The Black Swan

[Latitude9.5]

Gold was money long before paper was and gold will be the currency of last resort.

The stock market is how I make money, I've been day trading for several years, I just don't really talk about the economy and politics here because it doesn't have anything to do with sailing. I keep a blog on the economy that I pretty much update daily.

[TabbyCat]

Sean,
If you pay off your boat, then your money is tied up in a depreciating asset. If you ever need that money or want to invest it, then you would typically have to sell the boat or refinance it to get the money out. You might not be able to re-finance if credit is tight. You want your money working for you, paying you a monthly income. We're wondering if there is a place outside the USA to invest savings -not necessarily Europe. You might want to contact a financial advisor, since this advice is worth what you paid for it.

[Extemporaneous]

What's the latest prognosis?
Anyone?
Is the real ride just about to begin? Or is it a year away?
Anyone?

Extemp.

Originally Posted by TaoJones

In a stunning story from today's Telegraph (London) comes word that leads me to believe this may be the day we will look back on in future as the day the Black Swan arrived; the day the unthinkable became plausible; the day a catastrophic worldwide financial meltdown reached the tipping point.

* * * * *

"Bank losses from credit crisis may run to $1,600bn, warns Bridgewater

"By Ambrose Evans-Pritchard

"Last Updated: 1:59am BST 08/07/2008

"Bridgewater Associates has issued an apocalyptic warning to clients that bank losses from the worldwide credit crisis may reach $1,600bn (£800bn) [$1.6 trillion], four times official estimates and enough to pose a grave risk to the financial system.

"The giant US hedge fund said that it doubted whether lenders would be able to shoulder the full losses, disguised until now by 'mark-to-model' methods of valuing structured credit.

" 'We are facing an avalanche of bad assets. We have big doubts as to whether financial institutions will be able to obtain enough new capital to cover their losses. The credit crisis is going to get worse,' said the group in a confidential report, leaked to the Swiss newspaper SonntagsZeitung."

* * * * *

For the full report, go to:

Bank losses from credit crisis may run to $1,600bn, warns Bridgewater - Telegraph

How is this significant to the lives of cruisers?

Because anyone requiring credit to effect the purchase of expensive items like sailing vessels will discover that he/she will be competing for that credit in an already severely pinched credit market, thereby driving up the cost of financing. The banks, themselves, will be beating the bushes and looking under every rock for any available dollar to help meet their capital requirements.

It should be obvious that only governments can provide the necessary capitalization to prop up the financial system. And, in an almost cruel side note, this story runs on a day when it is revealed that the US government may have to nationalize the giant GSEs (Government Sponsored Entgerprises) Federal National Mortgage Association (FNMA or Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac).

Think carefully about the inferences to be drawn from the last paragraph of the article:

"If Bridgewater is anywhere near correct, governments alone have the wherewithal to rescue the system. This would mean the de facto nationalisation of the banking systems in the US, Britain and Europe."

TaoJones

[TaoJones]

If anything, Extemp, things are worse than when I wrote that, but this isn't the worst it will get. The author of the piece I provided made reference to "mark-to-model" accounting and the thinking at the time was that that option was no longer going to be available to those giant financial corporations that were technically bankrupt (liabilities exceeded assets with no potential to turn it around).

At the last moment, however, the FASB in the US (Financial Accounting Standards Board), after much back-room arm-twisting, decided to let mark-to-model remain the standard practice.

What does that mean?

It means that the "too big to fail" financial institutions can list the supposed value of the toxic assets on their balance sheets at whatever value they want to claim. Not surprisingly, none of them lists them at less than 100% of their face value, despite the fact that no one but the federal government would even consider paying more than pennies-on-the-dollar for them.

Actually, because there is no market at all for the toxic assets, whatever the government doesn't purchase with taxpayer funds at full face value is technically worth zero, nothing, nada, zilch. The reason there is no market is because it would confirm the truth that even if a buyer stepped forward, the offer for the virtually worthless junk would be very close to zero. Once a valuation is established in the open market, the mark-to-model fantasy collapses and the bankrupt institutions are exposed for the hollow shells they are.

