Reinko

CDS Industry: Zero Sum Game or Ponzi Scheme?

The CDS is only a small fraction of total over the counter derivates that total to about 600 trillion of notional amount.

These contracts did cost about 14.5 trillion or roughly one US GDP.

In terms of leverage it is about 1:40.

As usual the problem with stuff like this: Only a small rimple of a few percent in the 600 trillion fantasy world triggers and entire GDP size chunk of money to be paid.

Hardly a 'protective umbrella' after my humble opinion.

Paulson and Bernanke: A Conspiracy of Dunces

Your step 3 makes some sense; the banks complain that accountancy rule 157 is pro cyclical in nature.

But first the healing of rule 157 needs to set in.

Don't forget that a lot of banks used rule 157 in their benifit; they wrote down about 200 billion of their own debt obligations...

That is about the same size of the reported down writings in the first year of this credit crisis, of course it is rather strange to write down your own debt obligations. This lays the axe at the roots of your credit ratings but the banks did it anyway.

Furthermore, all attention is now on the normal bank balances. There is a large shadow bank system behind it where the Basel 1 rules for bank reserves simply do not apply.

The real shit is of course nicely parked in the shadow bank system...

Where's the Bottom? Still Anybody's Guess

A fiat money system like we can can survive a long time if the money supply is under control. There even are some simple laws that guide what money growth should be:

M3 money growth = GDP growth + inflation growth.

But the US Federal Reserve stopped publishing M3 money growths years ago with the weird argument 'This number gives no additional economical insight' (or words like that).

Of course a fiat money system can blow itself up if it is too far in the debt, this is called a Ponzi financial unit.
In a Ponzi financial unit the debt is so high that even for the interest more borrowing is needed.

As soon as the debtors find this out, the plug will be pulled.

An example of such a Ponzi unit is the combined US financial sector;

Even this last year when the credit crisis started they borrowed over 1500 billion more, now the total debt is over 16,500 billion US$ and is growing 10% a year.

The whole problem only emerges when the speed of borrowing is far above GDP growth, this is the case for many years in the USA.

And that is simple to explain: Alan Greenspan never did see the dangers coming with entire sectors borrowing themselves to death...

The Bailout to End All Bailouts

I have just done some calculations and they say:

In the most rosy picture, toxic debt will rise with at least 900 billion US$ a year for the next two years.

Let me explain:

The US financial sector is about 20% of the US economy and as such is about 2800 billion US$ a year in gross domestic product terms.

The total debt of the US fin sector is right now 16507.5 billion US$.
That is far above the GDP and in the most rosy picture it grows on exponentially with 5.4% a year.
Since it is above the GDP and grows faster than the GDP, large parts of the 16507.5 debt are in fact toxic.

5.4% is about 900 billion new debt, hence toxic debt grow in the fin sector is at least 900 billion a year.

__________

At last: The toxic debt that is bought by Paulson is mostly consumer related; houses, cars, student loans and so on.

All in all: 700 billion is not enough, 2500 billion or more would be better...

Prepare to Sell Monday - Cramer's Mad Money (9/19/08)

For me, as a guy from Europe, the Cramer guy is a very interesting study in the social sciences. Any air time to that guy is the same as giving air time to Paris Hilton or Britney Spears.

That part of the USA I still do not understand: Why are celebrities so important? May be they play some role like the knights and dukes did in Europe centuries ago; they had the power and in the USA the people 'famous for being famous' have a lot of power in the sense they get air time every time they burp some silly stuff.

Like Barry Ritholtz lately pointed out: Cramer is part of the entertainment industry and not part of serious financial analysis.

Banks on the Verge of a Nervous Breakdown

Nice stuff, especcially the math remarks.

I myself have a degree in math (the queen of science they say but in practice it is the oil of science) and I was capable a long time ago to declare armageddon on the US financial sector.

So it is great news to observe that the Harvard Business School is trying to put elementary math on the curicculum...;)

FDIC Won't Run Out of Money, But WaMu May Be Toast

The article is correct in stating there is no true FDIC fund at all; it only measures how much banks have contributed. And these contributions are spend a long time ago.

All the money the FDIC spends is borrowed money via newly issued Treasuries. And by the way: maturing Treasuries are not paid with tax money but with fresh new Treasuries.

As long as there are sucker investors out there that think it is a sound investment, this circus will go on and on.

The real problem is: There are no reserves anywhere in the system.
Nowhere, it is all revolving loans & more Treasuries.

It's Time For a U.S. Sovereign Investment Fund

To bbzz24:

Ha ha, that is a great idea!
Just like the FDIC fund that is funded with (still) AAA rated Treasuries...

What Should the Government Do About AIG?

Oh oh, when will the Americans understand their own financial system?

Lehman is gone and thus the CDS markets are stirred a bit (CDS are credit default swaps, it is just a small 62,000 billion or 62 trillion US$ market).

Have you guys & girls still never looked at this nice total derivative stuff from the Basel based Bank for International Settlements?

Here is the link:

www.bis.org/statistics...

Does it not clearly say that Dec 2007 total contracts is 596,004 billion US$ so since it is not Sept 2008 total contracts are well above 600 trillion?

As a comparison, the US gross domestic product is about 14 trillion a year. Anyone trying to understand the present 'credit crisis' problems must think twice: The USA banks hold the overwhelming stuff of this 600 trillion joke...

That explains why AIG suddenly needs 70 to 80 billion US$ in order to deal with a 'sudden' liquidity crisis.

Use your brain and not your ass to write articles!

AIG Borrows From ... Itself

Total derivate positions of the US banks is a multiple of the world domestic product; one day this will crash.

Total derivate positions on credit default swaps are 62,000 billion US$.

Now Lehman has gone this market is stirred up a bit and the sudden liquidity needs for AIG are rather likely related to the problems on the CDS markets.

The next days will bring more wisdom to this, for the time being Forbes has a very good article on this:

www.forbes.com/home/20...

Suddenly 70 to 80 billion needed? It all has the smell of derivatives...

AIG Is Toast

I have some reading around this evening and most likely the AIG problems are derivate related. The credit default swap and the likes...

The last hurricane is not much of a problem: That simply belongs to the old ways insurance companies have worked and if it is ok they have the reserves to deal with stuff like that.

Also: They need 70 to 80 billion fast so CDS stuff is a far more likely culprit compared to evil hurricanes.

AIG: The Cramer Conspiracy Theory

I think Cramer is a great guy because he is what America is:

Dumb beyond belief and a big mouth.

The only thing we miss is: He is not obese... (That is a true anti American thing, may be he is a secret supporter of al Qaida because that explains his investment advices.)