Federal Reserve losing control

[chiggerbit]

Unemployed people can't continue to make payments on their home mortgages (on which many are upside down on already). Nor can they continue making their credit card and car payments or buy more big screen tv's and refrigerators and other large, medium and small consumer purchases.

Don't forget all the insurances.

[ninakat]

We the People are now the lender of last resort to the same bankers who stole the cookies, charged us for the privelege of doing so, mortgaged and then collateralized the cookie jar and financed the batter, bowl, spoon and mixer through a pyramid scheme.

Well put!

And, I think you're right about unemployment and the resulting drop in consumer spending (70% of GDP) which may be what ultimately brings things down. Or, it could be a combination of things.

I confess that I'm somewhat of a novice at economics, but I do read a lot of various articles, and have been following Jim Sinclair's commentary over at his site. He talks about the OTC derivatives really being the big danger since they amount to something like $400 trillion of money that doesn't exist, that's basically on paper, and could come due as if the money DID exist.... I know I'm not stating it accurately, but the point is that the pyramid (scheme) is still standing, but not for long.

This is likely to play out over the next several years, but who knows, it could all come crashing down in a short period of time. I'm hoping for the former, because the latter just spells total chaos.

[Pazdispenser]

Hey nina,

anti had this wonderful summary in this thread way back on Feb 15:

When this thread began the mainstream was deep in denial. Now it is mainstream. But my God! how confusing it all is.

There is STILL an important part missing from the explanation.

Let me go back to basics....


The banks purchased mortgages and pooled them. They issued securities based on those pools (RMBS).

The same was done with commercial property, with car loans, with credit cards, with student loans.

Other banks then purchased a proportion of these RMBS and other types, and mixed up the geographic sources and types, creating another pool.

Based on THIS mixed-up pool the banks issued a new type of security called a collateralised debt obligation (CDO).

Now the logic was that by spreading thus the portfolio one reduced the overall risk.

Typically therefore 100% BBB- RMBS could be transformed into CDOs comprising 75% AAA, 20% BBB- and 5% unclassified. THAT was the "alchemy" of structured finance.

Now I could be crucified for putting it like this, but AAA debt is worth roughly twice what BBB- debt is worth.

By means of "financial alchemy" 100 units of BBB- had been transformed into 150 units of AAA (ie 75 worth double) plus 20 units of BBB- and zero of unclassified (5 worthless units).

That's a total of 170 units.

THAT's where Wall Street made their "profits".
170 minus 100 is 70 "profit".

ON TRILLIONS OF DOLLARS OF DEALS.

Do you see now why the banks were paying up to 110 percent of face value for packages of mortgages? Do you see now why it is impossible to open the mail without finding three new credit card offerings?

Not all was taken as capital. Much was taken in the form of fees and commissions and other types of skimming. Much was taken in the form of inputs into other CDOs (so called "CDO squared"). Some was taken as "enhancement" to so called "synthetic CDOs".

The point is, that 70 units has long gone.

And now the financial alchemy has collapsed.
Spreading the risk DOES NOT WORK.
When there is a systemic downturn, a recession, then everybody has a hard time.

If homeowners are having a hard time because of a bad economy, then SO IS EVERYBODY ELSE. Or, as they say in finance, correlations move towards one. Diversification is ineffective.

Nobody wants to buy these things because nobody else will buy them. Nobody wants to get stuck (as opposed to being a conduit-for-fee) with them because forty percent has been stripped out already (seventy out of 170 is forty percent).

All that slicing and dicing adds no value.

Now at the moment everybody is focussed at the mortgage end of the chain, which is AT BEST only half of the problem. The real problem is that potential mortgage losses are forcing the CDOs to be unwound.

All that "added value" on securitisation is going into reverse.

When the CDO is unwound 170 units of value revert back to 100 units of value. Which is a capital loss of 41 percent.

THEN, out of that 100 units of value there will be the mortgage losses. Let's say on average they lose 20 percent, so that 80 units of value is recovered.

The OVERALL loss is (170 - 80) on 170.
90 on 170 is 53 percent loss overall.

But notice only a minority, 12%, arises because of the mortgage end. The great majority, 41%, arises at the securitisation end.

IT'S THE CDO UNWINDINGS THAT WILL KILL WALL STREET.

And EVERYTHING coming out of Washington has one purpose, and one purpose alone. That is to prevent or slow down the unwinding.

Havent seen a better summation anywhere.....

[ninakat]

Paz, yes indeed, our anti has really got a handle on all this, and that was an excellent posting from February. Thanks for the rerun.

And, now for you (and others who are interested), here's a recent radio interview from Fresh Air that I'm listening to right now -- easy to understand for the economic layperson such as myself:

Our Confusing Economy, Explained
http://www.npr.org/templates/story/stor ... 43&sc=emaf

I'm only 13 minutes into it, but it is excellent -- highly recommended, because the interviewee (Michael Greenberger) is explaining derivatives, which are essentially bets -- with no regulation whatsoever, thanks to Phil Gramm who introduced legislation (back in Dec. 2000) to deregulate the derivatives markets. The bill was added as a rider to a larger bill as Congress was recessing for Christmas (so nobody read it, as per usual). Greenberger asserts that the bill was likely written by the lawyers for investment bankers on Wall Street.

And, btw, Phil Gramm is now the chief economic advisor to John McCain and his campaign. Maybe I'll vote for the lesser of the evils afterall. Jesus.

[isachar]

Excellent analysis from itulip with which I am in agreement. We face high rates of inflation as both a deliberate policy choice, and as a consequence.

(Go to link for excellent charts, especially THE last one)

http://www.itulip.com/forums/showthread ... #post33121

Dual Cycles of Demand Destruction and the Economic Face Plant

by Eric Janszen - April 8, 2008 (PDF version of this article here.)

An August 2002 iTulip forecast finally made the front page of the business section of the New York Times today, a slightly longer than usual time lag between one of our forecasts and an MSM report. Our thesis then was simply that governments, when faced with the problem of debt deflation that eventually occurs when a debt-laden economy turns down, always resort to currency depreciation and rate cuts as the primary tools to re-inflate the economy. If the debts left over from the previous boom where very large as in the case of the US economy after the housing and mortgage bubbles, the currency depreciation must be severe both in percentage terms and duration. Sooner or later these policies produce all-goods price inflation.

Ben Bernanke as much as admitted this in testimony before Congress earlier this year when he was asked by a member of Congress about the inflationary impact of cutting interest rates to simulate the economy. He replied, "You've put your finger on the problem. We have two problems but only one tool."

Asian Inflation Begins to Sting U.S. Shoppers
April 8, 2008 (New York Times)

The free ride for American consumers is ending. For two generations, Americans have imported goods produced ever more cheaply from a succession of low-wage countries — first Japan and Korea, then China, and now increasingly places like Vietnam and India.

