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Is The Fed Facing Margin Calls From European Banks?

Marla Singer's picture




 

by Marla Singer and Geoffrey Batt

Buried in the depths of page 26 of the Office of the Special Inspector General for the Troubled Asset Relief Program's (SIGTARP's) November 17, 2009 report "Factors Affecting Efforts to Limit Payments to AIG Counterparties" hidden in footnotes 33 and 34 is something of a mystery.  It might be the beginning of an interconnected financial chain involving Dubai, the Federal Reserve, AIG, Basel I, Eastern Europe and even Switzerland and which, even if it doesn't worry you, probably should.  Or it might be nothing at all.

Consider first "footnote 33," that reads as follows:

The first Basel Accord, known as Basel I, was issued in 1988; it focused on the capital adequacy of financial institutions. The capital adequacy risk—the risk that a financial institution will be hurt by an unexpected loss—categorizes the assets of financial institution into five risk categories (0 percent, 10 percent, 20 percent, 50 percent, and 100 percent). Banks that operate internationally are required to have a risk weight of 8 percent or less....

The original paragraph that references the footnote reads thus:

As of September 30, 2009, AIG had $172 billion in exposure to swaps in its foreign regulatory capital portfolio.  The portfolio contains swaps purchased by financial institutions, principally in Europe, to provide regulatory capital relief under Basel I. [note 33]  AIGFP’s COO informed SIGTARP in July 2009 that they expect that most of these swaps will be terminated by the end of the first quarter 2010 as most financial institutions complete their transition to Basel II.  Currently, financial institutions are required to hold a certain level of capital against their assets, and one way for a financial institution to reduce the amount of capital is to purchase swap protection on its assets.  However, new requirements decrease the level of capital required for such assets and, in most cases, there will be limited capital benefit to holding on to the existing swaps. Nonetheless, AIG warned in a June 29, 2009, SEC filing that if credit markets deteriorate, the company may recognize unrealized losses in AIGFP’s regulatory capital credit default swap portfolio. [note 34]  AIG could continue to be at risk if the swaps in its regulatory capital portfolio are not terminated by the end of first quarter 2010 as expected. (Emphasis added).

Taken together we read the thrust of this section to mean that a number of European banks, seeking to limit their regulatory capital requirements under Basel I (read: seeking to increase their leverage) bought swap protection on their assets from AIG.  These obligations still sit with AIG and, in the event credit markets sink materially, AIG is likely to take losses on these instruments.  Not just that but:

According to an AIG SEC filing, an ongoing concern for AIGFP is whether it will have to post more collateral if credit markets continue to deteriorate.  The amount of future collateral postings is partly a function of AIG’s credit ratings, which may be affected by any further decline in AIG’s financial condition. (Emphasis added).

Simply put, AIG might also have to post more collateral.  Moreover, though AIG initially expected most of these swaps to "be terminated by the end of the first quarter 2010 as most financial institutions complete their transition to Basel II," we see from footnote 34 that:

Subsequent to the June filing, European regulators adjusted the implementation timing of Basel II, potentially affecting the holders of AIGFP’s regulatory capital swaps to hold beyond previously anticipated termination dates.

In other words, AIG is still on the hook- and hadn't planned to be.

This raises a number of questions:

  1. If the European banks that bought swap protection from AIG are still relying on this protection to meet their capital requirements, and AIG might be unable to make good on the agreements, are these banks actually out of Basel I compliance as we type this?
  2. Are the banks still able to use swap protection to reduce their collateral requirements because of the implicit or explicit backing of AIG by the Federal Reserve?
  3. If this situation existed in September-November 2008, as it certainly appears to have, how exactly can the Federal Reserve claim in good faith that it lacked the leverage to negotiate with these banks from a position of strength?  (One assumes that many of the same names collecting payment from AIG were also AIG swap protection buyers of the sort mentioned in the SIGTARP report).  Failure to back up an insolvent AIG would have resulted in near-immediate Basel I non-compliance as the protection offered by these swaps, and on which these banks depended for their reduced capital requirements, evaporated- a near death sentence.
  4. Or had these banks somehow, and in the middle of the credit crisis, managed to boost their capital to levels that made the swaps unimportant?
  5. If so, why keep them on the books now, instead of unwinding them?
  6. Since it doesn't seem likely that a teetering AIG could make good on these agreements without substantial assistance is the Fed is currently the ultimate backstop for AIG?
  7. Does this mean that the Fed is effectively underwriting these swap agreements?
  8. Will the Fed post collateral if deteriorating credit conditions at AIG (today's -$11 billion news suddenly seems especially daunting if the potential insurance shortfall has an effect on credit ratings) or general credit market issues require it?  Or are we missing something significant?  By September 30, 2008 AIG had already posted $974 million in collateral for its "Foreign Regulatory Capital" portfolio.
  9. What if European banks are hit with more losses from, oh, we don't know, say... Dubai?  Deleveraging, risk reduction and credit tightening would have an effect on LIBOR, the Eurobond market and, of course, Eastern Europe.  Might not that sort of contagion easily spread to, say, Switzerland, which enjoyed the other side of the carry trade for years by lending Swiss Franc like mad to any Eastern European mortgage borrower who could sign documents?
  10. Could it be that the Fed, once again, might have to bail out the world?

Or maybe we are just missing something obvious.

 

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Mon, 11/30/2009 - 19:34 | 146916 dumbquant
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wow

Tue, 12/01/2009 - 04:19 | 147413 Anonymous
Anonymous's picture

VIDEO: Rise and Fall Of The The Federal Reserve

www.youtube.com/watch?v=-VZNSA9PJQg&feature=PlayList&p=FAFBF1900CF8B4A9&...

Mon, 11/30/2009 - 19:40 | 146925 JohnKing
JohnKing's picture

Round up the usual suspect.

Tue, 12/01/2009 - 20:11 | 148630 Gwynplaine (not verified)
Gwynplaine's picture

Another good line applies from the same movie (same character actually):

"I'm shocked, shocked to find gambling going on in here!"

- Julius J. and Philip G. Epstein, "Casablanca"

Mon, 11/30/2009 - 19:50 | 146930 Quackking
Quackking's picture

Res ipsa loquitur. The thing speaks for itself.

 

Jail 'em.

 

Mon, 11/30/2009 - 19:55 | 146934 SWRichmond
SWRichmond's picture

Excellent info of the kind I look for; Vielen Dank, Fraulein Singer.

  • Are the banks still able to use swap protection to reduce their collateral requirements because of the implicit or explicit backing of AIG by the Federal Reserve?  It certainly seems that way.
  • If this situation existed in September-November 2008, as it certainly appears to have, how exactly can the Federal Reserve claim in good faith that it lacked the leverage to negotiate with these banks from a position of strength? They lied their fucking asses off, like a teenager who stayed out too late drinking and having sex.
  • Does this mean that the Fed is effectively underwriting these swap agreements?  It would certainly seem that way.
  • Will the Fed post collateral if deteriorating credit conditions at AIG or general credit market issues require it?  Nah, the Fed will hire AIGFP to manage a new program and pay them $Billions to do it.
  • Could it be that the Fed, once again, might have to bail out the world?  That'll be right after they test the triparty liquidity drain thingy.
Wed, 12/02/2009 - 02:47 | 149001 Anonymous
Anonymous's picture

Good points, however i'd like to hear more about the teens getting drunk and having sex.

Mon, 11/30/2009 - 19:54 | 146936 just.a.guy
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Interesting!  A few questions:

A.  Is the $172 Billion in exposure cited the maximum possible loss or a best guess estimate at the time of the report?

B.  The 8% Basel I requirement appears to be something other than what we'd normally think of as "Tier 1 capital" -- How does that 8% risk requirement correlate in rough terms to leverage ratio?

C.  Of the biggest banks in regulatory compliance thanks to the swaps with AIG, how compliant are they?  That is, how far above the Basel I requirement (the 8% or Tier 1 equivalent) are they?

D.  How far below compliance would they be if AIG defaulted on its exposure when called upon to make good on their commitments?

...but the upshot of this does appear to be, as Marla says, that the US taxpayer is implicitly guaranteeing a pile of European banks.

Mon, 11/30/2009 - 19:59 | 146944 SWRichmond
SWRichmond's picture

It'll be a gas to see how the Fed posts collateral for AIGFP.  What'll they name it?  Maiden Lane 26?

Mon, 11/30/2009 - 20:11 | 146954 Marla Singer
Marla Singer's picture

Assuming buying swaps on your assets dumps them from the 100% level down to the 50% mark for the purposes of capitalization requirements, that implies that if you lost all the benefits of the swaps you'd see capital requirements pop by 50% of the total notional amounts of the swaps or that bank would be undercapitalized by about $86 billion without them.

There are a lot of assumptions in there.  I really don't know off hand what the exact impact of swaps is, or what kind of capital requirements were already on those assets.  Obviously, if the swaps are dropping assets from the 100% to the 0% capitalization requirement mark (I doubt this) then you would see banks scrambling to raise something like $172 billion in capital to make up the difference.

