"Heckuva job, Timmy..."

Yet again, Robert Kuttner,  economist and urban theorist, co-founder and co-editor of the American Prospect Magazine, Boston Globe columnist and author of , "Obama's Challenge: America's Economic Crisis and the Power of a Transformative Presidency," nails it. In fact, perhaps this time, he delivers a grand slam homer in: "Geithner's Folly."

As Kuttner tells us:


President Obama deserves immense credit for being willing to spend serious money to prevent recession from becoming depression. He has resisted pressures from fiscal conservatives to put budget balance first, or to make social insurance bear the brunt of spending cuts down the road. And he has used his gifts as a teacher to enlist the broad support of the American people for a far-reaching strategy of public investment.

However, all of this good work will be for naught if his team doesn't get the banking system functioning again. And so far the grand design of Treasury Secretary Tim Geithner is entirely on the wrong track.

Kuttner then continues, slamming Geithner's negotiated details with regard to the Citi deal, announced last week, saying nothing less than: "...the terms were appalling...the government gets more preferred stock with little voting power...Treasury has declined to convert its de facto ownership into effective management control, preferring to bargain with Citi's executives at arm's length."

Kuttner tells us the federal examiners were asleep at the wheel.


"Where have the examiners been all along? Why wasn't there serious investigation of bank balance sheets all along? Why should stress tests be performed only after disaster has struck (shades of Hurricane Katrina)?"

He then makes a point of calling out an entity near and dear to him: "...the worst culprit among the feeble regulators," referencing the Federal Reserve Bank of New York, "...whose examiners are responsible for assessing the safety and soundness of the holding companies of Wall Street's largest banks. It was high risk speculative activities by holding company affiliates that put the big banks under water."


Who dropped the ball? You may recall that Secretary Geithner, before he assumed his present post, was president of the New York Fed Bank. According to a withering feature piece from Bloomberg, he was asleep at the switch, and far too cozy with the banks. Heckuva job, Timmy.

So, let's take a little closer look at the New York Fed Bank Branch, shall we? And, please pardon me while I simultaneously parse Kuttner and expound upon his thoughts with a few of my own (a little "license," as it were).

EPIPHANY: You see, a lot of what Kuttner tells us about Geithner's actions with regard to the Citi deal also applies to what Geithner's doing with the AIG deal. In fact, if you look closely at what's occurring, this cycle is being repeated for all of our nation's economic "problems."

OUR ECONOMY'S REALITY, SIMPLIFIED

If one were to draw "food chain" with the Treasury Department's primary agents of federal paper
(a list of 19 firms, trimmed down from 22 just within the past year, which represents most of the leading players on Wall Street--no coincidence there) and the owners of the NY Federal Reserve branch (all of the member banks in the NY region) in the next position; followed by the U.S. Treasury Department (with the Federal Deposit Insurance Corporation ["FDIC"]) next; then, the Federal Reserve Board; immediately underneath the would be the Federal Reserve System; then, AIG and Citigroup (along with Fannie Mae, Freddie Mac and Bear Stearns), then continue back to the top of the food chain (with the 19 firms currently acting as gov't agents--let's call them the status quo for purposes of one of the points I'm making), you'd have a pretty good picture of where I'm going with this diary, as in right here (which is, in lay terms, all you ever needed to know about our current economic crisis in one, simple list):

THE TOP OF FOOD CHAIN: 1ST LINK (a/k/a: the status quo)--
THE WALL STREET STATUS QUO:
SOME LEAD PLAYERS IN THE NY FED AND/OR FEDERAL RESERVE PRIMARY DEALERS:

