Posted on 03/29/2013 4:16:03 AM PDT by blam
Wall-Street Craziness Is Back
Wolf Richter, Testosterone Pit
March 29, 2013
The craziness on Wall Street, the reckless for-the-moment-only behavior that led to the Financial Crisis, is back.
This time it’s Citigroup that is once again concocting “synthetic” securities, like those that had wreaked havoc five years ago. And once again, it’s using them to shuffle off risks through the filters of Wall Street to people who might never know.
What bubbled to the surface is that Citigroup is selling synthetic securities that yield 13% to 15% annually—synthetic because they’re based on credit derivatives. Apparently, Citi has a bunch of shipping loans on its books, and it’s trying to protect itself against default. In return for succulent interest payments, investors will take on some of the risks of these loans.
The first deal of this type was negotiated privately with Blackstone Group and closed last December. This second deal will be open to a broader group of institutional investors. Soon, similar synthetic securities will be offered to the treasurers of small towns in Norway.
But shipping loans are a doozy. After its bubble, the shipping industry fell into a deep crisis. It’s such a problem that Andreas Dombret, member of the Executive Board of the Bundesbank, listed it as one of the four risks to overall financial stability in Germany—in Hamburg alone, there were over 120 shipping companies.
He fingered two causes: shipping rates that had plunged during the Financial Crisis and never recovered, and continued overbuilding of ships of ever larger sizes, driven by “cheaply available financial means,” a direct reference to the easy money handed out by central banks.
And then he waded into the bloodbath in Germany: retail funds that blew up and were shuttered, banks whose shipping portfolios suffered heavy hits...
(snip)
(Excerpt) Read more at businessinsider.com ...
Two Citi-bankers, discussing these securities:
"Who is going to buy this crap?"
"Isn't it good? A Norwegian would."
No matter, the market will police itself. And then be bailed out by the taxpayers, because regulation is baaaaaad.
Oh, just damn! LOL
LOL!
http://www.youtube.com/watch?v=lY5i4-rWh44
Thanks for posting, blam. Very interesting. Synthetic securities...credit derivatives...
“The supremacy of finance capital over all other forms of capital means the predominance of the rentier and of the financial oligarchy; it means that a small number of financially “powerful” states stand out among all the rest. The extent to which this process is going on may be judged from the statistics on emissions, i.e., the issue of all kinds of securities.”
III. FINANCE CAPITAL AND THE FINANCIAL OLIGARCHY
V.I.Lenin
Thanks, Blam
From Wikipedia.
“A funded credit derivative involves the protection seller (the party that assumes the credit risk) making an initial payment that is used to settle any potential credit events. (The protection buyer, however, still may be exposed to the credit risk of the protection seller itself. This is known as counterparty risk.)”
I have approximately 30% of my retirement portfolio in stocks. Sometimes, I think that I should have been more aggressive in the market about a year ago, but I know this is a house of cards that will collapse eventually. However, watching the markets expand at a furious pace without any justification for this increase is making me more nervous about my liquid assets in the banks. I am actually thinking about taking half of my money out of the banks right now just in case.
Where it pretty much always goes wrong is when the derivatives portfolio is unbalanced, as when someone decides to gamble on the market going a certain way and loads up. If the gamble is right they make a ton of money. If it goes against them it is a financial disaster.
Ain’t shell games grand.
Soon, similar synthetic securities will be offered to the treasurers of small towns in Norway.
Two Citi-bankers, discussing these securities:
“Who is going to buy this crap?”
“Isn’t it good? A Norwegian would.”
Pardon my faulty memory, but isn’t this the sort of thing that destroyed Iceland’s banks?
Not a foolish move at all. But buy tangible goods that will hold their value. Your money will lose its purchasing power at home in a safe just as fast as it will in a bank.
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