Mon, 11/30/2009 - 20:33 | 146982 just.a.guy
just.a.guy's picture


Thanks for the response.  From what you wrote, it sounds like the notional exposure to AIG would max out at $172 Billion, which would be the maximum hole that would be covered in the capital ratios (were the swaps turning 100% exposures into 0%).  So if I read you correctly, it sounds like it's likely a potential balance sheet hole of somewhere between $86B - $172B.  I suppose the question is how thin the ice is under those bank balance sheets at present...

Another thing:  I'm not experienced with these types of contracts, but it sounds like the European banks have the option to extend them?  I wonder if AIG has the option to terminate them as well?

It would surprise me if the banks would enter a contract like this for a much longer time period than the previously believed implementation date of the lighter Basel II requirements.

And if AIG has an out at some point soon, the flip side of this is that there could be a lot of unhedged European banks looking for a counterparty (or to raise capital) in the not too distant future?

Thanks for what is a very interesting story.

Mon, 11/30/2009 - 22:42 | 147114 Hephasteus
Hephasteus's picture

Ya but just think of how abusive you could get with this if this is their reality construction. You take a group of 5 credit worthy people and let them co-sign their way to owning something really big.

Tue, 12/01/2009 - 10:47 | 147567 Anonymous
Anonymous's picture

Then you call the boys from Robert's Lounge Crew (aka GS) to bust it out!

Mon, 11/30/2009 - 19:56 | 146937 cougar_w
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Tish-tosh. Just print more dollars.

Any child who can count to 10 on their fingers can manage a monetary crisis these days.

cougar

Mon, 11/30/2009 - 19:57 | 146941 AN0NYM0US
AN0NYM0US's picture

Interesting as I believe that whatever the next big thing is (opportunity to go short or long) it's already out there hidden in plain view  as the lyrics go "And I know, I should have known" - sort of like back in March when Barney and Sheila arranged the $500bn line for the FDIC just a few days in advance of Timmay's big plan

Mon, 11/30/2009 - 20:01 | 146946 Anonymous
Anonymous's picture

Basil, Schmaesil, who cares about rules while there's still so many virgins to be raped?

Mon, 11/30/2009 - 23:12 | 147151 Anonymous
Anonymous's picture

Sir, civilized societies rape their virgins in an orderly manner.

See Junila under:
http://en.wikipedia.org/wiki/Sejanus#Execution_and_aftermath

So while you may jest, human history well shows that laws are used to justify anything in stressful times. Especially when you have criminals handling the finances and laws.

Tue, 12/01/2009 - 01:37 | 147292 tip e. canoe
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"YOU ARE LOOKING NOT WELL AT ALL!"

http://www.youtube.com/watch?v=lv5uOtAgiig

boy those brits can play good romans can't they?

Tue, 12/01/2009 - 22:27 | 148781 Rusty Shorts
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Caligula with some fine ass...epic !!!

 

http://www.youtube.com/watch?v=vnzFYUD_fNo&feature=related

Mon, 11/30/2009 - 20:02 | 146947 Careless Whisper
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The bad news is always found in the footnotes. Seems like you're on to something here. At least we know the next problem won't exceed $172 Billion.

Mon, 11/30/2009 - 20:07 | 146952 Anonymous
Anonymous's picture

Oh good lord.

And what, pray tell, was supposed to make the swaps go away by end of first quarter 2010?

I'm beginning to sense uneasily the word DEFAULT is becoming very prominent in my own subconscious when considering the US Financial situation.

-MobBarley

Mon, 11/30/2009 - 20:13 | 146957 Marla Singer
Marla Singer's picture

"AIGFP’s COO informed SIGTARP in July 2009 that they expect that most of these swaps will be terminated by the end of the first quarter 2010 as most financial institutions complete their transition to Basel II."

There's your answer.

Mon, 11/30/2009 - 20:48 | 147000 Ned Zeppelin
Ned Zeppelin's picture

Speaking as a business attorney, I am duty bound to point out that the term "expect" precedes every smugly well-crafted lie. If it is the case, you simply say it will be, not that you "expect" that it will be.  "Expect" means a lot of things: I hope, I dream, I can posit, I yearn, I wish, but it does not mean "I am certain. . . "

Mon, 11/30/2009 - 21:37 | 147044 Rollerball
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Regardless whether taxpayer money is imminently at risk (or latently), we should be FOIA'ing these contracts since they represent substantive systematic risk to national security.  Sheila Blair Witch project best roll out the Ouija board.

Tue, 12/01/2009 - 08:20 | 147294 tip e. canoe
tip e. canoe's picture

the spirits say F - U - B - A - R

Tue, 12/01/2009 - 12:54 | 147720 WaterWings
WaterWings's picture

It'll be the Turbo Timmay version of Basel II. So, nothing will really change. Tell the FDIC they're gonna have to respect da law. Haha! Good one!

Nothing changes until fractional reserve banking is outlawed. 

The private control of credit is the modern form of slavery.

Upton Sinclair (1878-1968)

http://charlesgoyette.com/uploaded_images/printing-press-762932.gif

Mon, 11/30/2009 - 23:34 | 147177 Anonymous
Anonymous's picture

Don't worry. We're too big to fail.

Tue, 12/01/2009 - 02:18 | 147320 Hephasteus
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Ya the titanic never sank. It's just a fairy tale to cover up the inadequcies and impotence of frozen water.

Tue, 12/01/2009 - 11:14 | 147598 JacksWastedLife
JacksWastedLife's picture

Danke for Titanic analogy! =)

Mon, 11/30/2009 - 20:13 | 146958 johngaltfla
johngaltfla's picture

Marla, it is fascinating that you found this just as Ambrose posted this in the afternoon in the UK Telegraph:

 

Morgan Stanley fears UK sovereign debt crisis in 2010

(link: http://www.telegraph.co.uk/finance/economics/6693162/Morgan-Stanley-fear... )

Coincidence? I think not. Excellent work Marla that is some hardcore reporting we'll never hear about on CNBC.

 

After all Krudlow's first story is that important financial crisis happening in the Tiger Woods' household.

Mon, 11/30/2009 - 20:14 | 146959 Lionhead
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This needs to be forwarded to the Senators questioning Bernanke at the reconfirmation hearing. Excellent work!

Mon, 11/30/2009 - 20:17 | 146962 Jestocost
Jestocost's picture

but I thought everyone here knew the AIG TARP bailout was to protect certain European (and American) banks???

Mon, 11/30/2009 - 20:43 | 146993 cougar_w
cougar_w's picture

Everyone does know.

But it wasn't enough help, apparently. So this can go on and on, looks like. Is BB ready to wire another $200B to European banks? Will we have to raise the US debt ceiling twice this year?

At some point it degenerates into a parody of itself. Such is the state of global macroeconomic policy.

cougar

Mon, 11/30/2009 - 20:52 | 147006 tip e. canoe
tip e. canoe's picture

speaking of the debt ceiling, the water's reaching oh so close to the top:

http://www.usdebtclock.org/

wonder if timmy is feeling like john cusack at the end of 2012 right now?

Mon, 11/30/2009 - 21:34 | 147041 MonkeyMan
MonkeyMan's picture

By my reckoning, that would give just under 3 weeks until it ticks over the limit. Just in time for Christmas! Perfect timing I think - you can always use a further 10 Trillion dollars or so during the holidays...

Mon, 11/30/2009 - 20:29 | 146976 Anonymous
Anonymous's picture

Could someone explain what all this means in plain english. I have a Masters in Molecular Biology and I still can't understand this stuff....

Mon, 11/30/2009 - 21:37 | 147045 deadhead
deadhead's picture

it's like when one of those biological critters that you study (say, a virus) mutates on its own and becomes an e-bola type of thing.  at first it hits a few people in,say, the middle of Africa but then the little critter starts spreading to other places....then, the shit hits the fan because a few people knew about it but decided to either cover it up or outright lie about it.

 

 

Mon, 11/30/2009 - 22:39 | 147109 msjimmied
msjimmied's picture

That's what I love about ZH, the thoughtful humor..deadhead, you are the absolute gentleman.

Tue, 12/01/2009 - 11:17 | 147602 JacksWastedLife
JacksWastedLife's picture

*the shit hits the fan because a few people knew about it but decided to either cover it up or outright lie about it.* - that is a correct explanation but previous two sentences are nonsense. =)

Mon, 11/30/2009 - 23:42 | 147181 mikla
mikla's picture

As a biologist, you can understand complicated systems with hard-to-quantify inputs.  You're absolutely qualified to understand this stuff (you merely require some terminology background, which comes with time).

The "Basel Accord" (Basel I) was an international agreement to decide how to settle transactions across international boundaries by international banks.  Among other things, it "caps" leverage at 12:1, or requires 8% capitalization.  It was deemed greater than 12:1 leverage (less than 8% capitalization) would jeopardize an institution's viability, and a bank with less than 8% capitalization would thus not be trusted to clear transactions as agreed.

Because of the promise of greater returns in the past few decades, banks wanted to lever-up beyond 12:1 ... no problem!  All you needed to do was purchase insurance against your default, and VOILA!  You didn't even need to keep 8% capitalization ... because the insurance you just bought would pay out in case you, as a bank, failed.  The accounting morons called this "insurance" as the same thing as the minimum 8% capitalization.  Accountants were morons because insurance is only as good as the ability of the underwriter to pay the claim.  Silly accountants didn't seem to understand that insurance companies often didn't maintain *ANY* reserves against credit default swaps like these (um ... infinite leverage?)  It was a house-of-cards just begging for a light breeze for an excuse to come down.