But mounting inflation in the developing world, especially Asia, is threatening that arrangement, and not just in China, where rising energy and labor costs have already made exports to the United States more expensive, but in the lower-cost alternatives to China, too.


Inflation Machine

A popular misconception is that inflation cannot occur in an economy without wage inflation to transmit prices into all-goods prices. Indeed the Fed has waged war on wages since the early 1980s so this point of confusion is understandable. (See The Fed’s Unnecessary Assault on Wages.) But wage inflation is but one of a long list of factors that can create an inflation spiral.

The mechanism that is producing inflation for the US is well understood, although not frequently admitted: currency depreciation that feeds back into prices and back into currency values. Here’s how inflation driven by currency depreciation without wage inflation works.
Dollar depreciates
Import prices rise, especially energy, exerting an outsized influence on food and other all-goods prices
Inflation is a tax on consumption, reducing aggregate demand and slowing the economy
The slowing economy reduces returns on foreign investment and purchases of dollar denominated assets (or for any country that runs a balance of payments deficit)
Demand for dollars declines, causing the value of the dollar to fall
Go to step 1
Why haven't you read more about this? Here’s a not very well kept secret. Most economists are on the payroll of Wall Street banks, media outlets whose shares trade on the public stock exchanges, or the current US government administration, or they toil at an academic institution where they hope some day work for a Wall Street bank or gain political appointment to the current or the likely next government administration. Government administrations, whether Democrat or Republican, have for decades supported pro-bank and anti-citizen policies that have resulted in an economy dependent on the finance, insurance and real estate industries – the FIRE Economy – and a social system of debt-serf neo-feudalism.

Any surprise, then, that these FIRE Economy economists dutifully report that a depreciating currency does not result in inflation? After all, currency depreciation is the last tool left to keep the debt deflation from swallowing up the FIRE Economy. They'd rather see the average citizen swallowed up by inflation but be unaware of the mechanism.

We call these paid-for economists the The Flying Monkeys of the FIRE Economy. They are let out of their cages on K Street and Wall Street, and various academic institutions where they are cared for and fed, each time a crisis occurs in the FIRE Economy to assure us all that the system – utterly unfair, dysfunctional, and corrupt as it is – will be back up and running in short order after the latest brief setback. All that needs be done is for money to be printed by the Fed and poured into private banking institutions to keep them afloat while Joe Sixpack runs to the local pawn shop to try to raise cash to "take advantage" of the inflation said bailout printing produces.

Top of our list Flying Monkeys list is Ben Stein who is usually the first to fly out of his cage to tell readers to stay in the market no matter what.

Warren Buffett famously said, “Never ask a barber if you need a haircut.” By the same token, never ask a FIRE Economy economist how the FIRE Economy is doing. Ask an independent economist, if you can find one. You'll find them on both the left and the right. Your job as an informed citizen is to hear the clarity of analysis through the filter of ideology, your own as well as the economist's. But at least when you are listening to an independent economist you are not hearing a FIRE Economy sales pitch.

If inflation is so high then why are bond prices so high and yields so low?

In a recent interview with independent economist Dr. Michael Hudson we learn:
Janszen: Here’s the conundrum. The question I always have with this issue of the CPI not reflecting the true level of inflation: the bond markets seem to believe the US government numbers. Why? I mean interest rates are falling. Yields on both short-term and long-term bonds are declining as if the inflation numbers reflect true inflation risk, that is, potential future loss of purchasing power.

Husdon: It’s the supply and demand of funds to buy bonds that is determining yields now. Inflation risk does not figure into it. There are always people sitting near the ticker, traders who see a high inflation number and ask, “What does this mean?” and they go by the old textbook assumptions. But that’s usually a blip. And then the blips are overwhelmed by the supply and flow of funds.

J: The recent rise in demand for Treasury bonds, and the rise in price and fall in yields started with this credit crunch back in the summer of 2007. Do you think that’s primarily what’s driving yields, not inflation expectations?

H: That seems to be. Absolutely. It’s the reverse of a credit crunch. The Fed is trying to keep the bubble inflating, or at least not bursting. It’s like trying to keep a Ponzi scheme going.

J: So could we have a situation where we’re banging against the zero-boundary on the short end the way the Japanese did a few years into their debt deflation...

H: That’s exactly the situation.

J: ...yet we have high inflation rates?

H: That’s also the situation. That’s exactly it. So America will try to inflate its way out of debt, mainly by inflating its asset markets. There will be a spillover into consumer prices. This is not so much because high asset prices are letting people borrow against their home equity any longer, but because the dollar is going down against other currencies, raising import prices.

J: If you go to ask what I will call, for lack of a better term, “establishment economists” if they are not worried about the inflationary impact of a weak dollar, their answer is that of all the things they can do that can stimulate the economy, the impact of a weak currency is the least inflationary, because imports account for only something like 12% of the US economy.

H: That’s true with respect to the percentage of the economy affected by imports, but not with respect to the impact. Consider the price of oil. Domestic oil is not imported, but its price is set by the price of oil imports. The economists you cite must know that their argument is dishonest. They’re simply trying to distract your attention from what’s really happening. Import prices determine domestic prices. It doesn’t matter that they are a small portion of the economy. This also is true for every economy throughout history, by the way, and is the basis of most economic theory. Whoever claims otherwise has no shame.

Interview: Dr. Michael Hudson - Part I: FIRE Economy in Crisis

But no two periods of inflation are alike, and the current American version is unique in economic history.


Inflation: The American Experience

In the US case, the antecedents for US inflation are brutally clear. Below is our nearly decade old chart that shows what we call the US Balance of Inflation. It shows how inflation is experienced by North Americans.

Since the birth of the FIRE Economy in the early 1980s, prices of non-traded goods and services purchased on credit, such as insurance, health care, and real estate, have increased at double-digit annual rates. Prices have increased much more slowly in the case of goods and services imported from countries with low labor standards and wages, and which manage their currencies via a peg to the US dollar, or a basket of currencies heavily weighted to the dollar, as does China.

The Bureau of Labor Statistics’ Consumer Price Index (CPI) is a composite of these traded and non-traded goods and services prices, the former actually rising at a declining rate (disinflation) and the latter rising quickly (inflation). Non-traded goods are inflationary and the traded goods are disinflationary. North Americans experience the composite of these two as the 2.5% annual inflation that the BLS reports – or at least we did until recently.

From our Balance of Inflation analysis we have forecast since 1999 two events. One, the US will some day be forced to depreciate its currency to fight the deflationary impact of debt deflation, and the result (we called it “Poom”) will be rising prices of imports – especially energy but also all commodities – priced in dollars. Two, sooner or later Asian exporters must allow their currencies to float in order to combat domestic inflation imported by a depreciating dollar. When these two events occur, the disinflationary source will end and both sources will be inflationary. As a result, the US will experience high rates of inflation. We caught a bit of flack for this forecast, by the way. And, of course, guys like Mike (Mish) Shedlock and Rick Ackerman simply got it wrong, but will never admit it.

