Yes, I am talking about the crash and the ensuing recession, the unemployment, foreclosures and the tune continues…….you may know that your 401k is not worth the paper it is printed on…..but do you know just how the crash happened?
I am guessing that most Americans either do not know or maybe they just do not give a crap……but if you are truly interested in educating yourself on how you were screwed….then by all means read on…….if not then maybe a good episode of “Jersey Shore” that teaches a lot about life is on MTV….if you do not care enough to learn what happen then keep thy mouth shut when it blows up again….and make NO mistake ….IT WILL!
A very good explanation has been written by Zeus Yiamouyiannis……..
Here is how the counterfeit value derivative con works. It’s a game of “I pretend, you pretend, we all pretend, and the taxpayer will pay in the end”.
1) I’ll create an instrument, say a credit default swap (CDS), an unregulated insurance with no capital requirements, with a certain “notional” value. Notional value is just something I assign. It does not have to be attached to or backed by any real asset or actual money/principal, but I can pretend as if it is. (Notional amount.)
2) As a seller, I will just declare that this swap covers the full value X of this company, contract, etc. if credit event Y happens. I receive lucrative insurance premiums and fees for my unbacked promise. The CDS’s value is based in nothing more than my promise to pay. I don’t have to have adequate capital reserves on hand, but I can pretend as if I do perhaps with some mini-reserves based on objective-seeming risk ratios calculated by my mathematical models. (credit default swap.)
3) As a buyer, you can then buy as many of these CDS’s as you want, even for a single default. If you are really sure something is going to tank you can insure it 30 times over (or a 100 or 1,000) and get 30 (or 100 or 1,000) times the return when it goes bust! In regulated insurance it is unacceptable to insure beyond the full replacement value of the underlying asset. Not so with CDS’s. The seller has gotten 30x the premiums and the buyer gets 30x value in the event of default. As a buyer of this phony “insurance” you don’t have a stake in the affected properties, but you can essentially pretend you do.
4) As buyer and seller of CDS’s either one of us can assign our risks to a third party through another contract, and pretend as if we are covered in case our own game playing blows up in our faces. This allows us to retain even less reserve capital and spend freed-up funds on more high-risk, high-(pseudo) return speculation. (The monster that ate Wall Street.)
5) We can purchase and sell of these derivative contracts to each other at unlimited rates to generate massive volume and huge fees and profits. We can simply hyper-cycle risk and take our chunk each time.
According to the Bank of International Settlements, as of June 2011 total over-the-counter derivatives contracts have an outstanding notional value of 707.57 trillion dollars, ( 32.4 trillion dollars in CDS’s alone). Where does this kind of money come from, and what does it refer to? We don’t really know, because over-the-counter derivatives are not transparent or regulated.
The answer to your questions are not as difficult to understand as the msm and the economists want you to believe……..once you learn the facts then you can keep your bank and brokers in check….that is if you really give a crap……and Dodd-Frank is a blowjob….it does little to keep the financial sector from gaming the system again and causing another meltdown….personally, I want to see someone go to prison because of what has been done to the economy and beyond that I want to make sure these con men cannot either game the system again so that we, the taxpayer, give them an out…..let them ROT in their own deceitfulness!
Today is the big day! The Prez will sign the new and improved FinReg bill into law….and it is everything they wanted….by they I mean Wall Street…..Obama has said….
“Because of this reform, the American people will never again be asked to foot the bill for Wall Street’s mistakes. There will be no more taxpayer-funded bailouts—period.”
The GOP immediately sent out their Agent Orange, Rep. Boehner, to condemn the bill and its passage (go figure)….which to me is astonishing because Wall Street made out like a bandit and the GOP should be pleased that the bill was so watered down…..or is it just a political tactic?
The bill authorizes the allocation of pubic funds to pay for the operation, without congressional approval, with the proviso that the major banks would subsequently be taxed to defer some of the cost.
This amounts to the institutionalization of financial rescue operations, instead of the ad hoc methods employed in the fall of 2008. The procedure is being put into place precisely because the regulatory overhaul fails to impose any real restrictions on the speculative activities of the banks.
It does not restore the legal wall between commercial banking and investment banking, a central reform carried out during the Depression of the 1930s to prevent deposit-taking commercial banks from engaging in the high-risk speculation that is the bread and butter of investment banks and brokerages. The weakening and final removal of this wall in 1999 during the Clinton administration encouraged the wave of speculation and swindling that led to the collapse in September 2008.
