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2008-11-24 -Signs, Portents, and the Weather-
The US government has announced a rescue plan for the Citigroup
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Posted by 3dc 2008-11-24 01:15|| || Front Page|| [11127 views ]  Top

#1 What I find remarkable is the almost complete absence of discussion of when and how the tab will be paid.

And I also find remarkable that no one is discussing how this is a huge experiment, which no one knows how will turn out in even a year's time.
It's an experiment amoungst other reasons because governments are throwing huge amounts of money at the problem in the hope that the economy will be growing again when the time comes to pay for it; governments debts won't run out of control; inflation won't explode; we won't get mired in deflation; government revenues won't crash as businesses go bust and people lose their jobs; and a few others.
Posted by phil_b 2008-11-24 01:48||   2008-11-24 01:48|| Front Page Top

#2 From Bloomberg,

The U.S. government is prepared to lend more than $7.4 trillion on behalf of American taxpayers, or half the value of everything produced in the nation last year, to rescue the financial system since the credit markets seized up 15 months ago.
Posted by phil_b 2008-11-24 05:11||   2008-11-24 05:11|| Front Page Top

#3 It won't work, in fact throwing taxpayers good money after bad will just turn a recession into a depression.

This is all to save the politically well connected bondholders at the expense of taxpayers and shareholders.
Posted by Bright Pebbles 2008-11-24 05:30||   2008-11-24 05:30|| Front Page Top

#4 Actually, phil_b, I wonder if they aren't trying to set off an inflationary spiral.

The one big feature of that is that you get to pay off your debts with "cheaper" money. You also encourage people to spend what money they have, since who knows how much "x" is gonna cost next week? Better buy it now....

In the meantime, they get equity in these companies....which equal a certain amount of control....and we are talking politicians and bureaucrats, after all. It's nationalization with a twist. The normal way to do it is to confiscate the property, screwing the owners over. This time we're rewarding the owners and screwing over the taxpayers.
Posted by Cornsilk Blondie 2008-11-24 07:25||   2008-11-24 07:25|| Front Page Top

#5 Who's next? Who's next?
Posted by g(r)omgoru 2008-11-24 07:35||   2008-11-24 07:35|| Front Page Top

#6 CB, you might well be right, but in that case they are trying to trigger inflation to prevent deflation, a far worse problem.

Has Debt-Deflation Begun?
Posted by phil_b 2008-11-24 08:04||   2008-11-24 08:04|| Front Page Top

#7 Damn I was hoping they would go under so I would stop getting mail from them.
Posted by Cyber Sarge 2008-11-24 08:48||   2008-11-24 08:48|| Front Page Top

#8 I'm not in total agreement with THIS, not quite that cynical. It is something to ponder at least.
Posted by Besoeker 2008-11-24 09:03||   2008-11-24 09:03|| Front Page Top

#9 So I can stop paying my credit card then since Uncle Sam is paying it?
Posted by DarthVader 2008-11-24 09:41||   2008-11-24 09:41|| Front Page Top

#10 Funny I just got an offer from them for a American Express card with 0% interest until 2/2010.

Maybe I should get it, max it out, and wait for uncle sam to pay it off....
Posted by CrazyFool 2008-11-24 09:54||   2008-11-24 09:54|| Front Page Top

#11 The biggest bank heist ever.

Interesting isn't it, how we.... wake up to these bailout decisions that happened late in the evening the night or week end before?
Posted by Besoeker 2008-11-24 10:08||   2008-11-24 10:08|| Front Page Top

#12 One of the Aussie Accountancy groups think the following is going on. I am not an accountant or banker so I can't really judge if it is correct or not. If it is correct it is one of the largest scams in the history of the human race:


And now the credit crunch takes a strange banking twist. It may also shed a little light on all that Cayman Island activity.

Is the world about to see the greatest transfer of wealth in history - a looting on a global scale?

A tsunami of hope or terror?

As the world slips into recession, it is also on the brink of a synthetic CDO cataclysm that could actually save the global banking system.

