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JohnnyCash

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Reply with quote  #121 

Quote:
Originally Posted by ogden
Today on NPR (Diane Rehm "US shadow banking system")they have a couple of guest who did a great job of explaining what are derivatives, specifically credit default swaps and the naked CDS.

They also talked about how things got to this point. If you mix greed, recklessness, selfishness, narcism, and immaturity you get what we got.

The host, Diane Rehm said she heard the CDS totals 56 trillion and the world wide derivative market is around quadrillion.  One of the guys on the panel who was very pro CDS said that the amount is closer to 26 trillion and that the calls on these derivatives the last 6 months have gone okay.

I'm going to try to link the segment.  You will not believe what you are going to hear.  The best way to describe it is that the big boys were playing fantasy baseball with the mortgages, and using fantasy money.  Now they want real money for the garbage scemes they created.  These schemes are garbage, especially the naked CDS. 

The naked CDS was a gamble that people who took out mortgages wouldn't pay them off.  They didn't pay them off so now they want to get paid.  I don't see why the taxpayer should pay these guys off, they provide no service or product that is essential to keep our economy going. 

This is a good radio program. By coincidence I had written a response to you last night which explained the dangers of Naked CDSs, but I dozed off and my hand hit the keyboard deleting the message. So I'm juiced with coffee now and that shouldn't happen again.

Put your thinking cap on this is going to be a little complicated and long but there is a relatively inexpensive solution to this whole problem. First some definitions: CMBS Commercial Mortgage Backed Security, RMBS Residential Mortgage Backed Security, CDO Collateralized Debt Obligation, CLO Collateralized Loan Obligation (typically used in a leveraged buyout of a corporation), these are all Derivatives because they are based (or 'derived') from the underlying debt agreements. Synthetic Derivative, a derivative which has no underlying debt agreement or asset but is designed to rise and fall in value like a particular non-synthetic derivative. It is sort of like betting how a stock index will act without owning any of the stocks in that index. One of the speakers on the NPR show estimated that Synthetics were 4 to 5 times greater in number that non-synthetic derivatives. CDS Credit Default Swap -- an insurance policy on any of the above instruments to protect the owner of the Derivative.

CDOs do not necessarily imply real estate. The collateral could be a car or airplane or manufacturing equipment or accounts receiveable or anything of recognized value acceptable to the original lender.

Securitization is the process by which a Wall Street magician bundles a bunch of mortgages or debentures (non-collateralized corporate debt) or student loans or municipal bonds or car loans or airplane loans or whatever the cat dragged in, passes them to his friendly Security Rating Agency and receives an AAA grade then puts this bundle with it's golden rating into a new LLC or corporation responsible for collecting and distributing the income to the "investors" usually spelled "suckers". At this point we have now given birth to a new "derivative security". Of course the LLC or Corporation provides limited liability, as they all do, to only the assets held in the LLC or corporation. The magician wouldn't want any of these deals to come back and bite him in the assets.

For over 150 years life insurance companies have held to the principle of "insurable interest". It is taught in the most basic insurance classes and is part of the required education for an insurance license in the state of California and probably every other state and country that permits the sale of life insurance. I may take out a life insurance policy on myself, spouse, children or business partner. I have an "insurable interest" in the life and well-being of each of those parties. I will suffer some loss in the event of death to any of them. The loss can be emotional or financial or both. It is not clear that I have an insurable interest in a stranger. For example Ogden I might want to take out a life insurance policy on you. However no life insurance company would write such a policy because long ago they learned that lives of strangers seemed to become unexpectedly shortened just after the policy became enforceable.

Now bearing in mind the previous 5 paragraphs here is the point. A Naked CDS is an insurance policy with no "insurable interest". For example you buy a CDO from reijoe. Then you go to AIG or Citibank and purchase, for a fat premium, a CDS to protect you against loss if the CDO defaults. Now I have some information that CDO will probably default. So I too can go to AIG or Citibank and purchase a CDS on your CDO. I have no insurable interest because in the event of the CDO default I won't lose a dime. However AIG overlooks this little problem and sells another policy to me on the same CDO for the same fat premium. Now something sinister pops into the mix. I actually have an incentive for the CDO to default! This is contrary to all insurance principles!! There is a dangerous multiplicative effect. Instead of paying only one injured party in the event of a default the insurance company will have to pay multiple UN-injured parties! Again completely contrary to basic insurance principles and patently ridiculous on the face of it.

So if this is so contrary to established principles why did such notable insurance companies write these policies? Two reasons, first and foremost blind greed and secondly complete and utter disregard for the risk such policies carried. It was not so long ago that the rocket scientists of LTCM (Long Term Capital Management) thought they had the perfect scheme to lay off risk across many instruments and parties, but failed.

The gathering CDS debacle in particular and the derivative debacle in general are all the result of reckless, collosal, inexcusable bad judgement on the part of experienced bank and insurance executives. There is no reason, there is no incentive, there is no responsibility that the US Taxpayer bears for soothing, alleviating or paying any of this.

