Posted on 02/18/2008 7:21:48 PM PST by B-Chan
The fall of Britain's Northern Rock bank may be the first dropped shoe in a chorus line of big banks tap-dancing into oblivion. The British government's move yesterday to nationalize the insolvent mortgage lender's remaining operations leaves shareholders holding an empty bag. Their only resort now will be to call their lawyers. What we may be witnessing, in a movement that will surely spread to the US, is a changing of the guard at the top of the financial food-chain between bankers and lawyers.
Shoes may have begun to drop in the US last week with Citigroup halting redemptions for its $500-million CSO mini hedge fund -- half a billion dollars being something less than walking-around-money in the Hamptons these days. Halting redemptions means that investors in the fund cannot withdraw their money -- the same as going to the bank and being told your account is frozen. Hedge funds can play rough with their investors because they are unregulated. The reason they remain unregulated is the presumption that anybody rich enough to "play" in a hedge fund can afford to lose (or be swindled) with no protection on the sidelines from government busybodies. What's more, the hedge fund managers do not have to make any of their operations open to public view, so that neither the investors nor any regulating authority knows what they are actually doing.
What the big banks who run many hedge funds are doing is going broke. They are pretending to be solvent by borrowing money from the Federal Reserve, the nation's alleged superbank. But borrowed money is not capital, i.e. surplus wealth wholly owned. Borrowed money is an obligation, a liability, a negative on the balance sheet. You can't have an entire financial system based on nothing more than a giant daisy-chain of liabilities. Somewhere there has to be a "reserve" of assets, items of value owned by somebody. Through most of modern times, assets have been denoted by cash money. A given bank will hold in "reserve" say $10 billion in money that is not owed to anybody, allowing them to do things like pay depositors who show up at the window needing money for groceries. Up until a few decades ago, nations held an ultimate reserve of actual gold in a vault (Fort Knox, Kentucky, in the case of the USA) and the physical possession of this gold was said to "back up" the value of the certificates that circulated as a "medium-of-exchange" or currency.
But that system was considered too awkward and "reserves" were then denoted in just currencies themselves, or certificates that represented the existence of currencies held elsewhere, or pixels on a screen representing the movement of alleged piles of currency from one place to another, or the intention to move a notional pile of currency to a theoretical destination, and then that became an algorithm purporting to represent the future arrival of a notional pile of money at theoretical destination to-be-named-later, and so on.... And after another while, the nature of money became so detached from anything real, so abstract, that its very existence became hypothetical. Even this "worked" for a while, in terms of the managers of this money being able to "cream" substantial amounts of this hypothetical money off the top of their notional operations and translate that hypothetical cream into Tribeca lofts, Gulfstream jets, and other real luxuries.
The rest of the economic food chain -- and the social order that represented it -- got stripped of remaining asset value (and social value) until they had nothing left to trade with except debt, in one form or another, and this phase of the game turned out to have a short lifetime when the the only debts remaining to be monetized were the contracts on houses occupied by people with no hope of ever meeting their obligations -- and then the whole sorry racket started to go up in a vapor.
This is roughly where we are, and where the banks stand today. They are pretending to have money and desperately cadging loans from all comers to keep appearances up, but the loans can't come in fast enough. The appearance of confidence is crucial (as it is, of course, in any "con" game) to keep the investors (depositors) at bay. If a bunch of investors (depositors) all got nervous about the solvency of a given bank, they might try to slip in there during business hours and withdraw or redeem their "money" and perhaps translate it into items of value like gold coins, bottles of vodka, or cases of 9 millimeter pistol ammunition. And if enough of this bunch showed up at the same time, we would see a phenomenon called a "run" on a bank. And after that started at one bank, the thing Franklin Roosevelt called "fear itself" could easily spread to depositors in other banks pretending to be okay... and that would be the magic moment that the USA discovered it was no longer a rich nation.
That would be a very rude awakening. The whole world would know about it in about thirty seconds, and the rest of the world would be in a lot of trouble, too, since so much of its notional wealth is represented by piles of US dollars (or certificates denoting them). Then what you could see is a run by other nations (investor-depositors) on the United States of America as a whole, or an awkward global receivership process, in which all remaining assets were stripped -- including maybe even some of those Tribeca lofts and Gulfstream jets.
Of course, the rest of the world would have a hard time getting any of this stuff out, or fencing it off at a discount. Rather, they'd probably just eat their losses and quarantine themselves off from the world's new financial-and-economic leper. They'd stop sending us Toyota Highlanders, plastic salad shooters, and, oh yes, oil. We'd be left with a lot of empty big box stores, vacant highways, and houses inconveniently deployed too far from any place of utility. One thing we'd have plenty of, though, is home-grown pissed-off people. Some of them may even be lawyers.
The Gods of the Copybook Headings
Rudyard Kipling
As I pass through my incarnations in every age and race,
I make my proper prostrations to the Gods of the Market Place.
Peering through reverent fingers I watch them flourish and fall,
And the Gods of the Copybook Headings, I notice, outlast them all.
We were living in trees when they met us. They showed us each in turn
That Water would certainly wet us, as Fire would certainly burn:
But we found them lacking in Uplift, Vision and Breadth of Mind,
So we left them to teach the Gorillas while we followed the March of Mankind.
