Some Clear Thinking on the Financial Mess from Norris and Krugman

December 22, 2008 by Pelikan · Leave a Comment
Filed under: Bailout Bill, Barack Obama, Fannie Mae, Freddie Mac, Recession, U.S. Economy, U.S. Financial Crisis

I read both of these columns in last Friday’s edition of the New York Times. It’s the end of a historic year for the U.S. economy. We may look back in a few years and say that 2008 was the beginning of the end for supply-side economics (trickle down) and a nearly wholly unregulated financial services system. 2008 will hopefully become known as the time when ordinary people got concerned enough about the price they were paying for the excesses of banks which traded stocks, brokerages which sold insurance and insurance companies which did both. 2008 was a year when ordinary folks began to understand mortgage backed securities and credit default swaps – and what the failure of those derivatives meant for their local widget makers’ line of credit.

If you don’t read anything else today, read these two columns:

Op-Ed, Floyd Norris: A year of financial contradictions and chaos - New York Times
Op-Ed, Paul Krugman: The Madoff Economy – The New York Times

Tags: A.I.G., Banking, Barack Obama, Bernard Madoff, Credit Default Swaps, Fannie Mae, Floyd Norris, Freddi Mac, Lehman Brothers, Mortgage Backed Securities, Paul Krugman, Regulation, securitization, Transparency, Trust, U.S. Economy, U.S. Financial Crisis

Dow 8,000?

October 6, 2008 by Pelikan · 1 Comment
Filed under: Bailout Bill, U.S. Economy, U.S. Financial Crisis

Financial, Markets, Economy News Roundup

Do you call a day like today bad or just reality?

Chaotic day with Dow down 3.8% – New York Times
Dow below 10,000 for first time since 2004 – Bloomberg
B of A cuts dividend, offers stock – Bloomberg
Paulson looking for ways to unlock credit – Bloomberg

I think we just gave him 700 billion ways.

Lehman managers portrayed as irresponsible – New York Times
Fuld blames Lehman’s collapse on ‘rumors’ – Bloomberg

Fuld is obviously a hopeless jackass.

Bond risk rises – Bloomberg
Oil prices fall below $90 per bbl – New York Times
Bailout’s limit on pay will be tough to realize – Wall Street Journal
Jim Cramer: Time to get out of market – NBC
Germany takes hot seat as Eurpope falls into the abyss – The Telegraph

We face extreme danger. Unless there is immediate intervention on every front by all the major powers acting in concert, we risk a disintegration of global finance within days. Nobody will be spared, unless they own gold bars. — Ambrose Evans-Pritchard

Tags: Bank of America, DJIA, Dow, Lehman Brothers, Markets, U.S. Economy, U.S. Financial Crisis, Wall Street, World Economy

The $50 Trillion Swindle the Investment Class Doesn’t Have Us on the Hook For – Yet

October 6, 2008 by Pelikan · 2 Comments
Filed under: Bailout Bill, U.S. Congress, U.S. Economy, U.S. Financial Crisis

Credit Default Swaps and the Potential Cost of a Las Vegas Financial System

If you’ve been paying any attention to my posts and choice of content over the last two weeks, you know I’m not for the current $700 billion federal bailout of Wall Street which is underway thanks to the jackasses in Washington – and I’m talking all of them regardless of party.

Granted, I’m not a financial expert. But, I have tried to educate myself, and this bailout just seems to be rewarding bad behavior with worse public policy. One book I’m about done with is Kevin Phillips’ Bad Money. This book is currently ranked 63 on Amazon and I highly recommend it. At any rate, just when I was getting resigned to the fact the bailout is now a fact of life, and there’s nothing I can do about it, I got a little more education this weekend.

On Sunday morning, I heard the latest edition of This American Life. Part of the show dealt with the impending doom that is ‘credit default swaps.’ You should give this show a listen online. Ira Glass’s gang simply defines and exposes the scope of the risk out there with these ‘swaps.’ Later in the day came this report by 60 Minutes. This is another great piece of journalism exposing the problem with these financial vehicles. So, what are they – and why should we care?

Let’s say I’m a hedge fund and I have $1 billion wrapped up in a collateralized debt obligation (CDO) – aka a bunch of mortgages bundled together, many of which are shit. Lehman Brothers or CitiGroup comes to me and says, “We will insure you against loss for 2% of what you paid for the CDO.” I’m a little worried about the underlying assets in the CDO, so I say, sure, and fork over $20 million. CitiGroup has now made $20 million for nothing. When banks, investment banks, and hedge funds were doing these deals, they were merely placing a bet that the CDOs they were “insuring” wouldn’t tank.

We know what’s been happening. There’s more junk in the CDOs than anyone realized or cared to admit. I believe part of the reason Lehman failed is that the folks they sold credit default swaps to began to come calling for their insurance payout. But wait, I’m talking about insurance, right? Why are they called ‘swaps?’ Simply put, if they called it insurance, it would be regulated, ie. the Lehmans of the world would have to show capital, or a risk reserve fund, backing up their deals. That’s cash. They call them swaps so the whole transaction remains the unregulated, gambling pile of poo that it is.

So far, taxpayers, we’re on the hook for $700 billion. If you watch the 60 Minutes segment, you’ll find out that the estimated value of all the credit default swaps out there in the world’s markets is around $50 trillion. That’s a “T” and an “R” at the beginning of that “illion.” How many more of the “insured” are going to demand payment from the underwriters of these swaps? How many more banks, insurance companies, or investment houses are going under? Who is going to pay for that?

Tags: CitiGroup, Credit Default Swaps, Lehman Brothers, Stock Market, U.S. Congress, U.S. Economy, U.S. Financial Crisis, Wall Street