It is a truly great irony that the world's banks could end up being saved not by governments, but by the synthetic CDO time bomb that they set ticking with their own questionable practices during the credit boom.

Alternatively, the triggering of default on the trillions of dollars worth of synthetic CDOs that were sold before 2007 could be a disaster that tips the world from recession into depression. Nobody knows, but it won't be a small event.

A synthetic CDO is a collateralised debt obligation that is based on credit default swaps rather physical debt securities.

CDOs were invented by Michael Milken's Drexel Burnham Lambert in the late 1980s as a way to bundle asset backed securities into tranches with the same rating, so that investors could focus simply on the rating rather than the issuer of the bond.

About a decade later, a team working within JP Morgan Chase invented credit default swaps, which are contractual bets between two parties about whether a third party will default on its debt. In 2000 these were made legal, and at the same time were prevented from being regulated, by the Commodity Futures Modernization Act, which specifies that products offered by banking institutions could not be regulated as futures contracts.

This bill, by the way, was 11,000 pages long, was never debated by Congress and was signed into law by President Clinton a week after it was passed. It lies at the root of America's failure to regulate the debt derivatives that are now threatening the global economy.

Anyway, moving right along – some time after that an unknown bright spark within one of the investment banks came up with the idea of putting CDOs and CDSs together to create the synthetic CDO.

Here's how it works: a bank will set up a shelf company in Cayman Islands or somewhere with $2 of capital and shareholders other than the bank itself. They are usually charities that could use a little cash, and when some nice banker in a suit shows up and offers them money to sign some documents, they do.

That allows the so-called special purpose vehicle (SPV) to have "deniability", as in "it's nothing to do with us" – an idea the banks would have picked up from the Godfather movies.

The bank then creates a CDS between itself and the SPV. Usually credit default swaps reference a single third party, but for the purpose of the synthetic CDOs, they reference at least 100 companies.

The CDS contracts between the SPV can be $US500 million to $US1 billion, or sometimes more. They have a variety of twists and turns, but it usually goes something like this: if seven of the 100 reference entities default, the SPV has to pay the bank a third of the money; if eight default, it's two-thirds; and if nine default, the whole amount is repayable.

For this, the bank agrees to pay the SPV 1 or 2 per cent per annum of the contracted sum.

Finally the SPV is taken along to Moody's, Standard and Poor's and Fitch's and the ratings agencies sprinkle AAA magic dust upon it, and transform it from a pumpkin into a splendid coach.

The bank's sales people then hit the road to sell this SPV to investors. It's presented as the bank's product, and the sales staff pretend that the bank is fully behind it, but of course it's actually a $2 Cayman Islands company with one or two unknowing charities as shareholders.

It offers a highly-rated, investment-grade, fixed-interest product paying a 1 or 2 per cent premium. Those investors who bother to read the fine print will see that they will lose some or all of their money if seven, eight or nine of a long list of apparently strong global corporations go broke. In 2004-2006 it seemed money for jam. The companies listed would never go broke – it was unthinkable.

Here are some of the companies that are on all of the synthetic CDO reference lists: the three Icelandic banks, Lehman Brothers, Bear Stearns, Freddie Mac, Fannie Mae, American Insurance Group, Ambac, MBIA, Countrywide Financial, Countrywide Home Loans, PMI, General Motors, Ford and a pretty full retinue of US home builders.

In other words, the bankers who created the synthetic CDOs knew exactly what they were doing. These were not simply investment products created out of thin air and designed to give their sales people something from which to earn fees – although they were that too.

They were specifically designed to protect the banks against default by the most leveraged companies in the world. And of course the banks knew better than anyone else who they were.

As one part of the bank was furiously selling loans to these companies, another part was furiously selling insurance contracts against them defaulting, to unsuspecting investors who were actually a bit like "Lloyds Names" – the 1500 or so individuals who back the London reinsurance giant.

Except in this case very few of the "names" knew what they were buying. And nobody has any idea how many were sold, or with what total face value.