  • BNP Paribas Securities Corp.
  • Bank of America Securities LLC
  • Barclays Capital Inc.
  • Cantor Fitzgerald & Co.
  • Citigroup Global Markets Inc.
  • Credit Suisse Securities (USA) LLC
  • Daiwa Securities America Inc.
  • Deutsche Bank Securities Inc.
  • Dresdner Kleinwort Securities LLC.
  • Goldman, Sachs & Co.
  • Greenwich Capital Markets Inc.
  • HSBC Securities (USA) Inc.
  • J. P. Morgan Securities Inc.
  • Mizuho Securities USA Inc.
  • Morgan Stanley & Co. Incorporated
  • UBS Securities LLC,
 et al (i.e.: Wells Fargo, Pimco, key hedge funds and a few other players)
            V
            V
            V
$$$--Sells Paper And Acts As Agents For Gov't Among Other Things--$$$
            V
            V
            V
THE FOOD CHAIN: 2ND LINK--
 U.S. TREASURY DEPARTMENT (Geithner, etc.)
* Federal Deposit Insurance Corporation
  (funded by Treasury w/backstops for banking industry which is supposed to repay Treasury Department in times of banking emergencies)
            V
            V
            V
$$$--Treasury Disburses Funds To Third Parties And/Or Advises Fed To Do Same--$$$
            V
            V
            V
THE FOOD CHAIN: 3RD LINK--
FEDERAL RESERVE BOARD (Bernanke, etc.)
            V
            V
            V
THE FOOD CHAIN: 4TH LINK--
FEDERAL RESERVE SYSTEM
12 Branches: New York branch and 11 others
            V
            V
            V
THE FOOD CHAIN:  BOTTOM LINK--
AIG, CITIGROUP, FANNIE MAE, FREDDIE MAC, BEAR STEARNS, OTHER BENEFICIARIES, ETC.
            V
            V
            V
$$$--AIG: "Settles" CDS's and CDO's w/participants in 1ST LINK (see top of list)--$$$
$$$--Citi: "Settles" MBS's and CDS's and CDO's w/participants in 1ST LINK (see top of list)--$$$
$$$--Fannie Mae and Freddie Mac: Buy "conforming" mortgages from lenders/brokers in 1ST LINK (see top of list)--$$$
$$$--Bear Stearns: "Settles" CDS's,  MBS's and CDO's w/participants in 1ST LINK (see top of list)--$$$

Conclusion: Government money flows from taxpayers back to entities in first link along w/other usual suspects.

LATHER. RINSE. REPEAT.

THE FEDERAL RESERVE BOARD AND THE FEDERAL RESERVE SYSTEM ARE TWO VERY DIFFERENT ENTITIES

The Federal Reserve Board is appointed by our government.  The Federal Reserve System is owned and run by the banking industry.

Perhaps the overriding reason this is the case is simply due to the fact that the Federal Reserve System is, for all intents and purposes, autonomous. It is owned and operated by the banking industry, although we're led to believe that it's under public control; the reality is it's 12 bank branches, established in 12 districts; and the "System's" banks are owned by the banks within their respective districts. (i.e.: The New York Fed, which Secretary Geithner ran prior to being appointed Treasury Secretary, is actually owned by the banks in the New York Fed District--i.e.: Wall Street; and, these folks, if you include the list or Federal Reserve Primary Dealers [see below] represent the lion's share of those receiving Fed bailout assistance now; at least once one realizes where all of those AIG bailout funds are going, in any event.)

The Constitution acts as the framework for governance of most entities here in the U.S. But, the Federal Reserve System marches to the tune of a different drummer: The Federal Reserve Act of 1913.

Historically, if you read the full Wiki entry linked in the previous sentence, the New York Federal Reserve branch is easily more powerful than all of the other branches, combined. In the 96 years the Fed's been in existence, little has changed to deviate from this reality, too. In fact, from a practical standpoint, it could be said that (in many ways) the New York Federal Reserve branch is more powerful than the Federal Reserve Board, itself.

Here's a little insight into who's actually calling the shots over at the NY Fed (the largest folks that either own it and/or provide it with most of its revenue acting as the Fed's agents):


LIST OF FEDERAL RESERVE PRIMARY DEALERS

The primary dealers form a worldwide network that distributes new U.S. government debt. For example, Daiwa Securities and Mizuho Securities distribute the debt to Japanese buyers. BNP Paribas, Barclays, Deutsche Bank, and RBS Greenwich Capital (a division of the Royal Bank of Scotland) distribute the debt to European buyers. Goldman Sachs, and Citigroup account for many American buyers. Nevertheless, most of these firms compete internationally and in all major financial centers.

