Over 75 years ago Wall Street Crashed; but today the New Crash is already underway...

Discussion in 'Chit Chat' started by SouthAmerica, Feb 7, 2008.

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    Mvic wrote: “Fair points, but even at $400B I don't think we see anything near your scenario of a global depression.”


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    February 11, 2008

    SouthAmerica: What will bring the First Great Depression of the New Millennium is the cumulative effect of all the things that I mentioned above they are actual events that has happened in the last 65 years. When you least expect the entire house of cards collapses, and we need to start from scratch once again.

    I believe that a major blow up on the DERIVATIVES market it will be the trigger for the domino effect to start and bring about the scenario that I have described on the above postings.

    Today, it might already be too late for the government of the major global economies to try to push forward the beginning of the next global economic depression since the derivatives market is full of land mines all over the place that can blow up at any time starting a chain reaction in the global financial system resulting in a major meltdown.

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    #41     Feb 11, 2008

  2. IF you are so terribly disgusted and life ain't worth a damn, go jump from a bridge and be done with that.

    Why make these long winding depressing posts?
     
    #42     Feb 11, 2008
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    day7793 wrote: "Why make these long winding depressing posts?"


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    February 12, 2008

    SouthAmerica: If you want a market cheerleader then you should watch the CNBC television channel instead of reading the postings on this Forum.

    Watch the Larry Kudlow program on CNBC according to his views there is just one direction for the economy and for the stock market to go all the time - and that direction it is up, up, and away.

    By the way, economic Depressions are also part of the long-term business cycles.


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    #43     Feb 11, 2008
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    February 18, 2008

    SouthAmerica: I have been writing in the last few years about the subject of economic depressions and that we are due for another major economic depression like in the 1930’s and also that one of the major triggers for this new depression would be the collapse of the global DERIVATIVES market.

    If I had to guess what the history books are going to say in the future when they try to figure out what was under the foundations that triggered the first great depression of the 21st Century – The headlines probably are going to say that the US financial markets were able to create the biggest financial scam in global financial history. The global financial system was taken for a ride when the US financial markets blew a super-bubble in the DERIVATIVES market that surpassed US$ 50 trillion dollars.

    After that market collapsed a close analysis showed that its structure looked more like a great scam than anything else; built with sophisticated mathematical equations that even the geniuses and the experts that created that mess had a hard time understanding it.

    That market started with financial instruments that made sense, then greed and pure stupidity took over and the market grew into a gigantic super-bubble that eventually started spinning completely out of control creating the biggest financial meltdown in global financial history.

    By the way, last Friday Paul Krugman’s column on The New York Times “A Crisis of Faith” raised many questions about the US financial system as well.

    And he said: “More important, however, is the way the ever-widening financial crisis has shaken investors’ faith in the whole system. People no longer trust assurances that fancy financial instruments will function the way they’re supposed to — after all, they know what happened to people who thought their subprime-backed securities were safe, AAA-rated investments…And loss of trust can be a self-fulfilling prophecy.

    He ended his column by saying: “…And the financial contagion is still spreading. What market is next?"

    We don’t have to look further than the DERIVATIVES market to get some clues to be able to answer his question.

    On Sunday The New York Times published a front page story that shows that another Economic Crash like in 1929 it is a very real possibility and the seeds for such an event might have been planted already. This time the economic meltdown can be even worse that in the Great Depression of the 1930’s. You can find some clues about a system that is at the edge of the abyss on the article: “Arcane Market Is Next to Face Big Credit Test”

    You can read the entire article at:

    “Arcane Market Is Next to Face Big Credit Test”
    By Gretchen Morgenson
    February 17, 2008 - Front Page Story
    The New York Times

    Source: http://www.nytimes.com/2008/02/17/business/17swap.html?scp=3&sq="Gretchen+Morgenson"&st=nyt


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    Here I am quoting from that article, and I am also making some comments along the way:

    Before I start quoting from that article The New York Times – the article also had a chart with the following information:

    The chart said: “In the Shadow of an Unregulated Market” – The value of the credit default insurance market is now much larger than the domestic stock market, mortgage securities market, and United States Treasuries market as follows:

    Credit Default Insurance Market = US$ 45.5 trillion.