Any congressman or senator could make a very strong legal case that insurance policies lacking "insurable interest" are illegal and not enforceable in a court of law. If not illegal then still unenforceable for the reasons above. If this were done then none of the companies writing the policies could be sued for breach of contract, the Taxpayer wouldn't have to pay a nickle, and as much as 4/5ths of derivative problem would disappear without injury to anyone except those with uninsurable interest who bought CDSs. (4/5ths because CDS were available on synthetics too)

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rickencin

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Reply with quote  #122 
Quote:
Originally Posted by JohnnyCash

Quote:
Originally Posted by ogden
Today on NPR (Diane Rehm "US shadow banking system")they have a couple of guest who did a great job of explaining what are derivatives, specifically credit default swaps and the naked CDS.


Here's the link http://wamu.org/programs/dr/ select the second show on the list of this web page 11:00 U.S. Shadow Banking System

Thanks for the link. 

In creative real estate terms, legitimate banks decided to "credit partner" on naked (no insurable interest) Credit Default Swaps.  This allowed the CDSs to get AAA ratings, based not on inherent low risk, but on the financial strength of the banks.  When real estate went south it took the legitimate assets of the banks with them. 

Insurance means that failing is no problem.  If I gave you $1,000 outside a casino and said I would insure your losses on just one bet, but you could keep 90% of the winnings, which bet on the roulette wheel would you take?

You should have warned me that this was liberal radio.  My head practically exploded when the caller said it was so lucky that the government doesn't allow us to invest social security in the stock market.  Spending the money right away is soooo much smarter.



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Reply with quote  #123 
Johnny Cash,

I came to a similiar solution as yourself after hearing the radio segment and furthering my understanding of what occured.  I came up with this solution and my wife (who acts a joe 6 pack taxpayer) agreed.

1. The US government tells the banks/insurance entities that they can only use federal funds to payoff regualated businesses.

2. Offer this contract to all who will gain from synthetic derivatives.  The banks and insurance will return your premium and null and void the contract. 

3. If you decide not to take this offer, we will not allow the banks to pay you off with fed funds and will use our controll to make sure that regulated business is capitalized before paying off derivatives.

4. Without our assistance the banks/insurance companies can't pay you so you will lose both your premium and anything you stand to gain.

5. If you litigate the banks will like go bankrupt, in which case the fed will get first oppurtunity to gather their assets as our own. Also the federal gov't will pursue that your business was illegal and unenforcible. 

6. The fed could create a "pen" or "bad back" in which derivatives are held just for the administraive purposes of returning premiums.  This bad back will not try to buy or value assets, it just returns the premiums.

7.  The bad bank will get these toxic assets of the books and companies wil be charged their portion of the premiums they need to pay back. This can even occur over several years and interest.

8.  The gov't can add that it has no obligation to pay these derivatives, and that the trillions needed to pay this would be better spent on schools, health care, infrastructure, and nation debt reduction. They can lobby thier congressman but it will be political suicide for that congressman.

I believe England doesn't allow naked swaps due to the 300 hundread year old law regarding insuring your somebodies else house. They found out centuries ago that people who lack an interest can create a negative outcome to collect.

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Reply with quote  #124 
Here's a similar idea offshooting from your idea ogden.

Just have a new insurance business started that purchases all of the legitimate insurance policies from AIG. Then let AIG fail with all of the bad policies. Keeps the government out of the business, and naked policy owners have no one to sue because their contract was with AIG and AIG no longer exists.

JohnnyCash

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Reply with quote  #125 
Quote:
Originally Posted by rickencin
Quote:
Originally Posted by JohnnyCash

Quote:
Originally Posted by ogden
Today on NPR (Diane Rehm "US shadow banking system")they have a couple of guest who did a great job of explaining what are derivatives, specifically credit default swaps and the naked CDS.


Here's the link http://wamu.org/programs/dr/ select the second show on the list of this web page 11:00 U.S. Shadow Banking System

Thanks for the link. 

In creative real estate terms, legitimate banks decided to "credit partner" on naked (no insurable interest) Credit Default Swaps.  This allowed the CDSs to get AAA ratings, based not on inherent low risk, but on the financial strength of the banks.  When real estate went south it took the legitimate assets of the banks with them. 

Insurance means that failing is no problem.  If I gave you $1,000 outside a casino and said I would insure your losses on just one bet, but you could keep 90% of the winnings, which bet on the roulette wheel would you take?

You should have warned me that this was liberal radio.  My head practically exploded when the caller said it was so lucky that the government doesn't allow us to invest social security in the stock market.  Spending the money right away is soooo much smarter.


Sorry, I hadn't listened to the show before giving the link. NPR isn't noted for it's conservative leanings. I thought the professionals on the show were relavent with a minimum of politics.

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JohnnyCash

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Reply with quote  #126 

Quote:
Originally Posted by ogden
Johnny Cash,

I came to a similiar solution as yourself after hearing the radio segment and furthering my understanding of what occured.  I came up with this solution and my wife (who acts a joe 6 pack taxpayer) agreed.