It does not cap executive compensation.
It does not eliminate or seriously limit trading in derivatives, the complex and opaque financial instruments that played a central role in the collapse of American International Group (AIG) and threatened to topple the entire banking system.
Instead, the bill sets up what some have called a Potemkin village of regulatory structures with little real substance, which Wall Street banks will have little difficulty manipulating and gaming. For the most part, the details concerning how much capital banks must hold in reserve, what percentage of their capital they can invest in hedge funds, which types of derivatives will be forced onto clearinghouses and exchanges and which will continue to be traded in the “shadow banking system,” etc. will be determined by the various regulatory agencies. It will grow the bureaucracy but will not cease the gambling by the Banksters with taxpayer money.
Once again the paid agents of Wall Street have successfully set the stage for another economic meltdown…….sooner rather than later……the only good thing is that youtube is up and alive and everything anyone has ever said about FinReg has been recorded and it will come back to them in the near future…….the American people are getting their Christmas goose early…..sorry to be a buzz kill!
In the beginning there was a massive amount of anger leveled at the Wall Street banks that took the US to the brink of collapse……..so much anger that the Congress set about to stop the gambling on the taxpayer’s dime…..regulation and oversight was the call of the day…..it showed promise….it showed that the Congress got the idea and started acting on behalf of the people……that was in the beginning….now it is something way less than the original intent…..
When the Senate bank reform legislation passed in May, Senate Majority Leader Harry Reid (D-Nevada) said it sent the message to Wall Street that they can no longer “recklessly gamble away other people’s money.” The bill told Main Street, “you no longer have to fear that your savings, your retirement or your home are at the mercy of greedy gamblers in big banks. And it says to them, ‘never again will you be asked to bail out those big banks when they lose their risky bets,’ “
The bill the Senate passed did protect the taxpayers from reckless gambling by the big banks, largely due to the last-minute inclusion of strong derivatives reforms authored by Senator Blanche Lincoln (D-Arkansas). So why is it that Senate and House leadership are now busy behind these scenes trying to kill the best provisions in their own banking reform legislation?
Behind the scenes, Senate Banking Chair Chris Dodd (D-Connecticut) and House Financial Services Chair Barney Frank (D-Massachusetts) have made it clear they are not fans of Lincoln’s proposal. Neither is the U.S. Treasury Department. Treasury official Michael Barr has been running around telling anyone who will listen that these derivatives rules were not part of the administration’s four “core objectives” for financial reform.
But opponents of strong derivatives reform have a big problem. They can’t just yank it out of the bill with an outcry from consumer advocates and reform groups like Americans for Financial Reform, who have been working hard on the issue. So they have cooked up a new scheme. They will replace the Lincoln language with the strengthened version of the Volcker Rule offered (but never voted on) by Senators Merkley (D- Oregon) and Levin (D-Michigan). They want to convince everyone that a strengthened Volcker Rule takes care of all the issues raised by Lincoln.
In case you are not sure what the Volcker rule is…let me help….The Volcker Rule deals importantly, but narrowly, with derivatives trading for a bank’s own account. This is called “propriety trading,” and banks would be barred from trading any financial instrument (mortgage-backed securities and stocks, as well as derivatives) for their own as opposed to a customer’s account. Merkley-Levin would make this reform a statutory ban rather than leaving it to the discretion of regulators and would further crack down on Goldman-style conflict of interest trading. But big banks would still be allowed to deal and trade on behalf of their clients and their derivatives business would still be backed by the taxpayer guarantee.
Watch the slight of hand by the Congress…the bill that is the final version will be far from the regulation needed to prevent the economy from collapsing again….with the Congress being paid by the banks to water any reform down….we can look ahead ten years or so and see all this economic woes occurring again…….Politicians need to think about that when they are so concerned about our children’s future…….
I am sure when the word “Lost” is mentioned we will have a wealth of people that will tear up at the mere mention of the now defunct TV show……thanks to say this is NOT about a bunch of fictional people lost on the island of Manhattan…..but rather…..
Back in the 1990′s I was a frequent player on the stock exchange…made some money…lost even more….but I recall the days of my adventurism……Japan was a shining light of capitalism especially in the later 80′s….but that was about to change…..
