that prestigious media to review the question again, in the light of the on-going fragmentation that has taken place in the financial system of the United States. The current financial crisis on Wall Street is a disturbing report on the financial health of the United States and this has a way of impacting on the European and Asian stock markets.

The effect of this melt-down will reverberate around the globe for quite sometime. It will not be enough to give financial life-line to the ailing companies. There is an urgent need for corporate turn-around of these businesses in order to cushion the financial “big bang.”
First of all, each company must undertake an immediate diagnostic review of their firms, provided that they are not already in the cold-room of the undertaker. Extending cash loans may not halt the extraordinary financial crisis some of these companies find themselves. Outright sale has been stalled because no-one wants to throw his money into a bottomless pit.

Stock relief measures granted to some companies, can only help in the short run. It will be incumbent on Central banks to increase funding and impose tighter regulatory controls. New liquidity measure should be comprehensive and far-reaching. There should be strict sanctions for banks and other financial institutions which derogate from the new regulatory measures. After all the peoples’ money is not for Casino lucky dip games.

After 158 years of excellent banking operations, the Lehman Brothers have declared bankruptcy. AIG Insurance Company is in serious trouble. We watched, with whispering hope, as AIGS’ stock took a free fall since November, 2007.

The manifold disasters in the US in recent years seem to have increased claims payments. Premiums have been slow in coming. This is an unhealthy situation for any insurance business. Since nature must have its way, uncertainties will continue to manifest in the insurance industry.

The Bank of America has acquired Merrill Lynch for 50 billion dollars. After completing the stock transfer forms, priority loans repayment must be separated from subordinated loans, so that the new management of Bank of America/Merrill Lynch will have a clear picture of the new company’s financial account balance. Sundry creditors and sundry debtor’s accounts must also be reconciled. They should evaluate Merrill Lynch accrued interest, this is the amount of interest, accumulated but not yet paid on their deposits or savings account. After this, a corporate turn-around mechanism could bring about a solid swing, in about a year or two.

Morgan Stanley has recorded dwindling fortunes, while Lloyds TSB took over Halifax Bank of Scotland. The financial crisis has forced Russia to allocate over 400 billion dollars to beef up some Russian companies.

The American financial crunch has caused some commentators to review the workings of the American economy, in the last twenty years. During the Allan Greenspan years, a liberal economic regime permitted mortgage-backed securities, steady decline in the value of the dollar, allowing clients to hold loans beyond redemption dates; banks were subsidized to give loans to clients to buy houses.

There was a swarming hive of over-paid CEOs, whose cuisine was always garnished with lobsters in olive oil. This, they downed with flaming red wines. A CEO, who often has lip-stick on his collar, always “with a jar of wine besides him”, may not care to look at his company’s financial accounts. “He takes the heavens for a tent and the earth as a mat. Then, he is in harmony with the life-giving forces.”(Zen Buddhist of the Ming Dynasty). Lack of financial prudence led, in a few cases, to corporate nightmares.Also, there were curious, quick and padded write offs. All these were the characteristics of apparent failures by financial regulators. Although these measures were aimed at permitting flexibility in the financial system, the chickens have now come home to roost.

Fannie Mae and Freddie Mac housing giants have suffered heavy losses in their mortgage business, from which they are not likely to recover soon. Hewlett-Packard is poised to cut 24,000 jobs and many other US companies will follow suit. European and Asian Pacific stocks are all down causing panic in London and Hong Kong. The financial accounts of Barclays Bank are not in order, which was why they backed out of the take-over deals they had shown interest in earlier.

By August 2008, the bank had written off over 40 billion dollars, which is more than it can chew, so to speak. We think that Barclays Bank should re-consider its decision not to extend assistance to Lehman Brothers. Tomorrow will surely come, with its share of uncertainties. What are corporate friendships for? All those invitations to exotic parties and after dinner speeches cannot be easily forgotten.