1. The US government tells the banks/insurance entities that they can only use federal funds to payoff regualated businesses.

This is a step in the right direction. The bank/insurance entity could still be pressed in court to use non-gov funds.

2. Offer this contract to all who will gain from synthetic derivatives.  The banks and insurance will return your premium and null and void the contract. 

Imagine if you had lost $500,000 on the derivative but your premium was only $50,000. You may not feel too cooperative and decide to sue in court for the full loss, $500,000.
 
Now Imagine you had a gain on your derivative, say of $200,000, the premium is still $50,000. Then you would accept the return of $50,000 and still keep the gain. However this isn't very fair to the bank/insurance entity because it's like getting fire insurance on your home and then after 20 years selling the home and getting all your premiums returned because the house never burned.

3. If you decide not to take this offer, we will not allow the banks to pay you off with fed funds and will use our controll to make sure that regulated business is capitalized before paying off derivatives.

A smart lawyer would say that segregating the Federal monies from funds available for CDS losses implies that other monies are available for such a purpose. This would go to court if the losses to the investors were significant.

4. Without our assistance the banks/insurance companies can't pay you so you will lose both your premium and anything you stand to gain.

Be careful here, this assumes that no currently solvent bank/insurance entities wrote CDSs. Imagine a bank/insurance company which is completely capitalized and more, does not need Federal assistance but still wrote CDSs.

5. If you litigate the banks will like go bankrupt, in which case the fed will get first oppurtunity to gather their assets as our own. Also the federal gov't will pursue that your business was illegal and unenforcible. 

Even in BK there are rules about distributing the assets of a defunct company, creditors always come before shareholders. I am not certain but I think policy holders would be considered first among creditors. Depending on the size of the loss several derivative policy holders could seek a class action law suit. 

The judicial route through illegal and/or unenforcible premises is a cleaner and all encompassing attack. What we need is a Federal case to establish that current insurance laws require (either through implication or specification) insurable interest on the part of any policyholder. Lacking such insurable interest the contract is void.
 
This is a little easier said than done because Insurance laws are primarily the purview of each state. There must be some Federal insurance laws I don't know about.

6. The fed could create a "pen" or "bad back" in which derivatives are held just for the administraive purposes of returning premiums.  This bad back will not try to buy or value assets, it just returns the premiums.

7.  The bad bank will get these toxic assets of the books and companies wil be charged their portion of the premiums they need to pay back. This can even occur over several years and interest.

I never really supported the notion of a "bad bank", I do support the idea of "bad bank officers". HAHAHA To me the idea of segregating "bad assets" in a "bad bank" and "good assets" in a "good bank" is just a convoluted childish concept which was first proposed by former Sec Paulson (I think). It's a sneaky way to absolve corporate execs who encouraged this behavior. Wouldn't we all like to keep our gains and have no responsibility for our losses???

This also skirts bankruptcy which was invented to handle this very problem in a fair and legal way. The $trillions of taxpayer and grandchild taxpayer money going to these TARP-like solutions is worse than bankruptcy court.
 
8.  The gov't can add that it has no obligation to pay these derivatives, and that the trillions needed to pay this would be better spent on schools, health care, infrastructure, and nation debt reduction. They can lobby thier congressman but it will be political suicide for that congressman.

I believe England doesn't allow naked swaps due to the 300 hundread year old law regarding insuring your somebodies else house. They found out centuries ago that people who lack an interest can create a negative outcome to collect.

You could very well be right about this.



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kaihacker

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Reply with quote  #127 

Quote:
This also skirts bankruptcy which was invented to handle this very problem in a fair and legal way. The $trillions of taxpayer and grandchild taxpayer money going to these TARP-like solutions is worse than bankruptcy court.


I agree with this completely.  We are
keeping zombie corporations alive, just like Japan.

Too big to fail...I don't buy it.  I would rather them be dissolved and let good companies take over.

Same goes for broke manufactures (auto makers).

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Gene Hacker

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JohnnyCash

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Reply with quote  #128 

Quote:
Originally Posted by reijoe
Here's a similar idea offshooting from your idea ogden.

Just have a new insurance business started that purchases all of the legitimate insurance policies from AIG. Then let AIG fail with all of the bad policies. Keeps the government out of the business, and naked policy owners have no one to sue because their contract was with AIG and AIG no longer exists.

In many states, perhaps all, there is a period of time prior to BK in which the court can go back several years and re-claim assets which are assumed to have been withdrawn or sold with the knowledge of impending bankruptcy. In California that period is 3 years and in New York 6 years.
 
If it can be proved that assets were transferred to avoid BK then the court may be able to go back farther in time. The California law requires no proof of BK avoidance in the first 3 years prior. It implies that any assets removed in the prior 3 years were moved with the knowledge of impending BK.
 
All the assets that are re-claimed by the BK court are put into the pool for paying legal expenses, creditors, investors and others.

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kaihacker

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Reply with quote  #129 

Doomsday Scenario: Could U.S. default on its national debt?

