Federal Reserve losing control

[barracuda]

I hope this collapse drives the DJIA all the way to 5000 in the next two weeks, guaranteeing an Obama presidency.

Unfortunately Dow 5000 in the next two weeks would mean certain war, and a McCain presidency.

[vigilant]

Although it is ripping my retirement accounts to shreds, I hope this collapse drives the DJIA all the way to 5000 in the next two weeks, guaranteeing an Obama presidency.


Dude if the dow hits 5000, we may all be looking for a rock to get under...

[smiths]

an excellent explanation for how the shit is hitting the fan

The Ultimate Wall Street Nightmare

Each time they intervene, they say "we must not reward CEOs who deceive the public and walk off with multibillion dollar bonus checks." And each time they say it's the "last time we'll make an exception to that rule."

But then they go ahead and do it anyhow, not only breaking their own word ... but also trashing the long tradition of restraint established by their predecessors since the Great Depression.

Why? Because they had neither the courage nor the audacity to confront Wall Street's ultimate nightmare: A collapse in the giant mountain of derivatives.

Derivatives are essentially bets on interest rates, foreign currencies, stocks or specific events like the bankruptcy of a particular company. The interest rate-related bets are by far the biggest. But the bets on bankruptcies — called credit default swaps — are the fastest growing and the most volatile.

These derivatives were originally designed to help hedge investments reduce risk — like insurance policies. But in practice, they've been increasingly used to leverage investments, increasing the risks of participants.

Here are some essential facts that illustrate the enormity of the problem ...

* The amounts are absurdly large. The total "notional," or face value, of derivatives held by U.S. banks is $180 trillion, and it's three times that much globally. This figure is said to overstate the actual market risk. But it does not overstate the risk of defaults such as those that could be triggered by the failure of a company the size of Lehman Brothers.

* Over 90% of all derivatives are traded outside of regulated exchanges. Consequently, other than very general information, the authorities have no mechanism for keeping track — let alone efficiently cleaning up the mess in the wake of a giant failure.

* Off the balance sheets. Some companies report nothing more than the total value of their derivatives in footnotes to their financial statements. Others don't report at all. Consequently, the actual risk, amounts and even the very existence of derivatives is often poorly disclosed to investors.

* Disclosure in the brokerage industry is especially bad. Many brokerages are private and do not disclose more than their rank and serial number. The SEC collects sparse data and does not publish it. So if you want to figure out how much derivates risk your broker is exposed to, good luck! Getting the information can be like pulling teeth.
Big Banks Risk All with Danger of Defaults on Derivatives

* Concentrated in the hands of five major players. Nearly 97% of all U.S. bank-held derivatives are concentrated in the hands of just five major U.S. banks — JPMorgan Chase, Citibank, Bank of America, Wachovia and HSBC.

* Far larger than assets. As you can see in the chart to the left, the pile-up of derivatives greatly exceeds the total assets of the firms. At the same time, in most cases, the default risk related to these holdings greatly exceed the banks' capital.

* Big brokers are also loaded with derivatives. Merrill Lynch has $4.2 trillion. Morgan Stanley has $7.1 trillion. As best we can determine, Lehman Brothers has significantly less — $729 billion. But in proportion to its dwindling capital, its exposure seems to be among the worst.

* The capital of major firms has been further weakened by recent losses and the failure to raise enough capital to cover them. The chart below tells the story in a nutshell:

Recent mortgage and credit losses greatly exceed new capital raised

Consistently, in bank after bank, the losses suffered from the mortgage and credit crisis have exceeded the amount of new capital they could raise. This was true when investors still had confidence in their ability to overcome the difficulties. It's even more true today.

Here's the great dilemma: The tangled web of bets and debts linking each of these giant players to the other is so complex and so difficult to unravel, it may be impossible for the Fed to protect the financial system from paralysis if just one major player defaults. And if Lehman is not that player, the next one will be.

To understand why, put yourself in the shoes of a senior derivatives trader at a big firm like Morgan Stanley (which has $7.1 trillion in derivatives on its books and about $10 billion in capital).

