The Next Meltdown: Credit-Card Blowup Ahead

Discussion in 'Economics' started by SouthAmerica, Oct 12, 2008.

  1. .
    October 13, 2008

    SouthAmerica: The stock market is up right now almost 800 points.

    After all the liquidity the Central Banks have been injecting into the world markets in the last 10 months – the latest actions of these European Central Banks plus the future actions by the US Treasury and Federal Reserve – It looks to me that they are just a desperate reaction to keep the global economy from going over the cliff.

    But how do you stop a nuclear financial explosion after the explosion is already underway and the chain reaction is devastating everything on its path?

    By throwing a huge amount of money at something and hoping for the best and getting hyperinflation in return – is my guess.

    Reminder: By the way, we still have 14 business days in the month of October and that is plenty of time for the stock market to resume the current financial crash.


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    ”Europe puts $2.3 trillion on line for banks”
    Associated Press - Monday October 13, 1:34 pm ET
    By Angela Charlton and Emma Vandore, Associated Press Writers

    European governments put $2.3 trillion on the line for banks, stocks soar

    PARIS (AP) -- European governments overcame their differences to put $2.3 trillion on the line Monday in guarantees and other emergency measures to save the banking system in their most unified response yet to the global financial crisis.

    The pledges by six countries that use the euro and Britain helped soothe stock markets, along with a promise by top central banks to provide unlimited short term dollar credits.

    The amount -- pledged by Germany, Britain, France, the Netherlands, Spain, Portugal and Austria -- dwarfs the $700 billion rescue package put together by U.S. President Bush's administration, although not all the European money will necessarily be spent.

    It represented Europe's most unified response yet to the financial crisis, after weeks where European governments often acted at cross purposes and sniped at each other -- a piecemeal approach that failed to stop steep and frightening slides on financial markets.

    "The time of each one for itself is fortunately over," French President Nicolas Sarkozy said, following a Cabinet meeting that approved France's spending in the framework of the scheme.

    "United Europe has pledged more than the United States," added the French leader, who has taken a lead in corralling European governments to act together.

    The money pledged by European governments will not go into a collective pot. Instead, governments were deciding individually how much to commit to supporting their own banks under broad guidelines agreed at a summit on Sunday. The sums are considered a maximum, and might not all be spent if the financial crisis eases.

    About 250 billion euros ($341 billion) of the European pledges was earmarked to be spent on recapitalizing banks by buying stakes.

    The money pledges put a price tag on the package agreed to Sunday by the 15 countries that use the euro currency. They agreed to individually guarantee bank refinancing until the end of next year, rescue important failing banks through emergency cash injections and take other swift measures to encourage banks to lend to each other again.

    Stocks markets rebounded Monday after the European decision and other weekend efforts to find solutions to the financial crisis, which has crushed major banks in both the U.S. and Europe and battered stock exchanges worldwide.

    Germany's DAX rose 518.14 points, or 11.4 percent, to close at 5,062.45, while France's CAC-40 was up 355.01 points, or 11.2 percent, at 3,531.50. Britain's FTSE 100 was 324.84 points, or 8.3 percent, higher at 4,256.90, despite some hefty falls in the banks that have accepted government help.

    Also helping markets was a joint move by the U.S. Federal Reserve, the European Central Bank and the Swiss National Bank to provide unlimited short-term credit in U.S. dollars to financial institutions. The Bank of Japan said it was considering similar measures.

    Europe's biggest economy, Germany, put together a rescue package worth as much as 500 billion euros ($671 billion) to shore up the country's financial system. "We are taking drastic action, no question about it ... so that what we have experienced is not repeated," German Chancellor Angela Merkel told reporters.

    Sarkozy said the French government would provide up to 360 billion euros ($491 billion) to help banks, most of that in guarantees for bank refinancing. The Netherlands put up 200 billion euros ($273 billion) to guarantee interbank loans.

    Austria's government offered up to 85 billion euros ($116 billion). Spain said it would guarantee up to 100 billion euros ($135 billion) in a bank bond issuance this year. Portugal guaranteed 20 billion euros ($27 billion) euros -- nearly 12 percent of annual GDP -- to encourage Portuguese banks to lend to each other.

    Italy did not earmark a specific amount but Finance Minister Giulio Tremonti told reporters the government would offer "as much as necessary."

    The European moves are modeled on Britain's 50 billion-pound ($88 billion) plan to partly nationalize major banks. Prime Minister Gordon Brown has also promised to guarantee a further 250 billion pounds ($438 billion) worth of interbank loans to restore confidence in the financial sector.