Quote:

Apparently the markets think that U.S. risk of sovereign default is steadily creeping up. Hedge fund blogger Zero Hedge puts up the numbers here. According to the numbers from finance calculator company Markit, U.S. is a greater default risk than Japan or Germany, among others.

Watch for further widening of CDS spreads as this could presage a truly awful event that would make even T-bills a less-than-safe haven. Can you say gold and oil, folks?



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Gene Hacker

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JohnnyCash

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Reply with quote  #130 
Quote:
Originally Posted by kaihacker

Doomsday Scenario: Could U.S. default on its national debt?

Quote:

Apparently the markets think that U.S. risk of sovereign default is steadily creeping up. Hedge fund blogger Zero Hedge puts up the numbers here. According to the numbers from finance calculator company Markit, U.S. is a greater default risk than Japan or Germany, among others.

Watch for further widening of CDS spreads as this could presage a truly awful event that would make even T-bills a less-than-safe haven. Can you say gold and oil, folks?


This is a possibility. However there is a dynamic angle to this. The US Dollar will not be the only currency nor US Treasuries the only government bonds to be subject to the possibility. Recall how many countries have followed the US lead with multi-billion $ rescue plans. The Pound, Euro, Ruble, Swiss Franc, Aussie Dollar, Canadian Dollar, Yen, Renminbi, Rupee, Peso etc. ...will be subject to the same possibility --- only more so. The order of collapse will be very important, starting with the smaller currencies. Then something unexpected will happen. THe value of the US Dollar, Euro, Pound, Swiss Franc ... will rise as the smaller ones fall, then the remaining currencies will play the same game all over again. In this backwards world the one to fall last wins.

Timing is very important. Remember Japan has still not felt the inflationary wave expected in response to it's two decades old attack on deflation in 1990. What if it only takes the US stimulus half that time to initiate the deadly hyperinflation? That equates to 10 years of deflation, and deflation means a strong Dollar and US Treasuries. Lets assume that it is true that hyperinflation will ensue in 10 years. Any investor who follows an inflationary strategy during the intervening deflationary period will be wiped out before being rescued by inflation.
 
As bad as things may become in this country, things will most likely be worse everywhere else.

 




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JohnnyCash

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Reply with quote  #131 
Quote:
Originally Posted by JohnnyCash
Quote:
Originally Posted by kaihacker

Doomsday Scenario: Could U.S. default on its national debt?

Quote:

Apparently the markets think that U.S. risk of sovereign default is steadily creeping up. Hedge fund blogger Zero Hedge puts up the numbers here. According to the numbers from finance calculator company Markit, U.S. is a greater default risk than Japan or Germany, among others.

Watch for further widening of CDS spreads as this could presage a truly awful event that would make even T-bills a less-than-safe haven. Can you say gold and oil, folks?


This is a possibility. However there is a dynamic angle to this. The US Dollar will not be the only currency nor US Treasuries the only government bonds to be subject to the possibility. Recall how many countries have followed the US lead with multi-billion $ rescue plans. The Pound, Euro, Ruble, Swiss Franc, Aussie Dollar, Canadian Dollar, Yen, Renminbi, Rupee, Peso etc. ...will be subject to the same possibility --- only more so. The order of collapse will be very important, starting with the smaller currencies. Then something unexpected will happen. THe value of the US Dollar, Euro, Pound, Swiss Franc ... will rise as the smaller ones fall, then the remaining currencies will play the same game all over again. In this backwards world the one to fall last wins.


Timing is very important. Remember Japan has still not felt the inflationary wave expected in response to it's two decades old attack on deflation in 1990. What if it only takes the US stimulus half that time to initiate the deadly hyperinflation? That equates to 10 years of deflation, and deflation means a strong Dollar and US Treasuries. Lets assume that it is true that hyperinflation will ensue in 10 years. Any investor who follows an inflationary strategy during the intervening deflationary period will be wiped out before being rescued by inflation.
 
As bad as things may become in this country, things will most likely be worse everywhere else.


 

Looking at the far right 28 Day Change we see that the absolute Japanese spread increased almost twice as much as the US. The absolute German spread increase equalled the US. On a relative basis the German and Japanese spreads are increasing at a faster RATE than the US. It is also true that the rate of spread increase is less for the UK and Italy but their absolute spreads are far in excess (73 to 98 bps) of the US, French, Japanese or Germans. The US, Japan, France and Germany are in a tight race with only 11 bps between them yet Germany and Japan are increasing at a faster rate than the US. The picture becomes clearer when we recall that France, Germany and Italy share the same currency, the Euro.

The point here is that the conclusion about the US relative weakness is much less evident when given a more thorough analysis of the data. Further the evidence shows a strengthening trend in the US spread ie; a relative decrease in the spread.


 


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Consumer spending, incomes rebound in January

http://www.reuters.com/article/ousiv/idUSTRE5212TH20090302

Quote:
U.S. consumer spending rebounded in January, snapping six months of declines, and incomes rose unexpectedly, boosted by salary increases for government employees, a government report showed on Monday.