Let's say you're personally responsible for $500 billion in derivatives contracts with Bank A, essentially betting that interest rates will decline.

By itself, that would be a huge risk. But you're not worried because you have a similar bet with Bank B that interest rates will go up.

It's like playing roulette, betting on both black and red at the same time. One bet cancels the other, and you figure you can't lose.

Here's what happens next ...

* Interest rates go up, reflecting a 2% decline in bond prices.

* You lose your bet with Bank A.

* But, simultaneously, you win your bet with Bank B.

* So, in normal circumstances, you'd just take the winnings from one to pay off the losses with the other — a non-event.

But here's where the whole scheme blows up and the drama begins: Bank B suffers large mortgage-related losses. It runs out of capital. It can't raise additional capital from investors. So it can't pay off its bet. Suddenly and unexpectedly ...

You're on the hook for your losing bet.
But you can't collect on your winning bet.

You grab a calculator to estimate the damage. But you don't need one — 2% of $500 billion is $10 billion. Simple.

Bottom line: In what appeared to be an everyday, supposedly "normal" set of transactions ... in a market that has moved by a meager 2% ... you've just suffered a loss of ten billion dollars, wiping out all of your firm's capital.

Now, you can't pay off your bet with Bank A — or any other losing bet, for that matter.

Bank A, thrown into a similar predicament, defaults on its bets with Bank C, which, in turn, defaults on bets with Bank D. Bank D has bets with you as well ... it defaults on every single one ... and it throws your firm even deeper into the hole.

So now do you understand why bookies belong to the Mafia and why gamblers who welsh on their debts wind up at the bottom of the East River? It's because defaulting gamblers are a grave threat to the entire system, just like Lehman Brothers is today.

Now do you see why the $180 trillion in U.S. derivatives, supposedly overstating the true risk, is actually a lot riskier than almost everyone cares to admit? It's because defaulting banks or brokerage firms are also a grave threat to the entire system.

And now do you understand why Mr. Bernanke and Mr. Paulson are probably bluffing?

Don't let them fool you. The Lehman Brothers debacle is a far greater threat than anyone has dared tell you. And if you haven't done so already, you must take the urgent defensive action we've been recommending day after day, week after week.

All the instructions are in my recent Money and Markets issues.

In a nutshell: Sell all your vulnerable stocks and bonds before it's too late, stashing the proceeds in cash with short-term Treasuries or a Treasury-only money market fund. And to the degree that you're unable to sell, buy inverse ETFs to protect yourself from devastating losses.

Don't wait for the market's reaction to the Lehman collapse. Act now.

http://www.moneyandmarkets.com/Issues.a ... tryId=2234

[vigilant]

smiths you been coming up with some good articles lately....you have a good bevy of source material

[smiths]

i've got a few that i check everyday, and luckily a full time job that allows me to spend a fair bit of each 'working' day reading

heres my daily money checks on delicious

http://delicious.com/doppelbrainer/dailyMoney

[Byrne]

A useful presentation:

Money As Debt

Paul Grignon's 47-minute animated presentation of "Money as Debt" tells in very simple and effective graphic terms what money is and how it is/was being created.

[vigilant]

For those of you that have sums of money in retirement plans at investment banks, think about this...

There really is no such thing as "insurance" on your money. The FDIC never could, and never will be able to insure your money. That was set up as a cover to hoodwink people into being comfortable with fractional reserve banking.

They loan out ten times the amount of money they actually have. They give you a piece of paper that says, "we have money, give John a car, or a house, he will pay us, and we will pay you"

The money isn't even there. They give you paper, and when you work your butt off and make payments, you give them "real hard cash money" for the thin air they loaned you. Its a way to convert "literally nothing" into real money.

So when you think about it, there is only enough money to insure one tenth of what was deposited, and they damn sure are not gonna give it all away to people who lose their "real dollars" that got stolen by them in the first place....get it?