As of February 11, 2009 according to the Federal Reserve Bank of New York the list includes (same as list, above; no coincidence there):

   * BNP Paribas Securities Corp.
    * Bank of America Securities LLC
    * Barclays Capital Inc.
    * Cantor Fitzgerald & Co.
    * Citigroup Global Markets Inc.
    * Credit Suisse Securities (USA) LLC
    * Daiwa Securities America Inc.
    * Deutsche Bank Securities Inc.
    * Dresdner Kleinwort Securities LLC.
    * Goldman, Sachs & Co.
    * Greenwich Capital Markets Inc.
    * HSBC Securities (USA) Inc.
    * J. P. Morgan Securities Inc.
    * Mizuho Securities USA Inc.
    * Morgan Stanley & Co. Incorporated
    * UBS Securities LLC.

Three notable changes to the list have occurred in 2008. Countrywide Securities Corporation was removed on July 15 due to its acquisition by Bank of America. Lehman Brothers Inc. was removed on September 22 due to bankruptcy. Bear Stearns & Co. Inc. was removed from the list on October 1 due to its acquisition by J.P. Morgan Chase. On February 11, 2009, Merrill Lynch Government Securities Inc. was removed from the list due to its acquisition by Bank of America.

Kuttner continues to mention the stress tests, and tells us that we're going to find out what we already know: "Surprise, the big banks are bust." He then concludes by mentioning the Federal Deposit Insurance Corporation ("FDIC"), which is really funded--contrary to popular perception--via an ancilliary account within the Treasury Department, into which the  member banks also deposit annual payments. (The Treasury Department, provides extended lines of credit when bank failures exceed the industry's ability to cover them. In this instance, we're probably talking about decades for the industry to catch-up with the havoc wrought here, however.)

What the FDIC does well,  historically, as Kuttner reminds us, is provide for the management of failed banking entities. And, with so many banking (insert: "mortgage,""insurance," etc., here, when discussing AIG, Fannie, Freddie, or Bear Stearns, etc.) sector folks unemployed right now, as Kuttner also reminds us, there's lots of talent out there ready to pickup the slack on the government's behalf now, too.

But, even  with the F.D.I.C. program discussed below, good ole' Timmy is going back to the same status quo agenda (see "Food Chain" list towards top of this diary) that seems to be the blueprint for everything else that's occurring now. This past Friday: the Federal Deposit Insurance Corporation ("FDIC") formally extended--and has now grossly contorted--a Bush Administration Treasury program that was orignally established this past Fall to free up consumer credit markets, to the point where taxpayers are now insuring virtually all banking industry "senior unsecured debt that converts into (bank) shares no later than the guarantee's expiration, which can last through June 30, 2012."

Known as the FDIC's Temporary Liquidity Guarantee Program ("TLGP"), today's announcement means that the FDIC is now getting into the business of insuring investors' funds when they buy into the preferred stock or warrants of a given bank, where (which covers most transactions of this nature) those investors may  then convert their notes and/or preferred shares to common stock shares of that entity.


"FDIC to Guarantee Bank Debt That Converts Into Equity."
By Gabrielle Coppola and Jody Shenn

Feb. 27 (Bloomberg) -- The Federal Deposit Insurance Corp. plans to back new debt sold by banks that would later convert into common shares in an expansion of its Temporary Liquidity Guarantee Program.

Under the interim rule approved today at an FDIC board meeting, the agency's backing will be available to senior unsecured debt that converts into shares no later than the guarantee's expiration, which can last through June 30, 2012.

"This modification will give institutions greater flexibility to attract longer-term sources of funding that otherwise may be unavailable in today's distressed funding markets," FDIC financial analyst Steve Burton said today.

Putting it bluntly, the FDIC has now decided that it's going to contort a program originally established to loosen up interbank lending and credit markets for a few months, so that the government may get into the business of guaranteeing investors that make preferred share purchases in banks now and going forward (at least until June 30, 2012).

Imagine that you're an investor buying stock in a company and being told that the U.S. taxpayer now guarantees that if that company (in which you're purchasing preferred stock) goes bankrupt, you'll get your money back?

The reality is that only major institutions (again, see "Food Chain" list, above), such as hedge funds and investment banks, will be purchasers of most of this banking industry preferred stock in coming weeks, months and years; and we're the ones insuring they don't get burned.

Yes, in conclusion, Kuttner asks:


" Why is Geithner dithering? Because he is asking the wrong question. The question he is posing is: how can the government save Citigroup?* The right question is: how can the government rebuild the banking system?

*=Insert name of failed bank, insurance or mortgage institution here.

"Heckuva job, Timmy," indeed.

