even with the $700b bail out, THIS is what has everyone worried still...THIS is probably the real root of the problem...if you haven't heard it by now (I first read about them in January), you will hear more about them as time goes on... Credit Default Swaps...explained well here by Ben Stein...
QuoteThe headlines scream doom. There are endless references to the economic situation being "the worst since The Great Depression." Immense names in finance have collapsed and sunk beneath the waves of the financial crisis. Please allow me to try to explain a bit of what's going on.
First of all, all you have to do is look around you to see that in terms of daily life, we are not anywhere near The Great Depression. Unemployment is barely about six percent. It was 25 percent at the nadir of The Great Depression. Real per capita incomes adjusted for inflation are at least five times what they were during The Great Depression. Airplanes are full. High-end restaurants are full. Prices are painfully high for food. These are not signs of a Great Depression.
On the other hand, the losses in financial products have been devastating. The Dow is off 23 percent from its high in 2007. Financial stocks even after the recent rally are off staggeringly. The biggest insurer in America has become a basket case.
Most of all, there is REAL FEAR in the air. Decent, hard working people are terribly afraid as they see their life savings melt away. Retirement has become just a forlorn dream for tens of millions of Americans.
How did it happen?
Here s one big part of the answer. First, the alert reader will notice that Ben Stein said many times that the amount of money at risk in the subprime meltdown was just not enough to sink an economy of this size. And I was right...to a point. The amount of subprime that defaulted was at most - after recovery in liquidation - about $250 billion. A huge sum but not enough to torpedo the US economy.
The crisis occurred (to greatly oversimplify) because the financial system allowed entities to place bets on whether or not those mortgages would ever be paid. You didn't have to own a mortgage to make the bets. These bets, called Credit Default Swaps, are complex. But in a nutshell, they allow someone to profit immensely - staggeringly - if large numbers of subprime mortgages are not paid off and go into default.
The profit can be wildly out of proportion to the real amount of defaults, because speculators can push down the price of instruments tied to the subprime mortgages far beyond what the real rates of loss have been. As I said, the profits here can be beyond imagining. (In fact, they can be so large that one might well wonder if the whole subprime fiasco was not set up just to allow speculators to profit wildly on its collapse...)
These Credit Default Swaps have been written (as insurance is written) as private contracts. There is nil government regulation of them. Who writes these policies? Banks. Investment banks. Insurance companies. They now owe the buyers of these Credit Default Swaps on junk mortgage debt trillions of dollars. It is this liability that is the bottomless pit of liability for the financial institutions of America.
Because these giant financial companies never dreamed that the subprime mortgage securities could fall as far as they did, they did not enter a potential liability for these CDS policies anywhere near their true liability - which again, is virtually bottomless. They do not have a countervailing asset to pay off the liability.
This is what your humble servant, moi, missed. This is what all of the big investment banks and banks and insurance companies missed. This is what the federal government totally and utterly missed. This is what the truly brilliant speculators in these instruments did not miss. They could insure a liability they could also create and control. It is as if they could insure a Cadillac for its value upon theft - but they could control what the value the insurer had to pay off was. The insurer thought it might be fifty thousand dollars - but it was manipulated into being two million.
This is the whirlpool sucking down finance.
Now, we are about to have a similar phenomenon happen with commercial mortgage debt, debt from mergers and acquisitions, credit card debt, and car loan debt. Many trillions of dollars in Credit Default Swaps have been sold on all of this, and the prices of all of them have fallen and can be made to fall more.
As I said, the pit of loss is bottomless. Warren Buffett, the smartest man of all time in the world of finance, has called financial derivatives - of which Credit Default Swaps are a prime example - "weapons of financial mass destruction." And so they are. As with the hydrogen bomb, no one thought they would ever be used to end the world. But unless someone figures a way out - and maybe the new RTC is and maybe it isn't - we are in real peril. This should never have happened. Now that it did happen, should the taxpayer pay to make the billionaire speculators whole on their bets? What the heck is to be done?
http://finance.yahoo.com/expert/article/yourlife/109609;_ylt=AinwUoVI2DyG4diV9eLaZYC7YWsA
Perhaps they should be outlawed? What are their positive features?
Quote from: RiversideGator on September 24, 2008, 11:07:21 PM
Perhaps they should be outlawed? What are their positive features?
well, massive positive features if you are one of the speculators who bought the contracts. also, they were considered easy $$ for the banks and ins. cos. writing the contracts. that is - until all hell broke loose in the financial world.
Great Article Driven!
It really helps drive this home to the many people who are wondering what the heck happened over the past year to cause this mess
Outstanding article! Especially this part...
QuoteThe headlines scream doom. There are endless references to the economic situation being "the worst since The Great Depression." Immense names in finance have collapsed and sunk beneath the waves of the financial crisis. Please allow me to try to explain a bit of what's going on.
