Derivatives and Bank Collapse - The Scam That Went Largely Unreported 11 comments
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Idiocy is usually described as "endlessly repeating the same process, hoping for a different result". Lawrence Summers, Timothy Geithner, Nancy Pelosi, Joe Biden et al are straining at the leash to get the Bailout Ball rolling once again. The stabilization of the financial sector, as elusive as it has been so far, has become the Holy Grail of Economic salvation. That makes $8.5 Trillion worth of trying and $0 of result. The Knights of the Oval Table are gathered to plan their mission as their beleaguered subjects are trying to batter down the castle gates. It's no small wonder that Geithner wants to get the money out the door as soon as the end of this week.
The most recent report from the Comptroller of the Currency seems to have gone unnoticed in Washington and the press. If banks are not lending because of increased capital requirements in the face of Credit Default Swaps, other derivatives and loan defaults, then the report goes a long way in describing exactly why.
Credit Exposure to Capital ratio. Amounts in $Millions
click to enlarge
The assets comprise largely of Real estate, residential mortgage, student, car and credit card loans. With the rise in defaulting mortgages, delinquent credit card and other debt, the problem can only get worse. To recapitalize the banks to the point where exposure is low enough to encourage lending would take trillions and that's before any more fallout from the collapsing economy. Lending also requires creditworthy borrowers, the number of which is in a nosedive. The $165 Trillion in notional derivatives and the associated credit risk related to $15 Trillion in Credit Default Swaps illustrated below is the poison apple that the taxpayer has been forced to bite into.
When the "credit crunch" began and Washington began the rush to solve the problem with taxpayer cash, no accounting of this derivative nightmare was ever brought to bear. In all the deliberations and press releases there was not a single mention of the fact that the primary cause of the bank collapse was due to these "instruments of mass destruction". It was widely discussed in the blogosphere but, like the real reasons for invading Iraq, never made it in to the mainstream media. As with Iraq, one would have to assume that the reason was to obfuscate the facts and cajole a shocked public into accepting as a remedy whatever was proposed by Paulson, Bernanke and Bush. The latter had to be completely aware of the OCC data at the time and to assume that they did not is simply not credible. It would have been completely obvious that $700 Billion would do absolutely nothing to alleviate the crisis. As witnessed in the ensuing months since the TARP bill, how the money was used has been obfuscated and concealed. This was always a scam.
Even as the economic indicators broke one record after another, the recipients of the TARP funds were selling Credit Default Swaps to each other, betting on each other's downfall. They knew the game was up and wanted to profit on the way down as much as they had on the way up. All the major Banks on Wall St. are seeing mounting losses and the failure of one will increase the losses of the other. They are joined at the hip and will fall like a house of cards.
The question begs to be asked, and this is where the cynic in me dominates, what's the plan? When they do fall, will the Government nationalize the last one standing for the good of the country and socialize even more of the losses? This would be the coup of the millennium and give birth to a new Governmental paradigm. To have this complete before the economy and society have completely broken down would be a good reason to declare a real National Emergency and declare Martial Law, the legislation, executive orders and infrastructure of which are already in place. How can one not be a cynic when we reflect on what has happened so far?
The numbers are in and the scam stands exposed to those who will look. Which way the story unfolds from here is anyone's guess. But I am ready to bet that Congress will not include the OCC data in the upcoming debate on the next round of cash for the Banks.
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This article has 11 comments:
At the end of the day, it matters not one jot precisely how many times those idiots sold each other a dead donkey. Their paper debts to each other are easily written down, because they represent nothing of value. It's pretend money that has been completely dissociated from any tangible assets.
What we have, in the end, is a country that has industrial, natural, and human resources. Whether it can grow up and start behaving rationally is immaterial: if self-indulged citizens won't get to work, a new crop of willing workers will happily take their place.
I can only pray -- fervently -- that the inevitable corrections will not unduly penalize those who did NOT play the credit game. If I'm debt-free, lived within my means, and spent only the money I had, then I shouldn't be burdened with my neighbor's payments. Realistically, however, I expect to be severely punished for my lack of indiscretions.
Singhash my best wishes and commiserations. I agree your worst fears wiil probably be realised.
IMHO, all what is needed is an International Clearing House, where
all non balance sheet credits and debits of all major banks are summed up and then matched (credits against debits between banks) The net sum would probably come down from trillions to billions and once the net figures are established, a settlement can be made.
On Jan 29 08:59 AM MauiJeff wrote:
> The whole derivative market is a casino. Most people have no ability
> or inclination to understand how it works. When the casino went bust,
> the banksters held up the taxpayer to pay off casino debts. We are
> witnessing the biggest rip off of all time. United States citizens
> are asleep upstairs and the bankers are in he house taking everything
> they can get. Criminal behavior in now being passed off as capitalism.
> After the looting is complete our bankrupt country will fall into
> chaos and then tyranny. Wake up people, this is no recession, it's
> the collapse of our country.
No sane investor is going to pump capital in to a bank without inspecting it's balance sheet and credit exposure.
With the OCC data out in the open, any further capital injection or purchase of "bad assets" without bringing the data and the balance sheets to the table and dealing with the neutralization of the derivative instruments only amounts to either incompetence on a monumental scale or, more likely, a deliberate fleecing of the taxpayer.
On Jan 29 08:59 AM MauiJeff wrote:
> The whole derivative market is a casino. Most people have no ability
> or inclination to understand how it works. When the casino went bust,
> the banksters held up the taxpayer to pay off casino debts. We are
> witnessing the biggest rip off of all time. United States citizens
> are asleep upstairs and the bankers are in he house taking everything
> they can get. Criminal behavior in now being passed off as capitalism.
> After the looting is complete our bankrupt country will fall into
> chaos and then tyranny. Wake up people, this is no recession, it's
> the collapse of our country.
On Jan 29 09:36 AM ecliptix543 wrote:
> mauijeff - I agree on the collapse theory. So far, I've set up a
> hedging strategy... For every 100 shares I buy, I also buy 100 rounds
> of ammo. One of the two is likely to prove the more prudent investment.
> Which one is anyone's guess.
www.rgemonitor.com/glo...
The assumption is that premiums charged for CDS's adequately represent the amount of risk transferred.
Remember, these are the same banks that could not even safely extend something as simple as a retail mortgage!
If risk is not reflected in premium, then the uncollateralised risk in the system has increased every time a CDS was sold.
While agreeing that the notional value of the CDS is not all at risk, if the premium inadequately reflected the notional risk by only 10% then the figures in the article imply unrealized interconnected losses of around $1trillion. And the author only cites 4 banks!
Assuming that each CDS was "resold" 3 times, this still represents a roughly $330 billion potential loss for the 4 banks, which is enough to wipe out the remaining common equity in all of them.
I am not confident that my analysis is complete, but I think there are still big questions here. Are you REALLY confident that this market is not in at least as big of a mess as plain vanilla mortgages?
On Feb 01 09:35 PM Ronald Pires wrote:
> I don't have any problem with the general thrust of your article,
> but tossing around notional amounts of derivatives is pretty much
> useless (and potentially quite misleading) as a measure of the ultimate
> exposure (potental losses) in the market. See "Everything You Wanted
> to Know about Credit Default Swaps--but Were Never Told" by Peter
> J. Wallison for a good explanation of this.
>
> www.rgemonitor.com/glo...