|September 14, 2009 - CDO's are only part of the $ 1.14 QUADRILLION
click here for more... Derivatives have no fixed set of rules and are
traded over the counter and not on a Stock Exchange. They are highly
dangerous investment instruments. They are often labeled as STRUCTURED
derivatives have multiplied wealth like a fractional reserve banking
system, but theyre hollow. When someone can no longer provide a
guarantee, the system collapses or at least part of it does.
We all heard about the
CDO's and the Subprime. However, it is not easy to understand what and how
For this reason we have incorporated a small presentation. CDO's are
The CDO Subprime presentation
The Credit Crisis explained in Black and White
Click here to see the strip for dummies
Scroll down for the Federal Reserve charts
The affected banks in Europe.
Some Slaughtered banks & financials as of
November 20, 2008 :
Northern Rock - Royal Bank of Scotland - Fortis
- Hypo Real Estate - IKB - Kauptling - Washington Mutual -
Posted October 7, 2008
The LIBOR or the London interbank rate is the
interest rate banks charge between themselves. The higher, the less Banks
trust each other!
Posted July 7 and updated July 11, 2008
Cassandra is back for the new readers and as a reminder for the veterans!
The Credit Crisis Is Going to Get Worse
BRIAN M. CARNEY
July 5, 2008; New
Twenty years ago, Ted
Forstmann contributed a scathing and prescient op-ed to this newspaper
warning that the junk-bond craze was about to end badly: "Today's financial
age has become a period of unbridled excess with accepted risk soaring out of
proportion to possible reward," he wrote in October 1988. "Every week,
with ever-increasing levels of irresponsibility, many billions of dollars in
American assets are being saddled with
debt that has virtually no chance of
Within a year, the
junk-bond market had collapsed, and within 18 months Drexel Burnham Lambert,
the leading firm of the junk-bond world, was bankrupt. Mr. Forstmann sees even
worse trouble coming today.
For a curmudgeon, he
is a cheerful man. When we met for lunch recently in a tony midtown
restaurant, he was wearing a well-tailored suit, a blue shirt and a yellow
tie. He spoke with the calm self-assurance of someone who has something to say
but nothing left to prove.
"We are in a credit
crisis the likes of which I've never seen in my lifetime," Mr. Forstmann
warns. He adds: "The credit problems in this country are considerably worse
than people have said or know. I didn't even know subprime mortgages existed
and I was worried about the credit crisis."
argument about the present crisis starts with the money supply. After Sept.
11, 2001, the Federal Reserve pumped so much money into the financial system
that it distorted the incentives and the decision making of everyone in
funds-Von Mises]. He illustrates this with what he calls his
"little children's story": Once upon a time, when credit conditions and the
costs of borrowing money were normal, the bank opened at 9:00 a.m. and closed
at 5:00 p.m. For eight hours a day, bankers made loans and took deposits, and
then they went home.
But after 9/11, the
Fed opened the spigot. Short-term interest rates went to zero in real terms
and then into negative territory. When real interest rates are negative,
borrowing money is effectively free the debt loses value faster than the
interest adds up. This led to a series of distortions in the financial
sector that are only now coming to light. The children's story continues: "Now
they [the banks] have all this excess money. And they open at nine, and from
nine to noon or so, they're doing all the same kind of basically legitimate
things with it that they did before."
So far, so good. "But
at noon, they have tons of money left. They have all this supply, and the,
what I would call 'legitimate' demand it's probably not a good word but
where risk and reward are still in balance, has been satisfied. But they're
still open until five. And around 3:30 in the afternoon they get to such
things as subprime mortgages, OK? And what you guys haven't seen yet is what
happened between noon and 3:30."
economics tells us that when you print too much money, it loses value and
prices go up. That's been happening too. But Mr. Forstmann is most
concerned with a different, more subtle effect of the oversupply of money.
When it becomes too plentiful, bankers and other financial intermediaries end
up taking on more and more risk for less return.
