Trouble in Bank Land

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M. Spector M. Spector's picture

Why not throw in "bank accounts" into your list?

I'm talking about the people who derive their income from the investment of capital by appropriating the surplus value created by people who actually work for a living. You know - the capitalist class?

ElizaQ ElizaQ's picture

quote:


Originally posted by M. Spector:
[b]Why not throw in "bank accounts" into your list?

I'm talking about the people who derive their income from the investment of capital by appropriating the surplus value created by people who actually work for a living. You know - the capitalist class?[/b]


No need to be snarky. I wasn't. I was asking a question for clarification purposes. Sorry for not 'getting it' right off. (and yeah that comment was a bit snarky)

Fidel

quote:


Originally posted by M. Spector:
[b]The U.S. has one, but it hasn't prevented the financial crisis, the housing bubble, the mortgage derivatives scam, and all the other financial horrors south of the border.[/b]

And the Yanks have had nothing but the same two old line big money parties in power and running the show since always.

Here in Canada, it's totally different. In Canada, we've had nothing but two old line big money parties running the show for just the last 140 consecutive years in a row. Our two old line big money parties have had a stranglehold on power twice as long as the Soviets ruled the USSR.

Fidel

The Yanks would put more of the fraudsters, banksters, and swindlers in prison, but I think U.S. gulags are filled to the brim right now.

ElizaQ ElizaQ's picture

[url=http://business.timesonline.co.uk/tol/business/industry_sectors/banking_... British Bank Goes Down (almost), More teetering in US[/url]

quote:

Britain’s biggest savings bank will be rescued from the brink of collapse this morning in a deal intended to stave off financial catastrophe but likely to put tens of thousands out of work.

As Halifax Bank of Scotland finalised an emergency takeover by Lloyds TSB, two of Wall Street’s most powerful investment banks were scrambling to survive. Shares in Morgan Stanley and Goldman Sachs, once the stormtroopers of global capitalism, tumbled,prompting fears for their future.

One shell-shocked senior banker in London said that there was no future left for the traditional investment bank. “The world is on the brink. The market is puking all over us. There’s no capital left in the world,” he said.

On a day of undisguised market panic, the US Government was forced to nationalise AIG, America’s largest insurer; the price of gold soared as panicked investors rushed to find safe havens; others sought shelter by buying US government bonds at levels not seen since Pearl Harbor in 1941; and Gordon Brown personally intervened to enable the fire sale of HBOS to Lloyds to create Britain’s biggest bank. The deal could cost as many as 40,000 jobs across Lloyds and HBOS branches, call centres and head offices, according to one estimate. The new bank will be called Lloyds Halifax, raising concerns north of the Border that it will lose its Scottish identity.


ElizaQ ElizaQ's picture

[url=http://www.nytimes.com/2008/09/19/business/worldbusiness/19centbank.html... Banks Start Pumping in More Cash[/url]

quote:

PARIS — The Federal Reserve, the European Central Bank, the Bank of Japan and other central banks significantly escalated the assistance offered to global money markets on Thursday, coordinating efforts to ease monetary constraints stemming from the turmoil emanating from Wall Street.

The Fed said in a statement that it had authorized a $180 billion expansion of its temporary reciprocal currency arrangements, known as swap lines, to allow banks to borrow more dollars in markets at a lower rates.

...................
The Fed also authorized increases in the existing swap lines with the European Central Bank, up to $110 billion from $55 billion, and the Swiss National Bank, up to $27 billion from $15 billion.

New swap facilities were established by the Fed with the Bank of Japan, for $60 billion; the Bank of England, for $40 billion; and the Bank of Canada for $10 billion.
..............
Central banks in Japan, Australia and India pumped a further $28 billion into money markets while China relaxed its monetary policy for the second time this week, Reuters reported.


ElizaQ ElizaQ's picture

[url=http://www.spiegel.de/international/business/0,1518,578944,00.html]The World as We Know it Is Going Under[/url]

quote:

Panic is the word of the hour on Wall Street. Now even Morgan Stanley is fighting for survival. The commercial bank Wachovia and China's Bank Citic are being discussed as possible rescuers. The crisis has led President Bush to cancel a trip.
...............
By the end of Wednesday, no one here was in the mood for laughter. The bad news on Wall Street was coming thick and fast. All the US indexes were crashing again after Tuesday's brief and deceptive breather. In its wild, rollercoaster ride, the Dow Jones lost about 450 points, which was almost as much as it lost on Monday, the most catastrophic day on US markets since 2001.

Investors were turning their back to the market in droves and fleeing to safer pastures. The price of gold broke its record for the highest increase in a one-day period.

.................

Things got worse after the markets closed. Washington Mutual, America's fourth-largest bank, announced that it had started the process of putting itself up for sale. The Wall Street Journal reported that both Wells Fargo and the banking giant Citigroup were interested in taking over the battered American savings bank.

And then came the announcement that would dominate all of Thursday's market activities: Morgan Stanley -- the venerable Wall Street institution and one of the last two US investment banks left standing -- had lost massive amounts and was fighting for survival. Media reports were saying that it was even in talks about a possible bail-out or merger. Rumor had it that possible suitors might include Wachovia or China's Bank Citic.