[vigilant]

We have had so many different financial threads going that I cannot remember who posted a link to one of those "what is money, history of money" articles. Somebody posted a link to one. I have read many, but I don't know if I have read the one that was recently posted in the forum.

I would like to check it out if anybody remembers what thread it was in. It could have been "smiths" that posted it, but I cannot remember.

Anybody remember? Jackriddler, smiths, nathan28, barracuda?

[vigilant]

Actually, I would like to start a "what is money, how did it originate" thread but I don't know how many people we have here that are interested enough to participate in it. Maybe more than I realize in the current financial climate. Its a fascinating topic, and an eye opener, as money is not, and never has been what it appears to be.......

[vigilant]

For those of you that have sums of money in retirement plans at investment banks, think about this...

There really is no such thing as "insurance" on your money. The FDIC never could, and never will be able to insure your money. That was set up as a cover to hoodwink people into being comfortable with fractional reserve banking.

They loan out ten times the amount of money they actually have. They give you a piece of paper that says, "we have money, give John a car, or a house, he will pay us, and we will pay you"

The money isn't even there. They give you paper, and when you work your butt off and make payments, you give them "real hard cash money" for the thin air they loaned you. Its a way to convert "literally nothing" into real money.

So when you think about it, there is only enough money to insure one tenth of the money in the system, and they damn sure are not gonna give it all away to people who lose their "real dollars" that got stolen by them in the first place....get it?

Saw this article today, and this is the sort of thing I am referring to. If you have a retirement account, what is it invested in?

Which organization is actually holding your retirement fund is not the answer to "what is it invested in". There is a good chance your money, or some of it, may be here.....think about it.

Just before every failed institution failed what was the story given? "All is well, we'll be just fine. Nothing to see, move along now."

I pulled every nickel I own out of my IRA already. Will the money markets fail, or lose a lot of their value? I can't answer that question.

Is it possible or even likely that the money market funds will fail or lose value? Absolutely....

Money is disappearing fast right now. What will yours do?


U.S. GOVERNMENT NOW PROPPING UP MONEY MARKET FUNDS
September 19th, 2008
http://money.cnn.com/2008/09/19/markets/money_markets/

The Treasury Department said Friday it will provide temporary relief for the U.S. money market fund industry by pledging to insure the holdings of any publicly offered money market mutual fund.

The agency said it would guarantee up to $50 billion dollars for the next year for both retail and institutional investors.

Money market funds invest in short-term debt issued by the federal government or by companies, and are widely used by consumers as a place to stash their extra cash.

Typically, putting money in these funds was thought to be as safe as money in the bank.

But these funds, which also serve as a fundamental source of financing for both financial institutions and capital markets, have come under severe strain in recent days following the dramatic events from earlier this week including the dramatic collapse of Lehman Brothers and the federal government’s rescue of the insurance giant AIG.

The Treasury Department said the action should help return some confidence to the market and alleviate investors’ fears about the ability for money market mutual funds to absorb a loss.

Several financial institutions - including Wachovia’s Evergreen Investments and Frank Russell Funds - announced plans Thursday to step in to prop up their funds now, but experts seemed certain that they could not do it indefinitely.

[vigilant]

When cash becomes scarce, money is tightened, or credit is made unavailable, who benefits?

There is only one correct answer. The people that issue the money benefit. Who is that? Is it who you think it is?

When the head of a household borrows money to buy the house, who owns the house? The head of the household operates the house, but the lender owns the house. The head of the household is free to operate the house "more or less" as he chooses within "certan restrictions" as long as the operator/head of household does what? Satisfies the lender.

Thinking like the people that own the train will tell you where the train is likely to go. The engineer who steers the train, is not the owner.

When the head of Governments borrow money from a lender who owns the government? The lender owns the government, and the government operates the country.

Governments only steer, for the owners...

Money is seldom ever "lost" but only transferred. When a government/nation suffers economic woes and misfortune an incredibly small number of people are almost always benefitting...