    U.S. Stock Market = US$ 21.9 trillion.

    Mortgage Security Market = US$ 7.1 trillion.

    U.S. Treasuries Market = US$ 4.4 trillion.


    NYT: “Few Americans have heard of credit default swaps, arcane financial instruments invented by Wall Street about a decade ago. But if the economy keeps slowing, credit default swaps, like subprime mortgages, may become a household term.

    Credit default swaps form a large but obscure market that will be put to its first big test as a looming economic downturn strains companies’ finances.

    Like a homeowner’s policy that insures against a flood or fire, these instruments are intended to cover losses to banks and bondholders when companies fail to pay their debts.

    The market for these securities is enormous. Since 2000, it has ballooned from $900 billion to more than $45.5 trillion — roughly twice the size of the entire United States stock market.

    No one knows how troubled the credit swaps market is, because, like the now-distressed market for subprime mortgage securities, it is unregulated.

    But because swaps have proliferated so rapidly, experts say that a hiccup in this market could set off a chain reaction of losses at financial institutions, making it even harder for borrowers to get loans that grease economic activity.”


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    SouthAmerica: This is just another example of how incompetent the Bush administration has been since January 2001.

    A financial market grows from $ 1 trillion to $ 46 trillion US dollars over a period of 7 years and it did not raise a red flag that such a market might need some government regulation to keep it honest and from spinning out of control at some point in the future.


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    NYT: “…Placing accurate values on these contracts is just one of the uncertainties facing the big banks, insurance companies and hedge funds that create and trade these instruments.

    In a credit default swap, two parties enter a private contract in which the buyer of protection agrees to pay the seller premiums over a set period of time; the seller pays only if a particular credit crisis occurs, like a default. These instruments can be sold, on either end of the contract, by the insurer or the insured.

    But during the credit market upheaval in August, 14 percent of trades in these contracts were unconfirmed, meaning one of the parties in the resale transaction was unidentified in trade documents and remained unknown 30 days later. In December, that number stood at 13 percent. Because these trades are unregulated, there is no requirement that all parties to a contract be told when it is sold.

    As investors who have purchased such swaps try to cash them in, they may have trouble tracking down who is supposed to pay their claims.

    “This is just a giant insurance industry that is underregulated and not very well reserved for and does not have very good standards as a result,” said Michael A. J. Farrell, chief executive of Annaly Capital Management in New York. “I think unregulated markets that overshadow, in terms of size, the regulated ones are a real question mark.”

    Because these contracts are sold and resold among financial institutions, an original buyer may not know that a new, potentially weaker entity has taken over the obligation to pay a claim.”

    In late 2005, at the urging of the Federal Reserve Bank of New York, market participants agreed to advise their trading partners in a swap when they assigned contracts to others. But it is unclear how closely participants adhere to this practice.

    It would be as if homeowners, facing losses after a hurricane, could not identify the insurance companies to pay on their claims. Or, if they could, they discovered that their insurer had transferred the policy to another company that could not cover the claim.


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    SouthAmerica: And this is supposed to be the most sophisticated financial market in the world – Can you imagine what they would be doing if they were not so sophisticated?

    There is a book called: “Great Financial Scandals” by Sam Jaffa, the book describes from the world's first notable financial debacle, the South Sea Bubble scandal of the seventeenth century, through to the Boesky, Guinness, BCCI, Barings and New Era scandals of more recent times, Sam Jaffa weaves a rich and startling web of the deceitful depths to which men and women will sink in search of fast - and big - bucks.

    Americans love sophisticated financial innovations, and here is another example an American financial innovation that took a lot of people for a ride.