China?

"Folks," economist Larry Kudlow, a host on the business channel CNBC begged his viewers that evening, "let's not let this magnificent country go down!"

End of an Era

In fact, it really does look as if the foundations of US capitalism have shattered. Since 1864, American banking has been split into commercial banks and investment banks. But now that's changing. Bear Stearns, Lehman Brothers, Merrill Lynch -- overnight, some of the biggest names on Wall Street have disappeared into thin air. Goldman Sachs and Morgan Stanley are the only giants left standing. Despite tolerable quarterly results, even they have been hurt by mysterious slumps in prices and -- at least in Morgan Stanley's case -- have prepared themselves for the end.

"Nothing will ever be like it was before," said James Allroy, a broker who was brooding over his chai latte at a Starbucks on Wall Street. "The world as we know it is going under."

.................
The only thing that is certain is that the era of the unbridled free-market economy in the US has passed -- at least for now. The near nationalization of AIG, America's largest insurance company, with an $85 billion cash infusion -- a bill footed by taxpayers -- was a staggering move. The sum is three times as high as the guarantee provided by the Federal Reserve when Bear Stearns was sold to JPMorgan Chase in March.

The most breathtaking aspect about this week's crisis, though, is that the life raft -- which Washington had only previously used to bail out the mortgage giants Fannie Mae and Freddie Mac -- is being handed out by a government whose party usually fights against any form of government intervention. The policy is anchored in its party platform.

"I fear the government has passed the point of no return," financial historian Ron Chernow told the New York Times. "We have the irony of a free-market administration doing things that the most liberal Democratic administration would never have been doing in its wildest dreams."


DrConway

That last line in the quote should be a BIG ANVIL SIZED HINT to Obama-Biden that they had better start moving left some more if they want to get ahead of the new craze for interventionism on the scale of FDR's plans in the 1930s.

Bubbles

It seems all rather unfair to see the government pumping in billions into the pockets of share and stock holders and see little in the way of relieve for the jobless and those that stand to lose their homes. Are those stock holders paying into an equivalent to unemployment insurance that entitles them to this hand out. Or is the government just priming the next wave of illusionists?

In away this might be a fertile time for some of the adjustments needed to our value system.

josh

quote:


Originally posted by ElizaQ:
[b][url=http://www.spiegel.de/international/business/0,1518,578944,00.html]The World as We Know it Is Going Under[/url]

[/b]


Sad that lessons learned in the first half of the last century have to relearned in the first half of this century. Government intervention in the economy is a positive good.

ElizaQ ElizaQ's picture

quote:


Originally posted by DrConway:
[b]That last line in the quote should be a BIG ANVIL SIZED HINT to Obama-Biden that they had better start moving left some more if they want to get ahead of the new craze for interventionism on the scale of FDR's plans in the 1930s.[/b]

You would think, but I don't know how it'd play out politically right now. It's like some big ball of confusion and cognitive dissonance going around it. So yes this admin is doing all this, but they're not actually admitting that's what's they doing. So the messaging is all weird. To even introduce the spector or thought of
this is like 'socialism' or the 30's is just unthinkable for the Republicans. It's a mess. So they seem to be focusing on base messages of just 'reform' and 'well the workers are strong,' and avoiding as much as possible, 'regulating' or saying it and in a kinda of talk around the subject way. The spin, 'it's the evil greedy elites that did this and we all know who they are *wink* *wink*'
The meme 'The US privatizes profits, and socializes loses' is creeping in all over the place though.
I'll pay more attention to what the Obama campaign is saying because I think they have to negotiate the spector of evil 'socialism' and socialist thought as well simply because it's such a political no no right now. The average discourse right now is just 'capitalism good' 'socialism' evil, bad, commie, pinko blah and that's where it stops.

ElizaQ ElizaQ's picture

To be fair the Dems are finger pointing at the Republicans too. It's an election of course. There's a lot of arguing going on about whose more connected to Wall Street, and bibbering on the net about this advisor and that person on the campaign team, which imo won't go anywhere because they BOTH have people connected with these companies.
McCain albatross is bigger I think though because his main economic advisor is Phil Gramm who has really, really direct connections with the crisis, plus McCains previous comments from the past on how ,'I don't really understand the economy' and various incarnations of that thought are rearing their heads. Plus right now he doesn't really sound like he understands what he's talking about. Then there is the now infamous, 'The fundamentals of the economy are strong' line to add to that.
Palin isn't helping much in that regard. In one of the only times she's talked about it she got some of the basics wrong, referring to 'construction bonds' and a bunch of stuff that made no sense. Not that the average voter would pick up on that, I wouldn't have, but financial people sure have.

