ashizashiz

Long Term, Financials Look Good

RE: "...I believe that Bernanke knows that if he waits until the credit markets unlock and the defaults are done, these companies will be worth much more..."

I have news for you Mr. Happy, it ain't.

Let's take Credit Markets, for example. And just to make things really interesting, I'm gonna ignore LIBOR and TED for the moment.

OK, project this: you are standing in front of a line of 100 people, stretched out perpendicular to your view.

OK, so you have 20 Billion Dollars. (Well, not actually real dollars: more like virtual dollars in guarantees....ya, debt.) Anyway...

You have 20 Billion Dollars. And the person who gave you the 20 Billion $ expects you to lend it out to 5 of the people in the line. And the LIBOR is coming in, and the TED spread is falling, and everything in 'the numbers' seems to point to this being a good way to make some cash: loan the $ out at a nice % of return, build on the 'principle', repay the 20 Billion $ and make a tidy li'l profit. Because that IS the name of the game here: PROFIT.

Hmmmm, but wait. There's a pretty good chance that at least 10-20 of these folks have a locked safe full of CDS "assets" that they are just praying that they can settle...not through continuing the lending cycle down to the consumer, but through holding onto the cash until their swap-based exposure comes to light, and then having the reserves on hand to settle margin calls without having to go belly up. Hmmmmm....kind of a crap shoot here. To whom do you loan the $$$??? Whom do you trust? They all have their hands out. They all appear sincere and well-mannered.

Oh ya. Another dilemma. You yourself also have a lot of vulnerability with regard to CDS and other worthless instruments gathering dust in your own vaults. AND, there's a pretty good chance---because these derivatives are sold and traded through dozens, if not hundreds, of unregistered, unrecorded transactions---that you may have to face the piper sometime down the road as some OTHER institution gets called to the carpet and one of your CDS bundles is unfortunately involved in the maelstrom.

LIBOR is down, TED is down...things look good. But the reality of the CDS worm leaves the LIBOR and TED spreads inconsequential to your decision-making processes.

Your choice? You sit on the 20 Billion $$$ and pray it's enough to cover your vulnerabilities as the swaps hit the fan over the coming weeks and months. (Of course, the dudes who lent you the 20 Billion are pissed and they show up with guns. Hmmm, what to do what to do?)

"Risk" has changed in ways we could never have imagined 30 years ago. Due to the unregulated nature of the Derivatives market, and because the bonds and other instruments being 'insured' didn't actually have to be 'one degree of separation' from the seller, we have a multi-trillion dollar, multi-trillion tentacled parasitic beast just waiting to bore through the leg of a few major financials....and then it's bye bye baby.

In your world Michael, there will come a time when people will once again be able to service their growing debt, where real capital growth will lead to economic expansion, and where the Fractional Reserve system will once again find itself on solid footing. BUT THAT CAN NEVER HAPPEN AGAIN MICHAEL.

This time we're talking tens of TRILLIONS of dollars of worthless "assets" in the vaults and on the ledgers of the major and small and every size financial inbetween...WORTHLESS!... Unserviceable debt. So it's not "interesting" ("...The most interesting thought with respect to this transparency is why the Federal Government didn't make companies show how much of this debt was on the books....") that the FED left this part of the process out of its playbook...it is criminal. And until ALL of the books are opened and all of the trillions and trillions of dollars in CDS-based debt is broght into the light, the financial system guided by the principles of Fractional Reserves is dead.

[ED: Comment edited to remove abuse.]