    A Ponzi Scheme - Named after Carl Ponzi, who collected $9.8 million from 10,550 people ( including ¾ of the Boston Police Force ) and then paid out $7.8 million in just 8 months in 1920 Boston by offering profits of 50% every 45 days.

    A swindle of this nature, referred to as a "bubble" for the hundreds of years it has existed and now referred to as a "Ponzi scheme" is basically an investment fraud where investors are enticed with the promise of extremely high returns or dividends over a very short period of time.

    This shorter period between payouts and high rate of return is required to create the impetus for the frenzy that is to follow as word leaks out, and is soon verified, by numerous sources. The truly experienced con will balance these two factors (payout period and promised rate of return) against the expected duration of the operation so as to maximize his take while still maintaining some semblance of credibility.

    In the true sense of borrowing from Peter to pay Paul, ponzi schemes are a simple fraud whereby initial investors are paid exceptional dividends as interest cheques from the deposits of a growing number of new investors.

    "Profits" to investors are not created by the success of the underlying business venture but instead are derived fraudulently from the capital contributions of other investors.

    A few people invest in the scheme, then as news of the offer spreads, more investors are drawn in. Usually there is no actual investment involved, contrary to your understanding, just money being shipped in from new investors to the earlier ones.

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    #44     Feb 19, 2008
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    February 18, 2008
    Continuation from above posting.


    Ponzi schemes eventually collapse because the underlying asset upon which the investment was based either never existed, or was grossly overvalued. And unlike pyramid schemes, where one's potential gain is measured by the active and conscious practice of participant recruitment, ponzi schemes attribute their moneymaking abilities on some elaborate and inventive investment or business process, with the influx of new depositors the result of word-of-mouth only.

    There are several distinctions between Ponzi schemes and pyramid selling schemes. A requirement of a Ponzi scheme is the promotion of what starts out to be, or appears to be, a real investment opportunity which investors may passively contribute to.

    The pyramid scheme involves a person making an investment for the right to receive compensation for finding and introducing other participants into the scheme. There is a clear understanding among the participants that the success of the opportunity is dependent upon attracting these additional participants.

    Pyramid schemes require active participants who will bring in more participants till reaching a finite end. Ponzi schemes can flourish even with passive investors without any responsibility to promote the opportunity.

    The similarities are uncanny but the draw of a ponzi scheme is that while most investors are either too lazy, sophisticated or introverted to consider a multilevel marketing program type of pyramid recruitment, even the most astute investor is drawn to a program which has proven itself to be highly successful over time, where the only requirement is providing funds for investment.


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    NYT: “Credit default swaps were invented by major banks in the mid-1990s as a way to offset risk in their lending or bond portfolios. At the outset, each contract was different, volume in the market was small and participants knew whom they were dealing with.

    Years of a healthy economy and few corporate defaults led many banks to write more credit insurance, finding it a low-risk way to earn income because failures were few. Speculators have also flooded into the credit insurance market recently because these securities make it easier to bet on the health of a company than using corporate bonds.

    Both factors have resulted in a market of credit swaps that now far exceeds the face value of corporate bonds underlying it. Commercial banks are among the biggest participants — at the end of the third quarter of 2007, the top 25 banks held credit default swaps, both as insurers and insured, worth $14 trillion, the currency office said, up $2 trillion from the previous quarter.

    JPMorgan Chase, with $7.8 trillion, is the largest player; Citibank and Bank of America are behind it with $3 trillion and $1.6 trillion respectively.


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    SouthAmerica: On Sunday, February 17, 2008 the British government nationalized a major British bank the struggling Northern Rock Bank.

    This bank lost billions of US dollars related to the subprime meltdown, and got the critical point that the only alternative left was for the British government to rescue this major financial institution and they had to nationalize it.

    The question that comes to mind is if the DERIVATIVES meltdown materializes in the near future how many American banks the US government also would need to nationalize?