First of all, all you have to do is look around you to see that in terms of daily life, we are not anywhere near The Great Depression. Unemployment is barely about six percent. It was 25 percent at the nadir of The Great Depression. Real per capita incomes adjusted for inflation are at least five times what they were during The Great Depression. Airplanes are full. High-end restaurants are full. Prices are painfully high for food. These are not signs of a Great Depression.
Quote from: stephendare on September 25, 2008, 01:01:05 PM
Quote from: BridgeTroll on September 25, 2008, 12:35:58 PM
Outstanding article! Especially this part...
QuoteThe headlines scream doom. There are endless references to the economic situation being "the worst since The Great Depression." Immense names in finance have collapsed and sunk beneath the waves of the financial crisis. Please allow me to try to explain a bit of what's going on.
First of all, all you have to do is look around you to see that in terms of daily life, we are not anywhere near The Great Depression. Unemployment is barely about six percent. It was 25 percent at the nadir of The Great Depression. Real per capita incomes adjusted for inflation are at least five times what they were during The Great Depression. Airplanes are full. High-end restaurants are full. Prices are painfully high for food. These are not signs of a Great Depression.
This is a great article based on the available information so long as one is unaware that the very metrics that we use in order to calculate the terms do not correlate with each other..
For example, the unemployment numbers.
This was something that I discovered in the midwest after NAFTA caused the economy to fail in the smaller industrial towns which comprise the vast majority of indiana, michigan and ohio.
During the era of the great depression, the unemployment figures included EVERYONE who wasnt working. The only exclusions were women (who were expected to raise children) and children under 13.
Old people were expected to make a living back then, and there was no such thing as social security.
"Retirement" as we think of it now was actually pretty rare.
The mentally ill and the homeless were included.
Today's 'unemployment' only covers a certain segment of the jobless.
For example, we do not count people over 65.
We do not count the homeless, the disabled, or the insane.
We do not count people under the age of 18.
We do not count people who are jobless but have outlasted unemployment benefits.
So for example, if you are a person who last worked in 2002, but you have exhausted your unemployment benefits, then you are no longer counted amongst our 'unemployment' figures.
Plus even the metrics are different.
You could take the same conditions described by the above passage and they would perfectly sum up Germany under the Weimar republic prior to the hyperinflation that destroyed the german Mark.
Does that mean that Germany was doing fine?
This may very well be true. It is my understanding that during the depression NO jobs were available. You could not even find a job digging ditches. Open todays want ads Stephen... There are literally thousands of job openings to be filled. I understand that a person may remain unemployed because they are trying to find a job in their field or income they are used to but there ARE jobs available. If you want to work and earn money... you can. During the depression you could not unless you were lucky enough to be employed by Roosevelts TVA etc. programs.
Quote from: stephendare on September 25, 2008, 01:01:05 PM
Quote from: BridgeTroll on September 25, 2008, 12:35:58 PM
Outstanding article! Especially this part...
QuoteThe headlines scream doom. There are endless references to the economic situation being "the worst since The Great Depression." Immense names in finance have collapsed and sunk beneath the waves of the financial crisis. Please allow me to try to explain a bit of what's going on.
First of all, all you have to do is look around you to see that in terms of daily life, we are not anywhere near The Great Depression. Unemployment is barely about six percent. It was 25 percent at the nadir of The Great Depression. Real per capita incomes adjusted for inflation are at least five times what they were during The Great Depression. Airplanes are full. High-end restaurants are full. Prices are painfully high for food. These are not signs of a Great Depression.
This is a great article based on the available information so long as one is unaware that the very metrics that we use in order to calculate the terms do not correlate with each other..
For example, the unemployment numbers.
This was something that I discovered in the midwest after NAFTA caused the economy to fail in the smaller industrial towns which comprise the vast majority of indiana, michigan and ohio.
During the era of the great depression, the unemployment figures included EVERYONE who wasnt working. The only exclusions were women (who were expected to raise children) and children under 13.
This is totally false and I would like to see a source for your statement. The unemployment calculations then were not significantly different than today. I have read a piece on this very topic recently. Oh and child labor laws were in force in the 1930s also.
QuoteOld people were expected to make a living back then, and there was no such thing as social security.
"Retirement" as we think of it now was actually pretty rare.
That is because most people died in their 60s back then with life expectancies being shorter.
QuoteFor example, we do not count people over 65.
We do not count the homeless, the disabled, or the insane.
We do not count people under the age of 18.
We do not count people who are jobless but have outlasted unemployment benefits.
So for example, if you are a person who last worked in 2002, but you have exhausted your unemployment benefits, then you are no longer counted amongst our 'unemployment' figures.