Antecedents for an Economic Crash

The US economy is not merely slowing but for all intents and purposes crashing, rapidly descending from strong positive growth to negative growth. The predictable event of the collapsing real estate bubble (See TK) has been exhaustively covered. Less well documented is the combined impact of rising all-goods prices fueled by dollar depreciation and falling asset prices driven by the de-leveraging dynamic of Ponzi finance, especially real state values. We call these the Dual Cycles of Demand Destruction.

The current period of high inflation and economic contraction, commonly known as stagflation (See Stagflation Godzilla [tk]) has been compared to the 1970s. The current environment is an echo of the 1970s but is in one crucial respect completely different. The story of how unlike the current stagflation is from the 1970s version is best told through another recent New York Times article, one that reports on the trend this year of American citizens lining up at pawn shops and jewelry and coin stores to sell silver and gold coin collections and heirlooms.
In a Modern Gold Rush, Can Memories Beat $913 an Ounce?
April 5, 2008 (New York Times)

Gold rushes should be simple money-making schemes.

And on the surface, this one is. With prices hitting record levels, people are melting down rare coins. They are digging through drawers for family heirlooms to pawn. And they are giving gold parties, inviting friends to walk in with gold and walk out with cash.

“Gold is coming out of the walls,” said Joseph Grunberg, a pawnbroker and jewelry shop owner in the Diamond District of Manhattan.

Behind every 18-karat gold herringbone necklace and 12-karat toggle bracelet is the story of a bad breakup or a late great-aunt.

That has turned the seemingly uncomplicated process of cashing in on gold’s surging value into an emotionally fraught experience, bringing new meaning to the notion of a precious metal.

“People tear up as they tell us about the jewelry,” said Michael Mouret, president of Louisiana Gold & Coins in Baton Rouge, who, like many storekeepers, has become a therapist for conflicted gold sellers.

Reading the New York Times story you get the impression that everyone is selling gold. Common sense tells you that if everyone is selling a good the price of that good will not be rising. Obviously, while many citizens are selling their precious coin collections and heirlooms in a desperate bid to raise cash to pay the bills as jobs dry up and inflation rages, someone else is on the other side of the trade, buying up the gold to protect their wealth from confiscation of purchasing power by inflation, the ultimate taxation without representation.

Seems counter-intuitive that so many North Americans are selling inflation hedges when they should be buying as they were in the 1970s. A closer look at who is selling and who is buying and why frames what we believe will develop into the widest and deepest political fault line that the US has seen since the 1930s. Presidential and Congressional candidates take note.

Inflation Hedges: Who is selling and why?

The way that the current downturn is developing follows from the rising inflation and falling asset prices in an economy characterized by extremes of wealth, income, and debt mal-distribution.

Income gains distribution has been heavily weighted toward higher income brackets in the US since the early 1980s when the FIRE Economy was born. Ideologues can knock themselves out debating whether this is good or bad for the US economy, but I'm here to tell you the in a Republic eventually the majority gain control of the political system, and crashing the economy for the majority is guaranteed to lead to major political change. In this recession poor distribution of income means that only the top income brackets have been able to both increase their living standards and save beyond the equity in their homes and so are positioned to ride out the downturn in jobs and reductions in access to borrowing in the credit markets.



Who can afford to save?


Not only have income gains been poorly distributed since the early 1980s but debt as well. Note the high fluctuations in the level of debt as a percentage of net worth during periods of recession for lower net worth groups. In this recession, once again the bottom 40% and middle 20% will bear the brunt of the impact of declining access to credit and rising unemployment. But this time the result will be much worse because the combination of higher debt service and inflation will be feeding back into the economy, increasing unemployment and reducing aggregate incomes.



Whose debt-to-income ratio falls in recession?


As I already mentioned but will repeat, since the early 1980s US households have experienced inflation as a mix in the rising prices of non-traded goods such as insurance and health care, rising dollar-priced traded goods for which we have no less costly substitutes, especially imported energy, and falling prices of traded goods from countries with low labor standards and wage rates, and managed currencies. As the Chinese yuan appreciates beginning in 2008 as China seeks to avert rising domestic inflation, the US will see Chinese import prices rise much as oil prices have since 2004. This inflation squeezes household and business cash flows.

But the result is uneven. The lower a household’s liquid net worth the more quickly that household will run out of money to pay the bills. This is not rocket science. The chart below shows distribution of liquid and total net worth in 2006. Note that the median is $6,000, and that includes Bill Gates and Warren Buffett.



Who has enough liquid net worth not tied up in home equity of retirement accounts
to ride out loss of access to income and credit without selling assets?


We read every day about the credit crunch. As bank lending standards tighten along with the credit standards of credit card companies, households’ access to credit is declining. As the economy slows en unemployment rises, incomes fall as well.

How long can the median US household hold out in this recession? Ready for this? The median US household if deprived of credit due to tighter lending and income due to job loss has enough savings to finance 18 days of cash flow, down from 30 days in 2001.



Eighteen days of liquidity based on media household cash flow


You want to know, Who are the people in line selling their coins and jewels? Here is your answer: they are the North Americans whose real wages crashed at the end of 2007.



Trend of rising inflation and stagnant wages accelerated in Q4 2007


Of course they are selling gold and jewels! They're in debt. They're broke. Yet everything they buy, from gas to food – and now even the items they are used to getting from China for next to nothing – is getting more expensive.

Inflation Hedges: Who is buying and why?

Obviously, gold prices can’t go up if everyone is selling. Who is buying gold to drive prices up over $900 while the median household is forced to sell gold to raise cash?

The answer: hedge funds, mutual funds, ETFs, investment banks, and financial advisors whose clients are in the top 5% of the net worth group. While median real income growth turned negative last year as the chart above shows, if you dig deeper into the incomes numbers by wealth group you can see that of the real incomes of top 5% increased 16% while real incomes for the bottom 95% declined. Only the top 5% of income earners experienced real gains since 2005.



Wage inflation? Yes. But whose?


Conclusion

In the 1970s the lines around the block were North Americans buying gold and silver to protect their savings from the ravages of inflation. Today the lines are of sellers, not buyers. The tragic difference between the 1970s stagflation and today’s is that where the average North American had savings then to convert into gold and silver to protect, today after 25 years of debt-serf neo-feudalism they instead have debt. Yet all the Fed can do to fight the forces of debt deflation unleashed by the collapse of the housing and mortgage bubbles is to print money and allow the dollar to depreciate further.

Here is the combined result.