AIG was a big seller of this insurance.

Fast-forward to today.  European banks are levered up at 30:1, 40:1, 80:1, and over 100:1.  While the US banks are screwed at that level too, European banks are screwed FAR worse (even less reserve requirements, smaller GDPs, etc.)  Iceland anyone?

Now, banks are starting to teeter-on-the-edge, and the counter-parties are getting nervous they won't be paid.  Everyone knows leverage is FAR beyond the 12:1 international agreement (for all the international banks).  Counter-parties are starting to lean on AIG to kick in the cash to cover the minimum 8% capitalization (e.g., "margin call").

They are so screwed.  The money does not exist, will never exist, and there is no scenario by which it will ever exist.  For various reasons, you can't even print this amount of money (though central banks everywhere will try).

Since AIG is already insolvent, and it's the back-stop to so many European banks that are insolvant, the domino of failures assumes the "daddy-of-them-all" (the US Fed) will just cut checks for everybody.  Uh, they may try, but it can't happen.

It's all going to blow.  What people don't understand is that it's *already failed*.  The only difference is that through fraud, obfuscation, and rampant central bank interference, price discovery is hindered and the accountants haven't done their *&@#! job yet.

I'm a biologist too.  We biologists need to stick together.

 

Mon, 11/30/2009 - 23:48 | 147186 andrew123
andrew123's picture

Thanks for the explanation.  I am a little confused as to why you are certain the Fed can't provide more money.  Also, is there any way to tell which European banks are most at risk?

Tue, 12/01/2009 - 01:30 | 147285 Anonymous
Anonymous's picture

They'd have to provide $640 Trillion. Sure, they could do that, but gas would be at about $1 Million per gallon. And you wouldn't be getting a raise for a while. Assuming that you had a job.

Tue, 12/01/2009 - 02:02 | 147312 Burnbright
Burnbright's picture

Yay! I am not the only biologist here! Well the Fed actually can provide more liquidity, personally I enjoy how they call it liquidity rather than inflation or expanding the money supply at least. I think what our previous biology friend was talking about though is that the Fed, if it were to create even further liquidity would guarantee a hyperinflationary event, if that hasn't already been done.

It is really just a matter of how stupid you think Ben Bernake is, or if you believe BB is doing this all on purpose i.e. problem reaction solution toward pushing global governance and one world currency.

Personally I have no idea what BB's reasons could possibly be, however I do believe he will provide more liquidity. He hasn't let any institution fail yet and I am willing to bet he never will.

 

Wed, 12/02/2009 - 00:08 | 148886 Josey Wales
Josey Wales's picture

I also have a MS in Molecular Biology and I began to switch my investments to metals when I started researching the markets.  What I saw were money growth, derivatives outstanding, Treasury debt, and all other concievable metrics of liquidity going parabolic.  Parabolic rates of growth end with a crash and return to equilibrium.  Complex systems all behave the same way, I doubt these guys running the show ever took a class in biology.

Tue, 12/01/2009 - 00:06 | 147209 Anonymous
Anonymous's picture

mikla - thanks a ton for the explanation (I'm a lowly Aerospace Engineer who has never understood the Basel I & II thingys). But I'd love to have an elaboration of your comment: "For various reasons, you can't even print this amount of money (though central banks everywhere will try)."

I don't understand why. When the Fed makes new money, there are all types of methods to do it, from having their primary dealer friends buy Treasuries that the Fed buys back in a week, to selling them to unnamed parties that routinely oversubscribe auctions, etc etc. But the last step always involved someone's finger pushing a button on a computer and money coming into existence in some Fed check register.

As far as I can see, all the hoopla about Treasury issuance is little more than a carny's trick of distraction. Make people believe that the only way money comes into the world is through convoluted processes, and maybe they'll overlook the fact that all of it in the end boils down to using a printer or computer. Ask R. Mugabe about the utter lack of difficulty of bringing quadrillions of new money into being.

The banks (central and otherwise) have been playing a game of kick-the-can all along. I don't understand how their game is up until the common people get involved and reject fiat; it is in the interest of all of the fakers to just keep on faking, and as long as we keep treating their money seriously, then they will remain on top.

Again, thanks for your post.

Tue, 12/01/2009 - 02:02 | 147305 mikla
mikla's picture

But I'd love to have an elaboration of your comment: "For various reasons, you can't even print this amount of money (though central banks everywhere will try)."

Short version:  It's complicated, but it's similar to the current argument of "inflation or deflation?"  Smart people can disagree (there are legitimate arguments on both sides), but in the short term, at least one of them will be wrong.

I'm in the camp believing in short-term deflation, followed by hyper-inflationary sovereign default (worldwide).

In short:  Central banks will inflate when that's to their advantage, and deflate when that's to their advantage.  They are currently attempting to inflate (at absolutely astounding rates) with some level of success (but not great success).

I assert that this is temporary because you can only "inflate your balance sheet" as long as you can service your debt.  The US Treasury can borrow infinite money as long as they pay 0% interest.  However, after borrowing infinite money, as soon as the interest rate goes to 1% (which it eventually will), then your "monthly minimum payment" on your credit card becomes more money than your GDP that month.  In that case, you're screwed (you can't pay your monthly minimum, and everything stops immediately -- ala Iceland).

But, what if I just print that money?  The current system doesn't work that way:  The US Treasury issues a bond, which must pay interest, to trigger the "manufacture" of more money.  The US Government *cannot* print more money without putting the US taxpayer on the hook -- hence the debt service issue.  So, the US Treasury can't create more money for "free".

But, the Fed can just print more money for "free"?  Yes, they can, but they can't give it to the US Treasury without the US Treasury issuing a bond (again, putting the US taxpayer on the hook, triggering the debt service issue).  The problem is that the Fed can't just pay the US Treasury's bills directly (although they are trying, by buying all the US Treasury auctions in 2009).

Further, even though the Fed is trying to de-value dollars as much as it can today (indeed, most central banks are trying to de-value their currencies), it realizes that currently, people will actually *use* dollars for stuff.  There's a point at which people will just call "bullsh*t", and not take dollars anymore.  The Fed knows this -- and the Fed won't let that happen (they will have just killed themselves, because they have no purpose in life except to control the monopoly called the "dollar").  So, while the Fed buys everything in the US Treasury auctions, even knowing it will never be paid back by the US taxpayer (it's mathematically impossible), the Fed will stop doing that the moment it realizes that the next bond purchase will make the dollar worth zero.  The Fed will try to save itself by permitting the US Government to have a failed auction, and to even to sovereign default.

So, when the Fed sees that the dollar is about to be worth *nothing* because they've printed too much, they will back-off and restrict dollar supply, so they can continue to control the dollar monopoly.  (Otherwise, the dollar monopoly won't be worth anything any more, because nobody will accept them for any purpose -- thereby making the Fed "dead", ala hyperinflationary currency collapse.)

The excitement comes as we all watch the Fed dance up-to-the-brink of the cliff, but then back away from the edge.  Can they back away from the edge in time?

I'm saying "yes" in the short term (we'll see a deflationary depression), but then everything will go to sh*t and it won't matter (dollars will be worthless because the old system will be gone in a hyperinflationary collapse).

But, this is speculating on "brinkmanship", and we don't see the end of the Roman Empire very often.  There are actually meetings being held about how to bring it down -- and you and I are not in the room (there are quite a few options for how to trigger the end-game). 

On the bright side, Planet Earth has never before seen Central Banks like they exist today, and their suicide is very exciting to watch...

 

Tue, 12/01/2009 - 02:25 | 147331 andrew123
andrew123's picture

This view sounds a lot like Karl Denninger's.   Assuming you are correct, how would you protect ourself?  Gold, bullets, land?  Are you really talking about apocalypse?

Tue, 12/01/2009 - 10:18 | 147530 mikla
mikla's picture

<snip>,   Assuming you are correct, how would you protect ourself?  Gold, bullets, land?  Are you really talking about apocalypse?

Big question, and I'll take that as an honest question, so I'll attempt an honest answer.  To not hide the point, I'll try to be short:

Denial, Anger, Bargaining, Depression, Acceptance.

No, I'm not trying to be cute.  People are asking, "please give me an option that has no consequences", but it doesn't exist.  Governments, pensions, and welfare states all over the world are broke and there's nothing you can do about it.  Life is unfair.  But, you never expected life to be fair, did you?

On the "positive" side (yes, really), children today are born into servitude and debt.  After this economic correction, that will no longer be true (that's good).  If you're Christian, you're generally not supposed to fear the Apocolypse - it's an upheaval, and no fun, but (in theory) we're all waiting for what's on the other side.

It's the same for this:  Societies will change structurally, the extended family and local communities will become *much* more important, an actual *value*-based production will be a much bigger part of everyone's lives.

Before this correction, 30% (then 40%) of the US GDP was based on fiancial transactions and Wall Street.  I'm a HUGE believer in the capital markets -- we need them -- but 30%-40% of GDP from paper-pushers that don't know what they are doing is absolutely insane.  Rather, ditch diggers create societal value, while many of these paper pushers were merely leverage arsonists that did what they could do to hurt society (e.g., establishing ponzi schemes).