But the gains in January are likely to be temporary as wages and salaries continue to fall amid a deepening recession.

The Commerce Department said spending rose 0.6 percent, the largest increase since May, after falling an unrevised 1 percent in December, and beating economists' expectations for a 0.4 percent advance.

Incomes advanced 0.4 percent, also posting the biggest increase since May, after December's 0.2 percent decrease, and above market expectations for the a 0.2 percent decline.


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Gene Hacker

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achab

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Reply with quote  #133 

Hi Gene,

As long as the U.S. national debt is in US dollars, and the constitution gives the federal government the power to print money, and the computer systems at the federal reserve are intact, there is 0 chance that the U.S. becomes unable to meet its national debt. The U.S can "print" (actually push a few keystrokes on a computer) $100000000000000000000000000000000000.00 anytime it wishes to pay back its US dollars based national debt, with money to spare for another AIG bailout.

Now, if someday the debt is held in terms of Euros, Rubles, Yen, Zimbabwe dollars, tomatoes, camels, cows, etc., then there is a risk of default. But not as long as all the U.S owes are U.S dollars.

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JohnnyCash

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Reply with quote  #134 

AIG posted a quarterly loss of $60 billion, the highest of any American company ever. The Federal Government reacted immediately to provide a $30 billion injection to the failing former Insurance giant. This is added to the $150 billion in taxpayer funds already given to AIG last year. The total Federal investment in AIG is now $180 billion.

This behemonth is going down, it's CDSs should be repudiated and whatever taxpayer funds can be withdrawn should be. The additional $30 billion given today will not change the end game for this company until it's CDS problem is addressed.

Is the Federal Government playing this by ear or does it have any idea how much taxpayer money it is willing to sacrifice to "save" AIG? If AIG is so important why can't the Federal Government explain the reason so much taxpayer wealth is given to one insurance company?

Is there no better or more important use for the $180 billion?


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achab

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Reply with quote  #135 
Quote:
Originally Posted by JohnnyCash

AIG posted a quarterly loss of $60 billion, the highest of any American company ever. The Federal Government reacted immediately to provide a $30 billion injection to the failing former Insurance giant. This is added to the $150 billion in taxpayer funds already given to AIG last year. The total Federal investment in AIG is now $180 billion.

This behemonth is going down, it's CDSs should be repudiated and whatever taxpayer funds can be withdrawn should be. The additional $30 billion given today will not change the end game for this company until it's CDS problem is addressed.

Is the Federal Government playing this by ear or does it have any idea how much taxpayer money it is willing to sacrifice to "save" AIG? If AIG is so important why can't the Federal Government explain the reason so much taxpayer wealth is given to one insurance company?

Is there no better or more important use for the $180 billion?

Why should the government provide any justification ? 99% of the voters voted for a presidential candidate who voted for the TARP. When push came to shove, the voters didn't consider the bailouts to be such a big deal.

Many of the people working on Wall Street have PhDs in theoretical physics, and several of them have studied black holes. For the first time ever, they managed to create a black hole right here on earth.

AIG is too big for information to come out. The gravitational pull is just too high. Any amount of money thrown at it will just disappear. All that will come out will be bursts of X-Rays once in a while. 

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JohnnyCash

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Reply with quote  #136 

Quote:
Originally Posted by achab
Why should the government provide any justification ? 99% of the voters voted for a presidential candidate who voted for the TARP. When push came to shove, the voters didn't consider the bailouts to be such a big deal.

Many of the people working on Wall Street have PhDs in theoretical physics, and several of them have studied black holes. For the first time ever, they managed to create a black hole right here on earth.

AIG is too big for information to come out. The gravitational pull is just too high. Any amount of money thrown at it will just disappear. All that will come out will be bursts of X-Rays once in a while. 

Yes, indeed, the Wall Street geniuses finally created a financial blackhole HAHAHA, LTCM didn't give them any pause to reconsider before creating another such situation many times worse. Why didn't they learn from their mistakes with LTCM? 

There is one consolation. The AIG problem is receiving a lot of attention in the press and Congress. I really don't think the Fed will be able to get away with many more of these automatic $30 billion relief packages. Many people are wondering why the worst offender in a supposedly bank and credit crisis is a non-bank insurance company. It is going to be very clear within the next 6 months that AIG is becoming more unstable no matter how much money is thrown at it.

DId you notice that AIG was able to pay it's "talent" $50 million in bonuses in December? I think there is another $150 million in bonus money scheduled for other "talent".  If it took "talent" to get AIG in this condition then we are in dire need of rank amateurs!

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Reply with quote  #137 
Quote:
Originally Posted by achab

Hi Gene,

As long as the U.S. national debt is in US dollars, and the constitution gives the federal government the power to print money, and the computer systems at the federal reserve are intact, there is 0 chance that the U.S. becomes unable to meet its national debt. The U.S can "print" (actually push a few keystrokes on a computer) $100000000000000000000000000000000000.00 anytime it wishes to pay back its US dollars based national debt, with money to spare for another AIG bailout.