The unemployed are considered those without work and actively seeking employment. Of course, if you are not able to work or not looking for work for a variety of reasons, you should not be counted as "unemployed".
QuoteYou could take the same conditions described by the above passage and they would perfectly sum up Germany under the Weimar republic prior to the hyperinflation that destroyed the german Mark.
Does that mean that Germany was doing fine?
What are you talking about by mentioning the German hyperinflation non sequitur?
Quote from: stephendare on September 25, 2008, 01:01:05 PM
We do not count people who are jobless but have outlasted unemployment benefits.
So for example, if you are a person who last worked in 2002, but you have exhausted your unemployment benefits, then you are no longer counted amongst our 'unemployment' figures.
Stephen, help me understand why we
should include these people? Why wouldn't someone who really wanted to work not be able to find a job since 2002?
Quote from: stephendare on September 25, 2008, 03:21:51 PM
River.
more partisan non speech.
here is a link documenting how the jobless figures have been increasingly fudged just since the 1980s
http://articles.latimes.com/2003/dec/29/business/fi-jobs29
you do not know what you are talking about.
Did you even read the article you cited? It doesnt say what you said it does and it certainly doesnt prove your earlier statement that:
QuoteDuring the era of the great depression, the unemployment figures included EVERYONE who wasnt working. The only exclusions were women (who were expected to raise children) and children under 13.
In fact, the very article you posted tends to discredit your statement. For example, it says:
QuoteInstead of unemployed, Fahringer was classified as “discouraged.†A little more than 8% of the people who want a job in the Bay Area are estimated by the Bureau of Labor Statistics to be discouraged, slightly higher than Los Angeles/Long Beach but lower than the battered technology center of San Jose.
Discouraged workers have never been included in unemployment rates, although they came close the last time a commission met to reform the system, a quarter of a century ago. “It was a very hot issue,†remembers Glen Cain, a retired economist who was a commission member.
http://articles.latimes.com/2003/dec/29/business/fi-jobs29
So, sorry Stephen but no cigar.
In fact, a strong argument can be made that today's unemployment figures are overstated because in today's age of unemployment compensation, people who could otherwise become employed sometimes take a few extra weeks off as a vacation while receiving their unemployment compensation.
Quote from: stephendare on September 26, 2008, 01:20:09 AM
seriously river.
youve lost your mind.
try reading the document.
I did read it. Try posting an excerpt from the article which proves your contention that:
QuoteDuring the era of the great depression, the unemployment figures included EVERYONE who wasnt working. The only exclusions were women (who were expected to raise children) and children under 13.
If you do not, we will all know you have been caught again. ;)
here is another story from today...
QuoteBUFFET'S 'TIME BOMB' HITS WALL STREET
By James B. Kelleher - Analysis
CHICAGO (Reuters) - On Main Street, insurance protects people from the effects of catastrophes.
But on Wall Street, specialized insurance known as a credit default swaps are turning a bad situation into a catastrophe.
When historians write about the current crisis, much of the blame will go to the slump in the housing and mortgage markets, which triggered the losses, layoffs and liquidations sweeping the financial industry.
But credit default swaps -- complex derivatives originally designed to protect banks from deadbeat borrowers -- are adding to the turmoil.
"This was supposedly a way to hedge risk," says Ellen Brown, the author of the book "Web of Debt."
"I'm sure their predictive models were right as far as the risk of the things they were insuring against. But what they didn't factor in was the risk that the sellers of this protection wouldn't pay ... That's what we're seeing now."
Brown is hardly alone in her criticism of the derivatives. Five years ago, billionaire investor Warren Buffett called them a "time bomb" and "financial weapons of mass destruction" and directed the insurance arm of his Berkshire Hathaway Inc (BRKa.N: Quote, Profile, Research, Stock Buzz) to exit the business.
Recent events suggest Buffett was right. The collapse of Bear Stearns. The fire sale of Merrill Lynch & Co Inc (MER.N: Quote, Profile, Research, Stock Buzz). The meltdown at American International Group Inc (AIG.N: Quote, Profile, Research, Stock Buzz). In each case, credit default swaps played a role in the fall of these financial giants.
The latest victim is insurer AIG, which received an emergency $85 billion loan from the U.S. Federal Reserve late on Tuesday to stave off a bankruptcy.
Over the last three quarters, AIG suffered $18 billion of losses tied to guarantees it wrote on mortgage-linked derivatives.
Its struggles intensified in recent weeks as losses in its own investments led to cuts in its credit ratings. Those cuts triggered clauses in the policies AIG had written that forced it to put up billions of dollars in extra collateral -- billions it did not have and could not raise.
EASY MONEY
When the credit default market began back in the mid-1990s, the transactions were simpler, more transparent affairs. Not all the sellers were insurance companies like AIG -- most were not. But the protection buyer usually knew the protection seller.