    Is it possible that JP Morgan Chase, Citigroup, and Bank of America among other banks will end up being nationalized by the US government?

    How many trillions of US dollars it will cost the US government to clean up the mess left behind by the collapse of the derivatives market?


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    NYT: “But many speculators, particularly hedge funds, have flocked to these instruments to bet on a company failure easily. Before the insurance was developed, such a bet would require selling short a corporation’s bond and going into the market to borrow it to supply to the buyer.

    The market’s popularity raises the possibility that undercapitalized participants could have trouble paying their obligations.

    …But financial history is rife with examples of market breakdowns that followed the creation of complex securities. Financial innovation often gets ahead of the mechanics necessary to track trades or regulators’ ability to monitor the market for safety and soundness.

    The market for default insurance, like the subprime mortgage securities market, is a product of good economic times and has boomed in recent years.

    In 2000, $900 billion of credit insurance contracts changed hands. Since then, the face value of the contracts outstanding has doubled every year as new contracts have been written. In the first six months of 2007, the figure rose 75 percent; the market now dwarfs the value of United States Treasuries outstanding.

    Roughly one-third of the credit default swaps provided insurance against a default by a specific corporate debt issuer in 2006, according to the British Bankers’ Association. Around 30 percent of the contracts were written against indexes representing baskets of debt from numerous issuers.

    But 16 percent were created to protect holders of collateralized debt obligations, complex pools of bonds that have recently experienced problems because of mortgage holdings.

    There is no exchange where these insurance contracts trade, and their prices are not reported to the public. Because of this, institutions typically value them based on computer models rather than prices set by the market.
    Neither are the participants overseen by regulators verifying that the parties to the transactions can meet their obligations.

    The potential for problems in sizing up the financial health of buyers of these securities leads to questions about how these insurance contracts are being valued on banks’ books. A bank that has bought protection to cover its corporate bond exposure thinks it is hedged and therefore does not write off paper losses it may incur on those bond holdings. If the party who sold the insurance cannot pay on its claim in the event of a default, however, the bank’s losses would have to be reflected on its books.

    Investors are already reeling from the recognition that major banks inaccurately estimated losses from the mortgage debacle. If further write-downs emerge as a result of hedges that did not work, investor confidence could take another dive.

    To be sure, the $45 trillion in credit default swaps is not an exact reflection of what would be lost or won if all the underlying securities defaulted. That figure is impossible to pinpoint since the amounts that are recovered in default situations vary.

    But one of the challenges facing participants in the credit default swap market is that the market value amount of the contracts outstanding far exceeds the $5.7 trillion of the corporate bonds whose defaults the swaps were created to protect against.”


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    SouthAmerica: Only here in La La Land you create a super-bubble (Derivatives market) in the credit default swap market that the market value amount of the contracts outstanding of about $ 50 trillion US dollars far exceeds the $ 6 trillion of the corporate bonds whose defaults the swaps were created to protect against.

    The architects of this gigantic financial mess remind me of the financial wizards who are running the Zimbabwe economy today.


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    NYT: “To the uninitiated trying to understand this complex market, its size might initially seem a comfort, as if there were far more insurance covering the bonds than could ever be needed. But because each contract must be settled between buyer and seller if a default occurs, this imbalance can present a problem.

    Typically, settling the agreements has required the delivery of defaulted bonds if the insurance buyer wants to be fully covered. If the insurance contracts exceed the bonds that are available for delivery, problems arise.

    For example, when Delphi, the auto parts maker, filed for bankruptcy in October 2005, the credit default swaps on the company’s debt exceeded the value of underlying bonds tenfold. Buyers of credit insurance scrambled to buy the bonds, driving up their price to around 70 cents on the dollar, a startlingly high value for defaulted debt.