Now, if someday the debt is held in terms of Euros, Rubles, Yen, Zimbabwe dollars, tomatoes, camels, cows, etc., then there is a risk of default. But not as long as all the U.S owes are U.S dollars.


No they can't. The U.S. can only raise funds through revenues or borrowing. The borrowing goes on their balance sheet. They might go ahead and borrow massive amounts of funds. But their balance sheet won't have a magical net increase of $100 trillion dollars.
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Reply with quote  #138 
http://www.cbsnews.com/stories/2009/03/12/60minutes/main4862191.shtml

Here is the video of Bernanke's interview on 60 minutes.

Interesting stuff.  He talks about unwinding when things improve to limit inflation.


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ogden

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Reply with quote  #139 
Johnny Cash and others,

We had posted our solution to the derivative mess.  I, then others posted this idea. 

1) Renogiate the terms of the derivative
2) AIG and others on the losing end of derivatives should threaten bankrupcy if counterparties don't agree to renegociation

This is what Hank Greenberg, a previous CEO of AIG recommended

1) Renogiate the terms of the derivative
2) AIG and others on the losing end of derivatives should threaten bankrupcy if counterparties don't agree to renegociation

He said it was foolish for AIG and others to pay these "on par". He said the gov't was foolish for allowing it, they went right through the bailout money.  He said these types of contracts are renegociated often.

I don't think the world economies would of fallen if some rich 55 year old bachelor from CA didn't get his multimillion payout.
achab

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Reply with quote  #140 
Quote:
Originally Posted by reijoe
Quote:
Originally Posted by achab

Hi Gene,

As long as the U.S. national debt is in US dollars, and the constitution gives the federal government the power to print money, and the computer systems at the federal reserve are intact, there is 0 chance that the U.S. becomes unable to meet its national debt. The U.S can "print" (actually push a few keystrokes on a computer) $100000000000000000000000000000000000.00 anytime it wishes to pay back its US dollars based national debt, with money to spare for another AIG bailout.

Now, if someday the debt is held in terms of Euros, Rubles, Yen, Zimbabwe dollars, tomatoes, camels, cows, etc., then there is a risk of default. But not as long as all the U.S owes are U.S dollars.



No they can't. The U.S. can only raise funds through revenues or borrowing. The borrowing goes on their balance sheet. They might go ahead and borrow massive amounts of funds. But their balance sheet won't have a magical net increase of $100 trillion dollars.

Hi Joe the Real Estate Investor,

What happened last week then ? Uncle Ben "printed" $1.25 trillion or so. It's not actual printing though. Just numbers on a computer. I should have been more specific though. It's the Fed that can print money, not "the U.S.", since Congress has delegated its authority to print money to the Fed. So, if by "U.S.", you mean the federal government (without including the Fed), then what you said may be correct. But the borrowing can be from the Fed who prints.

A question related to timing the real estate bottom is when are we going to switch from deflation to inflation. With the recent printing of $1.25 trillion, many people will expect inflation in the near future. And expectation of inflation itself generally leads to inflation.

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kaihacker

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Reply with quote  #141 
Quote:
Originally Posted by achab


A question related to timing the real estate bottom is when are we going to switch from deflation to inflation. With the recent printing of $1.25 trillion, many people will expect inflation in the near future. And expectation of inflation itself generally leads to inflation.


I am still not convinced that we are experiencing deflation...in fiscal terms anyhow.  M2 is showing steady increases.  I am interested to see what happens to the M2 with some of the recent announcements.

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reijoe

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Reply with quote  #142 
Quote:
Originally Posted by achab
Hi Joe the Real Estate Investor,

What happened last week then ? Uncle Ben "printed" $1.25 trillion or so. It's not actual printing though. Just numbers on a computer. I should have been more specific though. It's the Fed that can print money, not "the U.S.", since Congress has delegated its authority to print money to the Fed. So, if by "U.S.", you mean the federal government (without including the Fed), then what you said may be correct. But the borrowing can be from the Fed who prints.

A question related to timing the real estate bottom is when are we going to switch from deflation to inflation. With the recent printing of $1.25 trillion, many people will expect inflation in the near future. And expectation of inflation itself generally leads to inflation.


Right, the Fed issued the money not the US Gov. It's an important difference for a variety of reasons. One being that the US Gov is in the business of spending the money. So when they pay a guy to "dig a hole and fill it back in", that money is gone from their accounts and out in the wild.

At least with the Fed, they are buying securities, which should theoretically be exchanged back for the money that was issued. The Fed is not in the business of spending money to provide services to the public.
ogden

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Reply with quote  #143 
CNN had two stories about the inflationary mechnanisms by the Fed/Berneke.  They want to inflate your home and your portfolio.  Look at these indicators and tell me if we are now in an inflationary mode or still in a deflating mode.

1. consumer price index rose very slightly last month, first time that happened in about 7 months.
2. Oil is rising
3. Stock market bottomed out on March 9th and has been on a tear since
4. Fannie Mae announced you can buy 10 homes instead of 4
5. Fed is printing more money, Gov't is spending more
6. Dollar fell by 3% yesterday and has been falling lately against euros.
7. Homes sales rose in Feb.

