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Posted on 11/24/2007 2:16:54 PM PST by givemELL
There are four main triggering factors, according to our team:
1. Drastic drop in revenues for banks operating in the US 2. Slumping value of assets owned by these banks resulting from new US banking regulation (FASB regulation 157) 3. Increasing weakness of bond insurers 4. Economic recession in the US
These factors must of course be placed in the general context described by LEAP/E2020 since the beginning of 2006, i.e. a global systemic crisis, which only today is beginning to be grasped by the world's political, financial and economic leaders (4). The fact that over the past two years, the largest financial operators and central banks, the US Fed and the Bank of England in particular, were systematically late on the course of events, entails to believe that they will only become fully aware of the existence of a banking crisis once some major event has happened, once it is too late to efficiently prevent the system's contamination.
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read
http://www.europe2020.org/spip.php?rubrique8⟨=en
HERE ARE THREE PAGES OF ARTICLES FROM EUROPE FROM THE ‘TEAM’ that wrote the posted article...save and read...quite detailed analyses which have been fully predictive of the current crisis. Noriel Roubinis’ blog site it also of high quality, and, he is being proven quite correct in his prognostications: http://www.rgemonitor.com/blog/roubini
www.nychousingbubble.blogspot.com is especially informative with many focussed articles and data.
Another useful site is www.nakedcapitalism.com
Another: www.bis.org for pdf papers
A pair: www.ml-implode.com and www.hf-implode.com
Is there a scenario out there in which we all aren’t doomed?
Yes, many. None of them rely on debt based, fiat currency central banking systems where unlimited credit and bubble expansions and inflation are necessary for survival. World Credit is coming to a halt..there is no replacement for it....except this: A parallel, non-central bank financial system is advancing which will be the only system existing to pick up the pieces. Private (not central bank related) capital and banks and funds are accelerating their purchase of real assets worldwide (articles regarding this revolve around the words transnational financial interests)at ever lower prices.
The value of their holdings remains exactly the same as before, only a true valuation is now required.
If the back was playing loose with its asset valuation, then the asset value was lost in prior years and this is a most-needed correction to its trumped-up valuation.
This does not predicate a global bankruptcy situation. If every such institution was doing the same, then some modicum of the same deflation of assets happens with all such institutions, so everyone is net the same.
Such a regulation is a boon to investors wanting to invest with some reasonable knowledge of their target stock.
This is a ridiculous article from people who are supposedly “smart”.
Why is credit suddenly a problem? We have had periods of tight credit before and the economy eventually came roaring back.
BTW, you CAN get credit today. You just have to prove you can pay it back. Go figure.
And, on top of all this, they will tax carbon emmissions (energy use). Madness, pure and simple!
With #1, they are assuming banks are running as lean as possible already. Also assumed is that banks are to make the current level of revenue or greater to be solid. That’s just bogus. Does Wal-Mart fall into bankruptcy when its revenue drops below its recent highs?
With #3, we are not in a recession—we only have people running around in the media proclaiming one must be coming. I wonder how many of these people are shorting the market as they say that.
These “analysts” are really stupid, or, they are smart and know their words will manipulate simple-minded people.
The financial engineering of the past decade will create unprecedented economic contagion.
The banks cannot ‘pay it back’. To prove the value of their derivative exposures, they must ‘sell’..’mark to market’ their derivatives to establish a value..THERE IS NO MARKET. Here are the US treas figures on US bank derivative liabilities...
http://www.occ.treas.gov/ftp/deriv/dq207.pdf
This is the US govt. link for the derivative exposures in trillions for several US banks. Here is an excerpt from this pdf:
Some highlights from it:
JP Morgan - 1.2 Trillion in Assets - 80.3 Trillion in Derivatives
Citigroup - 2.2 Trillion in Assets - 34 Trillion in Derivatives
Bank of America - 1.5 Trillion Assets - 30 Trillion in Derivatives
Total Major Banks and Brokers - 10 Trillion in Assets against 160 Trillion in Risk.
The ‘notional’ amts are often quoted as being the original liabilities at about $20 trillion for our banks, BUT, these were leveraged out up to 228 times in the hedgefunds after the initial borrowing from the banks, and, that is where the BIS contract liability of $160 trillion comes from for US banks, and the reserve requirement of $16 trillion derives from (of which the banks have only about $10 trillion).
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Yes, polite understatements you have made.
Some issues for your consideration WRT #2:
FASB 157 will require that the age of wishful thinking (ie, financial models) as a way of valuing infrequently or rarely traded assets come to an end. Yes, as you say, for investors in banks/finance companies, this is a Good Thing[tm].
But if those banks/finance co’s are margined on a portfolio of illiquid assets... there could be margin calls, which would then result in their having to actually sell these assets and realize a loss.
Second issue that comes about as a result of this is that some companies/banks will have their credit ratings downgraded for issuing debt (which is right and proper) but will increase costs of borrowing for the little guy, because as we all know, banks don’t take losses. They seek to extract those losses from the banks of small creditors — individuals and small businesses.
Lastly, for the net:net effect of what is going on when these types of disclosures happen (much less are forced), look at Citigroup. They first claimed a few billion of bad debt assets on their books. Three weeks later, they came out and said (in effect) “Whoopsie... guess we misunderestimated what is out there... here’s another $7.9B more...” and the entire market swooned.
Now the CEO of Citi is gone, and whoever comes in next will most likely be a chop-shop expert, because that’s the fastest way to return value to the shareholders of Citi — cut it up and sell off the problematic pieces, keep only the most profitable pieces, and go forward. A lot of people are going to be losing their jobs as a result of that little $7.9B “whoopsie” admission.
Folks here have been consistently pooh-poohing these issues in the credit markets, and applying cash bookkeeping thinking to how the Wall St. credit markets. This is erroneous thinking. Mind you, we hold no debt and live a cash existence ourselves, so I’m right there with you in practicing what the cash-accounting folks preach. All I’m saying is that Wall St. is operating on a wholly different system, whether we fiscal/monetary conservatives like it or not. The failures in this pyramid scheme of debt are having a real toll on the little guy in the street in terms of lending for business, mortgages, and the value of the US dollar, and we’re NO WHERE near reaching the bottom of this mess yet.
The world banking system is under real strain right now, make no mistake about it. The reason why is that Greenspan (and other central bankers) created excess liquidity, and that excess was snapped up by young turks at various houses of greed and ill repute to try to “engineer” outsized gains in order to attract more money into their institutions.
Ultimately, this is the fault of “financial engineers” — clever mathematical sophists who have constructed elaborate mathematical models that attempt to show that it is possible to have higher-than-average gains with lower-than-average risks. Any experienced investor (meaning someone with gray or no hair on his head) knows that this is a crock. If you want higher-than-average returns, you will be taking on higher-than-average risk.
No. Would you like Orange or Cherry Kool-Aid?
A bank holding a derivative with a notional value of $1 billion does not owe anyone $1 billion.
Yes, the problem of proving one can pay it back IS THE ISSUE..Europe just stopped mortgage bond trading among its banks...http://www.bloomberg.com/apps/news?pid=20601087&sid=aLzGEmrjr0fA&refer=home
Now, in Europe only govt. AAA bonds are considered safe in the covered bond market.
Thanks for the link. Of course after netting out in the money and out of the money swaps the net figures are around 30% of the notional. And of course the banks and contra parties can now go to the Chicago Board of Trade and hedge their exposure with interest rate swap futures:
http://www.cftc.gov/dea/futures/deacbtsf.htm
Scroll down to the bottom.
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