Posted on 11/17/2008 6:29:35 AM PST by TigerLikesRooster
Meltdown: The toxic effects of Derivatives
By Monty Guild and Tony Danaher
A few weeks ago many thought I was out of my mind. I had the temerity to state that I thought that we were going into a depression, not a recession, and that the economic decline would last for two to three years. Now, it looks like a few others are coming around to my view.
The chairman of Goldman Sachs recently said we are facing a banking crisis worse than the Great Depression. The former chairman of the New York Stock Exchange said it is comparable to the Great Depression.
More and more are willing to admit the magnitude of the problem. We continue to see a few Pollyanna types who want to see everything as sunny. For them, we have the following outlook. In our opinion, things will get sunny and big buying opportunities will periodically develop, but they will be interspersed with big declines, and a lot of hand wringing.
It was probably more than six years ago that we first started to warn in these memos about the toxic effects of derivatices. It was about one and a half years ago that derivatives connected with mortgages began to meltdown.
Unfortunately, we do not believe that this is not the end of the derivative problem. A bigger problem looms on the horizon. Derivatives are still being created everyday. Often, they are created by people who are just as greedy and self deluded, as those who created the mountain of mortgage derivatives that have brought the system to its knees. If the current unexploded mountain of derivatives were to implode, (as those derivatives connected to mortgage bonds did) the crisis could become much worse.
(Excerpt) Read more at commodityonline.com ...
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don’t shoot the messenger
I read a few weeks ago that you'll know when to get back into stocks when both gold and the DJIA are at 5,000.
So there are credit default swaps on automobile debt and student loan debt and unsecured debt? Is that what he’s telling us?
The only toxic effects I know derivatives had was on my calc grade.
WTH is he talking about, for us non-financial people...
You can learn a lot about browsing through this blog
Only if you can stand to face bad news
It wasn’t derivatives that brought the system to its knees. It was the default on loans those derivatives tried to cushion that brought it around.
This guy has his head up his @ss.
For your average ignoramus on high finance, you hear figures in the trillions being thrown around concerning toxic assets in a parallel financial universe, totally unregulated. You don’t what to believe, but the questions are, weren’t these kinds of securities always around, and if so, how come they weren’t cause for concern before?
Canadians of a certain age will see some wry humor in all this. There was a party from the 30s to the 70s called Social Credit. They never gained federal control but they did rule some provinces. Their philosophy was that there is no need for anyone to lack money, since the government can print as much as they want and send it out. Or something like that. Everyone called that “funny money.” It seems to me the whole world has now come around to a form of Social Credit.
Yes and no, when people wrongly thought the could insurer against loss there was no down side, greed took over from there, supply exceeded demand, price exceed a supportable level, and the fools selling the junk warrants did not have the reserves to pay the loss.
The G-20 agreement says they will be regulated, which means they will be flushed.
When the structure is so dangerously unstable by design, the argument over what cause the initial shock is moot. Sooner or later, it will happen, and crash badly.
No they were no aways around, but there has been many similar scams. They happened because congress stuck it head if it's butt and refused to do their jobs for the past 15 years.
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Ah. cum'om...Both wife and I can recall those signs in the bank MANY, many years ago ==saying they (the banks) will adhere to the C R A rules and regs......I.E.? Give loans to folks who weren't able to pay them back....Mucho more than just 15 years,,,
The CRA does not and never did apply to the mortgage markets. Do a little reading, the election is over and the talking points are finished.
He’s talking about abstract, complex financial instruments. Basically, any secondary investment on a real thing. Think of buying an insurance on your neighbor’s credit card debt. You offer the policy to your neighbor’s credit card company for $10,000 pay out and each month get a nice check in the mail for $500. Pretty soon you offer ten more policies on different neighbors, borrowing the money using the original policy as collateral. Then you take those 11 policies and sell them for $2,000,000, and take the two mil and buy 30 policies.
Everything is humming along fine until it falls apart.
OK. That helps.
I think I’ll stick to the other kind.
Very simply, it’s selling debt and selling insurance on debt. And bundling the two together in various ways.
They used to be ways for investors to hedge their bets against a large gamble in a traditional stock purchase or commodity purchase. Figure it was like making two dates for a Saturday night in case one date fell through.
But the returns were too good to resist, and they became the primary investment for a lot of firms. They made two dates and kept both of them, like one of those situation comedies, but hilarity did not ensue,
'don’t shoot the messenger . . .'
Mortgage industry and Wall Street banking shills shot me many times. Right here on FR. They shot me in the back, too: Vile, lying, slanderous attacks. And nobody did anything about it.
I was complaining about mortgage industry deception in 2001. Went to the FBI three times in person complaining about death threats, drive by shootings, a bomb going off in my front yard; illegal wiretaps, computer sabotage, theft of banking records, etc. The cops were useless. FBI did not want to hear about it. Nobody did anything.
So now I say let them all 'Reap the Whirlwind.' Let them all perish in the financial crisis. So be it. There is a world food crisis coming, too. If so, let the survivors die of starvation . . .
Barney Frank shot you in the back and he is laughing because you’d rather blame capitalism and freedom instead of him.
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