The economic miracle ended abruptly at the very start of the 1990s. In the late 1980s, abnormalities within the Japanese economic system had fueled a massive wave of speculation by Japanese companies, banks and securities companies. Briefly, a combination of incredibly high land values and incredibly low interest rates led to a position in which credit was both easily available and extremely cheap. This led to massive borrowing, the proceeds of which were invested mostly in domestic and foreign stocks and securities.
This popped the bubble in spectacular fashion, leading to a massive crash in the stock market. It also led to a debt crisis; a large proportion of the huge debts that had been run up turned bad, which in turn led to a crisis in the banking sector, with many banks having to be bailed out by the government.
Overall, this has led to the phenomenon known as the “lost decade”; economic expansion came to a total halt in Japan during the 1990s. The impact on everyday life has been rather muted, however. Unemployment runs reasonably high, but not at crisis levels (the official figure is a little under 5%, but this is a considerable underestimate – the real level is probably around twice that).
I will bet you wonder why I mention this……does it sound familiar? It should or you are not paying attention to your life.
I gave you a little economic history because I see this happening in the US and I am not alone….Paul Krugman writes:
It’s not that nobody understands the risk. I strongly suspect that some officials at the Fed see the Japan parallels all too clearly and wish they could do more to support the economy. But in practice it’s all they can do to contain the tightening impulses of their colleagues, who (like central bankers in the 1930s) remain desperately afraid of inflation despite the absence of any evidence of rising prices. I also suspect that Obama administration economists would very much like to see another stimulus plan. But they know that such a plan would have no chance of getting through a Congress that has been spooked by the deficit hawks.
We hear daily that the US could become the next Greece because of the growing deficit….which seems to be the call of most conservatives these days,,,,,,,but I see it differently….I see the possibility of the US becoming another Japan with a “Lost Decade” and many years of suffering for the working majority of the country. Slow growth, high unemployment and a rise in the inflation rate.
Oh my God! So much has been said about the crisis in Europe and most verbally the situation in Greece. Gloom and doom is predicted…..if Greece then on to the others in P.I.G.S. and then if that why not the US going down the drain?
But what if? What if the crisis in Greece could ultimately benefit the US? In an article written by Derek Thompson for the Atlantic Business:
But what if Europe’s debt disaster actually works out for the United States … kind of? Tim Duy finds three reasons:
1. Capital Gains for the U.S. Scared investors are running from peripheral EU states that look like they could follow Greece into the abyss. (It’s called the contagion effect: explanation here.) Running from Europe, investors might seek shelter in US investments, driving down our interest rates and giving companies looking to hire more access to capital. Duy concludes, “the odds of sustainable recovery look better every day.”
2. No Tightening from the Federal Reserve. Some liberals and moderates are concerned that the Federal Reserve might try to prematurely tighten its monetary policy by selling assets to squeeze inflation before we’ve achieved sustainable recovery and consistent job gains. But the crisis in Europe makes it more likely that the Federal Reserve will sit tight and keep money easy. After all, a Greece default — which is all but certain — could shock high-debt, low-growth states like Portugal and Spain and send jitters throughout the global economy. The Fed, nervous about feeding those fears, will probably keep interest rates low for an extended period of time with the European debt bomb ticking.
3. Cheap Oil. A weak Euro and a stop-start European economy means cheap oil, relief at the pump for the re-emerging American consumer, and marginally higher demand for cars. An exogenous oil shock helped to pop the housing bubble in the mid-2000s. Cheap gas is an economic lubricant.
What is the possibility that the US could see some minor benefit from the crisis in Greece and possibly the rest of the EU? What are the possibilities of other countries seeing the same?
Nope…this is NOT a Chinese restaurant (shades of Big Trouble In Little China)…..I am talking about a financial dance that is causing a bit of concern, to say the least…..it is called “dark pool”, Dark Liquidity, and so on……basically it is market manipulation….does that sound familiar? Could this be the next economic slide waiting to happen?
Okay, Professor…but what the hell is a dark pool?
Truly dark liquidity can be collected off-market in dark pools. Dark pools are generally very similar to standard markets with similar order types, pricing rules and prioritization rules. However the liquidity is deliberately not advertised – there is no market depth feed. Such markets have no need of an iceberg order type. In addition they prefer not to print the trades to any public data feed, or if legally required to do so, will do so with as large a delay as legally possible – all to reduce the market impact of any trade. Dark pools are often formed from brokers’ order books and other off-market liquidity. When comparing pools careful checks should be made as to how liquidity numbers were calculated – some venues count both sides of the trade, or even count liquidity that was posted but not filled.