Tags: AIG, banks, Bear Stearns, Citigroup, depression, Fannie Mae, fdic, Federal Deposit Insurance Corporation, Federal Reserve, Federal Reserve System, Freddie Mac, New York Federal Reserve Branch, President Barack Obama, Recession, U.S. banking industry, US Treasury Secretary Tim Geithner (all tags)

Comments

16 Comments

Tips: "Heckuva job?" (Not so much.) n/t

by bobswern 2009-03-02 04:50PM | 0 recs
I'm scared.

The more I see of this, the more I wonder why President Obama is so confident that Tim Geithner is a good Treasury Secretary. All he's done so far is conjure up plans to postpone the inevitable. And ultimately, I need to also ask why President Obama wants to postpone the inevitable. Why not just nationalize the bad banks temporarily to clean them up & stop paying a whole lot for a whole lot of nothing?

by atdleft 2009-03-02 07:21PM | 0 recs
Re: I'm scared.

Because there is another point of view that is not being presented here.

Not saying it is right or wrong, or that I support it. But:

The objections that I see on how Giethner is handling the economy are all very sound economically, but leave out one critical factor: psychology of the market. A large factor in how the global economy functions is what people believe is going to happen, regardless of what actually does happen. Left leaning economists are correct that the quickest way to make our banking system solvent again is to nationalize. But psychology of the market says that if you start taking banks into receivership, the money will flow out of financial stocks in a flood - because as banks start defaulting on their loans to one another, who knows which one will be next? Then, as the money flows out of the market, stock values will depress, forcing margin calls, which will trigger more selling.

What I believe Geithner is trying to do is arrest this death spiral by the only means at his disposal. Yes, it isn't fair. Yes, the taxpayer is getting screwed. But the alternative is wiping out the retirement savings of the largest generation in American history right before they retire.

by pneuma 2009-03-03 04:37AM | 0 recs
Re: I'm scared.

Why not just bailout the taxpayers directly then?Besides, sometimes a harsh lesson has to be learned for people to demand change. You soften the blow, no reform will take place. People made the blunder of being blase about their leaders.

Besides, the market doesn't seem to respond to Geithners approach anyway.

by Pravin 2009-03-03 06:08AM | 0 recs
Re: I'm scared.

Why not just bailout the taxpayers directly then?

Because the taxpayers aren't the ones with the problem. It does you know good to have money if you can't buy anything with it, and if these companies go south, the whole economy collapses.

Besides, the market doesn't seem to respond to Geithners approach anyway.

Actually, I'd argue that it has. Geithner's approach is a "hold the line" approach. It will not result in a quick tunraround, nor will it result in a cratering of the markets. Nationalizing the banking system has a statistically signifcant chance of sending the stock market into a tailspin from which it cannot recover - economic collapse. I see Geithner's approach as the "safe" way - the results are fairly predicatable. It will be grotesquely expensive, and will likely result in a "lost decade". But these risks are known. Other approaches have too much uncertainty.

by pneuma 2009-03-03 06:42AM | 0 recs
Strongly disagree with assessment...

First of all, it was this hedging of the solution that got FDR into trouble and caused a second dip in the Great Depression in 1937.

It also flies in the face of common sense and virtually unanimous neo-Keynesian economic thought, as that has been voiced from that school over the past few weeks and months.

Third, the last thing you do is pump all your resources into salvaging insolvent entities. You let them die a natural death; the government has perfectly good infrastructure to deal with this. Focus on healthy financial services firms.

Fourth, underregulation/undersupervision of the financial services sector is very much at the heart of these matters.

Reliance upon a ridiculously unbridled hedge fund industry to lead a turnaround, as well as a private-sector-driven initiative is in line with Einstein's definition of insanity: "Repeating the same action and expecting a different result."

"You do what you done, and you'll get what you got."  

I couldn't disagree with your assessment of a "moderate," don't-rock-the-boat approach to this effort more if I tried.

The boat is sinking.

Time for a new boat.

Will there be some market upheaval associated with this? Absolutely. But, will the markets continue to tank without that? Looks like that's going to happen anyway. Just 60-90 days ago, they were talking about a 7000-7200 bottom for the Dow. That's been supplanted with a 5000-5500 projection as far as the CW is concerned.

The ongoing problem was the CONTINUED underestimation of how severe the realities were going to be as opposed to the projections.