Yes, we'll re-form international finance, national cultures (it's already started, read Steven Keen - Economist in Australia), and what comes out will be much greater happiness for future generations (for real).  If you want the positive, that's the most responsible thing we can do for our kids and grandkids.

But, it won't be fun for us.  And, the recently retired Baby Boomers are screwed: They were lied to, they were betrayed, and to a large extent their political behavior created this problem themselves.

None of us are in control anymore.

Tue, 12/01/2009 - 04:33 | 147420 ThreeTrees
ThreeTrees's picture

So, when the Fed sees that the dollar is about to be worth *nothing* because they've printed too much, they will back-off and restrict dollar supply, so they can continue to control the dollar monopoly.

Ok, so the two mechanisms of which I'm aware that the Fed can use to shrink the supply of dollars are 1) Reverse Repos and 2) Hike the interest rate.

We know the reverse repos haven't worked (why would banks want to buy back their worthless junk?) and the interest rate can't immediately decrease the amount of money in circulation but instead restrict the flow of new money entering the system.  I suppose there's currency confiscation but I don't even think that's on the radar yet.

What am I missing?

Tue, 12/01/2009 - 05:57 | 147442 hidflect
hidflect's picture

Raise the minimum capital reserve rate on banks by 2%. Repeal taxes on earnings from long term bank deposits. Slap out a nationwide (Federal)consumption tax of 5%. Repeal tax breaks for industry investment and charitable donations.

 

You could hit the money supply a long way down the pole with one speech.

Tue, 12/01/2009 - 09:22 | 147488 BRAVO 7
BRAVO 7's picture

In short: " Central banks will inflate when that's to their advantage, and deflate when that's to their advantage. "

THE FEDS PRIVATE STOCKHOLDERS PRIMARILY MAKE THEIR PROFITS FROM THE CREEPING INFLATION (THE GAS PEDAL)AND OCCASIONALLY WITH THEIR ARCH NEMISIS, DEFLATION (THE BRAKE PEDAL). BOTH OF THESE AND OTHER SCHEMES ARE MERELY TOOLS IN THE POUCH OF THESE MATTOID CRIMINAL GENIUSES. DO NOT, I REPEAT DO NOT, MAKE THE MISTAKE OF UNDER ESTIMATING THESE FINANCIAL OVERLORDS. IT IS ALWAYS HEADS THEY WIN AND TAILS YOU LOOSE, AND IF THE COIN SHOULD LAND ON IT'S EDGE, THEY HAVE THAT COVERED WITH A HEDGE...

 QUITE POSSIBLY ALL THE MISSING GOLD FROM FORT KNOX. WHICH WILL INCREASE THE NUMBER OF TRILLIONAIRES ON THIS EARTH AFTER A PAPER COLLAPSE. DOUBT IT NOT!

IF I WANTED TO BRING AMERICA DOWN TO THIRD WORLD STATUS, THE FIRST STEP WOULD BE TO DEBAUCH THE CURRENCY WHICH IS WELL UNDER WAY. NEXT STEP WOULD BE TO FORECLOSE ON AMERICA'S COLLATERAL (GOLD BULLION). THE FED AND GOLDMAN AND MORGAN CHASE ALREADY OWN HALF OF THE FORTUNE 500 WITH THIS 50% PUMP OF THE STOCK MARKET. I WOULD SAY THESE FED STOCK HOLDERS ARE "SITTING PRETTY" TO SCRAPE ABOUT ALL THE CHIPS OFF THE TABLE. AND ALL THE WHILE SEEMING TO BE TRYING TO SAVE THE FINANCIAL SYSTEM.

"MONEY IS THE GOD OF THIS WORLD AND ROTHSCHILD IS HIS PROPHET"

   BENJAMIN DISRAELI

Tue, 12/01/2009 - 11:16 | 147601 Anonymous
Anonymous's picture

Give me control of a nation's money and I care not who makes her laws.
Mayer Amschel Rothschild

Tue, 12/01/2009 - 11:45 | 147641 Anonymous
Anonymous's picture

Thanks Mikla. Great post.

Tue, 12/01/2009 - 16:10 | 148190 WaterWings
WaterWings's picture

Waitta minute! Do you make rockets?

Tue, 12/01/2009 - 00:15 | 147218 SWRichmond
SWRichmond's picture

At one point, ACA Capital was levered at 180:1, guaranteeing $61Billion in loans on its $326Million capital base.  http://seekingalpha.com/article/43538-loan-insurer-aca-capital-may-be-to...

Tue, 12/01/2009 - 01:25 | 147280 Anonymous
Anonymous's picture

Mikla and Deadhead thanks for taking the time to elaborate and explain. Thoughtful comments are one reason this is such a great site. The more people who understand what's going on the better. The ignorance out there is truly astounding...

Tue, 12/01/2009 - 01:47 | 147299 Dantzler
Dantzler's picture

mikla - thanks!

I'm a biochemist and it's nice to see some other non-finance folks stretching their brains to try to understand what's happening. For me it is more of a stretch because I try to simplify my system as much as possible before I perturb and observe.

Wed, 12/02/2009 - 22:33 | 150121 Anonymous
Anonymous's picture

that makes at least two of us on this thread!

Tue, 12/01/2009 - 04:41 | 147422 Anonymous
Anonymous's picture

Mikla

Thanks I was unfamiliar with Basel 1, that helped

ps Im so used to the tricky captchas that I automatically went to the calculator to do this one...blank x 17 = 170

dang I could have done that right in my head

Waldo

Tue, 12/01/2009 - 09:56 | 147507 Winisk
Winisk's picture

Me too.  But don't say that too loudly because natural systems are not welcome in the world of finance and economics.  They won't even admit we're animals. 

Tue, 12/01/2009 - 11:22 | 147610 JacksWastedLife
JacksWastedLife's picture

*The money does not exist, will never exist, and there is no scenario by which it will ever exist.* - bingo!

Thank you, sir.

Tue, 12/01/2009 - 01:19 | 147275 mberry8870
mberry8870's picture

While deadhead is EXACTLY right, let me say that these contracts called swaps entered into by these European banks had the effect is reducing the risk profile of certain assets on their balance sheet. In regulatory speak if you have less risky assets on your balance sheet you have a lower capital requirement. Which means for the same amount of capital you can do more stuff. However, if the swaps are no longer there, which is what AIG is expecting, this unwinding of the swap will increase the risk profile of the European banks thereby requiring them to raise more capital or sell assets. Good luck with that.

 

By the way this may be one of the main reasons our friends at the FED bailout AIG in effect being the guarantor for a bunch of European banks. Just another day at the office.

Mon, 11/30/2009 - 20:29 | 146977 Anonymous
Anonymous's picture

Debt ceiling? Let's install a retractable roof and get rid of the ceiling concept.

Mon, 11/30/2009 - 21:21 | 147022 Rollerball
Rollerball's picture

Good idea.  We'll let Krugman take Timmah's place.  Feel better now?

Mon, 11/30/2009 - 20:40 | 146991 AnonymousMonetarist
AnonymousMonetarist's picture

Marla,

Here is some background on this from December 2008...depending on how you count the beans they may not be beans or you may not need to count or ...oh who the hell knows...

http://anonymousmonetarist.blogspot.com/2008/12/blackholios-and-dark-mat...

AIG’s interpretation of accounting rules is different than that of Robert Willens, CEO of Robert Willens LLC, a corporate tax and accounting advisory firm in New York, and a professor at Columbia. He said AIG can’t have it both ways, calling the transactions swaps and then saying there’s no risk.

“If these are bona fide swaps, you look at them like any other transaction of this type with a transfer of risk,” Willens said. “If they do that, there would probably be very substantial writedowns because of what we’re seeing in the markets. If you’re using a different paradigm and saying there’s no risk transfer, these aren’t credit-default swaps. You’re getting a fee for renting the counterparty your name. There’s no third approach. The purpose of the swap is totally irrelevant.”

Mon, 11/30/2009 - 20:45 | 146995 binky
binky's picture

U.S. default is imminent. How it plays out is anybody's guess.

Tue, 12/01/2009 - 08:40 | 147477 TumblingDice
TumblingDice's picture

These things might play out longer than one might expect. They key is to identify the problem before those that caused it do.

Mon, 11/30/2009 - 20:46 | 146997 Anonymous
Anonymous's picture

The Fed had a $25B max allocation 40-day TAF auction this am, the results will post at 10:00 tmorrow am. these auctions have been typically running below the max allocations over the last several months. If this one maxes out tomorrow, I would take that as a bad sign. Also, the ECB will have their usual weekly USD auction Weds. am, these have been going for about $20B weekly lets see how both of these USD liquidity operations go this week in light of the USD funding problems in Dubai...stay tuned.

Tue, 12/01/2009 - 02:12 | 147318 Assetman
Assetman's picture

Very good observation, anon.

Mon, 11/30/2009 - 20:51 | 147004 john_connor
john_connor's picture

Black Swan, part dix neuf (fill in any suitable number).

I assume ZH is forwarding this info. to the legislative assistants of mssrs. Paul and Grayson?

Otherwise I can oblige tomorrow morning.