    Market participants worked out an auction system where settlements of Delphi contracts could be made even if the bonds could not be physically delivered. This arrangement was done at just over 36 cents on the dollar; so buyers of protection on Delphi who did not have the bonds received $366.25 for every $1,000 in coverage they had bought. Had they been valuing their Delphi insurance coverage at $1,000 per bond, they would have had to write off that position by $633.75 per $1,000 bond.

    That is why the valuation of these contracts is of such concern to some participants.

    As with other securities that trade privately and by appointment, assigning values to credit default swaps is highly subjective. So some on Wall Street wonder how much of the paper gains generated in these instruments by firms and hedge funds last year will turn out to be illusory when they try to cash them in.”


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    SouthAmerica: In a Nutshell: At any other time in passed history if I had created a similar market with similar financial instruments as the one described above I probably would end up in jail – and would be considered a scam artist.

    Just a Reminder: Washington Post, March 6, 2003, Warren Buffett: "derivatives are financial weapons of mass destruction"

    …In the words of Warren Buffett: “Derivatives represent a ticking ‘Nuclear Time Bomb’ that could wreck havoc on the financial system and the economy.”

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    #45     Feb 19, 2008
  6. Excellent Excellent Post
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    What is really shocking is the concept of valuation and Adam Smith´s invisible hand...

    Value is not necessarily an actual value....but what one thinks the value is...

    Thus one thinks about the simple 100 apartment example....

    Ie there are 100 apartments....one sold in 2005 for $100,000...one sold in 2006 for $200,000...and in 2008...one sold for $75,000....

    Three apartments actually exchanged hands financially....the value moved from $10,000,000 to $20,000,000...to $7,500,000...
    The price changed...the physical houses did not...

    Therefore the question becomes proper valuation methods...

    In the case of this latest Wall Street scam...the AAA rating was the main culprit...involved in the valuation......and these rating firms certainly do not have the ability to pay....

    Thus any type of regulation would be regarding proper valuation methods...

    What seems to be the instant valuation means ....is a law on a piece of paper....and paper with a little ink on it.....is cheap indeed...and this type of valuation is fast moving either way....

    Proper and legal valuation methods have to be improved in order for markets to be more viable...and to create more opportunities in a capitalistic framework....

    However capitalism far exceeds the valuations found in other legal frameworks such as socialism...

    And those who are able to live in a more self sufficient manner....will approach the highest true valuations...as others will be chasing the although legal...false valuations...irregardless of the currency(s) chosen.....
     
    #46     Feb 19, 2008
  7. .

    February 19, 2008

    SouthAmerica: I was not surprised when I read today on the front page of the Financial Times that the nationalization process of major American banks has already started.

    It is a back door type of nationalization – the first step on a long process of garbage in and taxpayer money out.

    The article said: “US banks have been quietly borrowing massive amounts of money from the Federal Reserve in recent weeks by using a new measure the Fed introduced two months ago to help ease the credit crunch.

    The use of the Fed’s Term Auction Facility, which allows banks to borrow at relatively attractive rates against a wider range of their assets than previously permitted, saw borrowing of nearly $50bn of one-month funds from the Fed by mid-February.

    …“The TAF ... allows the banks to borrow money against all sort of dodgy collateral,” says Christopher Wood, analyst at CLSA. “The banks are increasingly giving the Fed the garbage collateral nobody else wants to take ... [this] suggests a perilous condition for America’s banking system.”

    In another words this is an innovative and creative American way of nationalizing an American bank without coming out and saying we are taking over these banks.

    The good news for the American banks is that the US government can print as many trillions of US dollars as necessary to clean up this massive financial mess.

    It would be a good idea for people operating in the US financial markets today to start studying what happened in Germany around 1923.

    The question is: Why stop at US$ 50 billion?

    Based on my understand of how this new government bailout system is working - Here is an idea for the US banking system to make a quick buck at the expense of US taxpayers.

    The major banks can approach many hedge funds and borrow all the garbage that they are holding on their portfolios then the bank turn around and give that garbage as collateral on these fed loans – then the bank and the hedge funds split the profits of this scam – and the taxpayers hold the bag to the tune of $ 100’s of billions of dollars.