On the derivative front, a good deal of AIGs Tarp money went to other banks.  The derivative problem appears to be one that goes in circles.

I think buying good stocks, silver, and RE again may not be a bad idea.

I believe they will put the brakes on this inflationary cycle in a couple of years buy raising interest rates. 
kaihacker

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Reply with quote  #144 
Calculated Risk had an interesting post on the subject:

http://www.calculatedriskblog.com/2009/04/inflation-vs-deflation.html

Its pretty long but has a lot of info.  Lots to think about.


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Reply with quote  #145 
Quote:
Originally Posted by ogden


I believe they will put the brakes on this inflationary cycle in a couple of years buy raising interest rates. 


The feds did so much more than simply lower interest rates this year.  I think it will take a lot more than raising interest rates to get the inevitable inflation in check.

Lowering rates, and flooding the money with money is a popular and easy thing to do...reigning it all back in will much harder.

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Gene Hacker

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JohnnyCash

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Reply with quote  #146 

Quote:
Originally Posted by ogden
Johnny Cash and others,

We had posted our solution to the derivative mess.  I, then others posted this idea. 

1) Renogiate the terms of the derivative
2) AIG and others on the losing end of derivatives should threaten bankrupcy if counterparties don't agree to renegociation

This is what Hank Greenberg, a previous CEO of AIG recommended

1) Renogiate the terms of the derivative
2) AIG and others on the losing end of derivatives should threaten bankrupcy if counterparties don't agree to renegociation

He said it was foolish for AIG and others to pay these "on par". He said the gov't was foolish for allowing it, they went right through the bailout money.  He said these types of contracts are renegociated often.

I don't think the world economies would of fallen if some rich 55 year old bachelor from CA didn't get his multimillion payout.

Interesting, however AIG should go immediately into bankruptcy.

Have you seen the latest rendition of former Sec. Paulson's ploy to stick the taxpayers with the massive AIG (and others) losses?

Here is what your Treasury and the Fed have cooked up to raise the price of the "toxic assets" currently on the bank and insurance company balance sheets. Certain entities (you know the usual suspects, JP Morgan, Goldman-Sachs etc..) will be extended Fed/treasury loans at 92% LTV to purchase the "toxic assets", but it gets worse.  Suppose JP Morgan comes up with 8% down and the government provides the rest, if the assets become worthless or re-sell below the purchase price all or part of the loan does not have to be repaid!! The loan is an outright gift (from you the taxpayer) to these impoverished Wall Street free-marketeers. In other words the taxpayer could receive a 92% loss, JP Morgan an 8% loss. If there is a profit on any of these "investments" then JP Morgan keeps 50% of the profit and the Fed/Treasury gets the other 50%. Somehow I don't think any of the Fed profit will be applied to lowering taxes on you the taxpayer.

The Fed and Treasury hope this incentive will increase the prices bid by this "free market" of subsidized buyers, thus relieving the banks of marking-to-market (which would be close to zero since no one as yet has been willing to pay the historical prices the banks show on their balance sheets). IF private companies were to engage such a trick they would be prosecuted for price-fixing!! When the Fed/Treasury propose such a ridiculous plan they are praised as wise solution providers.

The shenanigans go even further. Congress and the Wall Street banks have successfully pressured FASB (Financial Accounting Standards Board) to "revise" it's ruling on "mark-to-market" --- now the banks have much greater leeway to price these "toxic assets" at higher values even if none are actually sold!! Doesn't this remind you just a little of the high priced appraisal scandals which happened during the RE boom?

It was only a few years ago that Wall Street banks strong-armed FASB into allowing mark-to-market. When these "toxic assets" were rising in value ,just a few years ago, the banks could show increasing balance sheet value just by employing the new rule rather than actually selling or doing anything. Then the poor Wall Streeters acted like petulant 5 year-olds stamping their feet and whining about mark-to-market when asset prices began to fall and thus forcing them to write-down assets and show losses on their balance sheets!!

Didn't any of these banking geniuses ever consider the effects of falling asset prices on their balance sheets??

Well of course they did and they knew that if they whined loud enough they could just as easily reverse the FASB rules when the market turned down. That's how Wall Street banks play the game --- and now they want your money for their mistakes.

All of this is just massive fraud on the unsuspecting taxpayer. No matter how tricky or complicated the solution from the Fed/Treasury team the answer is always the same ---- the innocent taxpayers foot the bill for the unwise, reckless and unprincipled actions of the Wall Street banks and insurance companies.

Let them all go into bankruptcy, that is what bankruptcy is designed to solve. These ad-hoc, absurd and convoluted blank-check attacks on the taxpayers wealth are far worse than the failure of any Wall Street corporation and it's overpaid failed leadership.

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reijoe

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Reply with quote  #147 
Quote:
Originally Posted by kaihacker
Quote:
Originally Posted by ogden


I believe they will put the brakes on this inflationary cycle in a couple of years buy raising interest rates. 


