If the smartest people in the room designed their credit default swaps, they forgot one thing - what if the business did not pay the money, you ask? Credit default swaps (CDS) have used a form of derivatives to hedge loans. They are sold as "insurance" against default and are used by banks as a substitute for adequate capital resources. But CDS are not ordinary insurance. Insurance companies are regulated by the government, with reserve requirements, statutory limits, andExaminers routinely showing up to the books you check whether the money is there to cover potential claims. CDS are private bets, and the Federal Reserve from the time of Alan Greenspan has insisted that regulators leave out the hands. The sacrosanct free market would supposedly regulate itself. The problem with this approach is that the rules are just incompatible. If there are no rules to the players to cheat, cheat, and they have a gambler's paradise with addiction. In December 2007 the Bank hasInternational Settlements reported derivative trades counting in 681 trillion U.S. dollars - ten times the GDP of all countries of the world combined. Somebody is obviously bluffing about the money to put the game, and this realization has made for some very nervous markets.
CDS were du jour as "the derivative disaster", the following CDO (collateralized debt obligations, SIV (Structured Investment Vehicles "), and other obscure financial restrictions we had toto learn last year. The derivative is a strange concept that is very difficult to understand, but the basic idea that you are an investment that you can up by betting that it will insure to bottom. The simplest form of derivative is a short sale: You can bet that some asset you own go down, so that you are covered, depending on how the asset-moving place. Credit default swaps are the most widely traded form of credit derivatives. They are bets between two parties, whethera company will default on the bonds. In a typical default swap, gets the "protection buyer" a big payout if the company defaults within a certain period of time, while the "protection seller" collects periodic payments for the acquisition of default risk. CDS something like insurance, but it is not necessary to actually maintain an asset or suffer a loss, so they are often used just to speculate on market changes. In the example, a blogger, a hedge fund want to increase their profits,could sit back and collect $ 320,000 per year in premiums just for selling "protection" on a risky BBB junk bond. The premiums are "free" money - free until the bond actually goes into default if the hedge Funds could be on the hook for 100 million U.S. dollars in claims. And since the rub: What if the hedge funds do not have the money? The company is a shell or limited partnership into bankruptcy, but it hardly helps the creditor is .
Derivative "insurance" is, turns out to be more likeInsurance fraud, and this fact has mainly home with the ratings downgrades of "monoline hit" bond insurers and the recent collapse of Bear Stearns. Monoline insurers are the greatest writers of protection for CDs, and Bear Stearns, one of the leading Wall Street investment broker was the twelfth largest counterparty credit default swap transactions in 2006. These players were all great "protection seller" in a vast network of credit default swaps, and when the "protection" goes, the wholefragile derivative pyramid go with him. But the immediate and inevitable collapse of the derivative monster do not have reason to despair. The $ 681 trillion derivatives trade is the last supersized bubble in a 300-year Ponzi scheme, one that is now taken over the entire monetary system. The nation's wealth has been drained into private vaults, so that scarcity in its wake. It is a corrupt system, and change is long overdue. Only when the end of the old leaky ship something can be better. Replace Great crises are major opportunities for change.
THE "DERIVATIVES Chernobyl"
The Bear Stearns shakeup on St. Patrick's Day weekend was a direct hit to the banking Titanic from the derivatives iceberg. Bear Stearns helped to bet the explosive growth in the credit market, where banks, hedge funds and other investors worth $ 45 trillion from the credit-worthiness of companies and countries have prescribed. In 2006, the twelfth largest counterparty Bear wasCredit default swap transactions. On 14 March, Bear's ratings downgraded by Moody's, and 16 March was designed Bear by JPMorgan for pennies on the dollar, a sign buyout in order to avoid the legal complications of purchased bankrupt. The project was supported by a 29 billion U.S. dollars credit line from the Federal Reserve. As one headline put it, "Fed's rescue of Bear halted derivatives of Chernobyl." Baer was in a reported $ 13 trillion in derivatives trades. [cite] But the idea that either was Bear"rescued" or that the Chernobyl was halted by the rescue plan, the Fed has been grossly misleading. The CEOs managed to save their breathtaking bonuses, but it was a "bailout" only for JPM and Bear's creditors. For shareholders, it was wipeout book. Their stock initially dropped from $ 156 to $ 2 per share, and 30 percent of which was held by the employees. Another large chunk of it was the pension fund of teachers and other public service instead. The share price was later increased to $ 10 per share in responseOutrage of shareholders, but shareholders still essentially wiped out. And the fact that a Wall Street bank had to be fed the lions to rescue the others hardly inspires a feeling of confidence. Neutron bombs are not so easily contained.
