click on image for better viewcourtesy of Mish, Bloomberg and JPMChase
Starting in 2003, many people questioned whether I had my wits about me, and if I needed to spend some time on the "funny farm." The reason - I had become alarmed at the proliferation of debt securitization, especially debt emanating from housing, and tried, mostly in utter vain, to have conversations about what it meant, and where it would lead.
The above chart is a fabulous example of my fears in illustrative form.
To be certain, I was simply reading and researching, regurgitating what I had absorbed. Nonetheless, my fears were well founded. What the chart shows is the dramatic fall in value of large financial institutions. That fall has occurred due to devaluation of structured financial products, namely derivatives. Debt can only be claimed as asset as long as the debtor has the ability to pay. When that ability to pay decreases, the debt becomes a liability.
The great minds of Wall Street encouraged looser guidelines for loans, for they made huge fees selling the securitizations. This, in turn, allowed more people to qualify for loans, which forced more buyers into the housing market which created more competition and drove up real estate values.
Imagine it this way - There are ten rungs to the economic ladder in our society. Prior to 2001, only the top 4 rungs could afford to buy a house in the traditional manner, ie 20% down with no more than a 35% Debt to Income ratio. Every deviation from that allowed a few more on the lower rungs to buy a house. By 2006, the loan programs were so loose, almost 8 out of ten rungs could buy a house. That's a 100% increase in the number of buyers, in 5 years. Twice as much competition meant bidding on attractive houses often exceeded asking prices.
Wall Street was in a feeding frenzy. The frenzy lasted until everyone that would ever be able to buy a house had bought a house. Then, the need for more housing drops to nil. 10 families only need 10 houses. The upward pressure on housing valuations would dissipate. For speculators, that is bad. They only bought in hopes of making a profit. After granite countertops, SubZero refrigerators, Viking stoves and hardwood floors, they need for the market to move up.
I think even 6th graders would state that things could not always increase in price. After all, their Pokemon cards lost luster in time. Somehow, our economic leaders lost simple economic realities.
When everyone was able to buy a house, due to looser guidelines, any bump downward in the economy would cause a certain percentage (those at the bottom) to start defaulting. This was bound to happen when you could no longer introduce large numbers into the buyer pool. Add to the mix that builders have given us 26 million more units than families needing a roof. Compound this with loan guidelines which were established on the premise that refinance or selling at higher price was ALWAYS an option, and disaster was guaranteed.
The disaster is what the chart shows.
Reflected in the chart is devaluation of derivatives, and decline in stock price. What is not shown is the amount of derivatives, still being claimed at full, or near full, value in level3 accounting rules. Most of these banks, in reality, have no green bubble. Many need another color bubble, let's say yellow, to illustrate how much they are in the hole. Some financial companies, such as Citi, would have a bubble in yellow that is almost as big as the blue bubble.
That is right, their eventual losses will exceed their current value by several times. The losses, as unbelievable as this sounds, are only getting started in being written down. The world economy is on the edge of collapse with the losses today. What happens when those losses are increased ten-fold?
This is why many people are saying, have said, and will continue to say that any money given to the banks is lost forever. Our leaders, especially Bernanke and Paulson, have repeatedly lied about the problem.
I hope Obama is different than Bush. Picking Geithner as Treasury Secretary is not a step in the right direction. Bernanke is his boss at the Fed, and Geithner agreed with his every move, to date. Every move Bernanke has made has been exactly the wrong move. 0% batting average. How can you put him in at clean-up? Bernanke will have a yes man at his side.
Most importantly, for confidence in the US to increase, those at the top in Wall Street need to be jailed before war crimes are considered. If that does not happen, the effects of how bankrupt our financial institutions will come into play while Democrats and Republicans squabble over where to send the terrorists. Yes, it is an extremely important issue, I am not suggesting otherwise. I just think that a Global Systemic Financial collapse, in which chaos ensues around the world, makes where the prisoners at Guantanamo go a moot point.
No government program will abate the coming collapse unless two things immediately happen:
1) Jailing those that created and sold fraudulent structured financial products. The crimes are so pervasive that Goldman Sachs was buying insurance (CDS) on the CDO's they were selling, hoping to gain when (not if. they knew it would) that CDO collapsed.
2) Establishing a system for the orderly removal of level3 accounting rules and all level3 assets, namely structured debt based derivatives.
Yes, many of the names on the above chart, as well as countless other corporations, will instantaneously fail. But, most of the ones that fail had the biggest part in building our financial structure to this point. They will fail in as much as they helped cause the problem.
Then, and only then, can we begin to recapitalize those that are strong, and create new entities that are unencumbered by debt. Confidence can be guaranteed, because all would have full disclosure.
