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This weekend’s meeting of four heads of central banks communicates the size of the OTC derivative disaster. It is a system that is broken. A bailout will require the printing of trillions of dollars worth of monetary stimulation making Bernanke’s helicopter drop look like chump change.
The dollar number of pending derivative bankruptcies is the size of the mountain of garbage paper issued by just those who are to be bailed out. That number is greater than the total world economies.
There simply isn’t enough money in the world for central banks to buy up the mountain of worthless paper sold by those who need bailouts; all of which made fortunes for their directors, officers and key people.
When an OTC derivative fails to perform, notional value becomes real value. The notional value of all OTC derivatives exceeds $500 trillion.
Credit default swaps (OTC derivatives) alone account for over $20 trillion dollars of notional value and are failing. Major dealers in these items, Lehman and JP Morgan, had their debt downgraded last week.
Maintaining the AAA rating on debt of public companies primarily issuing default swaps as credit guarantees is a sick joke of fabrication. This is a joke that in all probability will lead to litigation that destroys the rating companies.
You can be absolutely sure that all the biggies have their money out.
No one mentions these firms being bailed out are the ones who created this disaster, making billions for their economic sin. You can be sure the big boys have their money out of the now on-the-rocks international institutions.
No one mentions that bailing out the bankers will leave the average man victimized and paying for the pleasure of the economic rape.
Meanwhile derivative traders (salesmen of perdition, not traders) and their hedge fund managers are all in Greenwich, Connecticut with their hundreds of millions and billions, now retired playing tennis on their indoor courts at their waterfront mansions as the mess deepens.
Litigation against the officers and directors of these international banking firms, both against the biggies personally as well as the company, will make the biggies occupation one of defending against litigation for the rest of their lives.
For those biggies in these companies who trust no one and therefore have wives with no money will lose everything. Some of them I know. What goes around certainly comes around.
Litigation against OTC derivatives are slam-dunk victories for the injured plaintiffs. The biggies will pay.
This is the greatest act in the history of “The Public Be Damned” and “Let them Eat Cake.” It will not come about because in the USA it is already the hottest political potato.
The problem is that the plan of the US legislative [branch] is downright stupid. It is an embarrassment that legislators are so publicly moronic when it comes to economics.
The problem that no one is focusing on right now is the tracking of the mortgage itself to the structured product which has broken down. That means in these items many can’t connect the underlying mortgage to the structured investment product (derivative).
So far courts have held that the only entity that can foreclose is the entity that actually lent the money. The average guy does not know that with an attorney to protect him he has a free house!
The entity that actually lent the money has sold the mortgage and been paid. Therefore, where is the incentive for the original lender to foreclose? The answer is there is none. Bankers do not help bankers in the same way that sharks do not help sharks.
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Travis, I think you have it right.
Thanks for posting Sinclair, I missed it today.
He’s on my daily read list, along with Mish Shedlock and some others.
http://globaleconomicanalysis.blogspot.com/
From the Financial Times, via Mish Shedlock:
Central banks on both sides of the Atlantic are actively engaged in discussions about the feasibility of mass purchases of mortgage-backed securities as a possible solution to the credit crisis.
Such a move would involve the use of public funds to shore up the market in a key financial instrument and restore confidence by ending the current vicious circle of forced sales, falling prices and weakening balance sheets.
The Bank of England appears most enthusiastic to explore the idea. The Federal Reserve is open in principle to the possibility that intervention in the MBS market might be justified in certain scenarios, but only as a last resort. The European Central Bank appears least enthusiastic.
Any move to buy mortgage-backed securities would require government involvement because taxpayers would be assuming credit risk. There is no indication as yet that the US administration would favour such moves. In the eurozone it would require agreement from 15 separate governments.
One argument among policymakers and bankers has been that new international rules have exacerbated the credit squeeze by requiring assets to be valued at their current record lows rather than at face value.
Fed officials are monitoring the impact of the latest barrage of Fed liquidity moves and interest rate cuts. They also believe the US has not exhausted all the options short of wholesale public intervention and further intermediate steps are available to them.
These could include still more aggressive use of the Fed’s own balance sheet to boost liquidity in the markets.
Analysts say the US government also has plenty of scope to boost support for the markets indirectly through the Federal Housing Administration or Fannie Mae and Freddie Mac.
The UK lacks these institutions, which could be one reason why the Bank of England is keenest to explore outright intervention. The UK government has already become heavily involved in buying mortgages since September with the recent nationalisation of Northern Rock, the mortgage lender.
That's funny. And wrong.
Insofar as mortgages are concerned, when a mortgage company sells a mortgage, it assigns it to the buyer. In the Deed of Trust or Mortgage, the Assignee is protected. In the case you are describing, the plaintiff did not bring to court demonstrate chain of ownership of the instrument to foreclose. That is NOT the same as being able to foreclose; the plaintiff did not prepare well. They will from now on.
“Maintaining the AAA rating on debt” of public companies may be one thing, but the US credit rating has now dropped to AA, as of this last week.