This outcome is unacceptable politically and economically, so everyone involved accepts the balance sheets as if they're a true reflection of the economic health of these giant institutions, pretending to believe them.

Will it succeed? In the short term, yes . . . in the long term, however, it's highly unlikely. Should people be irate about this charade? It depends . . .

Do you want to let the crash happen now . . . just get it over with and begin the process of trying to put Humpty Dumpty back together on the other side of the collapse? Or do you prefer to maintain the fantasy, putting off the inevitable as long as possible . . . but understanding that that only magnifies the severity of the eventual collapse.

Pick your poison.

TaoJones

[speakeasy]

Tao, my studies agree with your analysis completely. Not to mention that the Fed audit showed them lending $16 Trillion to banking systems around the world. The Fed Audit - Newsroom: U.S. Senator Bernie Sanders (Vermont). I seem to remember reports at the time, in '08 that indicated that number as $28 Trillion, but why quibble about a few Trillion, eh?

Frankly, I wonder who authorized our Federal Reserve to push all that "money out of thin air" to the foreign banks in the first place. It appears to me that the financial elites worldwide have more loyalty and cohesion with each other than they do to their own nation. I knew that was the case throughout Latin America, but didn't realize it was a global phenom. Globalization is producing Corporate Feudalism. We are becoming the serfs of said system as first world wages keep falling to the level they are in China and the third world.

Good time to go a'cruisin' fellow serfers.

[David_Old_Jersey]

Originally Posted by David_Old_Jersey

It never existed. The Banks and other financial institutions effectively printed it. Instead of Dollar Notes they used plain old A4 paper and numbers in computers. Then it got spent / injected into the real (and not so real) economy. How could it all go wrong.........

Unravelling the USD1.6 Trillion (I have heard higher and lower - no one actually knows) is the problem. It should be impossible without making 1929 look like a blip. But the plan is to do exactly the same as that which created the problem - pretend everything will be ok and hope everyone else does the same. To be succesful this will also involve not doing anything equally as dumb over the next 20 odd years! Time will tell on that last one..........

FWIW I think the US will pull it off - cos' they still write enuf of the rules and do understand the potential problem that could arise by playing things too straight. The Uk? I think we have a few more structural issues with our economy, but our problems are less - but still.......

I am surprised that I was so optimistic back then

[Extemporaneous]

Thanks TaoJones,
I'll hang on then!

Good Luck to us All!
Extemp.

And yes POISON!
To bad there is no antidote for the poisonous greed that got us here.

Originally Posted by TaoJones

If anything, Extemp, things are worse than when I wrote that, but this isn't the worst it will get. The author of the piece I provided made reference to "mark-to-model" accounting and the thinking at the time was that that option was no longer going to be available to those giant financial corporations that were technically bankrupt (liabilities exceeded assets with no potential to turn it around).

At the last moment, however, the FASB in the US (Financial Accounting Standards Board), after much back-room arm-twisting, decided to let mark-to-model remain the standard practice.

What does that mean?

It means that the "too big to fail" financial institutions can list the supposed value of the toxic assets on their balance sheets at whatever value they want to claim. Not surprisingly, none of them lists them at less than 100% of their face value, despite the fact that no one but the federal government would even consider paying more than pennies-on-the-dollar for them.

Actually, because there is no market at all for the toxic assets, whatever the government doesn't purchase with taxpayer funds at full face value is technically worth zero, nothing, nada, zilch. The reason there is no market is because it would confirm the truth that even if a buyer stepped forward, the offer for the virtually worthless junk would be very close to zero. Once a valuation is established in the open market, the mark-to-model fantasy collapses and the bankrupt institutions are exposed for the hollow shells they are.

This outcome is unacceptable politically and economically, so everyone involved accepts the balance sheets as if they're a true reflection of the economic health of these giant institutions, pretending to believe them.

Will it succeed? In the short term, yes . . . in the long term, however, it's highly unlikely. Should people be irate about this charade? It depends . . .

