Credit Crunch – The New Diet Snack for Financial Markets (A MUST READ)

Prudent Bear ^ | September 5, 2007 | Satyajit Das

[GodGunsGuts]

By Satyajit Das

Credit Crunch – The New Diet Snack for Financial Markets

September 5, 2007

**Satyajit Das works in the area of financial derivatives and risk management. He is the author of a number of key reference works on derivatives and risk management and is the author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives (2006, FT-Prentice Hall).

Living in the Kaliyuga …

Inflexion points in financial markets are difficult to identify. As Yogi Berra observed: “making predictions is difficult, especially about the future”.

In Indian mythology, we are in the Age of Kali - the last age. The world ends when Kali dances the dance of death. There are no such clear markers in markets. Recently, we came close - Jim Cramer, a CNBC pundit, launched a “we’re in Armageddon” tirade on air. Embattled Bear Stearns’ CFO Samuel Molinaro pleaded: “I’ve been out here for 22 years, and this is as bad as I’ve seen it in the fixed-income markets.” Kali had begun to shake her booty. The credit bubble was finally deflating.

In 2007, householders in “cabbage-ville USA” (an English fund manager’s term) failed to make repayments triggering a global credit crisis. Markets ruminated about “a re-pricing of risk”. The faux “business as usual” calm masked the fact that the problems threaten to be the single largest credit crisis since the Savings and Loans collapse in the USA in the 1980s.

The early 2000s were a period of “too much” and “too little” – too much liquidity, too much leverage, too much complex financial engineering, too little return for risk, too little understanding of the risks....

[AprilfromTexas]

bump for later

[GodGunsGuts]

ping

[dennisw]

Oh, the derivatives guy who now says billions in derivatives are based on bundled loan&mortgages and must unwind and will make more billions on the books be written off.

POOF!—that money no longer exists

[dennisw]

Martin Weiss has bear email alerts that would interest you

[raybbr]

bump for later

[upchuck]

Lord knows I'm no financial genius. But that triangle looks very, very scary.

[donna]

I live in Phoenix in the fastest growing county in the US. Wouldn’t all these suffering investors be shocked to learn that we don’t even know a thing about their problems much less feel a money pinch?

All those people moving out of their McMansions are just moving back into the apartments they had before. They just had a fun time living in a big house for a time.

[dennisw]

You should talk with my sister. She loves to go on about McMansions. I never heard the word before. She goes on about the Toll Brothers and how they built them with large high ceiling front living rooms. I’ve never been in one

Toll Brothers- now in financial trouble. The brothers were selling stock like crazy before the worst hit

COUNTRYWIDE- Pres. Angelo Mozilo paid himself 140 million and also sold lots of stock while he had Countrywide doing large stock buy backs

[GodGunsGuts]

Whatever his culpability, I view this guy as a derivatives expert/insider who has decided for whatever reason to spill the beans. He wrote the book on derivatives, and we ignore him at our own peril IMHO. About a year or so ago, I used to warn about the massive house of credit cards that the derivatives market created. I now see I only understood but the tip of the iceberg. Das is describing what lies submerged below the surface for both layman and market players alike (and it would seem that many who played the derivatives market, driven by ever increasing demands for greater returns, didn’t have the foggiest notion of the true risks involved). And to that end, I plan on learning everything I can from whistleblowers like Das.

[GodGunsGuts]

Neither am I, but it certainly gives me pause for reflection. If what this guy says is true. Even traditionally safe investments (like CDs) are at risk because of the financial leverage tied to them. In these turbulent financial times, the phrase CAVEAT EMPTOR should most definitely be kept in mind.

[alrea]

But both Cabbageville and Turniptruckcity experience significant growth when taxes are cut. So the warnings of socialist professors, Northeast Liberals(which dominate Wall Street) or Keynesian Economists mean about as much as their Y2K predictions.

[donna]

I figure all those McMansions will eventually become boarding houses for illegal aliens.

[dennisw]

Satyajit Das .....

Humor me. He’s saying that billions and billions in derivatives and similar exotics have to have something of worth underlying them. That they are derived from..... And that something is bundled home mortgages, bundled 2nd mortgages and I suppose some bundled commercial mortgages too

Lead article, front page of today’s MIAMI HERALD-—>>>
20% of all home mortgages taken out since 2005 in Broward and Dade are sub prime. Includes 2nd mortgages/home equity loans

[kcar]

A good long read.

[GodGunsGuts]

If you haven’t already, I encourage you to read the entire article. This thing is much, much bigger than the mortgage meltdown. Derivatives have infested just about every aspect of the financial markets and now represent (according to Das) 802% of GLOBAL GDP. The sheer size of the financial tidal wave heading our way is unprecedented in both its size and scope. If this is truly the case, it’s time the average Joe began learning what he or she can do about it.

[GodGunsGuts]

Sorry about that. If I had found a shorter one that covers all the bases, rest assured, I would have posted that one.

[dennisw]

If it’s that bad then buying precious metals (gold) via a gold mutual fund in Fidelity or Vanguard won’t even cover you. Because these fund families will collapse. Or buying gold mine stocks. What you want is physical gold and some silver coins. Some paper money too. This is real survivalist stuff

Must read is “Reckoning” http://www.amazon.com/Great-Reckoning-Protecting-Yourself-Depression/dp/0671885286
They make a great case for us being unable to use inflation to get out of such a mess

[dennisw]

Funny how the big guys got all these bankruptcy laws passed just in time for this sh!t storm

[GodGunsGuts]

I haven’t read that one. Although I have read similar books by Prechtor and Shultz. I’ll click the link and give it a looksee.

PS Non-hedged gold mines/stocks with low extraction costs should skyrocket as never before.