FReeper Guide to the REAL economic problem - Credit Derivatives - Lesson 2

politicket | 9/27/2008 | Politicket

[politicket]

For Discussion...

[rabscuttle385]

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[Freedom_Is_Not_Free]

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[combat_boots]

bttt

[politicket]

Ping to Lesson 2...

[kaspergutman]

You can take out (‘buy’) insurance on debt obligations that you don’t own. And since many, many entities can do the exact same thing it creates a great big leverage factor if that underlying debt obligation goes bad. The seller(s) of the insurance now needs to pay up to a whole bunch of buyers.

Thanks for the illuminating commentary. Of course, the "underlying debt" wasn't supposed to "go bad" any more so than accounted for in the models. Three things come to mind:

1. Fraud: A lot of the MBS used for the CDOs may have been created and marketed dishonestly by realtors, appraisers, LO's, bank officers and Wall Street bundlers.

2. Ratings: Even if S&P and Moodys and Fitch acted in good faith rating this stuff (not a sure bet given the incestuous relationship with the IBs, etc.) you can't model fraud.

3. Exchange: Maybe $60 trillion (notional value) of derivatives floating about, but an unregulated and opaque market at best. Getting these instruments on an exchange with rules and transparency might have discouraged excessive risk taking and would at least have kept bankers, Fed chairmen and Treasury officials from fumbling blindly in the dark.

[TASMANIANRED]

bookmark

[politicket]

Getting these instruments on an exchange with rules and transparency might have discouraged excessive risk taking and would at least have kept bankers, Fed chairmen and Treasury officials from fumbling blindly in the dark.

You're correct. But now you see how Paulson will go out after the bailout plan is passed, holding his pail of money, and very likely could do more harm than good if he inadvertently triggers more loan and bond defaults. His mistake of spending a few million too little on a tranche of securities could cause devastating damage in the credit derivatives market.

I believe that a financial tsunami has been unleashed that will swallow up every bit of liquidity that Paulson wants to throw at it. He can buy up billions in loans and it still won't stop the wave.

The market (mainly controlled by investment banks) will be in complete euphoria for awhile this coming week. However, late in the week, or the following week, we will see the credit markets begin to tighten again as companies realize the severity of what was unleashed.

[444Flyer]

Thanks for the Ping. Your ability to communicate this in layman’s terms still amazes me. You need to be on Fox Business. Most of us have learned about 401k investment, mutual funds/CDs and diversifying and these CDSs are WAY over our heads. Up to a few days ago I thought it was all about bad mortgages, but you've been really helpful in helping to paint the real story and bigger picture.:-)

[politicket]

You need to be on Fox Business.

Was that an insult my FRiend? ;-)

[444Flyer]

LOL. No, you should replace the entire bunch of them!:)

[auboy]

I need to learn more before opening my mouth. Thanks for sharing your knowledge and experience!

[444Flyer]

How do you get this message out to our Congress members before they vote us into this Socialistic scheme called the “bailout”. Do you think they know the real storm coming and know the silly bailout will do nothing to prevent it? Why aren't Paulson and Bernanke talking about this?

[politicket]

How do you get this message out to our Congress members before they vote us into this Socialistic scheme called the “bailout”. Do you think they know the real storm coming and know the silly bailout will do nothing to prevent it?

I honestly don't know. I (and a few others) have been hitting this hard for two weeks on Free Republic and folks are just now starting to realize what is happening.

Why aren't Paulson and Bernanke talking about this?

I don't know. They are either foolish, blinded, or in on the whole deal. I'm beginning to feel the latter.

[444Flyer]

It doesn't help that the Congress is being rushed and pressured by the Feds, the President and the media. Who can make an accurate assessment and do any thorough research with that kind of pressure. Dave Ramsey (on Fox Business News;)) had a gentleman by the name of Brian Wesbury, he is the Chief economist for First Trust. He proposed that rather than do a bailout, Congress should temporarily relax accounting rules regarding mark to market accounting. http://www.ftportfolios.com Don't know whether its a good or bad idea, but the point is Congress doesn't have any time to get input from outside consultants who don't have lobbying power and aren't part of the establishment. Everything is being beelined to completion and they have only seen the tip of the iceberg.

[REDWOOD99]

bookmark

[politicket]

He proposed that rather than do a bailout, Congress should temporarily relax accounting rules regarding mark to market accounting.

This would allow a really disastrous situation to get unfathomably disastrous in the derivatives market. There are so many triggers set to go off that changing the accounting rules midstream would be insane.

I like Dave, but he needs to stick to household budgets.

[444Flyer]

I used to play Pick up Sticks when I was a kid. I remember trying to keep my hand from shaking while I carefully lifted those little wooden sticks up one at a time so as not to upset any of the other sticks. One wrong move and you could wreck the whole stack.

It’s hard to contemplate the web derivatives weave through the economy, but it sounds like we are walking on thin ice with any decision or manipulation of the market. Do you think it’s impossible to predict the tipping point or the cause that will send these derivatives crashing down?

Again, thanks for your patient explanations.

[politicket]

Do you think it’s impossible to predict the tipping point or the cause that will send these derivatives crashing down?

They crashed in July 2007. At first it was a snowball at the top of a very tall mountain. As it began rolling it became more massive.
That snowball rolled over some very big companies these last couple of weeks. It's not moving fast, but it's wiping out everything in its way. The bailout money will be consumed quickly and we will be right back where we are, but with a larger snowball.

[TomasUSMC]

How do you get this message out to our Congress members before they vote us into this Socialistic scheme called the “bailout”.
////////////////////////
There is only one language D.C. will understand - THE POWER OF MONEY.

TAKE YOUR MONEY OUT NOW

If Americans make a run on the banks and Market and withdraw a trillion dollars Monday, that will stop the BULLSHEET BAILOUT.

The best way to make sure this doesn't happen again is for PAIN to teach the guilty parties that it is not profitable. They will lose millions individually and in the future they will not take part in these types of tactics.

25billion FORD GMC ..wasn’t enough, need more
30billion BEAR .....wasn’t enough, need more
85billion AIG .....wasn’t enough, need more
138billion LEHMAN...wasn’t enough, need more(they tried to hide that one)
200billion FANNIES...wasn’t enough, need more
770billion WHO ELSE? and no one will ask the question,” Will this be the last dollar we have to spend”? ....
...........Because it won’t be.
Spend $700 billion, 5 percent of our gross domestic product?

THERE WILL BE MORE.

They only understand money.

Kill the Bailout and Shoot it in the head.

The Dow was in much worse shape during the 2000-02, when it went down 36 percent. Today its 24 percent down from its high. -— Its all a big Lie -—

Take your money before the banks do!