Senate Banking Committee Chairman Chris Dodd: The United States May Be “Days Away from a Complete Meltdown of Our Financial System” September 19th, 2008

Thousands of bailout stories around. Nobody knows WTF is going to happen now that we have passed the “oh shit” moment. There’s lots of “hope” though. HA

Via: AP:

Senate Banking Committee Chairman Chris Dodd says the United States may be “days away from a complete meltdown of our financial system” and Congress is working quickly to prevent that.

Dodd said Friday that Democrats and Republicans on the Hill are coming together to support the Bush administration’s developing plan to buy up bad debt from financial institutions and get the credit system working again. Dodd told ABC’s “Good Morning America” that the nation’s credit is seizing up and people can’t get loans.

[Byrne]

Proposed Wall St bailout to cost $700bn

By FT reporters [Financial Times, UK]

Published: September 20 2008 17:49 | Last updated: September 20 2008 17:49

The Bush administration sought congressional support Saturday for a $700bn bailout for US financial institutions to quell the turmoil in financial markets.

The plan would allow the government to buy the bad debt of any US institution for the next two years, raising the legal ceiling on the national debt from $10.6 trillion to $11.3 trillion.

President George W. Bush said: “We’re going to work with Congress to get a bill done quickly.” Treasury officials and members of Congress were meeting throughout the weekend to secure broad agreement on the package by the time world markets reopen on Monday. Legislation could pass early next week.

Saying the administration was faced with preventing the collapse of a financial “house of cards”, Mr Bush said: “People are beginning to doubt our system, people were losing confidence and I understand it’s important to have confidence in our financial system.” he said.

He said the risk of doing nothing far outweighed the risk of the package.

He assured taxpayers that over time they would get a lot of their money back. At the height of the presidential election campaign, attention on the crisis has focused on demands that the rescue package should help not only Wall Street but also “Main Street” where ordinary Americans are already faced by foreclosures, job losses, and high food and energy prices.

Martin Wolf

Leading economists propose their solutions to the financial crisis

Presidential candidates Barack Obama and John McCain are vying with each other to convince voters that their plans for the economy have the best chance of succeeding while protecting taxpayers. However, Nancy Pelosi, Democratic speaker of the House has assured the administration Mr Obama’s party is committed to “quick, bipartisan action”.

Charles Schumer, New York Democratic senator, said on Saturday: “This is a good foundation of a plan that can stabilise markets quickly. But it includes no visible protection for taxpayers or homeowners. We look forward to talking to Treasury to see what, if anything, they have in mind in these two areas.”

capitol hill

Text of the US Treasury’s legislative proposal

*

The plan is aimed at restoring confidence in the financial system by allowing US institutions to transfer their bad debt to the government.

The draft legislation would authorize the Treasury to: “purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States.”

Henry Paulson, treasury secretary, who would be charged with executing the bailout plan, said: ”We must now take further, decisive action to fundamentally and comprehensively address the root cause of our financial system’s stresses. The federal government must implement a program to remove these illiquid assets that are weighing down our financial institutions and threatening our economy.”

The action came after stock markets around the world roared their approval on Friday to news of plans for significant government action.

Shanghai surged 9.5 per cent, in the biggest daily gain for seven years, to 2,075.091. Hong Kong ’s Hang Seng gained 9.6 per cent to 19,327.73, breaking a seven-day losing streak. In London the FTSE 100 had its biggest daily gain in its 24-year history, jumping 8.8 per cent, while in New York the S&P 500 closed up 4.0 per cent, having risen 4.3 per cent on Thursday. The rallies in London and the US were partially fuelled by bans on short-selling in financial stocks announced on Thursday night.

The political negotiations on the rescue plan, which followed a week of unprecedented stress in global financial markets, envisage the most extensive peacetime expansion of the role of government in the financial system since the Great Depression and appeared to many to mark the end of an era of Reaganite deregulation.

Hank Paulson, the US Treasury secretary, said the programme would initially cost “hundreds of billions of dollars.” But he added it was far cheaper than the alternative – “a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion”.