    The head of the International Monetary Fund welcomed the European decision despite the high price it is expected to impose on state budgets.

    "We must recapitalize the banks ... otherwise everyone will suffer," Dominique Strauss-Kahn said on France's Europe-1 radio Monday. "And that costs money."

    The euro zone leaders who met Sunday have yet to sell their packages to voters at home, and analysts warned that governments and legislators could still balk. The overall cost will be heavy, especially on countries already in or on the brink of recession.

    Analysts from the banking sector generally saluted the euro zone measures. "After a haphazard start, Europe is finally getting its act together," Bank of America said in a research note. "The size and nature of the national plans suggest that they could finally make a difference."

    The rest of the 27-member EU will have a chance to sign up to the euro-zone measures when they meet Wednesday.
    Norway, outside both the euro zone and the EU, said it plans to offer new government bonds worth 350 billion kroner ($55.4 billion) to banks to help improve liquidity in the market.

    In Sweden, Finance Minister Anders Borg said the government plans to put forward a draft law Wednesday to guarantee new bank debt until the end of 2009 and support banks with added share capital.

    BusinessEurope -- a group
    representing most European major companies -- said EU governments' parallel moves to unfreeze bank lending would help "reinforce confidence and contribute to a continued flow of credit to companies and households."

    Source: http://biz.yahoo.com/ap/081013/eu_europe_meltdown.html

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    #21     Oct 13, 2008
  2. hayman

    hayman

    - Credit Cards

    - College Tuition Loan Defaults

    - Our Managed-care Medical System (Premiums and Cost)
     
    #22     Oct 13, 2008
  3. .

    October 13, 2008

    SouthAmerica: The Dow Jones went up today 936 points in a major effort to stage a Suckers’ Rally – keep in mind you need to throw a few bones out there to keep the suckers interested in the game and for them to keep coming back for more.


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    Pa(b)st Prime: …but the notion that credit card defaults are going to sink JPM or BAC is incredibly naive.


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    October 13, 2008

    SouthAmerica: I see that some people still have not grasped as yet the magnitude of the problem related to the derivatives market meltdown when I said that the $ 62 trillion derivatives market is spinning out of control and nobody knows how to stop the financial system from a complete meltdown.

    People think that is not going to affect Main Street or your local company, but look what happened to just one company in Brazil – Sadia – this company is the chicken and Pig business, and they lost their shirt in derivatives related to Lehman Brothers.

    Lehman Brothers did derivative business with 8,000 companies and roughly 1 million derivative deals had its name on them – an average of 125 contracts with each company.

    Sadia said last week that it had 760 million reais in losses (US$ 410 million) due to foreign exchange positions and Lehman Brothers Holding Inc bonds.

    Nobody knows at this point how many more Sadias are scattered all over the place with similar losses among the 8,000 other companies that did business with Lehman Brothers.

    And if Lehman Brothers caused such a massive losses to a lot of people when that company went out of business. Then just imagine the damage that Morgan Stanley is going to inflict when you consider that Morgan Stanley is holding ten times the number of derivatives contracts than Lehman Brothers to the tune of $ 7.1 trillion dollars.



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    October 6, 2008

    SouthAmerica: I was watching CNBC TV and their talking heads were trying to spin every way they could for people to go back into the market.

    Basically, only idiots would invest their money right now since the market is heading South and nobody have any idea where the bottom is regarding the current stock market MELTDOWN.

    The market is littered with nuclear mine fields called “DERIVATIVES” and these devices are exploding all over the place, but nobody can get even an estimate of the carnage that these devices are going to inflict in the financial institutions, and also on regular corporations.

    Here is only one example of what is in store for companies around the world.

    When the new earnings season starts the new estimates are going to be full of surprises, but real bad surprises – the type of surprise that the stock market does not like it.

    Not little surprises, real big surprises as in the case of Sadia the Brazilian company they just reported that they lost almost $ 500 million dollars in Derivatives and bonds related to Lehman Brothers.

    You can bet that the major American corporations are also going to disclose that they incurred a massive amount of losses in the derivatives market.


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    September 26, 2008

    Sadia shares plunge 28 pct on Lehman, derivatives collapse (guardian.co.uk)

    Shares of Brazil's largest poultry and pork processor Sadia plunged on Friday after the company reported serious losses due to forward derivatives positions taken on the currency exchange markets…

    Sadia said it had 760 million reais in losses (US$ 410 million) due to foreign exchange positions and Lehman Brothers Holding Inc bonds. That was more than the 689 million real profit the company had in 2007.

    http://www.elitetrader.com/vb/showt...dia#post2108821



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    Reminder:

    1) The number of firms that made derivatives deals with Lehman Brothers = 8,000 firms.