It is known that some $2 billion was sold to charities and municipal councils in Australia, but that is just the tip of the iceberg in this country. And Australia, of course, is the tiniest tip of the global iceberg of synthetic CDOs. The total undoubtedly runs into trillions of dollars.

All the banks did it, not just Lehman Brothers which had the largest market share, and many of them seem to have invested in the things as well (a bit like a dog eating its own vomit).

It is now getting very interesting. The three Icelandic banks have defaulted, as has Countrywide, Lehman and Bear Stearns. AIG has been taken over by the US Government, which is counted as a part-default, and Freddie Mac and Fannie Mae are in "conservatorship", which is also a part default – a 'part default' does not count as a 'full default' in calculating the nine that would trigger the CDS liabilities.

Ambac, MBIA, PMI, General Motors, Ford and a lot of US home builders are teetering.

If the list of defaults – full and partial – gets to nine, then a mass transfer of money will take place from unsuspecting investors around the world into the banking system. How much? Nobody knows, but it's many trillions.

It will be the most colossal rights issue in the history of the world, all at once and non-renounceable. Actually, make that mandatory.

The distress among those who lose their money will be immense. It will be a real loss, not a theoretical paper loss. Cash will be transferred from their own bank accounts into the issuing bank, via these Cayman Islands special purpose vehicles.

The repercussions on the losers and the economies in which they live, will be unpredictable but definitely huge. Councils will have to put up rates to continue operating. Charities will go to the wall and be unable to continue helping those in need. Individual investors will lose everything.

There will also be a tsunami of litigation, as dumbfounded investors try to get their money back, claiming to have been deceived by the sales people who sold them the products. In Australia, some councils are already suing the now-defunct Lehman Brothers, and litigation funder, IMF Australia, has been studying synthetic CDOs for nine months preparing for the storm.

But for the banks, it's happy days. Suddenly, when the ninth reference entity tips over, they will be flooded with capital. It's possible they will have so much new capital, they won't know what to do with it.

This is entirely uncharted territory so it's impossible to know what will happen, but it is possible that the credit crunch will come to sudden and complete end, like the passing of a tornado that has left devastation in its wake, along with an eerie silence.

Posted by 3dc 2008-11-24 11:09||   2008-11-24 11:09|| Front Page Top

#13 DAX up 9%
Posted by .5MT 2008-11-24 11:22||   2008-11-24 11:22|| Front Page Top

#14 Crazy Fool:
Read the fine print on those offers. They reserve the right to charge usurious rates at their discretion and without warning. You can transer large amounts of debt, too, and what you thought was a good deal could suddenly go up to 128% annually.
Posted by Thealing Borgia 122 2008-11-24 11:36||   2008-11-24 11:36|| Front Page Top

#15 Why don't we skip the depression and jump right into another world war to get us out.
Posted by rjschwarz 2008-11-24 11:45||   2008-11-24 11:45|| Front Page Top

#16 DV, you can also stop paying your mortgage as well according to some rumors I hear.
Posted by Broadhead6 2008-11-24 11:54||   2008-11-24 11:54|| Front Page Top

#17 Another day, another $326 billion.

A billion trillion here, a trillion there, and pretty soon you're talking real money.
Posted by ed 2008-11-24 14:12||   2008-11-24 14:12|| Front Page Top

#18 At some point there may be politicians and bankers swinging from the same lamp posts!
Posted by JohnQC 2008-11-24 14:13||   2008-11-24 14:13|| Front Page Top

#19 JohnQC,
I don't believe they will ever stop or even slow down until that very scenario plays out. The French and Bolshevik Revolutions were not THAT long ago.
Posted by bigjim-ky 2008-11-24 14:47||   2008-11-24 14:47|| Front Page Top

#20 Nostradamus redux
SINGAPORE.
Although political forecasting and economic prognostication have long made astrology look respectable, there is still a latter-day Nostradamus who has defied the odds. "If Nostradamus were alive today," said the New York Post, "he'd have a hard time keeping up with Gerald Celente" - the man who tracks the world's social, economic, and business trends for corporate clients.