THIS is the biggest ongoing theme, in fact.

Right now, all of the Obama administration's nos. are based upon a 3.0%+/- rise in the GDP in 2010. That's just wishful thinking.

Unemployment numbers, on a month-over-month basis, will probably be far worse than most were projecting even a two or three weeks ago.

Again...the biggest problem here (the most consistent ongoing theme) is underestimating--and then planning along the lines of these INACCURATE estimations--just how bad things were/are going to get.

Things are going to get far worse than that for which we're prepared, and that for which the current gov't is preparing us, in general.

Time to hope for the best and expect the worst.

To do anything less than that, at this point, is nothing but a recipe for failure and...potential societal disaster.

Moderate projections are just plain insane at this point.
 

by bobswern 2009-03-03 07:07AM | 0 recs
Re: Strongly disagree with assessment...

Hey, I said it wasn't my idea.

by pneuma 2009-03-03 10:55AM | 0 recs
If Geithner/White House can't...

...control the markets--and they cannot if you just look at what's happening now--then hoping for that to happen is just more of the same recipe for disaster.

How can you hope for an illness to be cured doing what you've done when you:

a.) haven't been able to cure it up until now;

b.) you no longer have total control over how it may be cured (unlike decades past, we now rely upon external gov'ts to support our debt);

c.) and then you seek to cure the symptoms and not the illness? (Underregulation and too little cash where it matters--and that's not propping up a house of cards comprised of insolvent institutions--will not solve these problems.)

by bobswern 2009-03-03 07:16AM | 0 recs
I'm scared.

The more I see of this, the more I wonder why President Obama is so confident that Tim Geithner is a good Treasury Secretary. All he's done so far is conjure up plans to postpone the inevitable. And ultimately, I need to also ask why President Obama wants to postpone the inevitable. Why not just nationalize the bad banks temporarily to clean them up & stop paying a whole lot for a whole lot of nothing?

by atdleft 2009-03-02 07:21PM | 0 recs
Re: I'm scared.

Again not my idea, not something I necessarily support, but:

I've often found in my job that it really helps managers make painful decisions if you can convince them it was their idea. The idea of nationalization is gaining traction daily...perhaps that was the plan all along?

I know, I know. The myth of Obama the miracle worker. You do have to admire how the guy has a knack for being perfectly positioned when his opponents self-destruct, though.

by pneuma 2009-03-03 11:01AM | 0 recs
All those Democratic apologists in November

Remember when apologists in our own party called us out on worrying way too much a few months ago and claimed that Obama has a plan once he takes power? Looks like the passivity  by him and other Democratic senators back then was because they are clueless on this issue. The only thing I support Obama on us is his willingness to fund public works projects. But they compromised a lot on this aspect while giving in on exec controls. I never understood why obama gives this Geithner guy so much respect. I don't see how he is much of an improvement over Paulson. He just seems to lack the fortitude required to reform the system and kick some ass out there in the business world. He identifies too much with his former peers.

by Pravin 2009-03-03 02:13AM | 0 recs
Geithner = loose cannon

It is giving Geithner the benefit of the doubt to call him a loose cannon.  It seems everything he is trying to do leads to striking up fear in the markets.  I have been throughly disappointed in this guy.

The question is not when are we going to nationalize the banks, it is "should we".  The government has shown, in this administration and the last, that they are unable to control the market.  

Why are we still having this discussion?  By adding control to the market we have not gotten economic security we have gotten wild fluctuations in the market.

How can the market function when up is down and down is up?  We are 55 trillion in debt and we wonder why the lending markets have froze up.  LET THE INTEREST RATES INCREASE.  Artificially holding them down is not increasing the flow of money being borrowed.

If fact in reality it has nothing to do with there not being enough money to borrow or the government would't go and borrow another couple of trillion dollars would it.  

The markets are weak because of one of two things:
1. They don't think the President has any intension of paying back the debt.  In which case inflation will be the solution he turns to.

2. Or he will try to pay down the debt without reducing spending.  Even at 100% taxation on the rich we can't do that.  We spend way too much.  

Something has to budge and it is not looking good for the entrepreneur or "The bourgeoisie".  They have become the target in a very Marxist fashion.