Secret deals carried on in the dark…..just another way to create wealth by side stepping the regulations of proper and fair financial transactions…..stock trader, Keith Fitz-Gerald sees problems looming:
- First, as more volume moves to the so-called Dark Pools, the very notion of what constitutes “public pricing” becomes suspect. Practically speaking, if we’re seeing only 50% of the trading volume in a given stock, who’s to say that the pricing we’re seeing is accurate if the other half remains a mystery.
- Second, the small- and mid-cap stocks that for so long have been the domain of smaller investors will likely become harder to trade. The reason: Dark Pools will absorb the liquidity that’s presently out in the open, just as a ” black hole ” in outer space sucks in all the matter that’s nearby. The net effect could be that smaller transactions become more inefficient, or that public pricing actually disconnects from private pricing. Either way, individual investors may not get the best possible prices.
- Third, you can bet regulators will get interested if there is even a whiff of impropriety at the expense of smaller investors who perceive (and rightly so) that they are being “locked out” of the markets by the big boys yet again.
The question now is, will Washington do something to prevent yet another meltdown in the financial markets? My guess would be…NO…they will do what they always do….wait and see….and we know just how successful that type of attitude has been in the last year or so…..
Senior Obama administration officials on Monday said in a newspaper op-ed piece that a landmark capital requirements, securitization and other problem areas blamed for the .reform plan to be released this week will target
One proposal, said Geithner and Summers, will be “raising capital and liquidity requirements for all institutions, with more stringent requirements for the largest and most interconnected firms.”
In addition, large and interconnected firms whose failure could threaten the stability of the system “will be subject to consolidated supervision by the Federal Reserve, and we will establish a council of regulators with broader coordinating responsibility across the financial system.”
New reporting requirements will be urged for issuers of asset-backed securities, as well as a rule saying securitizers must “retain a financial interest” in the performance of the asset-backed securities they issue, they said.
Reduced reliance on credit-rating agencies will also be proposed, said the piece.
Addressing another market implicated in the crisis, the plan will urge “oversight of ‘over the counter’ derivatives,” an unspecified “harmonizing” of futures and securities regulation, and stronger payment and settlement systems.
“All derivative contracts will be subject to regulation, all derivatives dealers subject to supervision, and regulators will be empowered to enforce rules against manipulation and abuse,” according to the op-ed piece.
It said the proposals will call for “a resolution mechanism that allows for the orderly resolution of any financial holding company whose failure might threaten the stability of the financial system.”
New rules……same game…different rules……not much will change.
Do not count on it.
The banks, some of them, will be allowed to repay about $68 billion and all is well…..only if you are on Wall Street.
The US Treasury Department on Tuesday approved the requests of 10 of the country’s biggest banks and financial firms to repay the bailout cash they received last year under the $700 billion Troubled Asset Relief Program (TARP).
Press reports listed the firms as JPMorgan Chase, Goldman Sachs, Morgan Stanley, American Express, Bank of New York Mellon, State Street, US Bancorp, Capitol One Financial, BB&T Corporation and Northern Trust.
So is this good news or not? NOT!
Barry Grey has written:
The $68 billion being returned is more than double the administration’s initial projection of some $25 billion being paid back this year. The money is also being returned much earlier than the government originally intended.
The banks’ motives in repaying the TARP handouts are entirely self-serving. Their campaign to return the money began in earnest last February, when Congress attached a provision to the administration’s stimulus package limiting executive bonuses at firms holding TARP funds to one third of base salary. Wall Street was outraged, and getting out from under TARP became a central preoccupation of the banking elite.
Banks that repay their TARP cash also stand to save billions of dollars in dividend payments on preferred shares they were required to give the government in return for the taxpayer money.
In other news of the economy:
The US government is preparing to unveil rules on executive pay for firms that have been bailed out, reports the BBC.
President Barack Obama will also appoint a “pay czar” who can reject compensation plans at companies getting “exceptional assistance”. Oh goody…yet another “czar”….there are more “czars” than reps in Washington.
The new rules on executive pay are expected to be announced by the end of the week.
But think about this…if the banks pay back the TARP cash…why will they listen to Washington on pay packages? This is all so damn silly and ineffective….just like the Dems and Repubs in Congress…they are allowing Wall Street to make their own rules.