In addition, the Bush administration also announced a blanket guarantee on all money market mutual funds, in an effort to curtail a brewing crisis in the $3,500bn (€2,422bn) sector. The Federal Reserve announced new plans to support liquidity in the mutual fund sector.

Copyright The Financial Times Limited 2008

[vigilant]

<snip>
As the riskier mortgages go into foreclosure, the institutional investors owning them as mortgage-backed securities will be left holding the bag; and these institutional investors are largely the pension funds on which the retirements of workers depend.

http://www.webofdebt.com/

[telephoneman]

Just read that the gov wants to bail out foreign banks. Hmmmm.
Hope this link works.
http://www.politico.com/news/stories/0908/13690.html

[Byrne]

Just read that the gov wants to bail out foreign banks. Hmmmm.
Hope this link works.
http://www.politico.com/news/stories/0908/13690.html

Hmmm, the FT has this:

Political wrangle over US bail-out fund

By Krishna Guha, Harvey Morris and Daniel Dombey in Washington and George Parker in Manchester

Published: September 21 2008 19:13 | Last updated: September 21 2008 21:33

A high stakes game of political poker was under way in Washington on Sunday as Congress prepared to vote this week on a plan to create a $700bn fund to buy toxic assets from banks and thereby ease the credit squeeze.

Democratic legislators pressed for a housing programme to be added to the bill and demanded assurances that President George W. Bush would not veto a subsequent second stimulus bill.

The Bush administration was trying to hold out for a “clean” bill that dealt only with the financial rescue, while Republicans in Congress said they would fight a hasty compromise that included many add-ons.

The political negotiations came as Hank Paulson, US Treasury secretary, called on other nations to follow the US lead in tackling the problems in the global financial system.

He said: “I will be pressing my colleagues around the world to design similar programmes for their banks.” The US is not asking other governments to join its proposed fund.

Mr Paulson said the US scheme should be open to all banks with “significant operations” in the US – including foreign banks, even though this may be politically controversial in the US.

“The American people don’t care who owns the financial institution. If the financial institution in this country has problems it has the same impact whether it is US or foreign-owned,” he told ABC’s This Week.

The passage of the legislation is considered essential to avoid a renewed tailspin in world financial markets.

Legislators and administration officials stressed their shared determination to get the legislation passed. But beneath the surface of bipartisan statements there was anger in both camps at what each saw as efforts by the other side to use financial danger to bounce them into policy decisions.

“It’s important that everyone understands the seriousness of the situation we’re in and that we send a very strong signal to the market that this plan will . . . go forward quickly,” said Tony Fratto, White House spokesman.

Nancy Pelosi, the House speaker, earlier asserted: “We will strengthen the proposal by ensuring that the government is accountable to the taxpayers in any future actions.”

Democratic legislators made clear that they would not simply rubber-stamp the Paulson plan. “It needs changes,” Charles Schumer, Democratic senator, said on This Week.

Some legislators from both parties proposed adding measures on corporate governance and executive pay, steps the Treasury fears could undermine banks’ willingness to take part.

“I don’t like the fact that we have to do this. I hate the fact that we have to do this,” Mr Paulson said on Sunday. “But it is better than the alternative.” [What is the alternative?]

Huge bankers’ bonuses came under heavy political fire from Gordon Brown on Sunday, as the City of London’s top watchdog vowed to crack down on pay package deals that fuelled risk-taking.

The [UK] prime minister said “irresponsibility”, driven partly by the bonus culture, had helped trigger the crisis, and that parts of the bonus system were “unacceptable” and had to be tackled.

The FSA, the main City regulator, said it planned to force banks to hold more capital if it felt their bonus structures were leading to excessive risk-taking.

Christine Lagarde, France’s economy minister, also attacked “perverse” pay structures that led to “greedy and blind behaviour”.

Australian regulators on Sunday extended their ban on naked short-selling – not ensuring positions can be covered – to cover all short-selling.

Copyright The Financial Times Limited 2008