Posted on 03/02/2009 3:48:42 PM PST by tobyhill
Sorry, I didn’t write that. I got it in an email along time ago. Only it was written about Clinton.....Works for Obama better.......
It’s crystal clear that the correct value of all the credit default swaps is zero.
Once that is acknowledged, we can move on to finding out what the underlying CDOs and houses are worth.
That's funny. You're not very good at math, are you?
CDSs are rising in value as bonds they are written against crater. For most corporates that bottomed last November, but for e.g. subprime mortgage CDS, the underlyings double dipped to new lows, which makes the CDS written against them rise.
The level of popular and journalistic ignorance on the subject is of course appalling. But for those in Rio Linda, since a CDS is a promise to pay a bond if the original borrowers default, it rises in price whenever default becomes more likely, or with a whole book of them, whenever defaults actually increase.
AIG got in trouble because it wrote too much of that stuff and it *rose* in price - not because it went to zero. CDSs are *bearish* bets, not loans. We do need central clearing for CDSs, and last fall that look on track, but we've heard little about it since then.
As for the CDO workout, precious little has actually been done. Assets have been written down by banks, that is about it. They haven't been moved out of the banking system as Paulson's original plan called for. They are not being aggregated and re-assembled into whole loans by having one owner buy up all tranches and cancel cross obligations to itself, which is the clearly correct way to proceed. Whole loans can be triaged into performers and workouts, the latter into refinances (there won't be many at the bottom end, despite all the plans pols love to announce) and foreclosures, and the workouts sold for pennies in RTC fashion.
The underlying reason this isn't happening remains unsolved. The authorities simply haven't made up their minds to support the banking systems in ways that might actually make bankers wealthier. They are paralyzed by populist fear in the matter. Of course that is flat stupid, the only thing the populists will remember or care about down the road is whether anything was actually fixed and how fast it was done, and delay makes both worse.
Go on and be insulting, that will win lots of support.
AIG going bankrupt makes the value of the swaps equal to zero; since the only thing stopping that is constant govenrment intervention, holders of the swaps need to understand that there is no value to them, except that assigned by the government.
Now the defenders of the status quo need to explain why the government needs to assign any value to the bad bets at all.
Pointing out your ignorance is insulting? LOL!
AIG going bankrupt makes the value of the swaps equal to zero;
I forgot that AIG was the only party that issued any swaps. Should I point out your ignorance again?
Things are much better on Tuesday. The Dow has lost only 40 points by mid-morning.
AIG and its bad swaps are the core problem, they’re the ones who are “too big to fail.”
But go on, snark away and see how many friends that wins you for your next bailout hysteria.
Explain to me again the obligation of the U.S. government to make sure bankers get richer in SPITE of their collective mismanagement of their risk management, please.
Holders of AIG swaps who cannot show any interest in the underlying paper need to get their minds around the hard fact that taxpayers have no compelling interest in paying off their speculations.
AIG made the bad bets, and AIG is effectively dead; now we’re just talking about unwinding their mess.
The only way forward is disclosure and mutual write-downs.
Well, Ozone is speaking again. Judging by the market impact evey other time he’s come out, the modest gain we have (2:24 pm est) will most likely be erased and we’ll head south again.
Dirt simple really.
Pushing more losses onto the banks only destroys 10-20 times as much for every dollar of loss you try to push there, because their capital is already impaired. Any reduction in their capital reduces all wealth in existence 10 or 20 fold. The treasury is (1) directly on the hook for the losses that result to the reckless lenders (who are *bank depositers*) and (2) owns 30% of the upside through its taxation rights to start with, ergo any new losses to the banks hits them vastly harder than it hits anyone else.
You can shoot yourself in the head out of spite if you like, but there is no solvancy for the US treasury until *bankers* make money, and lots of it. Every dime of capital destroyed by deadbeats not paying their loans back, will be repaid, 2-3 times over. Until it is, you go straight to hell and stay there.
You can't make capital services cost less by refusing to pay for them. Law of nature.
Ah.
So should I just sign over my future earnings for them to p_ss away as they please now, or do we get to go through this everytime some bright Master of the Universe comes up with a new risk management model which proves to be spectacularly wrong?
Some bankers will probably get rich, but I fail to see why THESE bankers, who just drove the economy into the ditch need assurance that THEY will get rich.
Thanks for the additional cup of snark; I was beginning to run short, and it really made your arguments clearer and made me much more symmpathetic to your arguments.