Household and business cash flow squeezed by inflation and falling demand


Anyone who expects anything but the equivalent of an economic face plant to result from the Dual Cycles of Demand Destruction is either a dreamer or an apologist for the system that created this mess. In a recent interview with Australian economist Steve Keen we were treated to a bold prediction that the only policy solution that will allow US households to pay down their debts is – ready? – a conscious monetary policy of wage inflation.

We are living through the final chapter in a story of misguided, ideology based economic policy that started in the early 1980s. The story of its dissolution has not and will not covered by the MSM. Tomorrow, April 9 at 3PM I will join Henry Blodget and Barry Ritholtz at the HedgeWorld/Reuters AdvicePoint event at the New York Athletic Club where I will explain to money managers why reading the FIRE Economy media is bad for your their client's financial health. See you there.

Eric Janszen
Founder & President
iTulip, Inc.

[Pazdispenser]

I was going to go see Eric v Blodget, but had a conflict. It would have been enjoyable Im sure.....

[Pazdispenser]

From Paul Krugman's blog:

Not over yet
Gurk. The TED spread is up again. So is the LIBOR-OIS spread. (One is the spread between Libor and Treasuries, the other the spread between Libor and the futures price of the Fed funds rate; I tend to prefer TED spread, because fears of bank defaults should affect Fed funds as well as Libor; but I know that Fed officials prefer OIS. Anyway, both pointing in the same direction.) And the flight to safety is back, with the interest rate on one-month Treasuries — which should be about the same as Fed funds — back down to 1%.
All of this involves fear of defaults by banks — despite what look from here (central New Jersey) like utterly clear signals from the Fed that bank debts will be socialized if necessary. I’m puzzled, and worried

[antiaristo]

.

Sensible people have been wondering about the pension funds.....

...looks like it will be really horrible.

Calpers CEO stepping down
By Greg Morcroft, MarketWatch
Last update: 10:37 a.m. EDT April 29, 2008

NEW YORK (MarketWatch) - The head of California's giant state employee pension fund is resigning to move into the private sector, marking the third recent high-level departure from the largest fund of its type in the country and raising questions about its direction.
Fred Buenrostro, the 58-year-old chief executive officer of the California Public Employees Retirement System, is resigning after about six years on the job, he said in a statement late Monday.

"Media speculation about reasons for my departure are unwarranted and incorrect," he said in a prepared statement.

Calpers President Rob Feckner added: "Media reports that raise a specter of controversy between him and the board are exaggerated."

He said that Buenrostro "has over time talked more and more about wanting to consider the time left in his career to pursue exciting opportunities in the private sector."

The move comes days after Russell Read set plans to depart after two years as chief investment officer of the $244 billion fund.

Calpers said Read will pursue an interest in environmental and clean-technology investing.

In February, Christianna Wood, senior investment officer, stepped down to become the CEO of hedge fund Capital Z Asset Management.

According to a report Tuesday in the Wall Street Journal, the rapid management change atop the megafund has led to speculation about the circumstances surrounding the executives' departure and has sparked concern about whether other investment professionals might follow.

http://www.marketwatch.com/news/story/c ... 6AB10EF%7D



"and has sparked concern about whether other investment professionals might follow."

Wow!

No other "concerns"?

[freemason9]

Economics fascinate me; therefore, I bump.

[StarmanSkye]

Indeed, great analysis by Eric Janszen on the Dual Cycles of Demand Destruction and the Economic Face Plant posted by Isachar -- Thanks!

Some added POVs below analyzing the real-world consequences of the commodity speculation driving up prices spurred by the US's attempt to 'solve' its huge defaults and trade imbalance by essentially exporting inflation -- aggravated by past several decades' policy of wrecking third-world agriculture by foisting cheap American subsidized grains on countries forced by IMF structural adjustments to quit protecting their own farmers with price supports. Also, Mike Whitney in the second article claims there isn't an oil shortage driving high oil prices -- it's the result of speculation.

Far from an accident, there are signs the global economic crisis is a very deliberate policy, an economic and ideological 'war' for global dominance.
*******

--quote--


http://www.globalresearch.ca/index.php? ... a&aid=8794
Financial speculators reap profits from global hunger
by Stefan Steinberg
April 24, 2008

A series of reports in the international media have drawn attention to the role of professional speculators and hedge funds in driving up the price of basic commodities—in particular, foodstuffs. The sharp increase in food prices in recent months has led to protests and riots in a number of countries across the globe.

On Tuesday, April 22, a UN spokesperson referred to a “silent tsunami” that threatens to plunge more than 100 million people on every continent into hunger. Josette Sheeran, executive director of the UN World Food Programme (WFP), noted: “This is the new face of hunger—the millions of people who were not in the urgent hunger category six months ago but now are.”

A recent article in the British New Statesman magazine, entitled “The Trading Frenzy That Sent Prices Soaring,” notes that increases in global population and the switch to bio-fuels are important factors in the rise of food prices, but then declares:

“These long-term factors are important, but they are not the real reasons why food prices have doubled or why India is rationing rice, or why British farmers are killing pigs for which they can’t afford feedstocks. It’s the credit crisis.”

The article states that the food crisis has developed over “an incredibly short space of time—essentially over the past 18 months.” It continues: “The reason for food ‘shortages’ is speculation in commodity futures following the collapse of the financial derivatives markets.

Desperate for quick returns, dealers are taking trillions of dollars out of equities and mortgage bonds and ploughing them into food and raw materials. It’s called the ‘commodities super-cycle’ on Wall Street, and it is likely to cause starvation on an epic scale.”

World prices for basic commodities such as cereals, cooking oil and milk have risen steadily since 2000, but have escalated dramatically since the developing financial crisis in the US began to bite in 2006. Since the start of 2006, the average world price for rice has risen by 217 percent, wheat by 136 percent, corn by 125 percent and soybeans by 107 percent.

Under conditions of growing debt defaults arising from the US subprime crisis, speculators and hedge fund groups have increasingly switched their investments from high-risk “bundled” securities into so-called “stores of value,” which include gold and oil at one end of the spectrum and “soft commodities” such as corn, cocoa and cattle at the other. The article in the New Statesman points out that “speculators are even placing bets on water prices” and then concludes:

“Just like the boom in house prices, commodity price inflation feeds on itself. The more prices rise, and big profits are made, the more others invest, hoping for big returns. Look at the financial web sites: everyone and their mother is piling into commodities.... The trouble is that if you are one of the 2.8 billion people, almost half the world’s population, who live on less than $2 a day, you may pay for these profits with your life.”

Investment in “soft commodities” is currently highly recommended by leading market analysts. According to Patrick Armstrong, a manager at Insight Investment Management in London, “Raw materials can prove to be the best investment class for hedge funds because the market is so inefficient. This results in more chances for profit.”

