The podcast is not yet available for free, but on today's 'This American Life' with Ira Glass, Glass delved into the Credit Default Swap market at great length, explaining how it relates to the financial crisis. That was interesting. Here's what's more interesting: There were two plans floated among economists as to how to shore up the balance sheet of insolvent banks. The first was the the plan we thought we exclusively got, which is pretty bad, and attempts to do the impossible: Establish a price on impossible-to-value-assets and have the Treasury buy them on behalf of taxpayers. Either the banks get hurt further because the price paid is too low, or the taxpayers get hurt because the price paid is too high. The second plan was killed by the banking lobby (or so they thought). This was essentially a 'stock buy-in' plan, whereby taxpayer dollars would have bought equity, maybe even preferred equity, in those banks needing to raise cash. Via this plan, there wouldn't have to be any mechanism to 'value' any assets, let alone impossible-to-value assets, as each dollar of taxpayer money would have bought a proportionate share of all the assets of the bank, good, bad and ugly. Here's the fascinating part: According to Glass and the economists, academics and policy wonks that he's been in touch with, and who have reviewed the final draft of the legislation that is now a fait accompli, both aspects have been incorporated into the bailout legislation, so that whoever the Treasury Secretary is at any given time may choose either method to 'help' banks and financial institutions. This is the very first time I've known of this. Not a single financial or 'mainstream' media source has reported this. The podcast of the show will be available for free on Monday @ http://www.thislife.org/
Thanks for posting about this ByLoSellHi. I'm listening to the program now - very interesting stuff. It's possible to catch it before Monday by looking at what stations it is playing on through the website and finding one that streams the feed - they all seem to have different programming schedules, so it plays in many different time slots around the country. smitty
You're welcome. Out of all the articles I've read, programs I've watched, or other sources of information, this podcast broke it down the best and filtered it the best - this whole crisis. And the kicker was that the Treasury has the discretion to demand equity - even preferred equity - from banks, which not a single other source I've come across has mentioned. Thanks, smitty. I didn't know that.
Thanks for the hint. It took me a while to find it. Here's the link for anyone who's interested: http://radiotime.com/program/p_55566/This_is_America.aspx
hope i'm not hijacking or sidetracking your thread ByLoSellHi, i'm still trying to figure-out what this financial crisis is, and doing a little googling came up with the following a multipart series of articles, i've just posted 2, this first relates there's a problem concerning who owns the mortgage - Deutsche Bank denied foreclosures in Ohio 'Sub-Prime Mortgage Debt is but the Tip of the Iceberg' Nov 23/07 Engdahl http://www.globalresearch.ca/index.php?context=va&aid=7413 eg fyi Cleveland, has more than 16,800 homes that have been abandoned because of foreclosures - Cleveland is the first major city to file lawsuits against banks for their predatory lending practices that created this crisis in the first place At the top of the list is Deutsche Bank, which foreclosed on more the 5,000 homes in the area so far. Cost to demolish and remove homes estimated at $8K per home - 8 x 16800 = $134,400,000 16,800 homes @ $300,000 (?) mortgage = $5,040,000,000 'Credit Default Swaps: Next Phase of an Unravelling Crisis' Jun 5/08 Engdahl http://www.globalresearch.ca/index.php?context=va&aid=9202 about the Credit Default Swaps market which is $62 (?) TRILLION so what's the bailout supposed to be doing ?
I mentioned this very fact thursday on the journal forum http://www.elitetrader.com/vb/showthread.php?s=&threadid=134037&perpage=30&pagenumber=3 the language is vague enough that preferred stock and common can be called an 'troubled asset'. Roubini is a biased fool a lot of the time. he missed this one and kept calling the plan 'ultra flawed' because they needed to infuse equity. well bernanke is not as dumb as you guys think
I happened to catch the broadcast on a drive home and thought it was very well explained. In their simplified terms here is how I understand the CDS(s). I own a $1Mil home that is surrounded by trees. ByLow thinks there is a risk to my home of fire and buys an insurance policy for $100K a year. To offset his cost he then turns around to Rennick and SELLS a $1Mil policy for $200K premium. Rennick decides to create more risk thus increase the value of the premium and starts a small fire near the home driving the premium higher and sells to ...RFT. Well the rains come and fire isn't so much a danger so RFT now can't find a buyer soooo.....he sets my house on fire to collect the $1mil insurance! In the meantime the original insurer has gone BK and cancel's the premiums...so everyone is SOL. They did not mention that in this game of CDS's buying and selling eventually is there not an incentive to buy a CDS then short the hell out of the company to cause it to fail so you can then collect the insurance? I'm sure this is oversimplified but it does point out the need for Capital Reserves, Margin requirements, or some kind of control. This business of not allowing short selling is nuts. The market has obviously given the SEC the finger and said "You won't allow shortselling financials?....then we will SELL the ENTIRE MARKET" and that is what is happening. .................................................... on a political note...while we focus on the top of the ticket the more important vote for ALL of us(US citizens) is our representatives to congress. Please carefully examine the candidates and their qualifications be willing to cross party lines to vote for the MOST qualified person because it will take 2-4-6 or more years to work thru this mess and we need the best and the brightest....not the party hack.
But the problem is that the language is 'vague,' and this power (stock injection) is to be used at the 'discretion' of the Treasury Secretary. The bank lobbyists resist this power. We don't know if the 700 billion to whatever trillion will be spent mostly on buying shitty assets, or via the use of this 'stock injection' method, whereby tax payers become preferred stock holders of banks requesting money, and therefore hold all assets of said bank, good, bad and ugly, in proportionate amounts to the money granted by the Treasury Department. It would appear there is no guarantee that the 'stock injection' authority will be used at all, sometimes, or often. The Treasury has the unfettered discretion to just 'price' the shitty paper these banks have and 'buy it' from the institution, risking underpayment (thereby hurting the bank) or overpayment (thereby hurting the taxpayer).
Rimes, it seems the situation is even more bizarre. While it would be uncommon for a homeowner, for example, to purchase more than one policy covering his house (and if he did that would certainly raise questions were the house to burn down) it is my understanding, and please correct me if this is not right, that more than one, perhaps many, CDS's could relate to the same underlying asset. In this way, insurers could leverage up their premiums, but would be in a whale of trouble if there was a default.