Mon, 11/30/2009 - 20:51 | 147005 Ned Zeppelin
Ned Zeppelin's picture

This is not a big deal. We'll simply ask the Federal Reserve to point out where in in its voluminous, publicly available and readily transparent files, policy statements, financial records, and documents on this subject where we can find the no doubt readily available and perfectly sensible explanation for all this, and we'll move on to more productive pursuits. 

 

Mon, 11/30/2009 - 21:39 | 147048 deadhead
deadhead's picture

it's on the same page that lists transactions for the es minis

Mon, 11/30/2009 - 20:55 | 147008 Anonymous
Anonymous's picture

OK, remember at the time of the crisis, AIG had $300BN of protection written for European banks (you can find it in their 10-K). This is why Christine LeGarde (you know her, "Finance Minister of the Year") personally called Hank Paulson and said it would be a good idea if the U.S. gov't. would help AIG. 'Cuz there tweren't no way French and Euro Banks were going to be able to find someone else to take that trade, and they sure couldn't cough up the requisite cash to provide the capital for those holdings--especially as risk climbed. My point--and I do have one-- is that I doubt that the Euros will do anything to upset this applecart.

Mon, 11/30/2009 - 20:57 | 147009 Herd Redirectio...
Herd Redirection Committee's picture

Great great work.  Typical of how things are done these days, to release the information, but to bury it in notes, and language would make even sophisticated analysts drool enter a type of trance.

Mon, 11/30/2009 - 20:59 | 147011 Anonymous
Anonymous's picture

Great Find Marla!

Can you or anyone explain to me why GMs and Chrysler's bankruptcy didn't trigger more defaults on unreserved CDSs. Thanks

SS

Mon, 11/30/2009 - 21:00 | 147013 Anonymous
Anonymous's picture

AIG tumbles 15% today. Coincidence?

Mon, 11/30/2009 - 22:35 | 147103 Hidetora
Hidetora's picture

Only if GS was shorting them...

Mon, 11/30/2009 - 21:31 | 147036 Unscarred
Unscarred's picture

Does this mean that, once the Fed makes whole on these payments, everyone here at ZH will stop dumping on Goldman Sachs?

Mon, 11/30/2009 - 21:40 | 147051 deadhead
deadhead's picture

No.

by the way, LB, what about that whole thing you were saying about wishing Goldman had NEVER participated in the FDIC TLGP borrowings to the tune of 22 billion plus?  How about paying off those bonds hypocrite?

yeah, i thought so....

Mon, 11/30/2009 - 23:42 | 147161 Unscarred
Unscarred's picture

Sorry...  LB?  Seriously?  Were you addressing me?

If you were, let me ask you, has your blind hatred completely cocooned you such that you are unable to see an obvious parallel and the inferred hypocrisy within?

I completely concur with the obvious fact that Goldman very likely would no longer be in business right now were they not Bernanke-Paulson benefactors.  I also agree that it would greatly behoove GS to use a sizable portion of that $20B bonus pool to buy back a significant portion of their TLGP bonds, but if the investors are happy to hold them, then what is the point (beyond ending the needless beratement, finger pointing and jealousy over an incredibly savvy business maneuver).

I am well aware that I completely open myself up to the ZH community for mass criticism by stepping out of the obvious trend and offer a counterpoint to prevailing sentiment.  I also see the irony in how a contrary perspective shared in a blog based on a move titled "Fight Club" would be met with spite, anger, and venom, as opposed to contrary logic, reason and rationale?

The entire point of this blog is the dissemination of information and sharing alternative perspectives, no?  And if so, why make it unnecessarily personal?

And one more thought in closing:  Everything that Goldman did is EXACTLY the same thing each of us would have done had we ourselves been in that same situation.  It is incredibly convenient for us to pass judgement, as we will never know what it was like to have been in their position.  Anyone who disagrees with that is either lying through their teeth or walking on water.

Let he who is without sin cast the first stone.  I'm ready.

[Personal experiment on crowd psychology to see what happens next]

http://i45.tinypic.com/34sp8pk.png

Mon, 11/30/2009 - 23:46 | 147185 deadhead
deadhead's picture

I'll fall for your "personal experiment".

Firstly, I wasn't addressing you as LB.  Apologies if it appeared that way.  The fact is that I have written extensively about LB and the FDIC TLGP matter on ZH. To answer your question of "why make it unnecessarily personal?" I don't believe I have made it personal.  Further, I think it is difficult, for me at least, to get personal with someone by the name of "unscarred".  Please don't take that personally.

Secondly, as to "blind hatred".  I fail to see how you can suggest that I have blind hatred for GS based on my one sentence question about GS paying off the FDIC TLGP bonds. Further, my issue with GS and Blankfein in particular, goes to the fact that he is a hypocrite for continuing to use low cost funds backstopped by the FDIC when he is on record (WSJ interview several weeks ago) that he wishes GS would have never borrowed any money under the program.  You've gone on to talk about the "savvy business maneuver" displayed by GS in utilizing the funds (not terribly savvy when the FDIC is shoveling out easy money) and I assume you mean "hey, why shouldn't they take advantage of cheap capital?"  If correct, and I believe it is, I fully understand why they would do it.  However, Blankfein continuing to use this cheap pool of funds while publicly stating that he wishes he hadn't, and he has the money to grant his own wish, is the ultimate in hypocricy.

You said: "Everything that Goldman did is EXACTLY the same thing each of us would have done had we ourselves been in that same situation. "  I disagree with that statement as there are a number of bank leaders in this country who chose not to participate in TARP or the TLGP program. 

My point as expressed many times before is the hypocricy of Blankfein, not the fact that he took advantage of a government handout.

To continue your experiment, please tell me if I have failed to make the point about a hypocritic Blankfein or, at least where I come from, we call people like Blankfein bullshit artists.

Tue, 12/01/2009 - 00:25 | 147220 Unscarred
Unscarred's picture

deadhead,

FIRST:
Thank you for the response.  I appreciate that your intention was not to make it personal.  When I read a direct response to my original post that says, "by the way, LB..." I assume that it is addressed to me (given that, again, it was a direct response to my original post).  I also did not take offense to your statement of my name, as I find it difficult to get personal with someone named "deadhead."  Again, nothing personal.

SECOND:
While you stated that you fail to see blind hatred it your one sentence questioning LB's obvious hypocrisies, I agree with you.  Were I DON'T see glowing love, however, is the following statement of, "yeah, i thought so..."  I have yet to experience an instance where a lil' somethin' somethin' after a point has already been driven home that is not done so without malicious intent.  Obviously, you can appreciate how this will never be seen as a sign of affection, matched with my above perception of the direct response to my original statement.  But, such is as such exists.

THIRD:
My statement of "Everything that Goldman did is EXACTLY the same thing each of us would have done had we ourselves been in that same situation" referred to the Treasury/Fed coercion of the $7B in AIG CDS payouts, not the TARP or TLGP participation, and I should have specified that.  Thank you for pointing out that numerous other banks did not participate in those two programs, and they (wisely) did so as to avoid government oversight moving forwards.  Since that is the source of the greatest amount of venom towards GS (the AIG CDS payouts), I figured that was understood.  I was obviously mistaken and I know better to understand nothing is understood.

FOURTH:
I agree with you 100% in your final statement about GS and LB.  LB is a hypocrite (doing as he pleases while trying not to look bad in the process), while GS is not (doing what it does best, making money at all costs).

FIFTH:
You did not pass the experiment.  Nor did you fail.  But, by participating, you have chosen to exist (token Atlas Shrugged reference).

Thanks.

Tue, 12/01/2009 - 00:35 | 147238 deadhead
deadhead's picture

I appreciate your response.  seems like we agree moreso than not.

you are correct about the lack of glowing love in regards the "lil somethin' somethin'" when i wrote "yeah, i thought so."  i don't view my feelings in this regard as malicious, but after 30 yrs in the financial business, bullshitters and hypocrites deserve a calling out, particularly if they are playing on my dime, which they are, and I do not like it at all.  fact is Blankfein is doing a p.r. tour yet continues the lies and hypocricy and many of us aren't falling for it....leopards rarely change their spots.

i've been a free enterprise, capitalist person at heart my entire life.  i have a real problem with those that claim to be "free enterprise" and "capitalists" (like goldman but certainly most of the other large banks as well and I would throw mr. all american grandpa, draped in the red, white, and blue sucking down a Coke and Dairy Queen burger Warren Buffet in that group of hypocritical gov't mammary suckers as well) yet when they have a problem they go running to the gov't that they despise so much in terms of interfering with them asking for a handout. 

I wish you well.

 

Tue, 12/01/2009 - 00:51 | 147256 Unscarred
Unscarred's picture

In my dealing with people over the years (far beneath the tenure of yourself), I find that once all of the bullshit gets stripped away and the volume turned down, people share more common sentiment on virtually all topics than they typically wish to acknowledge.  The differences, therefore, lie with the individuals themselves, and people (unfortunately) too rarely will let down their guard long enough to allow ideas to freely flow.

Thank you for your open-mindedness, and the best to you, as well.

Tue, 12/01/2009 - 02:13 | 147301 B9K9
B9K9's picture

DH, I appreciate your lucid and insightful comments, but you really should take some time to study a little history.