The fact is that the capital you wish to preserve is an accounting fiction: it is predicated on bond payouts that will never happen. Until the bad notes are wrung out of the system there’s no realistic prospect of recovery because there’s no amount of leveraging which will compensate for the fact that the underlying paper is worthless.
If this is bad news for the bankers plans to boost their Christmas bonus another million, I’m sorry; but the money was never really there to begin with.
No, the capital of the financial system is not an accounting fiction. Actually, the mark to market losses the present rules are forcing the banks to pretend to take are closer to matching that statement, being easily half to three quarters pure accounting fiction, based on the idiotic idea that everyone is always forced to sell to the lowest bidder.
As for the payouts that will never happen, there are indeed real credit losses on subprimes, but then those were written to approximately zero about five exits back. The populist liquidators have just kept on singing the same slander song ever since, but not a lick of it is true. I recall they also told us that 0.5% drops in asset prices would render everyone bankrupt because there were so many derivatives. We are at 50% and counting and most of the world stands. How do you suppose that is?
As for the smear at bankers and their bonuses, again the populist know-nothings attempt to repeal natural laws as unfair to their pie carving sense of the world. Incomes follow a Pareto distribution. That's a power law. 80 20 rules and all that. Those distributions were discovered in statistics in the course of studying income distributions.
We also know why, at least approximately, and the answer isn't self dealing or greed or any of the usual populist suspects. Just as anything governed by multiple independent trials with bounded mean will approximate a normal, if instead a normally distributed skill influences a success probability, anything that follows the accumulation of those successes will show a Pareto distribution.
But the primary fallacy lies deeper. Financiers produce huge positive externalities for everyone else. They don't consume a quarter of the value they actually add. Only research scientists (and although it is less well measured, law abiding soldiers) exceed them in that regard. Finance has paid vastly more to the treasury than it ever will receive from it, directly or indirectly.
Does anyone ever notice that deadbeats robbed bankers of $1 trillion? That every dime of that was real money and unearned income to the deadbeats, or those they bought things from at fancy prices? (Takers took).
But who cares about any of that? Everyone made something in the bubble, directly or indirectly. Workers did, borrowers did, lenders did, financier did, the government did, foreigners did, you name it. And the loss from misallocated capital was big enough that everyone was going to and is taking the hit for it. It is just kindergarten foolishness when anyone thinks they can escape it by passing it off on somebody else. There is no somebody else, certainly not big enough. Any hit this big hits everyone, no matter how you allocated the initial losses.
But if you don't, and fight over it forever, you can have losses 10 or 20 times as large, as well. So far the losses that have nothing to do with actual bad loans exceed those that do have something to do with actual bad loans by a factor of about 15, easy. Maybe when all is said and done the loan losses will be higher and drop that to 8 - more likely to 10, as the wider losses aren't over. Or maybe they won't. But you can be sure of this - the actual gain to deadbeats and immediate hit to bankers will be utterly dwarfed by the losses to everyone from pure pigheaded stupidity and refusal to face and allocate the loss.
Which sane men have been pointing out for a solid year now.
Now to what is worthless. The total future cash flows to all financiers in payment on debts are not worthless. Every time banking capital is impaired, the rates everyone pays for capital go up. Law of nature again. This occurs as wider spreads and higher real rates from falling prices, as well as straight nominal rate increases, but is always happens. The reason is simple, objectively higher risks will simply not be borne by anyone unless they earn more not less in the way of returns. Enough to cover all the likely losses and to spare.
The less you pay bills on time, the more you stiff bankers, the more you insist in high dudgeon that they be destroyed because their borrowers are deadbeats, the more all future borrowers get to pay to have any access to capital. And if you don't, then there isn't any capital and you don't get any access to it. And car sales fall 50% year over year. And federal spending explodes 33% a year, while revenues fall.
You can't make any of it better by reducing the payments to capitalists, because insufficient real payments to capitalists are the underlying cause of the problem in the first place. The real payments to capitalists, divided by some interest rate, *is* the value of capital the entire society will have access to. It has no other existence. And the more erratic and grudging the payments, the more it it pulling teeth to get someone to fork it over, the higher than divisor interest rate and the lower that capital value.
The only way to have capital, is to pay for it richly, on time, without a murmur, in industrial quantities.
Refuse, and there simply isn't any. Law of nature.
You spill a lot of pixels addressing hopeless ignorance.
But let’s leave aside the casual insults and move to substance.
Do you really believe that defaulting on a financial instrument is robbery? If so we have a lot of positive-externality producing financiers to lock up.
So let’s agree that many players have made bad plays.
What exactly is your policy prescription? Other than insulting people, that is.
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