$1 Quadrillion dollars of Unregulated Debt At Core of Coming Derivatives Crisis
This, in my opinion is the real crisis that is happening behind the scenes and is the elephant in the corner that no one is talking about. The real issue is when Bear Sterns, Fannie Mae, Freddie Mac and Lehman Brothers went under or were taken over this triggered by some estimates between $3-5 trillion dollars of these debt insurance contracts. That would be fine if these were regulated instruments of protection that had rules on the books for how much loss reserve you have to carry on your balance sheet against loss. But these were not those types of contracts.
They were instead unregulated insurance contracts between almost any two parties the each believe had a reasonable ability to function under the terms of the contract. They have been around since the early 1990’s, so this is how they have increased to a size of this proportion. Now with the GSE’s as the biggest real estate hedge funds (basically) in the U.S. and Bear and Lehman, who by the way was a top ten derivatives dealer so they were a counter party to many clients.
Now we have dominoes falling and no one knows what exposure other firms do so they are hesitate to lend with each other. Another problem was the fact of this being a method of generating fees for your firm, it was something that gained support and other players jumped into the game and this drove fees down and in essence under-priced risk on debt instruments that were being used in a bubble market. It is a very difficult situation and I would say it if plays out like it should then we would see many firms going out of business and the reform of the system to bring trust and prudent regulation into the markets.
Content Piece:
Despite all the blather and swearing-on-the-Bible pronunciamentos from establishment “pundits,” our house-of-cards financial system is not fundamentally sound. Expect such indices as the Dow to tumble even much lower when the Pandora’s box of derivatives is fully opened.
Believe it or not, the Dow is still not far from its all-time peaks, with a lot further to fall. The depression is still in its early stages. We are looking at $1 quadrillion of unregulated debt, with much of it at risk. (And we used to think $1 trillion was a lot.)
Banking crash hits Europe as ECB loses traction in money markets
This is getting more serious by the day. Looks the like European Central Bank or ECB is really seeing their banking freeze up as well. In the article they mention the five failed banks that have been rescued because of the massive strain in the system. Europe will need to de-leverage as well. UK especially, had a very over heated real estate market that was fueled by securitization of mortgages and hedging strategies against different bonds for default with insurance products such as credit default swaps or CDS. They mention the inter-bank lending market has collapsed and “The ECB is no longer able to inject liquidity because the money is just coming back to them again. This is extremely serious. If monetary policy is no longer working, there is a risk that the whole system will blow up in days.“ At this moment is when people need to not panic and let these bad institutions fail so we can clean the system of all this excess and set the right precedent so future banks will understand what happens when you conduct such reckless lending operations. I have read basic banking and lending theory and everything that has been pasted down in that area was ignored in all cases in this industry from making subprime loans to not carrying adequate reserves against losses on debt insurance contracts. We should never forget the basics and fundamentals.
News Article:
The Dutch-Belgian bank Fortis, Britain’s Bradford and Bingley, and Iceland’s Glitnir, were all partially or fully nationalized after failing to roll-over debts in the short-term money markets, while the French state pledged support for the Franco-Belgian lender Dexia after the share price collapsed on reports of a capital shortage.
“The European financial sector is on trial: we have to support our banks.” said French President Nicolas Sarkozy. He has reportedly ordered the state investment arm Caisse Des Depots to shore up Dexia, even though the bank is based in Belgium.
Libor Rises 431 basis points, Most on Record After Congress Rejects Bank Bailout
Well this shows how acute this situation is now it is time to let the market cleanse itself to get these excesses out of the way. The LIBOR or Interbank lending rate have gone up 431 basis points to bring the rate for banks to lend to each other to 6.88% which is so high that no one would want a loan at that rate.
News Piece:
The cost of borrowing in dollars overnight in London rose the most on record after the U.S. Congress rejected a $700 billion bank-rescue plan, putting an unprecedented squeeze on the global financial system.
The London interbank offered rate, or Libor, that banks charge each other for such loans climbed 431 basis points to an all-time high of 6.88 percent today, the British Bankers’ Association said. The euro interbank offered rate, or Euribor, for one-month loans jumped to a record 5.05 percent, the European Banking Federation said. The Libor-OIS spread, a gauge of the scarcity of cash, also increased to an all-time high.
Economist Max Keiser on the U.S. Dollar and Economy
I found this gentlemen online and I found that I do agree with his doomsday scenario on how this is going to play out in the end. I believe we have serious systemic problems in the U.S. economy and bailout or not I believe we have a real downturn in the works. Here a list of my Favorite videos I could find with Max talking about economics and the future. I am working on starting an interview series and this will be one of my the experts I would like to bring on to hear his advice.
Max Keiser - Special Liquidity Schemes, Gold and the Dollar
Afshin Rattansi & Max Keiser on Goldman Sachs & Toilet Paper
Economic Stabilization Act of 2008 (Bank Bailout Bill) - FAILS to Pass
I have been watching this live and this is very interesting times. The bill did not get a simple majority and lost by 22 votes and now we are seeing what Martial Law means. It was enacted Sunday night and now there is a motion to pass it by another vote which I fear is private based on party to shield them from political fallout out. I only saw 5 votes against suspending the rules of the house which is what can happen under Martial Law. With only 5 votes in the “nay” column, we can safely assume everyone except the most outspoken opponents voted for it so I know what I will be doing with my vote when it comes to re-election very very soon. The markets were down 700 points at one point and it could go lower. I will be covering this as it unfolds.
Bloomberg Release:
U.S. stocks plunged and the Standard & Poor’s 500 Index tumbled the most since 1987 after the House of Representatives voted down a $700 billion plan to rescue the financial system.
Sovereign Bancorp Inc. tumbled 66 percent and National City Corp. slid 52 percent, leading financial shares in the S&P 500 to an 11 percent slide. The MSCI World Index of 23 developed markets sank 6 percent, the most since its creation in 1970.
Citigroup to buy Wachovia banking assets
Along with National City, these are the next shoes to drop in this financial crisis. This is normal workings in the market after such a huge bubble that we should be accepting to see this happen. It would be more worrisome if we did not see bank failures and some plan to keep failed banks solvent. You might think that a plan like this is already in the works and you are correct. I am surprised to see Citigroup buying other banks asset when they are one of the most leveraged institutions in the market. What is also interesting is the fact they are opening themselves to $42 billion in bad loan exposure.
Press Release:
Citigroup Inc will buy the banking operations of Wachovia Corp in a deal brokered by the Federal Deposit Insurance Corp, the FDIC said on Monday.
The deal comes as authorities step in to rescue three European banks and as U.S. lawmakers prepare to vote on a $700 billion bailout of U.S. financial firms.
House Leadership Invokes ‘Martial Law’ to put pressure to pass bank bailout
Now this just gets better. Now after the tooth and nail fight last week to stop the Treasury and Congress from passing this bill that does not actually solve our economic issues is now being stepped up by Speaker of the House Nancy Pelosi and a large group of Democrats and Republicans. I did not know about this procedure and now after reading it is something that should only be used in an emergency. I would agree this crisis is serious but I am not sure if it is to this point yet.
Information:
The House Republican Leadership has announced its intention to have the House vote, before adjourning on Friday or Saturday, on several major pieces of legislation that are not yet available to House members in final form because behind-closed-door negotiations on the proposals are still going on.
The Leadership apparently intends to use a process known as “martial law” to allow these bills to be brought to the floor very shortly after negotiations are completed, with the result that Members of the House are likely to have virtually no time to examine and consider the details of the legislation before they will be required to vote on it.