The United States Government reversed its decision not to rescue Lehman Brothers and AIG by bailing out the companies with billion of dollars, which financial analysts think will put tremendous pressure on the Federal Reserve balance sheet. Investors will possibly consider investing in commodities rather than in stocks for now.

In Italy, Prime Minister, Berlusconi said that he was trying to see what he could do to reverse the fortunes of Alitalia, which declared bankruptcy last month. Although he has been speaking in the language of privileged government, investment experts in Milan are sceptical because of the unrelenting and belligerent stance of the trade unions and vocal stakeholders. Alitalia may wish to consider introducing shares option scheme, for its employees to calm their nerves.

The Bank of Japan promptly injected 248 million dollars in order to shore up any further decline in the fortunes of the Japanese economy. Euro-Asian Central Banks, including Russia quickly injected funds and replaced CEOs, who did not react in good time to prevent unbridled lending. Some financial experts are advocating the harmonization of the economic and industrial policies of UN Member-States and the elimination of disparities in the level of development of Member-States and that they should grant each other the most favoured nation treatment.

It is trite logic to ascribe the proximate cause of US financial problems to the fact that in the last eight years, the US has been managing a war economy. Between 1930 and 1938, Germany had a strong economy with machine building as it’s most lucrative sector, as could be seen in the fortunes of “Krupp Stahl” GMBH. Adolf Hitler frittered away all the fortunes of Germany, in his hegemonic enterprise.

World economic history records the activities of the United States in global economic development as very constructive. The US was an initiator, active participant and finisher of well-designed global economic projects. After the world economic depression of the late 1920’s, there was an unprecedented depreciation and disintegration in world trade.

The US helped to evolve an international monetary policy, caused the removal of artificial trade barriers, boldly and imaginatively confronted the “creeping miasma of political and economic ideology, closely related to the polar economic structures between the industrialized and non-industrialized states”. America helped to re-organise the post- Second World War economy in Europe, in a profound and lasting manner. European and world financial institutions were set up, mentored and nurtured by the United States of America. Imaginative Secretary of State, Cordell Hull, and genial George Marshall, turned Europe around from the devastations of Hitlerism.

The hare-brained policy of “not talking to rouge states” is neither here nor there. If Professor Dr. Henry Kissinger did not talk to the Chinese in the early 1970’s, where would American firms have outsourced their companies to, in 2000? As of now, China is decidedly America’s very good trading partner, all that pretentious talk about human rights notwithstanding. In the last three years, the US Secretary of the Treasury, Paulson has visited China many times, to strengthen the competitive position of American firms in China.

Since 1960, American governments have engaged the world community in constructive pursuits. The Kennedy Rounds of Tariff Negotiations were later followed by the Uruguay and Tokyo Rounds up to the Doha talks. Imaginative and innovative thinking has been the hall-mark of American diplomacy until George W. Bush turned the US economy into a war economy and while fighting terror militarized the psyche of political mal-contents around the globe.

States that could have been involved in a diplomatic and military offensive against the forces of evil became alienated by Bush’s belligerent tone and “shikoko attitude.” His allies systematically lost elections and went into political oblivion. His once beloved associates have de-camped and have written both constructive and sensational memoirs to denounce his style and direction of foreign and domestic policies.

The collapse of century-old financial institutions in America, which were the ladders that many Americans climbed to fortune and well-being, is a befitting legacy of an administration that loved the Iraqis and Afghans more than his Louisiana compatriots. Charity deserted home! The current economic down-turn in America can be traced to the wars in Iraq and Afghanistan and maintaining troops in all the continents of the globe. These have taken a toll on American resources. Many citizens now find it difficult to reconcile the present with the past.

Under the current deteriorating economic conditions, there is urgent need to relieve the unemployment situation, stem the increasing outflow of jobs and foreign exchange, in order to diffuse mounting social and political tensions. Amidst these inter-locking circles of misery, a bounce-back is not foreseen soon because of the evolution of production fragmentation, which include “the quality of institutional frameworks, the cost of establishing a new business and the quality of infrastructure”, in the United States.

Written by
Emmanuel Omoh Esiemokhai
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