We moved as the Spirit listed. They never altered their pace,
Being neither cloud nor wind-borne like the Gods of the Market Place,
But they always caught up with our progress, and presently word would come
That a tribe had been wiped off its icefield, or the lights had gone out in Rome.
With the Hopes that our World is built on they were utterly out of touch,
They denied that the Moon was Stilton; they denied she was even Dutch;
They denied that Wishes were Horses; they denied that a Pig had Wings;
So we worshipped the Gods of the Market Who promised these beautiful things.
When the Cambrian measures were forming, They promised perpetual peace.
They swore, if we gave them our weapons, that the wars of the tribes would cease.
But when we disarmed They sold us and delivered us bound to our foe,
And the Gods of the Copybook Headings said: “Stick to the Devil you know.”
On the first Feminian Sandstones we were promised the Fuller Life
(Which started by loving our neighbour and ended by loving his wife)
Till our women had no more children and the men lost reason and faith,
And the Gods of the Copybook Headings said: “The Wages of Sin is Death.”
In the Carboniferous Epoch we were promised abundance for all,
By robbing selected Peter to pay for collective Paul;
But, though we had plenty of money, there was nothing our money could buy,
And the Gods of the Copybook Headings said: “If you don’t work you die.”
Then the Gods of the Market tumbled, and their smooth-tongued wizards withdrew
And the hearts of the meanest were humbled and began to believe it was true
That All is not Gold that Glitters, and Two and Two make Four
And the Gods of the Copybook Headings limped up to explain it once more.
As it will be in the future, it was at the birth of Man
There are only four things certain since Social Progress began.
That the Dog returns to his Vomit and the Sow returns to her Mire,
And the burnt Fool’s bandaged finger goes wabbling back to the Fire;
And that after this is accomplished, and the brave new world begins
When all men are paid for existing and no man must pay for his sins,
As surely as Water will wet us, as surely as Fire will bum,
The Gods of the Copybook Headings will with terror and slaughter return!
Cheers!
Don’t forget to stop by Wal Mart on your way home from work and buy some gold. LOL.
ssssssssssshhhhhhhhhhhhhhh.....be vewy vewy qwiet......it could staht a panic if dah serfs find out dah banks awe bwoke. And dah gweedholdahs and elitists won't be able to get dah money out before dah wuns staht......ssssh!
you should put up a TIN FOIL alert, B-Chan. Forget gold. Buy tin-foil.
Published in October 1919 when the poet was 53 years old
The Gods of the Copybook Headings has as much meaning
now as it did then
Sorry, I wasn't endorsing the views--I just saw that you liked to read and comment on this type of topic.
What is most interesting to me is that there are several different schools of thought concerning what is going on with the banks, liquidity, credit, and the direction of the economy -- and they ALL disagree.
Since I haven't formally studied economics, I don't know enough to see through the mistakes of one group or another, so I just invest in popcorn in the meantime.
Cheers!
LOL.
I was speaking tongue in cheek. There are so many gloom and doom artists around that you'd think the sky is falling in chunks. I have a newsletter by a guy who called the 2000 dot com bust and he is a raging stock market bull right now. Go figure.
There are many people who don't have any money and resent those who do and, I believe, love to post financial heartache whenever they can.
Secondly, the US used to be the world's largest creditor nation and now we are the largest debtor -- and in my own life I have found it is a better position to be in to have money, than to owe money.
Cheers!
One of Kipling’s best. Thanks.
What you meant to say was,,,,,, “I am transferring my assets from my popcorn jug to increasing my waist size.”
Fixed. LOL
not surprising is it?...considering Art 1 sec 8 and the understanding that went into it...hell..even Greespan understood it before he got “Political” religion ...
its simple...2 schools of though...
Austrian vs. Keynesian economics...
one of em is bound to fail over time.....Do your own DD
Cheers!
Wall St. Banks Confront a String of Write-Downs
Wall Street banks are bracing for another wave of multibillion-dollar losses as the crisis that began with subprime mortgages spreads through the credit markets. In recent weeks one part of the debt market after another has buckled. High-risk loans used to finance corporate buyouts have plummeted in value. Securities backed by commercial real estate mortgages and student loans have fallen sharply. Even auction-rate securities, arcane investments usually considered as safe as cash, have stumbled. The breadth and scale of the declines mean more pain for major banks, which have already written off more than $120 billion of losses stemming from bad mortgage-related investments........
The problem is that everybody thought it was "different this time" because you could buy and sell protection from credit defaults. So they made a gazillion low doc and teaser type of mortgage loans, packaged them, insured them and sold them to investors who may or may not have credit swapped them sometimes with the same investment banks that sold them the stuff.
I have never been a fan of credit insurance because, in my mind, the underlying credit can't be erased. Why would investors worldwide buy the credit of 4 insurance companies? It's just like auto rebates. Why not just take the cash off the price to begin with?
The good news is that there was no underlying euphoria in the stock markets. They may suffer for a while but nothing like the 2000-2002 debacle which only happens every 40 years or so. Of course nothing is guaranteed.
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