Much of the international speculation in food commodities takes place on the Chicago Stock Exchange (CHX), where a number of hedge funds, investment banks and pension funds have substantially increased their activities in the past two years. Since January of this year alone, investment activity in the agricultural sector has risen by a quarter at the CHX, and, according to the Chicago firm Cole Partners, involvement by hedge funds in the raw material sector has trebled in the past two years to reach a total of $55 billion.

Large-scale investors such as hedge and pension funds buy futures—shares in basic goods and foodstuffs to be delivered at a fixed date in the future. When the price of the commodity rises significantly between the time of the investment and the time of delivery, the investor is able to take home a large profit.

In light of the current food crisis, substantial returns of profit are guaranteed. According to CHX figures, wheat futures (for delivery in December) are expected to rise by at least 73 percent, soybeans by 52 percent, and soy oil by 44 percent.

Major ecological disasters, such as the recent drought in Australia, which hit food production and drive up basic commodity prices, are good news for the corporate investor.

Substantially reduced harvests in Australia and Canada this year have led to soaring wheat prices. Deutsche Bank has estimated that the price for corn will double, while the price for wheat will rise by 80 percent in the short term.

Such ecological disasters, which can ruin ordinary farmers and mean poverty for millions through increased food prices, are an aspect of the “inefficiency” of the raw materials market referred to above, which currently makes “soft commodities” such an attractive prospect for major speculators.

Deadly greed
An article headlined “Deadly Greed” in the current edition of the German weekly Der Spiegel gives some details of the activities of hedge funds in food market speculation. The magazine cites the example of the hedge fund Ospraie, which is generally regarded as the biggest of the management funds currently dealing in basic foodstuffs.

The manager of the fund, Dwight Anderson, is nicknamed “the raw materials king.” Already, in the summer of 2006, Anderson was recommending the “extraordinary profitability” of agricultural crops to his shareholders. While Ospraie is reluctant to publicise its profit levels from speculation in basic commodities, a leading German investor is less reticent.

Andreas Grünewald started up his Münchner Investment Club (MIC) in 1989 with seed capital equal to just €15,000. MIC now controls a volume of €50 million, of which €15 million is from investment in raw materials.

According to Grünewald, “Raw materials are the mega-trend of the decade,” and his company intends to intensify its involvement in both water and agricultural stocks. MIC investment in wheat alone has already yielded profit levels of 93 percent for the 2,500 members of the club.
The Spiegel article points out that MIC and its members give little thought to the catastrophic consequences of their speculative investment policy for undeveloped countries. “Most of our members are rather passive and orientated to profit,” Grünewald notes.

MIC, with its €50 million, is a minor player compared to the finance giant ABN Amro, which recently acquired a unique certificate allowing it to speculate on behalf of smaller investors on the CHX.

In the wake of the hunger revolts that took place a few weeks ago, ABN Amro put out a prospectus noting that India has enforced a ban on exports of rice, which, together with poor harvests in a number of countries, has led to a worldwide decline in rice reserves. “Now,” ABN Amro notes in its prospectus, “it is possible for the first time to have a share in the number one foodstuff in Asia.”

According to the Spiegel report, those responding to the ABN Amro appeal were able to realise a 20 percent rate of profit in the space of three weeks—a period that saw a huge increase in investment in rice in Chicago and other major centres.

Biofuel investment
Another particularly lucrative investment sector contributing substantially to the current global food crisis is biofuels. Initially championed as a means of protecting the environment, biofuels have become increasingly identified by big business as a profitable alternative to increasingly expensive oil. Within the space of a few years, biofuel has become a booming private industry capable of generating large rates of profit.
Huge tracts of land across the planet have in recent years been switched from food crops to the production of ethanol or biofuel, aimed primarily as a supplement to oil-based gasoline. Next year, the use of US corn for ethanol is forecast to rise to 114 million tonnes—nearly a third of the entire projected US crop.

In the words of Jean Ziegler, the United Nations special rapporteur on the right to food, the switch to biofuels at the expense of traditional forms of agriculture is nothing less than a “crime against humanity.”
Although maize production worldwide is growing, the increase is being more than absorbed by biofuel diversification. According to the World Bank, global maize production increased by 51 million tonnes between 2004 and 2007. During that time, biofuel production in the US alone (mostly ethanol) rose by 50 million tonnes, absorbing almost the entire global increase.

Subsidised by the US government, American farmers have diverted fully 30 percent of corn production into the ethanol scheme, driving up the cost of other, more expensive, grains that are being bought as substitutes for animal feed.

The European Union, India, Brazil and China all have their own targets to increase biofuels. The EU has declared that by 2010, 5.75 percent of all gasoline sold to motorists in Europe must stem from biofuel production. This month, a UK law enforced a mandatory mix of 2.5 percent biofuel in gasoline sold to motorists. A similar law stipulating a staggered 10 percent increase in biofuel share in gasoline was recently struck down in Germany following opposition from the auto industry, as well as ordinary car owners who would be forced to buy new cars to accommodate the new fuel.

In addition to the rapidly rising price of basic commodities as a result of the decreased production of grains for food purposes, the switch to crop production of biofuels has served to orient food prices to the high price of fuel. An equivalence is emerging between the price of food and the price of oil.

According to Josette Sheeran of the World Food Programme: “We are seeing food in many places in the world priced at fuel levels,” with increasing quantities of food “being bought by energy markets” for biofuels.

With oil topping $100 a barrel, the biofuel sector is currently regarded as a potential source of huge returns for investors. The drive for maximum profits by the biofuels sector was summed up in the advertisement for a congress held in 2006, which declared:

“Biofuels Finance and Investment World is Europe’s definitive investor congress focusing exclusively on the value chain evolving around the new biofuels economy. Investors and financial institutions will gather with key industry stakeholders to discuss future investment opportunities, the risks and areas with huge potential for profit.”

The April 22 edition of Money Week recommends that investors stung by the subprime crisis switch their funds to the lucrative biofuels market. Money Week sides with Fortune magazine in identifying the oil multinational Royal Dutch Shell group as a guarantor of good returns: “We love it because it makes huge profits and is very cheap, but apparently it also has a large stake in Iogen, a Canadian firm with an exciting-sounding ‘potential breakthrough in ethanol technology.’”

************
http://www.globalresearch.ca/index.php? ... a&aid=8824
Global Famine? Blame the Fed
by Mike Whitney
April 27, 2008

The stakes couldn't be higher for Ben Bernanke. If the Fed chief decides to lower rates at the end of April, he could be condemning millions of people to a death by starvation. The situation is that serious. Food riots have broken out across the globe destabilizing large parts of the developing world. China is experiencing double-digit inflation. Indonesia, Vietnam and India have imposed controls over rice exports. Wheat, corn and soya are at record highs and threatening to go higher still. Commodities are up across the board. The World Food Program is warning of widespread famine if the West doesn't provide emergency humanitarian relief. Venezuelan President Hugo Chavez said it best:

"It is a massacre of the world's poor. The problem is not the production of food. It is the economic, social and political model of the world. The capitalist model is in crisis."