The incentive to be
conservative under normal credit conditions is driven in part by what
economists call opportunity cost if you put money to use in one place, it
leaves you with less money to invest or lend in another place. So you pick
your spots carefully. But if you've got too much money, and that money is
declining in value faster than you can earn interest on it, your incentives
change. "Something that's free isn't worth much," as Mr. Forstmann puts it. So
the normal rules of caution get attenuated
[misallocation of funds-Von Mises].
"They could not find
enough appropriate uses for the money," Mr. Forstmann says. "That's why my
little bank story for the kids is a fun way to put it. The money just kept
coming and coming and coming and coming. What are you going to do with it? IBM
only needs so much. The guy who can really pay his mortgage only needs so
much." So you start thinking about new ways to lend the money, which
inevitably means riskier ways.
"I don't know when
money was ever this inexpensive in the history of this country. But not in
modern times, that's for sure."
Combine this with
loan syndication and securitization, and the result is a nasty brew.
Securitization and syndication allow the banks to take the loans off their
books and replenish their capital. They then use this capital to make new
loans, which they securitize or syndicate and sell to the hedge funds, which
buy them with the money they borrowed from the banks. For a time, everyone
This circular creation of new credit, used to buy more newly created debt, all
financed by ultra cheap money and all betting with each other, has left the
major firms hopelessly intertwined. "It's very interrelated," he says, locking
his fingers together. "There's trillions and trillions of dollars that slosh
around between all these places and if one fails . . ." He doesn't finish the
"Buffett once told me
there are three 'I's in every cycle. The 'innovator,' that's the first 'I.'
After the innovator comes the 'imitator.' And after the imitator in the cycle
comes the idiot. Which makes way for an innovator again." So when Mr.
Forstmann says we're at the end of an era, it's another way of saying that
he's afraid that the idiots have made their entrance.
May 29 and updated October 23, 2008 (Telegraph)
US and European
debt markets flash new warning signals
By Ambrose Evans-Pritchard,
International Business Editor
debt markets in the US and Europe have begun to flash warning signals yet
again, raising fears that the global credit crisis could be entering another
cost of insuring against default on the bonds of Lehman Brothers, Merrill
Lynch and other big banks and brokerages has surged over the last two weeks,
threatening to reach the stress levels seen before the Bear Stearns debacle.
Spreads on inter-bank Libor and Euribor rates in Europe are back near record
Credit default swaps (CDS) on Lehman debt have risen from around 130 in
late April to 247, while Merrill debt has spiked to 196. Most analysts had
thought the coast was clear for such broker dealers after the US Federal
Reserve invoked an emergency clause in March to let them borrow directly from
its lending window...
Latest chart November 2008 - rather scary is
the least one can say!
Net free or
Borrowed Reserves are NEGATIVE. Theoretically, it means the banks are
bankrupt. Banks need Reserves (deposits) to be able to sell Credit. In other
words, they make money by paying less interest to the depositor than they
charge to the borrower. With Fractional Reserve banking, they
traditionally can lend a minimum of 10 times the deposits they have. What this
chart shows us, is that today, there are NO DEPOSITS left. Hence, they survive
because they are bailed out by the Federal Reserve. In other words, as
the Fed is injecting huge quantities of Fiat Money in order to keep the
financial system alive, this action creates (hyper)inflation. At the
same time, because of the CDO subprime and the Credit Crunch, credit
(debt/money) is becoming scarcer and interest rates are pushed upwards.
Chart of October 2008
Total borrowings of the financial institutions
(banks, brokers) from the Federal Reserve.
I don't remember that I have ever seen this kind of situation in my life.
Terrifying it is! If you compare this peak with the historical ones, it is
rather easy to imagine how much (Hyper)inflation it will create compared to
the small blips we saw in the past. As of June 1st, the figure has gone up to
a staggering $ 171 bn!
Chart October 2008
Chart November 2008
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