Whether Obama's plan is a good one or not, he and Biden can actually talk about what's going on in more then just sound bites and generalities. I read somewhere that with this issue because it's so confusing to most people and frightening that their strengths are that they can actually explain things better, like teachers. Whether they're explaining it right I really don't know, but in terms of actually getting elected I doubt that's going to matter much.

martin dufresne

quote:


[url=http://www.tomdispatch.com/post/174978/steve_fraser_the_end_of_a_gilded_... Street and Washington[/url]
How the Rules of the Game Have Changed
By Steve Fraser, TomGram

What is Washington to do as the financial system collapses? Clearly, stark differences in approach as well as in public policy have already emerged. Bail-out Bear Stearns and pump up the brokerage and investment business with new lines of credit. Nationalize Fannie Mae and Freddie Mac on the backs of the taxpayer -- but let Lehman drown. Tell the financial community to save itself, after which Bank of America salutes and buys Merrill Lynch. Then, the Fed gets cold feet and decides it can't let an institution the size of the insurance giant AIG go under as well. Washington is left staring into the abyss. The old rules no longer apply.

And that's the point. At moments of crisis since the mid-1980s, the relationship between Washington and Wall Street has changed fundamentally, at least when compared to anything that would have been recognizable in the previous century. As a result, the road ahead is dark and unknown. (...)


Tommy_Paine

BREAKING NEWS:

King Louis XVI has been forced to call an assembly of the Estates General, to deal with debt incurred by numerous wars, the nation's astronomical debt, the inability to look after the social welfare of military vetrans, and what has come to be seen as an unfair tax regime.

I think things will work out fine for Louis, and hopefully as well for George W. Bush.

Stargazer

Here is the Subprime Mortgage Primer in stick figures and real terms. Enjoy:

[url=http://www.businesspundit.com/sub-prime/]The Subprime Mortgage Primer[/url]

Tommy_Paine

Putting aside the racial aspects of he sub prime mortgage scheme, for the moment, during the unravelling it was found that a very good percentage of the consumers would have qualified for a normal mortgage, but they were conned into the sub prime market.

I think the idea of government regulation is starting to circulate more generally, and I'm all in favour of that, but it seems to me that judicious and impartial applications of the criminal code in Canada and in the U.S. would have put a damper on this kind of activity.

But then, unlike tories, I am a big fan of law and order.

[ 18 September 2008: Message edited by: Tommy_Paine ]

Uncle John

Interesting first page on today's Globe Report on Business:
US Government bailouts:
(figures in billions US)
AIG Insurance $85
Federal Housing Administration $300
Housing grants $4.4
JP Morgan Chase $87
Term-Auction Facility $200
Bear Sterns $29
Fannie Mae and Freddie Mac $200

By my reckoning that is $905.4 billion

They say the total exposure could be as high as $3 trillion, so I guess we are about 30% there....

Tommy_Paine

Hey, a hundred billion here, a hundred billion there, and pretty soon you're talking real money.

Doug

quote:


Originally posted by DrConway:
[b]That last line in the quote should be a BIG ANVIL SIZED HINT to Obama-Biden that they had better start moving left some more if they want to get ahead of the new craze for interventionism on the scale of FDR's plans in the 1930s.[/b]

No way - the messenger would be shot. It's one thing if Republicans go around nationalizing banks but if anyone vaguely left-ish does it, you'll never hear the end of the screaming. [img]rolleyes.gif" border="0[/img]

Fidel

[url=http://www.globalresearch.ca/index.php?context=va&aid=10268]Global Financial Meltdown[/url]

quote:

[b]Financial Warfare: The Powers of Deception[/b]

The weapons used on Wall Street are prior knowledge and inside information, the ability to manipulate with the capacity to predict results, the spreading of misleading or false information on economic occurrences and market trends. These various procedures are best described as the "powers of deception", which financial institutions routinely use to mislead investors.

The art of deception is also directed against their banking competitors, who are betting in the derivatives and futures markets, in stocks, currencies and commodities.

Those who have access to privileged information (political, intelligence, military, scientific, etc.) will invariably have the upper hand in the conduct of these highly leveraged speculative transactions, which are the source of tremendous financial gains. The CIA has its own financial institutions on Wall Street. . .


Insider financial terrorism?

DrConway

The USA should take comfort in knowing right-wing pushes for financial deregulation also lets foreign intelligence agencies make a killing on international speculative markets. It's been alleged that the KGB did this to good effect in the late 1970s and all through the 1980s while ordinary Soviets got paid in rubles that barely bought anything of value.

But then Republicans are good at waving the flag while letting foreigners with fundamentally unfriendly intentions towards the US get away with murder, apparently sometimes literally.

(bin Ladens being flown out of the USA on special airplanes after September 11th, anyone?)

kropotkin1951 kropotkin1951's picture

quote:


Originally posted by Uncle John:
[b]Interesting first page on today's Globe Report on Business:
US Government bailouts:
(figures in billions US)
AIG Insurance $85
Federal Housing Administration $300
Housing grants $4.4
JP Morgan Chase $87
Term-Auction Facility $200
Bear Sterns $29
Fannie Mae and Freddie Mac $200

By my reckoning that is $905.4 billion

They say the total exposure could be as high as $3 trillion, so I guess we are about 30% there....[/b]


But god forbid that a government could have over the last decade in the States invested 10 billion a year in building social housing. Gee then there would be hundreds of thousands of lower income people in houses not being evicted because of the cruel financing scam they were subjected too.