The inherent tension between monarchy & democracy has been debated and discussed since at least from the days of Pericles.

Once a democratic state is empowered with monopoly power over territory & laws, it becomes a natural target by those who would exploit its position for their own personal benefit.

To state that you are a "free enterprise, capitalist person at heart my entire life" is nothing more than an admission that you are either naive, ignorant or both.

We The People created Goldman Sachs and their ilk. How come commercial banks held no power in Nazi Germany, Imperial Japan or the defunct USSR, nor currently exert any influence in "modern" fascist, state controlled China? (While, in the mean time, a dictatorial Russia has stripped assets from anyone not towing the country line?)

Does anyone want to live in those types of societies? Of course not. Which is why the squid is always looking for emergent democracies in which to exploit the people's passions & desires.

The illusion of comfort & wealth is just as an important driving force as sex, food & shelter. The bankers merely supply the drug (FRB driven inflation) for a desire that is simply insatiable.

Once you understand this basic fundamental component of human nature, then you will clearly see why events play out the way they do. In a democratic state, politicians get elected who successfully deliver the high. Bankers are merely the "growers & distributors"; legalization is accomplished with full accordance, no, demand by The People.

There will always be fraud & corruption; there is no force of law (or Constitution) that is strong enough to withstand the corrosive temptations of human nature. Stop blaming others and identify the true culprits: ourselves.

Blaming others for one's own mistakes is the hallmark of a juvenile behavior. ZH and other financial blogs are simply infested with this type of thinking.

There will always be criminals and corruption. It is the duty of free people to defend against such actions. The fight for freedom should have taken place long ago upon recognition that some fellow citizens would sell their birthright for the illusion of inflated wealth.

 

 

Tue, 12/01/2009 - 02:20 | 147322 faustian bargain
faustian bargain's picture

Very thought-provoking, but not an indictment of capitalism. As you say, there will always be criminals and corruption.

Tue, 12/01/2009 - 02:31 | 147333 Unscarred
Unscarred's picture

 

Touché!

Tue, 12/01/2009 - 13:03 | 147783 B9K9
B9K9's picture

Not an indictment of capitalism, rather one of democracy. I suggest people (re)read Hobbes and Hoppe (Democracy: The God that Died).

Knowing what you know now, what would be your reaction if you discoved a country that was about to fling open broad enfranchisement?

That's right - become a banker. The siren song of sweet, effortless wealth is simply irresitible to the general populace. Soon enough, the country would have in short order a central bank, FDIC, home ownership subsidies/tax breaks, the whole enchilada.

'Cause, you know, a modern state must provide "social justice"; the People, after all, demand it. We all know how the story ends.

Tue, 12/01/2009 - 10:18 | 147529 Anonymous
Anonymous's picture

A Thief is a Thief. I suppose you wish us to assume the theft was ok, because the mass passively or unwittingly condoned it. In your world, if my house isn't locked I am asking to be robbed and deserve it. Cleavage is asking for rape etc...

Tue, 12/01/2009 - 13:18 | 147808 B9K9
B9K9's picture

You must be young - you assert with confidence that "cleavage is asking for rape" is negatory. I've got news for you - it's positive.

Go back and (re)read some of those old time classics like Treasure Island & Robinson Crusoe. They get a rep as children's books because they provide a ripping good yarn. Yet, upon reconsideration, you may notice the overriding theme is one of self-protection.

In the 'bad old days', there simply was no one to help you. Trouble came from anywhere - study up on what happens when primitive trides happen to meet. The natural, unthinking reaction is to try and exterminate the others. Which is why the words speak from the hearts of those who felt danger first hand and expressed them within an adventure story.

Criminals & corruption have, and will always exist. It is the duty of free men to constantly be on guard. We employ the ruse of the state to act as our agents, yet the same ending occurs over & over again.

"The fault, dear Brutus, is not in our stars, But in ourselves, that we are underlings." Julius Caesar (I, ii, 140-141). The bankers are not our masters, they are our slaves. They wouldn't exist if WE didn't create them.

 

Tue, 12/01/2009 - 14:21 | 147920 WaterWings
WaterWings's picture

Hey, your Ivory Tower called. The janitors can't make any decisions without you there to insult them.

It's hard to take posters like you seriously:

We The People created Goldman Sachs and their ilk.

 

Blaming others for one's own mistakes is the hallmark of a juvenile behavior. ZH and other financial blogs are simply infested with this type of thinking.

Tue, 12/01/2009 - 14:38 | 147958 Unscarred
Unscarred's picture

 

B9K9, when Anon said "Cleavage is asking for rape etc..." he may have meant that as an inference to his perception of your own statement.

In your statement "Once you understand this basic fundamental component of human nature, then you will clearly see why events play out the way they do," I could not agree more!  That is the fundamental basis of my understanding of the world, and if more people shared it, we would truly have an opportunity to advance ourselves as a society (and a species), rather than continuously relive history time and time again.

Further, this dialogue has completely unfolded exactly how I thought it would when I initiated this discussion, except that I expected myself to be the hunted.

Tue, 12/01/2009 - 14:41 | 147964 WaterWings
WaterWings's picture

"Sometimes it is said that man cannot be trusted with the government of himself. Can he, then be trusted with the government of others? Or have we found angels in the form of kings to govern him? Let history answer this question."

   - Thomas Jefferson

Tue, 12/01/2009 - 11:49 | 147651 JacksWastedLife
JacksWastedLife's picture

"The people's selfish desires are the cause of all suffering in the world" - that's said by a one wise man ~2500 years ago.

It seems like there is the time to live in countries whose citizens still honors and respects that man.

Tue, 12/01/2009 - 02:30 | 147334 Unscarred
Unscarred's picture

All good stuff, and thanks to everyone for participating.

Tue, 12/01/2009 - 00:15 | 147217 Anonymous
Anonymous's picture

Let me fill their pockets with the stones to be cast as they're walking on water so we can catch the next bubble to ride.

Tue, 12/01/2009 - 00:59 | 147263 Hephasteus
Hephasteus's picture

Exactly right. Power enables abuse. There's no character quality difference other than the character quality differences that lead to the imbalance.

I have a dream. I want the people to know and see that it is not possible to force anyone into inferior position and make it stick. I want them to know and see that these new asshole leaders are no different than the previous asshole leaders. I want them to know and see that the strong exist only through the tolerance and good will of the "weak". That nothing is sacred except abuse and any attempt to make anything sacred is purely the process of sacriligiousness.

The powers that be are only rotten because they do not give their fellow man the necessary control to make them good. Faith ruins the world. Suscpicion is it's true savior.

Mon, 11/30/2009 - 21:46 | 147059 Rollerball
Rollerball's picture

Same jokers, different suits.  They're both short US.

Mon, 11/30/2009 - 23:01 | 147139 Ned Zeppelin
Ned Zeppelin's picture

Unscarred: Goldman Tab is $13 billion of AIG money stolen via complicit ex-CEO treasury secretary and traitor to the US, Hank Paulson, plus insured FDIC bonds, all of which need to be paid back, with interest, for a clean slate to even be discussed - will that be cash, Mastercard, Visa, Amex or Discover? We'll take gold bullion, but there's a hold til the assays come back clean, no tungsten.

Mon, 11/30/2009 - 23:13 | 147147 Unscarred
Unscarred's picture

Same jokers, different suits.  They're both short US.

My point exactly.  And Zep, you're right.  That is one helluva number, and it will be interesting to see how that compares to our European friends when this is all said and done.

Mon, 11/30/2009 - 23:04 | 147142 Ned Zeppelin
Ned Zeppelin's picture

No. Thieving GS cephalopod scum gets no respect here. Sorry.

Mon, 11/30/2009 - 23:29 | 147172 Anonymous
Anonymous's picture

Seriously? Now why the MSM hasn't caught onto this is anyone's guess (see below).

Tyler/Marla,

Could I request a cover on this if you get the time?

I really do appreciate your place here.

"Against that bleak backdrop, Wall Street is squeezing one of America's weakest cities for every penny it can. A few years ago, Detroit struck a derivatives deal with UBS and other banks that allowed it to save more than $2 million a year in interest on $800 million worth of bonds. But the fine print carried a potentially devastating condition. If the city's credit rating dropped, the banks could opt out of the deal and demand a sizable breakup fee. That's precisely what happened in January: After years of fiscal trouble, Detroit saw its credit rating slashed to junk. Suddenly the sputtering Motor City was on the hook for a $400 million tab."

http://www.msnbc.msn.com/id/34067419/ns/business-businessweekcom/

Not just Deriot - many other places like VA and NJ.

Now let's get this straight. GS almost went under - except for public funds kept them from BK. Now they are sharking the states.

Please, shine this light this way.

Thank you.

Mon, 11/30/2009 - 23:57 | 147196 MsCreant
MsCreant's picture

Awesome, Anon, wish you had a name/avatar. Something that eats sqwidz? Tear em up. You got the stage as far as I'm concerned.

Tue, 12/01/2009 - 00:14 | 147216 Anonymous
Anonymous's picture

Thank you. We should really press this. Any help you can give is appreciated.

I will set up an account (I tried before but had issues).