The solution is not to "run" the banks books.  Stop propping up the failures, they are doomed to fail again.  

by Classical Liberal 2009-03-03 07:07AM | 0 recs
We bailout AIG then it bails out Citi, etc.

It's all about the huge and impossible to ever solve (unless the govt just declares them illegal, null and void) CDS problem. The key to understanding why taxpayers are handing AIG so much bailout money is that it will send that most of that money on to the very well-connected CDS players it has insured (emphasis added):

AIG is one of the largest players in the global, unregulated market (estimated at $62 trillion) in credit default swaps-i.e., private contracts under which companies like AIG guarantee the debt, including mortgage-backed bonds, held by banks and other companies. Although it was allegedly an insurance company, AIG joined the speculative frenzy on Wall Street and paid vast sums to its top executives. When the housing bubble burst, financial institutions began demanding coverage for their losses. It quickly became clear that AIG could not pay.
"Essentially," Justin Fox,Time 's business and economics columnist wrote, "AIG got into the business of insuring much of the world's financial system against the consequences of a global financial meltdown. It turned out to be incapable of delivering on that insurance-no private company could deliver on it, which is one reason why AIG's business of selling credit default swaps was a scam. And so government has stepped in as the ultimate insurer."

Now, the company has turned into a financial black hole. Much of the government bailout money is channeled into other financial institutions and corporations that purchased AIG insurance, and AIG comes back looking for more.

Fed Chairman Bernanke and then-Treasury Secretary Henry Paulson, engineered the first bailout of AIG last September, pointing to the potentially "catastrophic" implications for the world financial system if the insurer failed. Goldman Sachs Group Inc.-which Paulson used to run-Société Générale SA, Deutsche Bank AG and Merrill Lynch & Co. were among the largest banks that bought swaps from AIG, according to insiders. The insurer reportedly handed over about $18.7 billion to financial firms in the three weeks after the September bailout.

http://www.wsws.org/articles/2009/mar200 9/aig-m03.shtml

by fairleft 2009-03-03 09:50AM | 0 recs
Re: We bailout AIG then it bails out Citi, etc.

It was such BS when Bernanke was claiming he was coming in to clean up the AIG mess. He's right, he did not have any regulatory oversight of the AIG credit defaut swaps.

However, Bernanke was directly responsible for regulating the banks that wrote the credit default swaps with AIG. He easily could have stopped the banks from taking on this risk.

All the same guys that got us into this mess, Bernanke, Paulson, Geithner, Dodd, Frank, etc are the same guys that have a new solution to get us out of this mess?

Solve a huge debt problem by taking on even greater debt? Brilliant!

by tpeichel 2009-03-03 01:30PM | 0 recs
Money was pouring in, bucket loads of money....

No one was asking too many questions.

Kind of like Steroids in baseball..

Homeruns were being hit, the fans were loving it,
the ballparks were packed, the media was jazzed.

Owners, management and players were not going to start complaining, this was a golden time!

Oh, there was a dark feeling, something is fake here...nothing fundementally had changed, but records that had stood for generations were being shattered year after year.

So it seemed to a few on observing this frenzy?

How were ordinary folks affording McMansions?

How were SO many mortgages being made? Salaries were not going up, but more and more houses were being sold...

Why did standards and poors and Moody stamp repackaged subprimes as AAA securities?  

300 risky loans bundled together SUDDENLY became less risky?  Why? Only if you believe that defaults are random, individuals NOT because of societal events such as economic downturns. History tells us otherwise. All you need to do is look back and see the same story...

And, finally, WHY did this seem eerily familar, hadn't Long Term Capital Management come up with a scheme to "eliminate risk" and then got hit with the perfect storm?

Didn't these SAME folks bail them out, and swear they all learned their lessons?

by WashStateBlue 2009-03-03 01:54PM | 0 recs
Tim Geithner and Obama

These two are moving too slow and too timidly with the banks.  Me thinks they are caving to pressure from the financial giants NOT to do some of the things that need to be done.  

Jim Cramer was on Hardball last week and made some excellent points.

They better figure what they are doing and move on it.   They knew of this problem in December.   Obama told us he had to overlook Geither's "issues" because he was the man to solve this and here we sit in March, stock market having leaked again, and we are STILL NO STEP CLOSER TO A SOLUTION.

 

by RichardFlatts 2009-03-03 11:34AM | 0 recs

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