Do you want to let the crash happen now . . . just get it over with and begin the process of trying to put Humpty Dumpty back together on the other side of the collapse? Or do you prefer to maintain the fantasy, putting off the inevitable as long as possible . . . but understanding that that only magnifies the severity of the eventual collapse.

Pick your poison.

TaoJones

[anotherT34C]

Tao, can you define 'short' and 'long' term? I'm wondering, because it seems that if the fantasy pricing can persist for long enough, it becomes real, doesn't it? Isn't the near zero value of those assets also something of a fantasy as well? Even a toxic mortgage has a physical house that's presumably worth something in terms of labor and materials. Even if the whole financial edifice collapses, the houses, roads, automobiles, universities, bridges, educated workforce, favorable demographics, and so on, will remain.

Looking at our present Gini value, maybe shaking up the paperwork wouldn't be so bad?

[TaoJones]

Originally Posted by anotherT34C

Tao, can you define 'short' and 'long' term? I'm wondering, because it seems that if the fantasy pricing can persist for long enough, it becomes real, doesn't it? Isn't the near zero value of those assets also something of a fantasy as well? Even a toxic mortgage has a physical house that's presumably worth something in terms of labor and materials. Even if the whole financial edifice collapses, the houses, roads, automobiles, universities, bridges, educated workforce, favorable demographics, and so on, will remain.

Looking at our present Gini value, maybe shaking up the paperwork wouldn't be so bad?

While at base there is a physical asset that has some intrinsic value, the problem is the "assets" that derive from that physical asset. First, some genius got the idea of bundling thousands of mortgages with various levels of risk, then selling off pieces of these mortgage bonds in tranches based on an investor's chosen risk/return sweet spot. The "asset" the investor purchased may derive from a real physical asset, but what he bought was a piece of paper.

Why would anyone trade capital for a piece of paper? To end up with more capital, naturally. And the paper was safe, too . . . it had been given a AAA credit rating by the credit-rating companies. Little did the investor realize that the creator and marketer of the bonds had paid the credit-rating companies for those AAA ratings, or that the ratings companies had very little understanding of what it was they were being paid to rate.

When the underlying mortgages began to default at an alarming rate, it called into question the assumed risk. A closer look revealed that the Mortgage Backed Securities were not only not AAA, they were closer to junk because of the true risk of default on the underlying mortgages, but investors were paid rates of interest as though the securities were the safest possible investments.

Not surprisingly, most of those who invested in these toxic assets are unhappy about it. Only the Federal Reserve has willingly taken them onto its balance sheet as collateral for the billions of dollars in bailout funds it created to save the giant financial institutions from collapse . . . at full face value. Others, like pension funds, who resent being sold junk at premium prices are suing.

Bank of America recently settled one such lawsuit from New York Bank Mellon for $8.5 billion . . . not the first such settlement, nor the last - they face many more similar suits. Don't be surprised to see B of A, the largest bank in the US, fail soon and get broken up and parcelled out amongst the surviving financial institutions.

B of A can't even prove legal title to many, if not most, of the assets it tries to foreclose on, and the MERS system that the financial institutions created to get around the laborious title transfer process is itself likely fraudulent and under attack in courts everywhere. If the banks can't prove title, they have no standing to bring a foreclosure action. Thus, the physical reality of a house or bridge or whatever is meaningless if clear title is impossible to establish.

And Bank of America is far from unique in having perpetrated such a complex web of lies, deceit and fraud. All of the remaining financial giants are in it up to their necks, arguing that they must have immunity from prosecution or the entire American economy will collapse, taking the economies of the western democracies with it and threatening the economy of the entire world. In that, they're probably correct, but even if they're wrong, as long as they can convince those in positions of authority that they're right they will be bailed out.

That's where we are now.

As far as what is short term and what is long . . . who knows? If that were knowable, it would be the most valuable piece of information imaginable. Since it isn't, everyone must do their own homework, calculate the odds and roll the dice.

Good luck to us all.

TaoJones

[anotherT34C]

Thanks, Tao. Informative as always.

Wondering... If the federal reserve, as lender of last resort, implicitly guarantees these assets with the promise of bailout, does the AAA rating become justified?