Right on, Hugo. There is no shortage of food; it's just the prices that are making food unaffordable. Bernanke's "weak dollar" policy has ignited a wave of speculation in commodities which is pushing prices into the stratosphere. The UN is calling the global food crisis it a "silent tsunami", but its more like a flood; the world is awash in increasingly worthless dollars that are making food and raw materials more expensive. Foreign central banks and investors presently hold $6 trillion in dollars and dollar-backed assets, so when the dollar starts to slide, the pain radiates through entire economies. This is especially true in countries where the currency is pegged to the dollar. That's why most of the Gulf States are experiencing runaway inflation. This doesn't mean that oil depletion, biofuel production, over-population, and giant agribusinesses don't add to the problem. They do. But the catalyst is the Fed's monetary policies; that's the domino that puts the others in motion. Here's Otto Spengler's summary in his recent article in Asia Times, "Rice, Death and the Dollar":

"The global food crisis is a monetary phenomenon, an unintended consequence of America's attempt to inflate its way out of a market failure. There are long-term reasons for food prices to rise, but the unprecedented spike in grain prices during the past year stems from the weakness of the American dollar. Washington's economic misery now threatens to become a geopolitical catastrophe....The link between the declining parity of the US unit and the rising price of commodities, including oil as well as rice and other wares, is indisputable.

Never before in history has hunger become a global threat in a period of plentiful harvests. Global rice production will hit a record of 423 million tons in the 2007-2008 crop year, enough to satisfy global demand. The trouble is that only 7% of the world's rice supply is exported, because local demand is met by local production. Any significant increase in rice stockpiles cuts deeply into available supply for export, leading to a spike in prices. Because such a small proportion of the global rice supply trades, the monetary shock from the weak dollar was sufficient to more than double its price." ("Rice, death and the dollar", By Otto Spengler, Asia Times)

The US is exporting its inflation by cheapening its currency. Now a field worker in Haiti who earns $2 a day, and spends all of that to feed his family, has to earn twice that amount or eat half as much. No wonder that six people were killed Port au Prince in the recent food riots. People go crazy when they can't feed their kids.

Food and energy prices are sucking the life out of the global economy. Foreign banks and pension funds are trying to protect their investments by diverting dollars into things that will retain their value. That's why oil is nudging $120 per barrel when it should be in the $70 to $80 range.

According to Tim Evans, energy analyst at Citigroup in New York, “There’s no supply-demand deficit". None. In fact suppliers are expecting an oil surplus by the end of this year.

"The case for lower oil prices is straightforward: The prospect of a deep U.S. recession or even a marked period of slower economic growth in the world’s top energy consumer making a dent in energy consumption. Year to date, oil demand in the U.S. is down 1.9% compared with the same period in 2007, and high prices and a weak economy should knock down U.S. oil consumption by 90,000 barrels a day this year, according to the federal Energy Information Administration." ("Bears Baffled by Oil Highs" gregory Meyer, Wall Street Journal)

There's no oil shortage; that's another ruse. Speculators are simply driving up the price of oil to hedge their bets on the falling dollar. What else can they do; put them in the frozen bond market, or the sinking stock market, or the collapsing housing market? The Fed has gummed up the entire financial system with its low-interest credit scam; now it's on to commodities where the real pain is just beginning to be felt.

This is what happens when there's too many dollars sloshing around the system; they all need a place to rest, and when they do, they create equity bubbles. Sound familiar? Indeed. This is Greenspan's legacy in a nutshell; the dark specter of Maestro will continue to haunt the world until all the hyper-inflated asset-classes (real estate, bonds, stocks, commodities) return to earth and all the red ink is mopped up. That'll take time, but Bernanke could make things a lot easier if he accepted some responsibility for the current turmoil and raised rates by 25 basis points. That would show speculators that the Fed was serious about defending the currency which would send the commodities bubble crashing to earth. Prices would go down overnight.

But Bernanke won't raise rates because he doesn't really give a hoot about the people in Cameroon who have to scavenge through garbage-dumps for a few morsels to keep their families alive. Nor does he care about the average American working-stiff who gets cardiac-arrest every time he pulls up to the gas pump. What matters to Bernanke is making sure that his fat-cat buddies in the banking establishment get a steady stream of low interest loot so they can paper-over their bad investments and ward off bankruptcy for another day or two. Its a joke; it was the investment banks that created this mess with their putrid mortgage-backed securities and other debt-exotica. Still, in Bernanke's mind, they are the only ones who really count.

And don't expect Bush to step in and save the day either. The "Decider" still believes in the unrestricted activity of the free market; especially when his crooked friends can make a buck on the deal.
From the Washington Times:

"Farmers and food executives appealed fruitlessly to federal officials yesterday for regulatory steps to limit speculative buying that is helping to drive food prices higher. Meanwhile, some Americans are stocking up on staples such as rice, flour and oil in anticipation of high prices and shortages spreading from overseas. Costco and other grocery stores in California reported a run on rice, which has forced them to set limits on how many sacks of rice each customer can buy. Filipinos in Canada are scooping up all the rice they can find and shipping it to relatives in the Philippines, which is suffering a severe shortage that is leaving many people hungry." (Patrice Hill, Washington Times)

The Bush administration knows there's hanky-panky going on, but they just look the other way. It's Enron all over again---where Ken Lay Inc. scalped the public with utter impunity while regulators sat on the sidelines applauding. Great. Now its the Commodity Futures Trading Commission (CFTC) turn; they're taking a hands-off approach so Wall Street sharpies make a fortune jacking up the price of everything from soda crackers to toilet bowls.

"A hearing Tuesday in Washington before the Commodity Futures Trading Commission starts a new round of scrutiny into the popularity of agricultural futures, a once a quieter arena that for years was dominated largely by big producers and consumers of crops and their banks trying to manage price risks. The commission's official stance and that of many of the exchanges, however, is likely to disappoint many consumer groups. The CFTC's economist plans to state at the hearing that the agency doesn't believe financial investors are driving up grain prices. Some grain buyers say speculators' big bets on relatively small grain exchanges, especially recently, are pushing up prices for ordinary consumers. ("Call Goes Out to Rein In Grain Speculators", Ann Davis)

"The agency doesn't believe financial investors are driving up grain prices"?!?
Prices have doubled, people are starving, and the Bush troop is still parroting the same worn party-mantra. Its maddening.