Barry Grey continues:
The stress tests allowed the government to declare the banking system “fundamentally sound,” despite the existence of at least a trillion dollars of bad debts on the banks’ balance sheets. They were designed to provide a further boost to the banks.
Since the results were announced on May 7, the banks have raised almost $90 billion through offerings of common stock and bond issuances. Bank stocks have continued to soar, with big-bank stocks rising 87 percent since their lows in early March.
By allowing most of the biggest banks to repay their TARP funds, entirely on the banks’ terms, the administration is essentially giving them a clean bill of health and providing a rationale for rejecting any serious regulation of their activities. Tuesday’s Treasury announcement sets the stage for the administration’s release of its financial regulatory proposals, set for next week.
Yes Irene…nothing is changing……and Wall Street will soon return to their speculative ways that bottomed out the economy and we can play this damn silly game all over again…because NO ONE has the balls to make Wall Street play fair.
CNN is reporting that a group of economists are saying just that.
The end of the recession is in sight, according to a new survey of leading economists.While the economy is showing signs of stabilizing, the recovery will be more moderate than is typical following a severe downturn, said the National Association for Business Economics Outlook in a report released Wednesday.
The panel of 45 economists said it expects economic growth will rebound in the second half of 2009.
“The good news is that the NABE panel expects economic growth to turn positive in the second half of this year, with the pace of job losses narrowing sharply over the remainder of this year and employment turning up in early 2010,” said NABE president Chris Varvares in a written statement.
Almost three out of four survey respondents expect the recession will end by the third quarter of 2009, the report said.
But 19% predicted that a turnaround won’t come until the fourth quarter, and 7% said it may not come until early 2010. None of the panelists expected the recession to continue past the first quarter of next year.
I think that the indicators do not illustrate this optimism. This report came out just one day after the Consumer Confidence Index which showed that the consumers were becoming more confident. The survey is of 5000 households, apparently they ask only those that are stable and thriving.
Businesses are struggling….Staples losses business…..Costco has falling sales and has to cut back….and the list can go on and on…..businesses are suffering because NO ONE is spending…where is the dang confidence there? And then there are the “real” people that make the economy run…the average consumer, who are facing unemployment, foreclosures, growning credit debt, and so on……just take a moment and think about everything you have heard or read in the last month …….Now, are you optimistic?
Even the ticket prices for the Obama fundraising visit to Beverly Hills had to be discounted to sell…….are you still optimistic?
This is just another attempt to fuel the market, in my opinion. I do not see too much validity in anything these guys have said….and I look at it from a person struggling in the economy….I do not see too much improving in my economic life by the end of 2009.
Many media pundits are blasting the Obama approach to the economic crisis, saying that they should have fixed the banking industry first and maybe then there would be more confidence in the programs from there on. There seems to be little good that Geithner is doing, according to most in the broadcast media. They are blaming him for the screaming fall in the markets.
But if you really want to fix the banking industry then there is an answer.
While the Treasury busily fills in the gaps in its latest plan to save the banking industry, a former Federal Reserve official says that regulators should instead apply a law enacted in the wake of the savings and loan meltdown.
The law, the Federal Deposit Insurance Corporation Improvement Act, was signed into law in 1991. In an interview with Financial Week, Bob Eisenbeis, a former research director of the Federal Reserve Bank of Atlanta, said the FDICIA contains more than enough tools for regulators to help stem the current financial crisis.
If regulators had applied FDICIA’s provisions once the solvency of major banks was first called into question, Mr. Eisenbeis said, many would already have been taken over by Uncle Sam.
That would mean that their good assets would have been separated from their bad and sold off to healthy institutions or other investors.
Indeed, he said the Treasury’s approach suggests regulators have forgotten that the earlier law is in place, since the capital injections the department has provided since the Troubled Asset Relief Program was authorized by Congress last October reflect what Mr. Eisenbeis calls “regulatory forbearance.” Rather than apply FDICIA’s numerous capital adequacy tests, he said, regulators seem intent “to throw it out and start over.”
While that may buy the banks time in hopes that they won’t need further capital injections, Mr. Eisenbeis is skeptical. He said both the stress test and the plan to relieve banks of their toxic assets would only mask their losses—that is, if the banks aren’t required to value the assets on a mark-to-market basis.