    2) The derivatives contracts were a big business for Lehman: When the firm went under in September, roughly 1 million derivative deals had its name on them.

    3) Lehman Brothers had contracts worth about $ 738 billion as of its last annual report:

    4) Morgan Stanley may implode by this coming week, and be forced to go out of business, and in September 2008 Morgan Stanley was loaded with derivatives; they had contracts worth $ 7.1 trillion dollars.

    http://www.elitetrader.com/vb/showthread.php?s=&threadid=106795&perpage=6&pagenumber=8



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    October 13, 2008

    SouthAmerica: Regarding the Derivatives market:

    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.

    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.

    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 — JP Morgan Chase, Citibank, Bank of America, Wachovia and HSBC.

    That means that the total "notional," or face value, of derivatives held by U.S. banks is $180 trillion dollars and the amount held by these five banks is: $ 175 trillion dollars.

    Just wait to see how fast these Ebola virus derivatives are infecting the entire global financial system and the damage that they are inflicting all over the place.

    Pa(b)st Prime as you said: “the notion that credit card defaults are going to sink JPM or BAC is incredibly naive.”

    But the notion that the derivatives holdings of these institutions is a real threat to the future survival of these banks and that there is the possibility that they are going to sink the juggernauts such as JP Morgan or Bank of America – is a subject that still is open for debate.

    Remember what happened to the Titanic, that huge ship was also supposed to be unsinkable.

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    #23     Oct 13, 2008
  4. Lehman Bros. collapse was essentially the biggest heist in world history.
     
    #24     Oct 13, 2008
  5. If Sadia lost such a huge amount on Lehman Bros, then that is something that will have a strong impact here in Brazil as well. I buy a lot of Sadia products and consider them the top quality - prefer them over Perdigão.

    Brazil is a huge exporter of poultry and other frozen meat products, and from all the reports and comments I have seen this is in no way endangered by the financial crisis.
     
    #25     Oct 14, 2008
  6. .

    October 15, 2008

    SouthAmerica: I knew all along that the $ 700 billion dollars Wall Street bailout was just a case of a “Bait and Switch.” That is why Treasury Secretary Paulson wanted a blank check and Warren buffet also lobby on his behalf for the government to give him the blank check.

    Bill Gross already got a piece of the new action, they reported yesterday on the news.

    Last night an economist on the Lou Dobbs show on CNN said that all together the global economy is getting cash injection of about $ 4 trillion dollars in 2008.

    Regarding the US government cash injection into the 9 major financial institutions that means these institutions are going to be hit with a massive derivatives losses and the US government decided to send money to these institutions for them to be able to write off their massive losses without creating a total panic and a run on the banking system all over the United States.

    It is possible that they already know what is in the pipeline and they don’t want to cause a major Panic.

    The FDIC fund is empty, but they increased the deposit insurance to the amount of each account with no limit.

    Before the FDIC fund had a balance of $ 45 billion dollars to insure $ 4.4 trillion dollars in deposits up to $ 100,000 dollars. Now that the FDIC fund is almost completely depleted and very soon that fund will be completely empty the, then the US government decided to ensure around $ 7 trillion dollars in deposits with nothing in the fund to pay any claims. Basically FDIC deposit insurance is also becoming worthless.

    The liquidity that the US government regulators want to provide to the US banking system is for one purpose only it is for then to be able to absorb the massive losses that are snowballing into a giant wave of losses.

    This US government latest strategy is not a bailout to the banking system it is a handout to keep them from collapsing and starting a nasty chain reaction.

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    #26     Oct 15, 2008
  7. What would be interesting is to see a comparative analysis with the rest of the world's economies.....

    If the financial conditions are even worse in the Eurozone, thus causing havoc to the other commodity based and manufacturing based economies.....

    Then what would a true comparative analysis look like?

    If all countries shift down via the deleveraging of both the US and Eurozone.....Then what does the total picture say?
     
    #27     Oct 15, 2008
  8. interesting discourse.

    Southamerica must have a lot of spare time...
     
    #28     Oct 15, 2008
  9. Not as much as ZZZZZ.

    That guy pumps out more anti republican rhetoric than the DNC, and posts it all on ET! Sorry this off message, but it is truly astounding how much time some people spend researching their own views on the net, and then feel the need to post them.
     
    #29     Oct 15, 2008
  10. The "fiasco" was not caused by the mortgages themselves but by the derivative trading.
     
    #30     Oct 15, 2008