The Bear Stearns hit from the derivatives iceberg followed an earlier in January, when global markets had their worst tumble since May 11 September 2001. Commentators asked whether this "The Big One" - a 1929-style crash - and itwould probably have been, if not quickly recognized skillful manipulating the market over the approaching catastrophe. The steep decline was due to the threat of downgrades in credit ratings of two major monoline insurers, Ambac and MBIA by a loss of 7.2 billion U.S. dollars in derivative transactions, the Societe Generale, France's second-largest bank blamed followed. The "monoline" are so named because it allows them to "assure" just one industry, the bond industry. Like Bear Stearns, they serve as counterparties in aCompromising network of credit default swaps, and concessions in their assessments would be the whole edifice shaky derivatives.
The January collapse in the international markets occurred on Martin Luther King Day, when U.S. markets were closed. That meant there was no Federal Reserve, no CNBC business channel, no Plunge Protection Team at work to turn the misfortune away. The team was clearly at work the next day, when the market suddenly reversed course, but the curtain was thrown back a long timeenough to see what the future might suspect anything good. The Plunge Protection Team is a team of experts assembled by the President to specifically manipulate the market. Formally called the President of the Working Group on Financial Markets, it includes the President, the Secretary of the Treasury, the chairman of the Federal Reserve, the chairman of the Securities and Exchange Commission and the chairman of the Commodity Futures Trading Commission. If ever a last doubt as to whether suchTeam actually goes into action in such situations, it was dispelled by a statement by Senator Hillary Clinton, according to the State News Service on 22 January 2008. She said:
"I think it is imperative that we must do the following step. The President should have already and should not so quickly, the President may convene working group on financial markets. This is something that he can ask the Secretary of the Treasury to do .. .. This must be in all markets with the coordinationRegulators here and obviously with regulators and central banks around the world. "
The market reversed on rumors of a 15 billion U.S. dollars rescue package for the ailing bond insurers by the banks stood to lose the most when it went down. But no rescue materializes in the next month, and even if it was 15 billion U.S. dollars is clearly insufficient to rescue the monolines. Analysts said the ailing insurer might need as much as 200 billion U.S. dollars in order to remain viable. They warned that investors wouldFace huge write-downs on the valuation of securities guaranteed by the insurers if they lost their top credit rating. The insurer "covered" securities with credit default swaps, thinking they would never actually have to pay. This was for the municipal bonds it guarantees traditionally, since municipal bonds rarely default. The failure of the monolines has been branching out into securitized mortgage debt. If the housing market were defaults cascading everywhere.
On22. Reversed in February 2008, suddenly after a bad week in the U.S. markets, rumors of a bailout package caused the stock market again, but again the rumors suggest. Bill Murphy wrote in his farm market commentary "Midas", "My guess is they were looking at another potential Asian meltdown Sunday night, and will do anything to avoid the abyss." The alleged bailout passed, and none was known, and if a resolution was finally announced, it was only for Ambac raise an additional $ 1.5Million in capitalization through the issuance of shares. But the PPT had his work are necessary in creating the illusion to "do trust in the market, the" rehabilitation and we will not likely hear nothing more about the downgrade of the monolines, particularly now that the Federal Reserve, the needs of their "Triple A" Veneer justify the sub-prime debt load as collateral for the Bear Stearns deal.
Institutional investors have lost a lot of money in everything, but the real catastrophe is to the banks. Theinstitutional investors who have previously bought mortgage-backed bonds no longer buy them in 2007, when the housing market collapsed. But the investment houses that sold them have billions of dollars "left on their books, and it is these banks that particularly stand to lose as the derivative Chernobyl implodes. Without the monoline insurers' triple-A seal, billions of dollars of triple-A investments back on junk bonds, and because many institutional investors have a fiduciary dutythrown to invest in only the "safest" triple-A bonds, bonds get downgraded to the market, jeopardizing the banks that are still in the hands of billions of dollars from them. The downgrade of Ambac in January signaled a simultaneous downgrade of bonds from over 100,000 municipalities and institutions, totaling more than 500 billion U.S. dollars.