It looks to me that even in the USA if you look real close you can see the Puppet Strings attached to the Invisible Hand.

Frustrated Mess Frustrated Mess's picture

Anyone know how many Wall Street criminals have been held accountable for the mess that now threatens to unravel the world economy?

Tommy_Paine

Well, John McCain promised yesterday to fire the outgoing head of the SEC....

I think it takes time to build these financial cases, and I think there will be charges, eventually. In the States.

But in Canada, our law enforcement couldn't even get a conviction in Bre-X, so it will be business as usual, as usual.

Frustrated Mess Frustrated Mess's picture

BTW, being the strong leader on the economy that he is, Harper [url=http://network.nationalpost.com/np/blogs/posted/archive/2008/09/19/harpe... would not urge consumers to panic[/url].

Thank God we have him otherwise we would all be running amok in the streets with our hands in the air.

Frustrated Mess Frustrated Mess's picture

quote:


Originally posted by Tommy_Paine:
[b]Well, John McCain promised yesterday to fire the outgoing head of the SEC....

I think it takes time to build these financial cases, and I think there will be charges, eventually. In the States.

But in Canada, our law enforcement couldn't even get a conviction in Bre-X, so it will be business as usual, as usual.[/b]


The subprime mortgage scam began unraveling about two years ago. McCain's empty threat to fire the the head of a regulator he worked hard to defang (and supported his appointment) rings hollow.

[ 19 September 2008: Message edited by: Frustrated Mess ]

ElizaQ ElizaQ's picture

I'm going to guess. 0. But have no fear McCain is on it. He said he'd fire the FEC chairman oh wait he really meant SEC. So I guess that's a start.

[ 19 September 2008: Message edited by: ElizaQ ]

Fidel

quote:


Originally posted by DrConway:
[b]The USA should take comfort in knowing right-wing pushes for financial deregulation also lets foreign intelligence agencies make a killing on international speculative markets. It's been alleged that the KGB did this to good effect in the late 1970s and all through the 1980s while ordinary Soviets got paid in rubles that barely bought anything of value.[/b]

If that's true about the KGB, then they didn't seem to have enough dollars for even the crooked privatizations of the 1990's. To make things appear legit, U.S. dollars were the agreed upon currency for the oil, gas, and vast mineral wealth buys by Russian, Euro, as well as American oligarchs now left hung out to dry for deals gone bad in Russia. Russian and other oligarchs didn't even pay world market values for the resources they stole from Russians, but the privatization decrees(written by oligarchs themselves) did require U.S. dollars of which the oligarchs needed outside partners for the appearance of legitimacy according to several sources. The ruble was wiped out with elimination of wage and price controls - Jeffrey Sachs referred to Russians life savings then as "pesky overhang" that prevented Russian workers from being totally reliant on the new market system. Russians needed this shock from their life of leisure and dependence on the state for employment and social supports. There were bonds issued to ordinary Russians for shared ownership in the common good distributed to workers, but Russians believed the papers to be worthless, sold them to street swindlers working for the oligarchs at criminally low prices. This, to my understanding, was the secret to Marxian primitive accumulation pushed through at breakneck speed in 1990's Russia.

In 1986, oil prices dropped as Saudis began dumping oil on world markets. The Soviets having no financial system decoupled from the physical economy relied mainly on oil and natural resource exports for earning hard currency. RAND Corp. said at the time that the Soviets were spending 50% and higher GNP on military and the occupation in Afghanistan. That was a big fib, but it at least inspired more Pentagon capitalism/upside-down socialism in the USSA. The Soviets were deficit spending and draining foreign capital reserves. Today the Saudis seem to be working to maintain higher oil prices to the Russians advantage.

[ 19 September 2008: Message edited by: Fidel ]

ElizaQ ElizaQ's picture

Well this looks promising. Kinda makes you all tingly inside.

[url=http://www.nytimes.com/2008/09/20/washington/19cnd-cong.html?_r=1&hp=&pa... Stunned By Warnings - Meltdown[/url]

quote:

As Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the Banking, Housing and Urban Affairs Committee, put it Friday morning on the ABC program “Good Morning America,” the congressional leaders were told “that we’re literally maybe days away from a complete meltdown of our financial system, with all the implications here at home and globally.”

ElizaQ ElizaQ's picture

quote:


Originally posted by DrConway:
[b]That last line in the quote should be a BIG ANVIL SIZED HINT to Obama-Biden that they had better start moving left some more if they want to get ahead of the new craze for interventionism on the scale of FDR's plans in the 1930s.[/b]

Well Paul Krugman, liberal economist and known Bush critic is now referring to Treasury Secretary, Henry Paulson as Comrade Paulson. Does that count?

Michelle

Just watching The National. The new term for bad investments is "Illiquid Assets"!?

Tommy_Paine

Does this mean they are "solid" assets?

The verbal embroidery is something to behold, is it not?