The US has been gaming the system for decades; sucking up two-thirds of the world's capital to expand its cache of Cadillac Escalades and flat-screen TVs; giving nothing back in return except mortgage-backed junk, cluster bombs, and crummy green paper. Nothing changes; it only gets worse. But this time its different. The world is now facing the very real prospect of famine on a massive scale because twelve doddering old banksters at the Federal Reserve would rather bailout their sketchy friends then save the lives of starving women and children. Bernanke now has an opportunity to send more people to their eternal reward than Bush with one swipe of the pen. If he cut rates; the dollar will fall, commodities will spike, and people will starve. It's as simple as that.
*****
http://www.globalresearch.ca/index.php? ... a&aid=8828
Global Famine: The Lords of Capital Decree Mass Death by Starvation
by Glen Ford
April 28, 2008

Black Agenda Report <http://www.blackagendareport.com/index.php?option=com_content&task=view&id=589&Itemid=1>
Having crushed the planet's peasants and converted food into just another commodity for global manipulation, the Lord's of Capital have unleashed upon humanity the threat - no, certainty - of mass starvation. The criminal mega-enterprise is centered in the United States, the former "breadbasket of the planet" whose massive conversion to biofuels has caused staple crop prices to skyrocket beyond the reach of hundreds of millions of the world's poor. The death of millions translates into profits in the trillions for the Lords of Capital, killers on a mass scale whose only talents lie in "the production of overlapping calamities, each more lethal than the last."

"No amount of emergency aid is sufficient to make up for the wild price rises that have already occurred."

Fidel Castro called biofuels "genocide <http://archive.newsmax.com/archives/ic/2007/4/4/81325.shtml?s=ic>," and he was right. And there can be no question as to the identity of the perpetrators of this global genocide: the Lords of Capital that formulate the foreign and domestic policy of the United States. That policy calls for 20 million acres of corn from states like Iowa to be converted from food to fuel. As should have been expected, such a massive diversion almost immediately pushed up the price of all other basic foodstuffs - a global disaster made quick and easy by the fact that, over the past several decades, planetary food production has been taken over by agribusiness - the speculative human parasites that control how food is bought and sold, and to whom, and for what purpose. These Lords of Capital are killers on a mass scale.

"Hot" money has totally distorted the "marketplace" for life-sustaining goods, causing millions of the desperately poor in scores of countries to take to the streets. "In less than a year," writes the Guardian <http://www.guardian.co.uk/environment/2008/apr/13/food.climatechange/print> newspaper, in Britain, "the price of wheat has risen 130 per cent, soya by 87 per cent and rice by 74 per cent."
These are nothing less than crimes against humanity, and cannot help but destroy the lives of millions who are already at the very edge of the precipice.

"The Lords of Capital have imposed a triage of death by starvation on the planet."

The so-called "market" - which is actually a club of super-rich men who distort and destroy everything of value to humanity that they touch - will be the death of us all, and much quicker than through the effects of global warming, which is also greatly accelerated by the ghoulish, greedy rush to grow food for cars rather than people. In such a murderous environment -manipulated purely for the profits of the Lords of Capital - neither trees nor peasants stand a chance. The United Nations says it needs about half a billion dollars for the most critical cases of starvation, but no amount of emergency aid is sufficient to make up for the wild price rises that have already occurred - and which will put trillions in the pockets of the Lords of Capital.

Agribusiness wiped out small farmers in the U.S., and impoverished and pushed off the land untold millions of peasants, worldwide. Now the Lords of Capital have imposed a triage of death by starvation on the planet. The people who live on two dollars or less per day will have to die, and then, as prices rise, the three dollar people will follow.

The men who profit from such mass murder use terms like "structural adjustment" and "economic fundamentals" to attach a veneer of rationality to a chaotic system they have created on the fly for the sole purpose of mega-theft. In the end, the Lords of Capital have mastered only one art: the production of overlapping calamities, each more lethal than the last. Soon, if not already, the Haitian poor will have no cooking oil to mix with clay for their diet of dirt pies <http://www.counterpunch.org/sharon04112008.html>. The Lords of Capital will have turned them into dirt for another Haitian's consumption and demise.

For Black Agenda Radio, I'm Glen Ford.

[antiaristo]

.

Pazdispenser,
Thank you for this.
Y'know, we've got some interesting evidence coming up.

Hey nina,

anti had this wonderful summary in this thread way back on Feb 15:

When this thread began the mainstream was deep in denial. Now it is mainstream. But my God! how confusing it all is.

There is STILL an important part missing from the explanation.

Let me go back to basics....


The banks purchased mortgages and pooled them. They issued securities based on those pools (RMBS).

The same was done with commercial property, with car loans, with credit cards, with student loans.

Other banks then purchased a proportion of these RMBS and other types, and mixed up the geographic sources and types, creating another pool.

Based on THIS mixed-up pool the banks issued a new type of security called a collateralised debt obligation (CDO).

Now the logic was that by spreading thus the portfolio one reduced the overall risk.

Typically therefore 100% BBB- RMBS could be transformed into CDOs comprising 75% AAA, 20% BBB- and 5% unclassified. THAT was the "alchemy" of structured finance.

Now I could be crucified for putting it like this, but AAA debt is worth roughly twice what BBB- debt is worth.

By means of "financial alchemy" 100 units of BBB- had been transformed into 150 units of AAA (ie 75 worth double) plus 20 units of BBB- and zero of unclassified (5 worthless units).

That's a total of 170 units.

THAT's where Wall Street made their "profits".
170 minus 100 is 70 "profit".

ON TRILLIONS OF DOLLARS OF DEALS.

Do you see now why the banks were paying up to 110 percent of face value for packages of mortgages? Do you see now why it is impossible to open the mail without finding three new credit card offerings?

Not all was taken as capital. Much was taken in the form of fees and commissions and other types of skimming. Much was taken in the form of inputs into other CDOs (so called "CDO squared"). Some was taken as "enhancement" to so called "synthetic CDOs".

The point is, that 70 units has long gone.

And now the financial alchemy has collapsed.
Spreading the risk DOES NOT WORK.
When there is a systemic downturn, a recession, then everybody has a hard time.

If homeowners are having a hard time because of a bad economy, then SO IS EVERYBODY ELSE. Or, as they say in finance, correlations move towards one. Diversification is ineffective.

Nobody wants to buy these things because nobody else will buy them. Nobody wants to get stuck (as opposed to being a conduit-for-fee) with them because forty percent has been stripped out already (seventy out of 170 is forty percent).

All that slicing and dicing adds no value.

Now at the moment everybody is focussed at the mortgage end of the chain, which is AT BEST only half of the problem. The real problem is that potential mortgage losses are forcing the CDOs to be unwound.

All that "added value" on securitisation is going into reverse.

When the CDO is unwound 170 units of value revert back to 100 units of value. Which is a capital loss of 41 percent.