As it grew -- according to the industry's trade group, the credit default market grew to $46 trillion by the first half of 2007 from $631 billion in 2000 -- all that changed.
An over-the-counter market grew up and some of the most active players became asset managers, including hedge fund managers, who bought and sold the policies like any other investment.
And in those deals, they sold protection as often as they bought it -- although they rarely set aside the reserves they would need if the obligation ever had to be paid.
In one notorious case, a small hedge fund agreed to insure UBS AG (UBSN.VX: Quote, Profile, Research, Stock Buzz), the Swiss banking giant, from losses related to defaults on $1.3 billion of subprime mortgages for an annual premium of about $2 million.
The trouble was, the hedge fund set up a subsidiary to stand behind the guarantee -- and capitalized it with just $4.6 million. As long as the loans performed, the fund made a killing, raking in an annualized return of nearly 44 percent.
But in the summer of 2007, as home owners began to default, things got ugly. UBS demanded the hedge fund put up additional collateral. The fund balked. UBS sued.
The dispute is hardly unique. Both Wachovia Corp (WB.N: Quote, Profile, Research, Stock Buzz) and Citigroup Inc (C.N: Quote, Profile, Research, Stock Buzz) are involved in similar litigation with firms that promised to step up and act like insurers -- but were not actually insurers.
"Insurance companies have armies of actuaries and deep pools of policyholders and the financial wherewithal to pay claims," says Mike Barry, a spokesman at the Insurance Information Institute.
"SLOPPY"
Another problem: As hedge funds and others bought and sold these protection policies, they did not always get prior written consent from the people they were supposed to be insuring. Patrick Parkinson, the deputy director of the Fed's research and statistic arm, calls the practice "sloppy."
As a result, some protection buyers had trouble figuring out who was standing behind the insurance they bought. And it put investors into webs of relationships they did not understand.
"This is the derivative nightmare that everyone has been warning about," says Peter Schiff, the president of Euro Pacific Capital at the author of "Crash Proof: How to Profit From the Coming Economic Collapse."
"They booked all these derivatives assuming bad things would never happen. It was like writing fire insurance, assuming no one is ever going to have a fire, only now they're turning around and watching as the whole town burns down."
http://www.reuters.com/article/newsOne/idUSN1837154020080918
thanks Stephen!
now, this from The Economist...
The Unexploded 'Bomb' of CDSs....
Quote
Boom goes the CDS
THIS afternoon, I listened to Axel Leijonhufvud give a very interesting (and scary) talk at the Graduate Institute in Geneva about the financial crisis. He spoke about many things, but his account of the "unexploded bomb" of credit default swaps disturbed me. Others have written on CDS, but until today I didn’t really get it. Here is how I make sense of it.
Fact oneâ€"there are several dozen trillion dollars of these things out thereâ€"an amount that makes Paulson’s $700 billion look like a rounding error.
Fact twoâ€"they are basically insurance policies on bond defaults that are written without regulation, so the usual insurance-industry practice of setting aside reserves does not apply. Oh, and while the premia enter as bank income the pay-out obligations are not on their balance sheets.
Fact threeâ€"the large banks think they are hedged since they have "insurance policies" on both sides of the default events. Hedged? In normal times, perhaps. But imagine if one big issuer of these insurance policies went broke at roughly the same time that one of the insured bonds went badâ€"say, for instance, Ford bonds and a major Wall Street bank headquartered in Europe.
The Ford bond default would trigger a call for a huge payout by many banks, but the disappearance of one of the major issuers would wipe out the hedge that many other banks thought they had. This would leave banks liable for a huge payout for which they would have no reserves. This could trigger a wave of failures that would be very hard to stop given the size of the market.
Here is an account on Eurointelligence (from February 2008) of where the CDS' "unexploded ordinance" problem stands. Satyajit Das writes:
The CDS market entails complex chains of risk. This is similar to the re-insurance chains that proved so problematic in the case of Lloyds. … Over the last year, securitisation and the CDO (collateralised debt obligation) market have become dysfunctional. As the credit crisis deepens, the risk of actual defaults becomes real. Analysts expect the level of defaults to increase. The CDS market is about to be tested. While there have been a few defaults, the market has not had to cope with a large number of defaults at the same time. CDS contracts may experience problems and may be found wanting.
I hope the geniuses in the American and European governments are working on a contingency plan for a meltdown in the CDS market. Given the size of this unexploded ordinance, let’s hope they are working on it together.
by many accounts (no one knows because it is an UNREGULATED MARKET), it is about a 50-60 TRILLION DOLLAR market. this is the one thing that scares me most. i have hope for us, but if even 10% of these things end up unwinding, even my optimism would be gone.