Posted on 09/23/2008 6:42:35 PM PDT by politicket
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"These Credit Default Swaps have been written (as insurance is written) as private contracts. There is nil government regulation of them. Who writes these policies? Banks. Investment banks. Insurance companies. They now owe the buyers of these Credit Default Swaps on junk mortgage debt trillions of dollars. It is this liability that is the bottomless pit of liability for the financial institutions of America."
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(Excerpt) Read more at finance.yahoo.com ...
Excellent post. Just wanted to add one point.
The short sales are only being nominally impacted due to the knowledgable in the market using "synthesized shorts" - basically via put and call options.
I'm voting for Sarah!
Much, much more.
We haven't even discussed the REST of the derivatives market.
What do I really need to do to prepare. I’ve been reading your posts for the last few days and have taken some steps already. But I would kinda like for you to spell it out. I’ve got some cash on hand, I’m storing up food (my family will not go hungry), ordered seeds for my garden, and have purchased some gold. these are all good things to do anyway. My oldest son says cash will be worthless in a depression so I think I should take my cash and buy more supplies. But then I look around and everybody else is going about like nothing is wrong and I think I’m being paranoid.
I just use that number since it often gets thrown around in the media. Actually the number is closer to $62 trillion.
That is just the CDS component of the derivatives market. The market as a whole is around $750 trillion if you include OTC and all other contracts.
Understand that these are not "real" dollars when they're being bet. They just end up being real dollars when somebody collects.
There was an article just this past week on Greenspan’s activities during that time. I wish I had kept the link. Been reading so danged much lately it’s all jumbled in my brain.
I’ll try to find the link.
First of all, don't take what I say as the gospel. I'm just "reading the tea leaves" like everyone else. I do think that it is extremely important for people to be prepared at all times, and especially now with what we may be facing.
I recommend a normal month's supply of cash-on-hand (add up all of your normal costs for a month - cash, credit, loan, etc.) If there were a bank run you would not have to be standing in line.
Store up food for at least a month for your family.
Make sure that you can protect your family if close to a population center.
etc., etc., etc.
And most importantly, sing praises to God our Father because His mercy endureth forever!
>>>The only answer is to outlaw financial derivatives such as Credit Default Swaps retroactively, and nullify them.
Plan B to this approach: any such Bailout To End All Bailouts includes wording to the effect that any derivative NOT ON THE BOOKS of corporations is null and void because they lacked transparency and hence must be a fraudulent conveyence. The accountants certifying the books should be fined for each occurrence.
Thanks.
I suspected the Wall St whiz kids would be able to work around a short ban with some kind of option trade.
I get it. So then, wtf is there to do? The option of going into a depression is, I think, wishful thinking. I think it would be much worse as, at that time, the global downturn didn’t provide for any foreign capital to start soaking up American assets. This time would be different—China could, for instance, buy up a significant part of the Financial sector, as could a handful of Arab states. Neither prospect sounds good to me; I’d rather that if the whole thing collapses, we take down the rest of the world with us rather than leave our enemies standing, ready to devour what’s left.
I am willing to bite the bullet and let the Fed do this thing, only with assurances that it will have strict rules on which assets will be absorbed (i.e., only the strongest of the weak, so to speak) and that any profits that might materialize down the road will be returned to taxpayers directly, rather than the black-hole of the general fund. I also like some of Gingrich’s suggestions.
my-head-may-explode-trying-to-understand-this-mess place marker.
Great posts FRiend. I have always considered the stock market a crap shoot, no different than Las Vegas. The derivatives market was the smart guy betting against the guy rolling the die in craps......betting with the house. The "house" bet trillions waiting for the gentlemen to crap out.....
Only difference I see is that the guy that "crapped out" is financed by the the US tax payers.
Thank you for your insite.
This is an amazing article by Ben. Thanks for posting.
I think I am finally getting a clue as to what this “bailout” mess is all about.
Should I grab my ankles yet?
Stein has been wrong for so long. Looks like he is late to the party, but better late than never.
No, you should be preparing your household for possibly a very difficult time ahead.
So do I - but it's the only way that I can stay somewhat "cheery"about this. I've been screaming this from the FR rooftop for days and I think the realization is beginning to sink in for a lot of people.
You know that Private Mortgage Insurance (PMI) you have to take out if you don't have 20% equity in your house? It's supposed to pay the bank if you default on your mortgage.
Well, the big banks holding all those Mortgage Backed Securities (MBS - the bundled and sliced and diced crap mortgages loaned out lately to subprime lenders) took out similar insurance on these securities. These insurance policies pay off if those MBS's default, or even if they just fall below a certain credit rating.
AIG (that big insurer you've read about lately) wrote a lot of that insurance.
When Lehman and Fannie and Freddie each ran into nasty problems this last couple of weeks, it triggered a lot of that insurance -- AIG was obligated to pay out more than it had on hand. Kinda like home insurance companies would look if Cat 5 hurricanes hit Miami, New Orleans and Houston, dead on, all in the same hurricane season ... bankrupt.
This credit insurance is roughly what's called Credit Default Swaps.
Unfortunately, AIG writes a lot of other insurance as well, such as 90% of the insurance for commercial airliners. So if AIG goes under, the commercial airliners can't fly ... guess how long before they go bankrupt ... given that they already have their chosen bankruptcy legal firms on speed dial thanks to fuel prices ... not long.
In fact, short term commercial loans, whether overnight between banks or for less than 90 days with businesses, would dry up, as banks and businesses quickly stopped trusting each other any further than you'd trust a guy trying to sell you a used car in a dark alley late at night on the wrong side of town.
Money Market funds, that most investors keep their money in between other investments, are the primary source of these short term loans.
Last week, thanks to Lehman defaulting, the biggest, oldest, best known Money Market fund lost 3% of its value and had to put one week holds on withdrawals. This was starting to cause a major run on Money Market funds, with hundreds of billions being withdrawn.
That Money Market money is like the oil in your cars engine; without it, our banking system freezes up lock solid.
Credit cards, checks, banks, your paycheck, ATM machines, ... rapidly grind to a halt, within a couple of days. Trucks, planes and trains stop. Grocery stores sell what they have on the shelf, for cash only.
Those of us who have stockpiled ammo, whiskey and survival food get to gloat ...
Well, you did not follow the process until the end.
After making that loan to Joe Poor, the banker then took Joe Poor's IOU and sold it to the manager of your mutual fund that expected a nice, steady yearly return on the investment of YOUR mutual fund money.
So, you not only countersigned the loan ...... you BOUGHT it.
The guy who approved the loan is now enjoying the commission he got from selling that IOU to your mutual fund. It's not his problem anymore.
I don't have the answer to that my FRiend. The bailout will not work - things are too far gone. It will be like using a squirt gun on a forest fire.
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