Dominique Strauss-Kahn told the CBI annual conference of business leaders that another huge call on public finances by the financial services sector would not be tolerated by the “man in the street” and could even threaten democracy.

“Most advanced economies will not accept any more [bailouts]…The political reaction will be very strong, putting some democracies at risk,” he told delegates.

“I do believe that the financial sector needs to contribute both to the costs of the financial crisis and to reduce recourse to public funds in the future,” he said.

He pointed to the debate in the US over the Troubled Asset Relief Programme and said that in many countries, including France and Germany, he doubted that politicians would secure the mandate needed to secure any further bail-outs if banks got in to trouble again, in several years’ time.

Europe is in dispute over the spiralling cost of the global economic bailout, with Germany and France calling for a reduction in state support as their economies have shown signs of an upturn.

In September, George Osborne, the Shadow Chancellor, sided with Germany and France, accusing Gordon Brown of being in “complete denial” over the mounting bill of the financial rescue packages and agreed with Britain’s neighbours that it was time to look for an exit strategy. Countries are recovering from recession at different rates, with Britain lagging behind.

Mr Strauss-Kahn said that while the global economy had made “remarkable” progress in exiting recession, and was on the cusp of recovery, it remained “highly vulnerable” to shocks.

He said state support for the world’s battered economies must remain in place if a smooth recovery is to be achieved.

“We recommend erring on the side of caution as exiting too early is costlier than exiting too late.”

Mr Strauss-Kahn is one of a series of high-profile speakers at the CBI conference, in Central London. Gordon Brown, David Cameron and Nick Clegg will all speak at the event as they seek to sway influential business leaders before a general election next year.

In his speech, Mr Strauss-Kahn also warned that the huge amounts of capital being pumped into China could fuel a pan-Asian bubble.

His comments come after warnings from economists that the economic conditions in China and the rest of Asia are such that asset prices could rip free of their fundamental values unless the bubble threat is addressed.

The Chinese banking sector is currently the scene of an unprecedented frenzy of new lending, which could reach up to 11,000 billion yuan (£97.7 billion) by the end of this year.

Mr Strauss-Khan said that the old paradigm of growth generation based on households in the US was dead. The future sources of growth and the recovery will “depend on a new balance between the US and deficit countries on one hand and emerging markets and surplus countries on the other”.

Emerging markets will provide some of the growth that the US can no longer offer, however he warned that while China and other emerging Asian economies were shifting from exports to domestic demand, they still had some way to go.

Source: http://business.timesonline.co.uk/tol/business/economics/article6928147.ece

Goldman Sachs stands to receive a payment of $1bn – while US taxpayers would lose $2.3bn – if embattled commercial lender CIT files for Chapter 11 bankruptcy protection, people familiar with the matter said.

The payment stems from the structure of a $3bn rescue finance package that Goldman extended to CIT on June 6 2008, about five months before the Treasury bought $2.3bn in CIT preferred shares to prop it up at the height of the crisis. The potential loss for taxpayers would be the biggest to crystalise so far from the government’s capital injection plan for banks.

The agreement with Goldman states that if CIT defaults or goes bankrupt, it “would be required to pay a make-whole amount” that totals $1bn, the people familiar with the matter said.

While Goldman is entitled to demand the full amount, it is likely to agree to postpone payment on a part of that sum, these people added. A CIT filing last week said that it was in negotiations with Goldman “concerning an amendment to this facility”.

Goldman said: “This would not be a windfall payment. The make-whole payment is simply the present value of the spread to be earned over the life of the facility.”

CIT declined to comment. In an effort to prevent bankruptcy, it is working on a debt exchange offer that would virtually wipe out equity holders. In the event of bankruptcy, Goldman would reap more than $1bn because it also holds credit insurance that would be paid off.

Goldman said: “The credit default swaps Goldman Sachs purchased to prudently manage the risk associated with the CIT financing are not a directional ‘bet’ on CIT, but were bought to protect against the possibility of a precipitous decline in the value of the collateral.”

source: http://www.ft.com/cms/s/0/9170b5f2-b10f-11de-b06b-00144feabdc0.html?ftcamp=Popu_story2/NL/UKOct2009/Vanilla_gldcit/0/&nclick_check=1

And so, cleverly manipulating the politicians, the banks are disposing of their victims – the suckers who took on mortgages they couldn’t afford – and shifting worthless assets on to a new batch of suckers (taxpayers). Prognosis: a new, lean banking machine ready to cash in on the glorious opportunities over the next business cycle.

This is not the authorised version, of course, but the ability to control the way the public perceives the problem is part of the crisis management skills that are fostered by what we might call the logic of our economic system.

Spilling the Beans

Sometimes, the beans are spilt, of course, like the revelations by Mark Patterson. He is chairman of the company that is supposed to be pioneering the joint public-private bank rescues in America. Because he was speaking to a forum of investors in a far-flung corner of the Persian Gulf, Patterson thought it safe to offer the insider’s account of the US government’s strategy. But someone recorded his words and this is how they were reported in the Daily Telegraph (May 14):

“The taxpayers ought to know that we are in effect receiving a subsidy. They put in 40% of the money but get little of the equity upside. It’s a sham. The banks are insolvent. The US government is trying to sedate the public because they are down to the last $100bn of the $700bn Troubled Asset Relief Programme [TARP] funds.”

Much the same rip-off is operating in London, of course, where the authorities are pumping in money to rescue banks by protecting the financiers and socialising the losses. A few sacrificial lambs are offered, of course, but the golden handshakes handed out do much to soften the blows. Meanwhile, the money-printing pump-priming operation run by the Bank of England is enabling banks to rebuild their capital base, leaving the inflationary consequences (like the erosion of the buying power of wages) to somebody else.

Playing by the Rules

There is nothing illegal about these scams. Governments and the bankers are playing by the rules. Those rules were calculated to produce the boom, the busts and the managed recovery back to business-as-usual. So milking the taxpayer to protect the financial sector is not corrupt: it’s the name of the game.

Britain’s parliamentarians affirmed this logic over the past two weeks. They used their so-called expenses to lavishly appoint their homes and, in some cases, to make capital gains out of the sale of properties which they bought in part with the money received from taxpayers. It was all done according to the rules. Some MPs were reimbursed for the interest payments on mortgages that did not exist.

Let’s be honest. Members of the public who are outraged at the way their MPs milked their expenses to enhance the value of their properties were happy to pocket the something-for-nothing value that miraculously attached itself to their homes over the past 10 years. Few questioned the ethics of this way of getting rich. It all came out of “the rules”.

Digging up the Foundations

What passes for diagnosis – explaining the global economic crisis – is no more than navel-gazing. Discussions around “the future of capitalism” carefully avoid challenging the rules that direct people into ethically corrupt behaviour. Just about everyone now has a vested interest in protecting the system – meaning, the rules of the game.

Economics lacks the forensic archaeologists who are needed to excavate the foundations for a critical look at what, exactly, is corroding the social super-structure. Given the geo-political realities now in place, this can mean one thing only – violent times ahead.

For the next series Part 3 Income Tax click here