Mr. Celente's accurate forecasts include the 1987 stock market crash, the collapse of the Soviet Union in 1991, the 1997 Asian currency crash, the 2007 subprime mortgage scandal that he said would soon engulf the world at a time when Federal Reserve Chairman Ben Bernanke, a macroeconomist and expert on the Great Depression, told us, "the worst is behind us." In November 2007, Mr. Celente also told UPI a massive devaluation of the dollar was coming and that some Wall Street giants were headed for total collapse. He called it "The Panic of 2008."

"Worse than the Great Depression," Mr. Celente opined. Beginning with a sharp drop in standards of living, and continuing with an angry urban underclass that threatens a social order that allowed the mega-rich to continue living behind gated communities with summer escapades to luxurious homes on the French and Italian Rivieras or to bigger and better and more expensive boats from year to year.
This time, Mr. Celente's Trends Research Institute, which the Los Angeles Times described as the Standard & Poor's of pop culture, can see a tax rebellion in America by 2012, food riots, squatter rebellions, job marches and a culture that puts a higher premium on food on the table than gifts under the Christmas tree.
Posted by Besoeker 2008-11-24 14:52||   2008-11-24 14:52|| Front Page Top

#21 Remember "victory gardens"? Unfortunately, you can't grow them in Colorado without water. Lots of water.
Posted by Old Patriot">Old Patriot  2008-11-24 15:14|| http://oldpatriot.blogspot.com/]">[http://oldpatriot.blogspot.com/]  2008-11-24 15:14|| Front Page Top

#22 No need to worry TB - I'm sure that The LightWorker(tm) would pay all my credit debts - and mortgage and gas.... just like he promised!

And yes I know about the fine print - tho I've never seen one go up to 128% :). The key is to read the fine print and know exactly what you're getting into and all the 'rules' which apply - like never being late on _any_ payments for debts - even unrelated ones.
Posted by CrazyFool 2008-11-24 16:04||   2008-11-24 16:04|| Front Page Top

#23 What a joke! C'mon Bush, Americans would be better off if Trustees in Bankruptcy were running these failed companies. Allow a Trustee to protect the depositors; those who invested in incompetence can go to hell. Bailouts prolong the inevitable. Face it, most loan assets will eventually be written down to one-sixth their book value. Now Obama can point to bi-partisanship when he bails out the UAW.
Posted by Goober Sneamble4879 2008-11-24 16:50||   2008-11-24 16:50|| Front Page Top

#24 Does anyone else feel like these bailouts are rash and feeble? The government needs a long-term plan, rather than trying to jump-start matters. They need to set a goal and see their idea through successfully!

I think another vital note from this bailout is that we now see the magnitude of this recession. We all should take the necessary steps to recession-proof our lives. In order to do so, I think a realistic estimate of the amount of money we need to cut back on is relevant. Additionally, we all should have a clear vision of our altered future- many people are still living as if we’re in the .com boom of the 90’s! Here’s a great resource I found helpful when reorganizing my future: www.thevisionboardkit.com. This kit actually outlines how to create a vision of your goals and dreams and explains how to execute them with success.
Posted by Vanessa 2008-11-24 17:00||   2008-11-24 17:00|| Front Page Top

#25 Does anyone else feel like these bailouts are rash and feeble? The government needs a long-term plan, rather than trying to jump-start matters. They need to set a goal and see their idea through successfully!


Sounds like a centrally planned economy to me.
Posted by Mike N. 2008-11-24 17:25||   2008-11-24 17:25|| Front Page Top

#26 And the rest sounds like spam.
Posted by Mike N. 2008-11-24 17:26||   2008-11-24 17:26|| Front Page Top

#27 Vanessa's communism with capitalism got us into this mess.
Posted by Bright Pebbles 2008-11-24 18:31||   2008-11-24 18:31|| Front Page Top

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