A parade of rescue SYSTEMS
Now that some highly leveraged banks and hedge funds have had their cards on the table and expose their worthless hands,This Avid free market screaming for government intervention to save them from monumental losses, while preserving the monumental gains raked in when their bluff was still good. In response to their cries, the men behind the curtain have scrambled to develop different systems to rescue package, but the plans have been bandaids at best. To bail out a $ 681 trillion derivative scheme with taxpayer money is obviously impossible. As Michael Panzer observed on SeekingAlpha.com:
"As the slow motion --Train wreck unfold in our financial system further, there are too many poorly designed to go rescue attempts and dubious turnaround plans, as well as propaganda, hypocrisy and intrigues of banks, regulators and politicians. All this is done in an effort to try to buy time or to find out how the losses on the lap of some Patsy (for example, can be sunk) to the taxpayer. "
The idea seems to be to get to play the violin, while the Big Money Boys in the mist and man slipthe lifeboats. As noted in a blog called "Jesse's Café Americain" concerning the Ambac rescue:
"It seems that the real core of the problem is that AMBAC was as a" cover "of the banks that originated these bundles of mortgages used to get their mispriced ratings. Now, as the borrowing is to be performed and the banks are with put them, AMBAC can not possibly pay, they can not for the debt. And banks do not want to mark these CDOs [collateralized debt obligations] toMarket [downgrade to their real market value] because they are probably the best worth 60 cents on the dollar, but by the banks, the bottom line instead of around par. This is a 40-percent haircut with enough debt to fall in each bank involved in this situation. . . . In fact, for all intents and purposes, if market values banks are insolvent. Thus, the banks will make available capital to AMBAC. . . [but] it's only a game by money order. . . . Why the banks are participating in thisCharades? This looks like an attempt to disbursements has gone bad on a big Ponzi scheme that collapsed from the extended. . . . "
THE WALL STREET Ponzi scheme
It has Ponzi scheme gone bad that is not just another false investment strategy. It's the core of banking business, the thing that it has based the course of three centuries. A Ponzi scheme is a form of pyramid scheme in which new investors must continually drawn to the bottom, the supportInvestors at the top. In this case, new borrowers must continually be sucked into the creditors at the head support. The Wall Street Ponzi scheme is built on "fractional reserve" can credit to create the banks, "credit" (or "debt") with postings. Banks are now allowed to give 10 to 30 times their "reserves," essentially counterfeiting the money they lend. ) About 97 percent of the U.S. money supply (M3 was created by the banks in this manner. The problem is that banks createonly the principal and interest are not required to repay their loans, so new borrowers must continually be found to take new loans just to create enough "money" (or "credit") to service contracts, the old loans, of which the money supply. The scramble to find new debtors has now has over 300 years - since the founding of the Bank of England in 1694 - until the whole world are in debt to the banks' private money monopoly gone. The Ponzi scheme has finally got hismathematical limits: we are "all borrowed up."
When the banks ran out of creditworthy borrowers, they had to creditworthy subprime borrowers in turn, and avoid losses from default, they moved these risky mortgages off their books by bundling them into "securities" and selling them to investors. To induce investors to purchase, then, these securities were insured "with credit default swaps. But the housing bubble itself was a Ponzi scheme, and finally, there was no longerBorrowers who were in at the bottom that make the ever-inflating home prices sucked. If the borrower pays an end to end investors buying mortgage-backed securities. The banks were then left holding their own suspect paper and without triple-A ratings, there is little chance that buyers for this "junk will be found" to. The crisis is not in the economy itself, which is fundamentally sound - or it would be with an appropriate credit system to oil the wheels of production. TheCrisis in the banking system, which can no longer cover the shell game it has played for three centuries with other people's money.
The banks will therefore no doubt have a rescue package after another from his pocket deeper than just their own, the U.S. government, but if the government tolerates, even it could be dragged into the voracious debt cyclone of the mortgage mess. The Federal Government's triple A credit rating is already in jeopardy, because of its huge $ 9Trillion debt. Before the government agrees to bail out the banks, it should insist on some adequate quid pro quo. In England the Government has decided to bail out bankrupt mortgage bank Northern Rock, but only in exchange for shares of the bank. On 31 March 2008, reported the London Daily Telegraph that Fed strategists had looked at the nationalizations that saved Norway, Sweden and Finland from a banking crisis from 1991 to 1993. In Norway, according to a Norwegian consultant: "The law was amendedso we to assume 100 percent control of any bank where its equity had fallen below zero. "
Benjamin Franklin SOLUTION
Nationalization has traditionally had a bad reputation in the United States, but this solution might actually an attractive alternative for the U.S. government. Turning bankrupt Wall Street banks into public institutions might the government to get out of debt cyclone by releasing what we enter. Instead of robbing the order to pay Paul, flappingAround in a sea of debt trying to stay afloat by creating more debt, the government might the problem at its source address, it might restore the right to create money to Congress, to which the public body, the sacred obligation has been transferred under the Constitution.
The most brilliant model in our national history was established in the first half of the eighteenth century by Benjamin Franklin in the home province of Pennsylvania. The local government a "land bank" (a bank to issueMoney allegedly backed by land) that the money lent to farmers at a modest interest. Covering the state government created enough extra money to the interest were not established in the original loan, they spend in the economy on public services. The land bank was publicly owned, and the bankers were employed in public service. The interest on their loans has been generated, sufficient to finance the government without taxes, and because the newly issued money came back to was the government, not the resultinflationary. The Pennsylvania banking scheme was a sensible and highly workable system that was a product of American ingenuity, but never a chance to prove itself after the colonies became a nation. It was ironic, because after Benjamin Franklin and others, restoring the power to create their own currency was a chief reason the colonists for independence. Money in the banks for the creation of machine has had two centuries of empirical testing and has proved a failure. Itis time that the sovereign right to create money from a private banking elite and restored to be taken to the American people.