ElizaQ ElizaQ's picture

Here's today's political comments on the whole thing...
[url=http://www.johnmccain.com/Informing/News/Speeches/Read.aspx?GUID=9a60425... Remarks on the Economy [/url]

[url=http://www.youtube.com/watch?v=L2fxGAXzFAY]Video of Obama commenting on McCains Remarks -short[/url]

[url=http://www.clipsandcomment.com/2008/09/19/full-text-obama-statement-on-e...'s Speech on the Economy[/url]

Fidel

I think we have to remember that markets operate by rigorus analysis and some of the greatest financial brains in the world. Everything is under control until some point when the calm and collected begin screaming sell! Sell! SELL!

DrConway

But markets are rational. [i]Really.[/i] Just ask Stephen Gordon or any other economist, even though they were all taught in econ 101 that the paper economy doesn't add to national production in any meaningful manner.

Fidel

Yep, they're rational until the herd mentality kicks in. [img]frown.gif" border="0[/img] [img]tongue.gif" border="0[/img]

M. Spector M. Spector's picture

[url=http://www.commondreams.org/view/2008/09/19-4]Hang Onto Your Wallet! The Government Is About to Rescue Us[/url]

Fidel

I know Spector and Ken Burch aren't high on Lyndon Larouche. If he is anti-semitic, then it's a strike against him and his organization. And LL [i]is[/i] for a stronger central bank taking hold of the reins in America, an institution that actually needs democratizing not something that one or two terms of Democrat control alone could fix anyway according to several authoratative opinions on the matter. But Larouche is known in the U.S. for his condemnation of banking and finance deregulation for a long time, as well as his calls for FDR New Deal style fixes. They can bail out too big to fail banks all they want - it only delays the inevitable according to Larouche, Weimar like hyperinflation and economic chaos for America, the stuff of revolutions.

[url=http://www.larouchepub.com/pr_lar/2008/lar_pac/080919bush_medvedev.html]'Times That Try Men's Souls': Bush Must Telephone Medvedev[/url]

quote:

A "New Bretton Woods" agreement in the spirit of the initiative of President Franklin Roosevelt, is the only precedent of relevance for the currently ongoing, general breakdown-crisis of the world's present monetary-financial system

ElizaQ ElizaQ's picture
500_Apples

Here is an excellent article from counterpunch: [url=http://counterpunch.com/martens09202008.html]http://counterpunch.com/mar...

quote:

Next is the corrupted model of housing a trading desk for the firm inside the same company that is supposed to issue unbiased research to the public. For example, let’s say that XYZ Brokerage buys a big stake in ABC Company on its proprietary trading desk (the desk that trades for profits for the firm) on Wednesday afternoon. On Thursday afternoon, it could almost guarantee profits for itself by issuing a research report upgrading the stock. Conversely, it could short the stock on Wednesday and issue a negative report to drive down the price on Thursday, also guaranteeing itself a profit. Other than a fictional Chinese Wall, there is absolutely nothing to stop this type of public looting.

As for the 700 billion dollar bailout, wow, that's a big number.

M. Spector M. Spector's picture

And of course the compliant Democratic Congress will give it to him.

All the "greedy" behaviour that led to the crisis can continue apace, secure in the knowledge that the government will always be there to bail the corporate welfare bums out of a tough situation.

quote:

The real reason we have mega financial institutions is that mega financial institutions pay mega bucks to managers and make mega donations to the campaign coffers of politicians. They also get to put some of those mega-buck managers into key advisory positions in each administration, Republican and Democrat, to ensure that government polices allow them to get even bigger and even richer--and to ensure that when they screw it up, they get rescued at the taxpayers' expense.

- see the link I posted previously.

[ 20 September 2008: Message edited by: M. Spector ]

Frustrated Mess Frustrated Mess's picture

All that money for worthless paper. Now think about that for a moment. The US government could give that money to individuals struggling to make mortgage payments and help them pay their mortgages which in turn would solve the liquidity problem and they could restore regulations to the market. But that would be "socialism", so in turn they will give the money to the richest criminals the world has ever seen to allow them to begin all over again, such as following the half-trillion savings and loan fiasco, and that's free market capitalism.

Have called Americans suckers before? I mean, are they really that stupid as to allow this to happen again and again and again?

500_Apples

Do people think this 700 billion dollars will be enough? How much time before the next bailout?

I predict the next bailout will come in February.

M. Spector M. Spector's picture

I don't think anybody knows.

The real message we're getting is "as much as it takes".

And once they've sunk half a trillion into corporate welfare, there will be all the more "reason" to keep throwing more money after that.

500_Apples

quote:


Originally posted by M. Spector:
[b]I don't think anybody knows.

The real message we're getting is "as much as it takes".

And once they've sunk half a trillion into corporate welfare, there will be all the more "reason" to keep throwing more money after that.[/b]


As much as it takes is just posturing.

What they might mean is "as much as we can".

At this time, I do not believe that will be sufficient.

M. Spector M. Spector's picture

Are there actually limits to how much the government "can" give away in corporate welfare?

Funny, they don't seem to be concerned about limits to what they "can" spend on wars.

West Coast Greeny

The alternative to a bailout would be a stock market panic. A Black Friday, or Monday.