The feds did so much more than simply lower interest rates this year.  I think it will take a lot more than raising interest rates to get the inevitable inflation in check.

Lowering rates, and flooding the money with money is a popular and easy thing to do...reigning it all back in will much harder.


If the asset collateral the Fed holds is actually worth what they "paid" for it, the inflation isn't as bad as it seems. The problem is that it's likely worth very little.
reijoe

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Reply with quote  #148 
Quote:
Originally Posted by JohnnyCash
Interesting, however AIG should go immediately into bankruptcy.

Have you seen the latest rendition of former Sec. Paulson's ploy to stick the taxpayers with the massive AIG (and others) losses?

Here is what your Treasury and the Fed have cooked up to raise the price of the "toxic assets" currently on the bank and insurance company balance sheets. Certain entities (you know the usual suspects, JP Morgan, Goldman-Sachs etc..) will be extended Fed/treasury loans at 92% LTV to purchase the "toxic assets", but it gets worse.  Suppose JP Morgan comes up with 8% down and the government provides the rest, if the assets become worthless or re-sell below the purchase price all or part of the loan does not have to be repaid!! The loan is an outright gift (from you the taxpayer) to these impoverished Wall Street free-marketeers. In other words the taxpayer could receive a 92% loss, JP Morgan an 8% loss. If there is a profit on any of these "investments" then JP Morgan keeps 50% of the profit and the Fed/Treasury gets the other 50%. Somehow I don't think any of the Fed profit will be applied to lowering taxes on you the taxpayer.


And unless the treasury restricts the types of transactions, this could easily become a giant swap game where JP buys GS's crap at 8/92 and GS buys JP's crap at 8/92. Suddenly with one swift move, all of the default risk has been transferred to the government.
JohnnyCash

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Reply with quote  #149 

Quote:
Originally Posted by reijoe
Quote:
Originally Posted by JohnnyCash
Interesting, however AIG should go immediately into bankruptcy.

Have you seen the latest rendition of former Sec. Paulson's ploy to stick the taxpayers with the massive AIG (and others) losses?

Here is what your Treasury and the Fed have cooked up to raise the price of the "toxic assets" currently on the bank and insurance company balance sheets. Certain entities (you know the usual suspects, JP Morgan, Goldman-Sachs etc..) will be extended Fed/treasury loans at 92% LTV to purchase the "toxic assets", but it gets worse.  Suppose JP Morgan comes up with 8% down and the government provides the rest, if the assets become worthless or re-sell below the purchase price all or part of the loan does not have to be repaid!! The loan is an outright gift (from you the taxpayer) to these impoverished Wall Street free-marketeers. In other words the taxpayer could receive a 92% loss, JP Morgan an 8% loss. If there is a profit on any of these "investments" then JP Morgan keeps 50% of the profit and the Fed/Treasury gets the other 50%. Somehow I don't think any of the Fed profit will be applied to lowering taxes on you the taxpayer.


And unless the treasury restricts the types of transactions, this could easily become a giant swap game where JP buys GS's crap at 8/92 and GS buys JP's crap at 8/92. Suddenly with one swift move, all of the default risk has been transferred to the government.

Let's hope that there is enough public pressure to prevent the Fed/Treasury from subsidizing this fradulent scheme. If not then as you say the losses will automatically accrue to the government --- ie; taxpayer.


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kaihacker

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Reply with quote  #150 

This is from a gold site but pretty int interesting:

The National Debt and the U.S. Selling Spree

From News.goldseek.com

The actual numbers are actually terrifying, as, “Receipts for the month fell 28 percent to $128.96 billion from $178.82 billion a year earlier”! Tax revenues fell 28%? Yow!

This can only mean that people are spending less money, and that means that they are borrowing less money, which makes the “deflation problem” worse, which means that the Congress and the Fed will doubtlessly redouble their efforts to kill us with inflation in the money supply which creates inflation in prices and inflation in the size of government! Gaaaahhhh! We’re freaking doomed!

My involuntary screams of terror seemed so long and loud that I quickly realized that I was not properly anesthetized to be looking at such horrifying statistics. So, after a couple of long, thirsty pulls on a bottle of bourbon with a beer back, I soon felt I was ready to look at that again. Maybe kick some butt this time!

Squaring my shoulders, I soon saw that I was right; my eyes were now crossed and everything was blurry and spinning around! Much better! Hahaha!

So, instead of looking at this inflationary horror and getting “the spins”, I instead hear James Turk of the Freemarket Gold & Money Report apparently poking fun at me for being concerned about ordinary inflation, saying, “hyperinflation does not arise from banks lending too much money. Rather, hyperinflation invariably occurs for only one reason – too much government spending that leads to too much government borrowing and these debts are then turned into currency by the government’s captive central bank. And that scenario describes exactly what is happening in the United States today.” Exactly!


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Gene Hacker

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http://RiverLakeRE.com riverlakere@gmail.com

Home Inspections in Bakersfield and all of kern county:
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