THEN, out of that 100 units of value there will be the mortgage losses. Let's say on average they lose 20 percent, so that 80 units of value is recovered.

The OVERALL loss is (170 - 80) on 170.
90 on 170 is 53 percent loss overall.

But notice only a minority, 12%, arises because of the mortgage end. The great majority, 41%, arises at the securitisation end.

IT'S THE CDO UNWINDINGS THAT WILL KILL WALL STREET.

And EVERYTHING coming out of Washington has one purpose, and one purpose alone. That is to prevent or slow down the unwinding.

Havent seen a better summation anywhere.....

Essentially I was pointing out the forty percent margin that Wall Street has taken on these CDOs.

There is a conspiracy of silence going on.

Now look at this.
It has gotten NO COVERAGE.
It is DREADFULLY BADLY WRITTEN.

S&P Lowers CDO Assumptions, Signaling More Downgrades (Update3)
By Jody Shenn

April 28 (Bloomberg) -- Standard & Poor's lowered its assumptions for how much money investors will recover after defaults of mortgage-tied collateralized debt obligations, a sign that the firm may be preparing to add to record downgrades.

Ratings cuts on top of the more than $351 billion from New York-based S&P in less than a year may push owners such as UBS AG and Citigroup Inc. to sell the debt rather than wait for CDO demand to rebound, said Brian James, a partner at Link Global Solutions, a New York-based structured-finance consulting and recruiting firm.

``Further rating-agency action will cause banks who hold the majority of AAA bonds to re-evaluate their strategy,'' James said. ``So far they have been more comfortable writing down their positions in the hopes of better recoveries.''

The CDOs covered by S&P's revision are at least 40 percent invested in some U.S. home-loan bonds created since Sept. 30, 2005 or pieces of other CDOs with such holdings, according to a statement today. The most-senior bonds from the CDOs originally rated AAA should recover 60 percent of principal owed, while securities rated A or lower will get nothing, S&P said.

While S&P's recovery expectations for a structured-finance security generally don't affect the ratings the firm assigns to that bond, the assumptions can influence whether the company believes a vehicle such as a CDO that itself holds the security deserves a certain rating.

Mortgage-linked CDOs, mainly classes once rated AAA by S&P or Aaa by Moody's Investors Service, have been the biggest source of the more than $320 billion of asset writedowns and credit losses reported by the world's largest banks and securities firms since the start of 2007. CDOs repackage assets such as mortgage bonds and buyout loans into new securities with varying risks.

Secondary Activity

The change announced today ``may have a negative impact on the ratings assigned to the affected CDOs because a reduction in expected recoveries typically necessitates more'' investor protection, S&P analysts led by Patrice Jordan, the head of its global CDO business, said in the statement.
More downgrades could also force banks, insurance companies and securities firms to raise more capital, cut dividends or reduce assets.

S&P so far has cut $351.6 billion of CDOs ``as a result of stress in the U.S. residential mortgage market and credit deterioration'' among home-loan bonds, the ratings company said April 25. Ratings on $16.3 billion more were under review by S&P with a ``a high likelihood of downgrade.''

Investors should recover 35 percent of principal after defaults on securities from the CDOs junior to their so-called super-senior classes but also originally rated AAA, S&P said today. Originally AA classes should recover 5 percent, it said.

(More)

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net.
Last Updated: April 28, 2008 16:56 EDT

http://www.bloomberg.com/apps/news?pid= ... BD4f72Wpio


What this tells us is that S&P have finally quantified the unwindings on $352 billions worth of CDOs.


The VERY BEST of the so called AAA will get back sixty cents on the dollar. They have lost the "securitization margin", but nothing on the underlying mortgages. In my example from above, the 170 units has reverted to 100 units.

Some proportion of the so called AAA will get back thirty five cents on the dollar. They have lost the "securitization margin" plus a further twenty five percent on the underlying mortgages.

AA will get the dregs from the morgage portfolio. Five cents on the dollar.

A and below gets nothing.

I would remind everyone that "A" means investment grade. Worth nothing. Across a sample of $352 billion.


Something else that you as taxpayers should know. The Federal Reserve is accepting AAA CDOs as collateral for its swap facility.

Hundreds of billions at face value.

And S&P are telling us NOW (AFTER the Fed shenanigans have been put in place) that it's worth thirty five cents on the dollar.

And nobody in the MSM has picked it up?????

[tal]

.



Something else that you as taxpayers should know. The Federal Reserve is accepting AAA CDOs as collateral for its swap facility.

Hundreds of billions at face value.

And S&P are telling us NOW (AFTER the Fed shenanigans have been put in place) that it's worth thirty five cents on the dollar.

And nobody in the MSM has picked it up?????

Extraordinary Times, Intentional Collapse, and Takedown of the U.S.A.


[url=http://elainemeinelsupkis.typepad.com/money_matters/2008/05/china-japan-and.html]China, Japan And Korea Sign New Monetary Union Accords

[/url]

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[Pazdispenser]

Hi tal -

I checked out your Elaine Sepkis link, and shes a keeper. I read more finance and "true state of the economy" blogs than are in existence (no its not masochism, its work.....okay, never mind).

I read a number of Elaine's posts (check out "THe Bubble THat Will Break America"; while long, I learned more than an entire book on the Depression), and she joins our anti at teh Adult Econ Blog table.

[isachar]

Anti, your original analysis posted here was dead on. The Fed's response was to take the CDO trash in exchange for access to its term auction facility. This amounts to a "Fed cash for bank trash" bailout program that will - for a short time - contain the financial consequences of the CDO/subprime debacle from spilling out of control. This, in combination with the Bear Stearns intervention (which even Warren Buffet has acknowledged averted a catastrophic meltdown in world financial markets in late-March) appears to have held off the moment of reckoning for now.

Under the admin/Fed's policy it doesn't pay to be a smart investor (e.g., I had a very nice short position that came due late March that was wiped out by the Fed's Bear Steans and other market intervention during that time). It only pays to be a well-connected investor - like a major bank or well-connected investment brokerage house - like Citi or JP Morgan.

I wonder how much longer they can keep the balloon afloat. A lot of this trash ended up being held by various pension funds. The magnitude of their exposure and the hit they've taken hasn't yet been disclosed or revealed as far as I know. We can be sure they've taken a signficant hit.

Small investors and Billy bob and Cindy lou homeowner get taken down (fleeced, foreclosed and evicted) while Morgan, Citi, and other fat cat bankers and securitizers etc. get bailed out. Meanwhile, Buffett gets his pick of the little morsels strewn about in what's left of the carnage (like the highly lucrative muni bond insurance market).

[HMKGrey]

Okay, folks. Marvellous thread. But what should I do with my cash?

Seriously, what should I be doing with my cash today given all of this?