    Basically, by accepting all this garbage as collateral the US government has become a silent partner on the biggest financial scam in world history.

    The US government calls the system channeling liquidity, but at the end of the day we all know what the US government is channeling…..



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    “US banks borrow $50bn via new Fed facility”
    By Gillian Tett in London
    Published: February 19 2008
    Financial Times – UK
    Front Page Story - Unease over indirect government support

    US banks have been quietly borrowing massive amounts of money from the Federal Reserve in recent weeks by using a new measure the Fed introduced two months ago to help ease the credit crunch.

    The use of the Fed’s Term Auction Facility, which allows banks to borrow at relatively attractive rates against a wider range of their assets than previously permitted, saw borrowing of nearly $50bn of one-month funds from the Fed by mid-February.

    US officials say the trend shows that financial authorities have become far more adept at channelling liquidity into the banking system to alleviate financial stress, after failing to calm money markets last year.

    However, the move has sparked unease among some analysts about the stress developing in opaque corners of the US banking system and the banks’ growing reliance on indirect forms of government support.

    “The TAF ... allows the banks to borrow money against all sort of dodgy collateral,” says Christopher Wood, analyst at CLSA. “The banks are increasingly giving the Fed the garbage collateral nobody else wants to take ... [this] suggests a perilous condition for America’s banking system.”

    The Fed announced the TAF tool on December 12 as part of a co-ordinated package of measures unveiled by leading western central banks to calm money markets.

    The measure marks a distinct break from past US policy. Before its introduction, banks either had to raise money in the open market or use the so-called “discount window” for emergencies. However, last year many banks refused to use the discount window, even though they found it hard to raise funds in the market, because it was associated with the stigma of bank failure.

    The Fed has not yet indicated how long the TAF will remain in place.

    But the popularity of the scheme is prompting speculation the reform will stay in place as long as the financial stresses last.

    “Some Fed officials have expressed an interest in keeping and possibly expanding the TAF,” says Michael Feroli, economist at JPMorgan.

    Nevertheless, Mr Feroli said banks now appeared to be using the TAF instead of other funding routes, meaning that the overall level of reserves in the system was remaining constant. “The banking system certainly has its problems, however the notion that ... banks have trouble maintaining reserves stems from a superficial reading of the Fed’s statistical reports,” he said.

    Source: http://www.ft.com/cms/s/0/66db756a-de5d-11dc-9de3-0000779fd2ac.html?nclick_check=1

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    #47     Feb 19, 2008

  8. in order to have a 1923 style meltdown you need a severe and abrupt increase of government debt relative to total productivity.
    In the same manner that the treaty or Versailles and the French and Belgian invasion of the Ruhr crippled the Weimar Republic, combining heavy war debts with a cease of all industrial productivity, so that the debt/production ratio went through the roof overnight.

    How do you suppose such an event as the 1923 meltdown could happen to the US? in other words, where do you think the Aquila's heel is? do you think such an event could be triggered by an abrupt increase on debt, a disruption of production [perhaps due to a credit contraction?], or some other reason or a combination of several reasons?
     
    #48     Feb 19, 2008
  9. Even the 1922-1923 hyperinflation took a little while to occur. From 1920-21 there was increasing overall inflation which occured. Initially it wasn't entirely unwelcomed either. It was only in the last few months of the hyperinflation, october to december 1992 that everything turned to hell. Probably was best to have been a farmer at that point as almost everyone was ruined.
     
    #49     Feb 19, 2008
  10. Actually, many Germany's wealthiest made a killing during the hyper inflation... they had debts denominated in Marks, that simply vaporized...

    The worse of the inflationary spike happened in the last months with prices doubling every few hours... to a high on Nov 15th of 42, 000, 000, 000, 000 marks per dollar.
     
    #50     Feb 19, 2008