M. Spector M. Spector's picture

That's exactly how it works: "Give us money or we'll wreck your economy".

wwSwimming

This is a re-post of an email I got from John Mauldin. Some of his writing is online at
[url=http://www.investorsinsight.com/]http://www.investorsinsight.com/[/url]

There is an aspect here of feeling like I'm "dealing with the devil" - John manages money for rich people. The tone at their meetings is that it is OK to make fun of environmentalists, labor supporters, and 'community organizers' (like Obama)(not that Obama is perfect).

Anyway, it's one of the most succinct explanations I've scene of what's happening in US bankland (and everyone around the world who made the mistake of buying there products). But, it's still long. The way their website is, I can't find a way to link to it.

This whole thing reminds me a little of what it's like to be skin-diving & see a large gray shark. Simultaneously fascinating & terrifying.

"Let's jump back 18 months. I spent several letters going over how subprime mortgages were sold and then securitized. Let's quickly review. Huge Investment Bank (HIB) would encourage mortgage banks all over the country to make home loans, often providing the capital, and then HIB would purchase these loans and package them into large securities called Residential Mortgage Backed Securities or RMBS. They would take loans from different mortgage banks and different regions. They generally grouped the loans together as to their initial quality as in prime mortgages, ALT-A and the now infamous subprime mortgages. They also grouped together second lien loans, which were the loans generally made to get 100% financing or cash-out financing as home owners borrowed against the equity in their homes.

Typically, a RMBS would be sliced into anywhere from 5 to 15 different pieces called tranches. They would go to the ratings agencies, who would give them a series of ratings on the various tranches, and who actually had a hand in saying what the size of each tranche could be. The top or senior level tranche had the rights to get paid back first in the event there was a problem with some of the underlying loans. That tranche was typically rated AAA. Then the next tranche would be rated AA and so on down to junk level. The lowest level was called the equity level, and this lowest level would take the first losses. For that risk, they also got any residual funds if everyone paid. The lower levels paid very high yields for the risk they took.

Then, since it was hard to sell some of the lower levels of these securities, HIB would take a lot of the lower level tranches and put them into another security called a Collateralized Debt Obligation or CDO. And yes, they sliced them up into tranches and went to the rating agencies and got them rated. The highest tranche was typically again AAA. Through the alchemy of finance, HIB took subprime mortgages and turned 96% (give or take a few points depending on the CDO) of them into AAA bonds. At the time, I compared it with taking nuclear waste and turning it into gold. Clever trick when you can do it, and everyone, from mortgage broker to investment bankers was paid handsomely to dance at the party.

Will we ever forget Charlie Prince's line, the CEO of Citigroup, saying that "As long as they are playing music, you have to get up and dance?" just a few weeks before the market imploded? Apart from having his rhythm being proven totally horrendous and overseeing an implosion which cost Citigroup tens of billions, it was a great statement of the zeitgeist of the financial world at the time.

The key word here is model. The ratings agencies used data supplied by the investment banks on what the likely default rates would be. It was something like taking an open book test where you get to write the questions. And since home values had only gone up, default rates were low. And of course, the data was from an ear when bankers lent money actually expecting to get paid back.

Inside a RMBS
Let's look at a RMBS. As Berg points out, when you are buying a mortgage backed security, there are really only three questions you need to know the answers to:

How many mortgages will default?
How much will I get back on a defaulted loan?
How much credit enhancement is there in the security?
Let's set the table by looking at a few terms and definitions. Using his example, let's take a mortgage where the home was originally appraised for $400,000 and there is a $300,000 mortgage on the home. Let's assume a default and the bank takes back the home. If they sell the home and recover $240,000 that means they lose $60,000. This is called a 20% severity. If they sold and recovered $150,000 it would be said to have a 50% severity.

Next, let's look at how the rating agencies come up with the AAA rating. First they model the expected losses, with emphasis on the word model. If they figure that worst case that 8% of the loans default at a severity of 50%, then the security would lose 4% of its value. To get an AAA rating you have to have at least two times the coverage of the "modeled" loss. In this illustration, that means that 92% of the loans would be put into the AAA tranche. An A rating assumes a coverage of more than 1 times but less than 2. B means you expect to get your money back and if they model that you will get below 100% back then the rating would be at junk levels.

Now, this next fact is important. All ratings assume a par value of 100. The rating of these bonds has nothing to do with price. After the presentation, Rich sat down with me and pulled up an actual mortgage backed security that was being offered that day on his screen. It was once a AAA rated Alt-A security. If I remember correctly it was a 2006 vintage security.

As of the latest reporting, a little over 5% of the mortgages were over 60 days past due or in foreclosure. In this security, there are no toxic option ARMS. The numbers of mortgages in this security that are in trouble are rising. S&P has downgraded that AAA tranche to BBB, which of course means its value is going down.

And sure enough, the offered price of the security is 70 cents on the dollar, or 70% of the original par value. Now remember, this particular AAA bond will only start to lose money after the lower tranches take up the first 8% of losses. Thus, this bond can be said to have an 8% credit enhancement.