Also wondering... Why does the FR not refinance and guarantee the assets 'at the bottom' by shoring up the holders of mortgages they can no longer afford? Would this also not justify the AAA rating of the derivative, while also keep houses in the hands of people rather than banks, which is presumably desireable...

I also can't shake the metaphorical feeling that the USA is an institution with top notch hardware, but we seem to have a software problem.

[twoblocktom]

This is all so far above me. I'm lost. It seems I'm left to squander in my own filth. I don't have much money left to live, let alone invest. What's left for us....riot???
I'm not afraid of work, but what I know is what allowed me to live long enough to see this mess. I'm sick of lemon aid !!!

[Extemporaneous]

Originally Posted by anotherT34C

Thanks, Tao. Informative as always.

Wondering... If the federal reserve, as lender of last resort, implicitly guarantees these assets with the promise of bailout, does the AAA rating become justified?

I think that's the problem! The FR is losing the potential to properly guarantee these assets. Yes they can pay with additionally printed (non backed) money but that causes inflation! They could possibly combat inflation by raising interest rates which would increase there own cost to borrow (gov bond rates?) and absolutely cause them to fail.
Now to be clear..... I know nothing and knew even less a couple of months ago, but this is what I understand to be at least part of the problem (with the high debt) and how it relates to default (which they won't). They just keep printing money (their only choice) which will (and is) cause inflation and then hyper inflation.
In terms of renegotiating their interest rate on their debt, it's as low as it can go now (they set it)! And they're buying their own bonds (I guess that mean the American public is) now, so that avenue is DONE.

PLEASE straighten me out where I'm wrong in my understanding.
(And boy do I hope I've misunderstood).

Extemp.

[anotherT34C]

As I understand it, TARP wasn't printed money per se, but rather a line of credit that would show up on the balance sheet as addition to the national debt.

Having the FR add to the national debt seems to be a stealthy way to print money, as the FR seems to say, "look, we're printing money today, but we promise to destroy it at some later date" *wink* This presumably keeps inflation at bay, but we all know that this type of intragovernmental borrowing never actualy gets payed back, it simply gets inflated away over the years.

An interesting question then, is how large an intragovernmental debt can you sustain (interest on it is essentially 0%) before your currency inflates away? I suppose Japan shows that it's at least 200% GDP. It may be more for the holder of the dollar.

[AllezCat]

These subjects are very hot in the blog-o-sphere presently.
I sure don't understand it so well but here's my simplistic view:
The treasury department issues bonds - treasuries.
The Federal Reserve is a private organization run by the banks - prints our money - which must be paid back - with interest.
The MBS are riddled with lies fraud etc on every level - from mortgage holders lying about their income - banks issuing the loans to those whom they knew could not repay on bubble inflated assets. However, the greatest fraud occurred with the rating agencies who were effectively paid to issue "AAA" rating on junk.
Other entities invested in these bonds based on the rating.
The next level of fraud/subterfuge is the fed "printing" money to pay for junk bonds, at face value, from the big banks. They also print money to pay for treasuries!!!!
nothing wrong with this - will end well...

i like this guy Gonzalo Lira:
Gonzalo Lira: Mr. Cheney’s Victory Lap

and zero hedge for financial stuff:
ZeroHedge | On a long enough timeline the survival rate for everyone drops to zero

[David_Old_Jersey]

The irony of course is that the banks and financial institutions that would all fail (without continued Govt support - actual cash or implicit guarantees) are those making money* from betting that very thing will happen.

*it's not real money of course, not being based on actual wealth.......but it could be part of the solution.

If I was Obama, for the next round of $1 Billion QE I would create a lottery to repay half the debt of those with mortgages on occupier homes, max the state average (cash goes to the banks, as usual )............as long they accept that the other half of the debt is 100% legit (and waive any future suing rights).....will be a drop in the ocean (and arguably unfair on those without mortgages).........but the bonus could be a feelgood factor (and light at end of the tunnel, for the people, business and wall street).........I would run the lottery on Election day in 2012, with payout the day after