Since writing the article "Mortgage Mess Means Trillions in Losses for Wall Street Banks", some people asked me why I think that the Fed would not bail out its masters with another $2.19 trillion? After all, weren't they already talking about distributing $1 trillion more allegedly to "reduce the unemployment rate?
The thought comes to mind that the first $1.75 trillion in so-called quantitative easing clearly didn't help reduce unemployment. Bernanke and his group of merry men may not be wise, but they are not so stupid that they don't understand this. So the real reason for the new counterfeiting proposal (a/k/a "quantitative easing") is something else. Perhaps, the money is really going to be printed to put cash into the hands of the errant banks to pay these claims? I really don't know. Certainly, printing this money is NOT going to do anything positive for the real economy.
In the article, I was remiss in not mentioning the impact of derivatives. Big banks issued a raft of credit default swaps (CDS), and synthetic RMBS, along with the real RMBS. The nominal value of the derivatives is many times larger than the underlying securities. Rather than a total of $7.3 trillion in RMBS, therefore, the total is probably close to $20 or $30 trillion when we include derivatives.
If the banks, for example, are unable to meet initial redemption demands on the underlying securities, a wave of CDS obligations will be automatically triggered. That means a tidal wave of additional obligations which also will be impossible to pay. That, in turn, means yet more claims upon non-bank counterparties who took up the risk that the banks could not pay. Not even the big bank slush fund (a/k/a Federal Reserve) will be able to deal with it, unless it is willing to steal the value of every last dollar saved by grandma, grandpa and every other careful saver.
As for those who suggest investing in puts or short positions in the big banks, you need to be reminded that the process by which other financial institutions will begin offering the failed securities for redemption will take a year or two. Very long dated puts are extremely expensive. Furthermore, there is a lot of room for artificially created stock prices and market manipulation, in the interim. And, then, there is the Federal Reserve, which continues to threaten to steal the value of money from savers and give it to speculators, through the corrupting mechanism of so-called quantitative easing. With the Fed supplying huge sums of money to its primary dealers, the stock market might boom until it suddenly flash crashes down to a reality-adjusted value of near-zero.
Are Fed officials honest or patriotic? Do they have personal integrity? Recent history suggests that, with a rare exception or two, they don't. So, I will not argue with those who tell me that they are persons willing to destroy America, if doing that helps their masters. We can only wait and see.
Disclosure: No positions