Pricing in Financial Armageddon
Now, let's stress test that loan. For the AAA portion of the loan to lose money, that would mean that 16% of the loans would have to default with a severity of 50% losses. Could that happen? Sure.

But let's look at what buying that loan at 70 cents on the dollar does for the new owner. First, you are getting a much higher yield (interest rate) because you are buying the security at a lower valuation. But something else even more interesting happens.

Even though the security sold at 70 cents, it still gets all of the first of the proceeds of the home owners who pay their mortgages, up to 92% of the original value in the security. How many loans would have to default in order to make the buyer at 70 cents lose money? Remember, we already had credit enhancement of 8%. But at 70 cents, we just "bought" or priced in another 30%. Let's think Armageddon and that 50% of the mortgages default and they only recover 50% of the loans. That would only be a total loss of 25% to the entire collateral of the deal, but it would mean that the new investor still get all of my 70 cents plus another 13% back! The proud new owner could get up to 92% of the monies paid. Even in a pretty bad scenario, you get more than you paid for the security.

Let's walk through the math. Let's say the original security was $100 million (which would be a very small RMBS). The AAA tranche would have cost $92 billion. If you have it at 70 cents on the dollar you paid approximately $64 billion. In my Armageddon scenario above, the security loses 25% or $250 million. The lower rated tranches are completely wiped out losing $8 billion. Your tranche loses the remaining $17 billion which means you get $75 billion and you only paid $64 billion.

So, how bad would things have to get to lose money on this security? If I am doing the math right, 72% of the loans would have to default with a severity of 50% before your investment of $64 billion was impaired by even so much as 1 dollar. If that happened, it would be Armageddon.

So, why is it rated BBB? Because the rating is over the entire tranche and it is made at a par price of 100. The rating is not affected by the current price. As of today, assuming that even double the number of mortgages currently delinquent default with a 50% severity, your returns over the life of the security would be well over 12%. You would get back $92 million for your $64 billion dollar investment along with interest payments.

The reason this presentation was being made to banks and institutions? Because if you are a bank, you can generally only get prime plus 2% on a loan you make. But if you buy this security with your capital, you can make prime plus 6%. That is a large difference to a bank. Performance Trust has sold billions of this type of paper to banks and institutions.

If this is such a good deal, then why isn't everyone hitting the bid? Because these securities are very difficult to analyze. It is time consuming. You need to analyze every loan and develop your own valuations. You simply can't trust the ratings, as they are measuring something completely different.

And the real truth is that many of the various RMBS securities will in fact be totally wiped out or lose a great deal. Many are seeing default rates of 30% or more. You have to be very careful when you walk through this minefield. And in a time of crisis, it is not clear what the new rules will be. What if the government forces lenders to re-set mortgages at some loss level? What if the housing crisis gets worse? On the other hand, what if the government comes in and buys up all the bad mortgages in an attempt to stop the erosion in the home markets. The level of uncertainty in these times makes people a lot more cautious.

There are Alt-A RMBS like the one mentioned above that are probably not worth even 70 cents on the dollar. These things are marked to a market that is frozen. Everything gets lumped into the same basket and it all has to be marked to market by the new accounting rules called FASB 157. The institution selling the above mentioned security is being forced to do so, either because they are in financial trouble or they are not allowed to hold BBB securities in their portfolios and by law are required to sell. And in times of crisis, the selling price is not that of normal times.

Ratings to Collateral to Ratings: A Vicious Cycle
What's a recipe for a perfect financial storm? Let's make a massive amount of bad loans and get them on the books of most of the major financial institutions because they are rated investment grade. Then let's have the loans start to go bad. Throw in some general panic as everyone tries to sell the loans. No one is buying.

Let's make a new rule that you have to mark your illiquid securities to the last price paid by someone desperate to sell. That means that many institutions now have to mark their capital down and that means those pesky rating agencies must by their own rules mark down the ratings of the institutions which of course means that it costs them more to raise capital at a time when they can't get it which means they get lower ratings and so on. It becomes a vicious cycle.

In the early 80's, every major US bank was bankrupt because they had loaned Latin American countries far more than their capital they had on their books. The Latin American countries defaulted. If the US banks had been forced to mark to market, they would have all gone down taking the US economy along with them. So, the Fed simply allowed them to carry the loans at book value, offering liquidity and allowing the banks to buy time to make enough money to eventually write off the loans.

The current mark to market rule, while nice in theory, works in normal times. But it has the unintended consequence of making things worse in crisis times. Why should an institution have to write down a security which over time is going to pay back the lion's share or more of its value just because a severely stressed institution was forced to sell that security at a very low price in a time of crisis?

Yes, there needs to be transparency and we as investors need to know what is on the books of the companies that we invest in. But it is somewhat like my bank asking me to mark to market my home and pricing my loan daily based on that new price. If my neighbor loses his job and sells his home at auction, does that mean my home is now worth less two years from now. Maybe an even better analogy, if I am renting that home to a very good tenant, does my neighbor's price impair my income?