Avatar: http://en.wikipedia.org/wiki/File:Bernardbaruch.jpg

Thanks again.
sandman

Tue, 12/01/2009 - 00:43 | 147248 sandman.
sandman.'s picture

Got through the process.

Tue, 12/01/2009 - 01:15 | 147271 MsCreant
MsCreant's picture

Hey sandman,

So glad to see your avatar over here! Another commenter (unscarred) posted the Detroit doings as well below.

I keep thinking I have finally heard it all and nothing will surprise me any more. This is an outrage, plain and simple. They get "team" help and they are not loyal team players.

I doubt you are into this sandman (as I know you to be a true gentleman [proper, reserved, civilized]) but there is a Metalica song called "Enter the Sandman." Pretty potent stuff, that sandman.

For your debut to this forum sandman:

http://www.lyricsfreak.com/m/metallica/enter+sandman_20092087.html

The song, a little loud, a little brash:

http://www.youtube.com/watch?v=1QP-SIW6iKY

Tue, 12/01/2009 - 01:33 | 147284 Unscarred
Unscarred's picture

sandman.

Great post, and nice Bernard Baruch reference.  I forwarded the article to Tyler/Marla via the ZH "Tip Mailbox" and hopefully we'll see a full workup about it, ZH style.

Thanks for the info, and I look forward to reading more from you.

 

MsCreant,

Doooown girl...  Don't scare him away after his first day!  (Whoosh)

I added his link to my reply to your post so as to share it and not allow it to get lost in the mix as Anon.  I like the Metallica reference; however, my loyalty (along with my moniker) lies with Pantera:

http://www.lyricsfreak.com/p/pantera/a+new+level_20104418.html

New life, in place of old life,
UNSCARRED by trials

Tue, 12/01/2009 - 01:55 | 147304 MsCreant
MsCreant's picture

Sandman is solid as a rock. He won't scare easy. I know him from, shall we say, other virtual places...

Tue, 12/01/2009 - 02:13 | 147317 Unscarred
Unscarred's picture

 

http://www.youtube.com/watch?v=IexH0itz3CQ

"(cough) Very good..."

Tue, 12/01/2009 - 11:32 | 147625 sandman.
sandman.'s picture

MsCreant and Unscarred,  Thank you for the kind words and the warm welcome. 

 

The song and videos are pretty good

 

Thanks again.

Tue, 12/01/2009 - 01:23 | 147276 Unscarred
Unscarred's picture

[retracted]

Tue, 12/01/2009 - 02:23 | 147328 stedanrac
stedanrac's picture

 Mish has a post on Detroit: 

If Detroit Mayor Dave Bing pays UBS one dime over this, he is a complete fool.
The solution is easy. Detroit should declare bankruptcy.

 

http://globaleconomicanalysis.blogspot.com/2009/11/virginia-borrows-126-billion-to-pay.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:+MishsGlobalEconomicTrendAnalysis+(Mish's+Global+Economic+Trend+Analysis)&utm_content=Google+Feedfetcher

Mon, 11/30/2009 - 21:43 | 147056 deadhead
deadhead's picture

Thank you to Marla and Geoffrey for taking the time and making the effort to publish this piece.

I have written to my Senator, Schumer, several times on these items including a request to withold support for Bernanke (I can see Chuckie just guffawing over that one).  I do hope folks here will write to their Senators, particularly if your critter is on the Senate Banking Committee chaired by residential mortgage expert and Ireland real estate magnate Chris Dodd.

Mon, 11/30/2009 - 21:51 | 147064 Rollerball
Mon, 11/30/2009 - 21:50 | 147061 Anonymous
Anonymous's picture

It was frustrating how the MSM ignored the Basel treaties last year when explaining to the public why, exactly, we needed to empty our pockets to TARP the banks. I'm not even in the biz and I knew about Basel I/II, and how, after a massive discontinuity in September 2008 (one big withdrawal or a quick series of big ones) a few major US banks found themselves unable to meet Basel treaty requirements sufficient to do business on the international stage. Enter the printing press. This is why I wasn't surprised that the banks didn't lend the TARP money to the public afterward as promised: To do so would have defeated the purpose.

Mon, 11/30/2009 - 22:33 | 147101 Hidetora
Hidetora's picture

If the rock you sit on starts to roll...jump clear.
                  
Or you'll go with it, and be squashed.

Mon, 11/30/2009 - 22:47 | 147118 laughing_swordfish
laughing_swordfish's picture

Let's see if I understand this right.

By buying capital requirements credit default swaps these European banks were able to reduce the actual amount of capital on hand to meet the requirements of Basel I.

Sooo... if AIGFP defaults, all these banks no longer have sufficient statutory capital and are legally insolvent.

And the Fed claims in "negotiating" with these parties they are NOT negotiating from a "position of strength".....

Infrickingcredible.

Fire the whole lot of them.

BTW, anyone know how much The Squid benefited from all this?

Marla, with all due respect, it's time - indeed past time - for heads on pikes.

 

KptLt. laughing swordfish

9er Unterseeboote Flotille

 

 

 

 

Mon, 11/30/2009 - 23:16 | 147157 Anonymous
Anonymous's picture

Marla: Someone really should give you a medal for your sleuthing. Well done. Again.

Mon, 11/30/2009 - 23:40 | 147179 MsCreant
MsCreant's picture

So I'm probably being naive, but if I bought insurance, I expect them to pay, unless I have committed fraud.

Is there a way to count up who owes who what, but do sort of a practice run? Isn't it possible that a lot of this just cancels out? Isn't it really about time and logistics? If I get the swap money I am owed, I don't bankrupt. If I don't, I bankrupt before I get my losses covered. People don't want to bankrupt, and do want to keep paying those they depend on in the system, right?

I'm trying to suggest a "scrip" or IOU system, where you keep everything propped up all fake like it is, but you run through it and see where everything settles. I hope someone gets what I am trying to say. Then, all at once, give everyone the number they have once the swaps settled. I think if you did something like this, fewer bankrupcies would happen. Certainly there would be less systemic chaos.

Course you would have to trust an arbitrator and who would you trust not to give GS everything? But we trust judges enough...

WTF, let the gift "swapping" begin and let the Margin Call from Hell ring out around the world this joyous holiday season as Ben Santa Allah Long and his demonic elf Timmah juice the spreads on Christmas holiday treason.

Mon, 11/30/2009 - 23:51 | 147191 Unscarred
Unscarred's picture

+100

Beware the Timmah Juice this holiday...  And isn't it a bit ironic that the Dynamic Duo (Treasury/Fed) entered themselves into a hellishly toxic transaction (see topic) while trying to bail out another?  This keeps getting better and better.

Just wait to see how many other Detroits we'll see in 2010.

http://www.msnbc.msn.com/id/34067419/ns/business-businessweekcom/

 

Tue, 12/01/2009 - 00:29 | 147232 Anonymous
Anonymous's picture

LoL got it nice. 2010 is going to be awesome.

Tue, 12/01/2009 - 01:14 | 147270 mikla
mikla's picture

So I'm probably being naive, but if I bought insurance, I expect them to pay, unless I have committed fraud.

 

You might expect them to pay, but if they go bankrupt, you're merely a creditor that will wait in line to get what you can get (likely nothing).

Yes, these things were "insurance".  However, that's the magic of the Collateralized Debt Swap market -- because of their structure, they were not regulated, and there were no reserves established from which the claim could be paid.

Yes, it was fraud (typically by a chain of parties).  The accountants and regulators had no problem with it, though, so there will be no punishment.

Just suffering for us all.

Tue, 12/01/2009 - 01:15 | 147272 Anonymous
Anonymous's picture

Where it will all "settle out" is with many, many bankrupcies, since there is no "real economy" (people making useful things) underneath all this finance -- that is -- debt. The bill for our decades of living on credit will be exposed for what it is: unpayable in our and our childrens' lifetimes.

Mon, 11/30/2009 - 23:51 | 147190 Anonymous
Anonymous's picture

AIG/Hank Greenberg committed massive fraud. His former attorney Neil Barofsky is now a pivot man in the Obama administration. They should all be in jail. What can europe do? Declare war on the US? Were they actually so stupid to trust a new york financial institution? When will they learn?

Mon, 11/30/2009 - 23:53 | 147192 DaveyJones
DaveyJones's picture

Ellen Brown - Basel global Currency conspiracy article

http://www.marketoracle.co.uk/Article10112.html

Tue, 12/01/2009 - 00:05 | 147206 Pinkfleud
Pinkfleud's picture

Sorry, you guys are way smarter than I but I have to ask; everything I've read and not just on the alternates says that this is nothing more than an extend and pretend with no real tangibles, so whats the point or to be a tin foil hatter whats the end game that they're planning? Even a joe 6 pack or 12 pack as of late can see that they're out of bullets and this is all a dance ( potomac two step ). Travelled out of the US ( Down south ) lots of gringos buying up a lot of stuff ???

Tue, 12/01/2009 - 00:41 | 147242 Comrade de Chaos
Comrade de Chaos's picture

there is a good article that might answer your question:

http://opinionator.blogs.nytimes.com/2009/10/06/leopard-behind-you/#more...

 

 

Tue, 12/01/2009 - 00:36 | 147236 Comrade de Chaos
Comrade de Chaos's picture

Marla, tell me what a democracy is like. Does democracy imply the transparency for a few chosen or the transparency for all? And if only a few chosen are aware while the rest of us are supposed to make the choice, WTF do we call it a democracy? 