I was, and am, a fan of mark to market pricing. But we need to think through what a market price is. Not all things can be easily marked to market. This is doubly true when "market price" is a nebulous index of mortgage securities which may or not have a fundamental relationship with an illiquid security on the books of an institution which has no intention of selling, especially in a time of credit crisis.

It is one thing to require that you mark your stocks or bonds to market values. It is another thing entirely to require all mortgage backed securities, which are extremely complex things, can be very different one from another and which require a lot of time and effort to value, to be priced as though they are all the same.

FASB 157 needs to be amended this week. If Congress can create a new Resolution Trust Corp in a week, the surely the accounting board, with the suggestion of Treasury, can figure out a better way to price illiquid securities.

This Too Shall Pass
I know that you probably are reeling from all that has happened the past few months and especially the past two weeks. Lehman and Mother Merrill gone? We the people own AIG? Fannie and Freddie? A new housing bailout which will cost hundreds of billions? The Fed creating whole new programs to provide liquidity? Did you notice they loaned some $250 billion this last week to banks all over the world? Stopping short selling?

Want to see in graph form how bad it got and what spooked Paulson, Bernanke and company to act so quickly? Look at these graphs from my friends at Casey Research (http://www.caseyresearch.com/crpmkt/crpSolo.php?id=119&ppref=JMD119ED0908A). 30 day commercial paper went to 5% from 3% a week ago. The market was literally freezing. And the amount of paper issued is in free fall. Commercial paper is the life blood of the financial and business world. Without it commerce will soon grind to a halt.

{graphs & charts}

It simply takes your breathe away. As President Bush said today, it does not help to find who is at fault today, we have to figure out how to get out of this mess. It is going to cost the taxpayers a lot of money. While I think the losses on AIG will be rather minor in the grand scheme of things, if you add up Fannie and Freddie and a new RTC, coupled with the stimulus package, you can easily get to $500 billion, and that is probably a low number.

For such a price, we had better get a new regulatory scheme which requires reduced leverage. Want to get really mad? Up until 2003, all investment banks were allowed only 12 to 1 leverage. Then in 2004, the SEC basically gave five banks (and only five banks) the ability to lever up 30 or even 40 to 1. Bet you can guess the five banks. Bear, Lehman, Merrill, Morgan and Goldman. Three down.

As Barry Ritholtz wrote: "So while the SEC runs around reinstating short selling rules, and clueless pension fund managers mindlessly point to the wrong issue, we learn that it was the SEC who was in large part responsible for the reckless leverage that led to the current crisis." (Don't get me started on blaming the short sellers. Let's not blame the people who leveraged up their companies 40 to 1 with bad investments.)

We absolutely must move credit default swaps to a regulated exchange, no matter how much investment banks and hedge funds scream. Must be done. Do it now. Real rules about writing mortgages, although now that losses are in the hundreds of billions, underwriting rules are already becoming quite restrictive.

And while we are at it, a thorough revamping of the rating agencies and the rules they use should be at the top of someone's list."

jrootham

From [url=http://globalresearch.ca/index.php?context=va&aid=10265]here.[/url]

quote:

Since then, derivative trades have grown exponentially, until now they are larger than the entire global economy. The Bank for International Settlements recently reported that total derivatives trades exceeded one quadrillion dollars – that’s 1,000 trillion dollars.3 How is that figure even possible? The gross domestic product of all the countries in the world is only about 60 trillion dollars. The answer is that gamblers can bet as much as they want. They can bet money they don’t have, and that is where the huge increase in risk comes in.

Credit default swaps (CDS) are the most widely traded form of credit derivative. CDS are bets between two parties on whether or not a company will default on its bonds. In a typical default swap, the "protection buyer" gets a large payoff from the "protection seller" if the company defaults within a certain period of time, while the "protection seller" collects periodic payments from the "protection buyer" for assuming the risk of default. CDS thus resemble insurance policies, but there is no requirement to actually hold any asset or suffer any loss, so CDS are widely used just to increase profits by gambling on market changes. In one blogger’s example, a hedge fund could sit back and collect $320,000 a year in premiums just for selling "protection" on a risky BBB junk bond. The premiums are "free" money – free until the bond actually goes into default, when the hedge fund could be on the hook for $100 million in claims.

And there’s the catch: what if the hedge fund doesn’t have the $100 million? The fund’s corporate shell or limited partnership is put into bankruptcy; but both parties are claiming the derivative as an asset on their books, which they now have to write down. Players who have "hedged their bets" by betting both ways cannot collect on their winning bets; and that means they cannot afford to pay their losing bets, causing other players to also default on their bets.

The dominos go down in a cascade of cross-defaults that infects the whole banking industry and jeopardizes the global pyramid scheme. The potential for this sort of nuclear reaction was what prompted billionaire investor Warren Buffett to call derivatives "weapons of financial mass destruction." It is also why the banking system cannot let a major derivatives player go down, and it is the banking system that calls the shots. The Federal Reserve is literally owned by a conglomerate of banks; and Hank Paulson, who heads the U.S. Treasury, entered that position through the revolving door of investment bank Goldman Sachs, where he was formerly CEO.


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