We have so many choices, 

choice a

and choice or else.

 

I think we deserve better. I think we should demand better.

Tue, 12/01/2009 - 00:40 | 147241 Anonymous
Anonymous's picture

Several here have asserted that the Fed "cannot print enough" to cover this, and the reason for this is not clear to me.

I believe the Fed can print any amount they want, in fact they can buy every asset in this country including my neighbor's Weber grill if they wish.

Bernanke will fire up the electronic dollar machine and this problem will go away very easily.

If i am incorrect, I would like to know why..

thanks

Tue, 12/01/2009 - 00:54 | 147260 Anonymous
Anonymous's picture

Could this be why Timmay paid off AIG at 100%. If AIG is holding swaps to all these Euro banks, and they pay off GS at 50 cents on the dollar, all those E-banks have to adjust their capital to reflect a reduced liklihood of payoff from the insurance, this in turn keeps the dominoes falling in the global meltdown.

Tue, 12/01/2009 - 01:01 | 147265 cocoablini
cocoablini's picture

Why doesn't the FED post the Currency Swaps,Agency Debt, Fannie and Freddie as collateral for AIG's obligations which it will surely default on. Then the Eurotrash can have all this crap they bought from us BACK. Then the FED can hold that collateral and monetize the monetized collateral...

Tue, 12/01/2009 - 01:08 | 147269 Anonymous
Anonymous's picture

The reason for the big dump in AIG shares today was not that, but this analyst note that AIG may be 11 billion short in reserves to pay claims in its property and casualty insurance business.

http://jessescrossroadscafe.blogspot.com/2009/11/wll-aig-be-able-to-pay-...

That was a stunner to me. I have been following the swaps drama, and understand it fairly well. It is mispricing of risk of the first order, and shows what a joke the Basel agreements became if they could be subverted by such a transparently dodgy scheme.

But could AIG start defaulting on insurance claims to mom and pop, and their mom and pop businesses? That would be something that might shake the Bickerson out of their media induced slumber.

I have not seen much else on this story around. Its a big one if the analyst has it right and its true.

Tue, 12/01/2009 - 01:17 | 147274 Cursive
Cursive's picture

I know about "extend and pretend", but how is there any equity left in these banks?

Tue, 12/01/2009 - 01:26 | 147281 mberry8870
mberry8870's picture

There isn't and that's the point. Apparently this isn't the first time. It has been reported that Volker has stated all banks were bankrupt back in the Carter/Reagan days.

Tue, 12/01/2009 - 01:32 | 147288 MsCreant
MsCreant's picture

This crap could go on forever.

Tue, 12/01/2009 - 02:22 | 147323 Unscarred
Unscarred's picture

That's an interesting point, because not only were banks not bankrupt then, but they were a whole lot worse after the S&L fallout of the late 80's/early 90's, yet came out smelling like roses.  The heavy consolidation during that period, however, ultimately bred the TBTF contagion we experience today.

I realize it's probably too optimistic to HOPE (see avatar for cheap laugh) for Volker to be so monumentally wrong twice, BUT...

http://laughingsquid.com/wp-content/uploads/bob-hope-20081012-110532.jpg

Tue, 12/01/2009 - 02:05 | 147314 dot_bust
dot_bust's picture

Great article, Marla. 

One question, though: If AIG's exposure hits the maximum of $172 billion and the Fed wants to backstop it, does that pierce the debt ceiling, throwing the U.S. Government into default?

Tue, 12/01/2009 - 02:16 | 147319 Anonymous
Anonymous's picture

this is excellent reporting and attention to detail which would never be found in the pom-pom press like cnbc, forbes, ft, et. al.

the questions posed here are precisely the questions which congress should be asking of liar/traitor/financial terrorist/asshole bernanke...

there are too many ambiguities to the information to draw any conclusions and it is for this reason why the fed needs to be audited and then abolished and thrown in the bottom of the ocean in casket where john f kennedy's body is.....

Tue, 12/01/2009 - 02:20 | 147324 Printfaster
Printfaster's picture

The solution to the problem is simple:  The Fed buys all the failed assets and prints dollars for them.

Everybody is happy.

Printfaster, its not just an alias, it is a form of government.

Tue, 12/01/2009 - 02:26 | 147329 Unscarred
Unscarred's picture

Printfaster, its not just an alias, it is a form of government.

Nice.  Volume buyer, willing to pay market for that one!

Tue, 12/01/2009 - 02:40 | 147340 MsCreant
MsCreant's picture

If we are dealing with a real black hole, you may not be able to print fast enough. Valliant effort, sir knight, but as everyone waits for the bottom on the markets, there may not be one. Folks are liking the term extend and pretend.  We may be pretending into a system that has become moribund, impossible to sort, and absurd. The computer has enabled transactins that occur at a higher frequency, with greater complexity, across the globe, than any historian has ever contemplated. The artificial run up in real estate prices, coupled with a culture of ponziness, across the globe, may make this impossible to resolve.

If greed wasn't driving it, we could do it, we could sort it out. A better nature is possible.

Imagine financiers with the spirit of the people who went to help during 911, Katrina, and other disasters we have known. Those firemen kept working because they hoped to God they could save another one. They were addicted to it. You couldn't stop them to feed them or make them sleep hardly. Think about that. I have seen/felt this spirit before. It may be a disaster, but the atmosphere is loving and trusting. You step up to bat because you want to, need to. Ego dissolves. The article Sandman and unscarred both posted points to what is really pissing us off about the TBTF. They wouldn't go into a burning economy to rescue any one. They modify the terms of an agreement ONLY because they will profit or cut losses.

911 fireperson

vs.

Goldman Sachs CEO

Who do you want as your neighbor?

Tue, 12/01/2009 - 06:08 | 147446 gatopeich
gatopeich's picture

It has already been evident that GS, BB & Co. all think of themselves as '911 firefighters'.

I don't buy the hero-for-one-day shit. BTW, that's a very 'American' (as in 'USA native') concept. 911 firemen did not make the world a better place. You USA lived some kind of religious ecstasy those days and all the World end up worse as a result...

I maybe asking for Soap here, eh-eh!

But hopefully I don't need to enumerate the facts here. It was about time to wake up, and ZH is a goddamn sign of it.

In brief: gimme less heroes and more thoughful people.

Tue, 12/01/2009 - 09:01 | 147481 MsCreant
MsCreant's picture

This is fair:

gimme less heroes and more thoughful people.

Meanwhile it is not just American, nor is what I am talking about just kitsch. I have been on site at disasters, both as a recipient and giver of aid. When things are first busting open, generally people (not just Americans) are good to each other. In those moments no one is asking "who is going to pay for this" you just donate what you have, put your shoulder into it, and get what needs to be done, done. It is only later, when one is out of the moment and in their heads over thinking the thing and acting out of fear that any of that changes.

I will stand by what I have experienced, when things are bad, people help each other.

Goldman Sachs, invoking clauses just because they can make some money, instead of trying to help Detroit restructure: I say f@ck them, what is wrong with them, they got bailed out and they turn around and have no sense of reciprocity? I sure as hell did in my little world, grateful to have a chance to pay back what was done for me. The only answer I can come up with is the bailout was not received as aid, not appreciated as aid, it was taken as what was entitled. Or worse, they knew it was theft when they were doing it. What they were not doing was acting like grateful recipients of help, who would not abuse the help they were getting. When you have been helped, it is a pleasure to return the favor. I have no sense of this from them.

Tue, 12/01/2009 - 19:21 | 148565 RockyRacoon
RockyRacoon's picture

Thanks for a beautiful statement.  Agree or not, to each his own. I, for one, agree.

Re your statement, "Goldman Sachs, invoking clauses just because they can make some money,...".   Yeah, it's time for them to tout the so-called sanctity of contracts.  It's valid if it's their contract, and it's sacred if there is money involved.... their money.

 

 

Tue, 12/01/2009 - 02:21 | 147325 Anonymous
Anonymous's picture

Riveting post and commentary. I'm one of the unwashed masses, and so - I'm long on pitchforks, funs and ammo.

Tue, 12/01/2009 - 02:22 | 147326 Anonymous
Anonymous's picture

I'm one of the unwashed masses, and so - long on pitchforks, guns, and ammo.

Tue, 12/01/2009 - 02:34 | 147335 ReamUs
ReamUs's picture

OMFG! It's all gonna come crashing down. Wow - YOU are a GENIUS! So insightful. 

I'm just gonna start adding this comment to every post I cross when I'm enjoying my White Russians - until they ban me. 

Tue, 12/01/2009 - 02:56 | 147351 Unscarred
Unscarred's picture

LOL!

Tue, 12/01/2009 - 02:38 | 147339 ReamUs
ReamUs's picture

Oh, I just bought a nuclear missile on Amazon - got the defense shield as a bonus. Do NOT mock my bonus! I'll nuke your ass.

So don't ban me. I have poor people who work dirt cheap for you. You come visit - we agree on much. Difference aside! Yes?

I'm gonna launch my nuclear missile up your collective asses, post it as a porn video. How ya like them apples?

Do NOT follow this link or you will be banned from the site!