Because of this problem, which all governments and those at the top in corporations are intimately familiar with, nobody trusts anyone else. Even those in the media don't get it. I recently spent a good deal of time with an economic writer for a major global newspaper explaining derivatives to him and how corporations are valuing them. He has a degree in economics, and did not understand.
Well, the market in turmoil is making everyone a believer.
The big money has no confidence in a safe haven. Treasuries, all short term (the US government has been the largest buyer of long term for weeks now), will be sold en masse if gold begins its expected march. That will hurt the dollar, and we lose the ability to manage our debt, ie we will not be able to meet the interest payments on the bonds we have already issued. Then it is game, set, match.
Any, and I emphasize ANY ACTION that does not immediately tell the global financial world that we will not allow liars, cheaters and thieves to prosper, will have calamitous effects.
There is very little time left to deal with this issue.
Starting in 2003, many people questioned whether I had my wits about me, and if I needed to spend some time on the "funny farm." The reason - I had become alarmed at the proliferation of debt securitization, especially debt emanating from housing, and tried, mostly in utter vain, to have conversations about what it meant, and where it would lead.
The above chart is a fabulous example of my fears in illustrative form.
To be certain, I was simply reading and researching, regurgitating what I had absorbed. Nonetheless, my fears were well founded. What the chart shows is the dramatic fall in value of large financial institutions. That fall has occurred due to devaluation of structured financial products, namely derivatives. Debt can only be claimed as asset as long as the debtor has the ability to pay. When that ability to pay decreases, the debt becomes a liability.
The great minds of Wall Street encouraged looser guidelines for loans, for they made huge fees selling the securitizations. This, in turn, allowed more people to qualify for loans, which forced more buyers into the housing market which created more competition and drove up real estate values.
Imagine it this way - There are ten rungs to the economic ladder in our society. Prior to 2001, only the top 4 rungs could afford to buy a house in the traditional manner, ie 20% down with no more than a 35% Debt to Income ratio. Every deviation from that allowed a few more on the lower rungs to buy a house. By 2006, the loan programs were so loose, almost 8 out of ten rungs could buy a house. That's a 100% increase in the number of buyers, in 5 years. Twice as much competition meant bidding on attractive houses often exceeded asking prices.
Wall Street was in a feeding frenzy. The frenzy lasted until everyone that would ever be able to buy a house had bought a house. Then, the need for more housing drops to nil. 10 families only need 10 houses. The upward pressure on housing valuations would dissipate. For speculators, that is bad. They only bought in hopes of making a profit. After granite countertops, SubZero refrigerators, Viking stoves and hardwood floors, they need for the market to move up.
I think even 6th graders would state that things could not always increase in price. After all, their Pokemon cards lost luster in time. Somehow, our economic leaders lost simple economic realities.
When everyone was able to buy a house, due to looser guidelines, any bump downward in the economy would cause a certain percentage (those at the bottom) to start defaulting. This was bound to happen when you could no longer introduce large numbers into the buyer pool. Add to the mix that builders have given us 26 million more units than families needing a roof. Compound this with loan guidelines which were established on the premise that refinance or selling at higher price was ALWAYS an option, and disaster was guaranteed.
The disaster is what the chart shows.
Reflected in the chart is devaluation of derivatives, and decline in stock price. What is not shown is the amount of derivatives, still being claimed at full, or near full, value in level3 accounting rules. Most of these banks, in reality, have no green bubble. Many need another color bubble, let's say yellow, to illustrate how much they are in the hole. Some financial companies, such as Citi, would have a bubble in yellow that is almost as big as the blue bubble.
That is right, their eventual losses will exceed their current value by several times. The losses, as unbelievable as this sounds, are only getting started in being written down. The world economy is on the edge of collapse with the losses today. What happens when those losses are increased ten-fold?
This is why many people are saying, have said, and will continue to say that any money given to the banks is lost forever. Our leaders, especially Bernanke and Paulson, have repeatedly lied about the problem.
I hope Obama is different than Bush. Picking Geithner as Treasury Secretary is not a step in the right direction. Bernanke is his boss at the Fed, and Geithner agreed with his every move, to date. Every move Bernanke has made has been exactly the wrong move. 0% batting average. How can you put him in at clean-up? Bernanke will have a yes man at his side.
Most importantly, for confidence in the US to increase, those at the top in Wall Street need to be jailed before war crimes are considered. If that does not happen, the effects of how bankrupt our financial institutions will come into play while Democrats and Republicans squabble over where to send the terrorists. Yes, it is an extremely important issue, I am not suggesting otherwise. I just think that a Global Systemic Financial collapse, in which chaos ensues around the world, makes where the prisoners at Guantanamo go a moot point.
No government program will abate the coming collapse unless two things immediately happen:
1) Jailing those that created and sold fraudulent structured financial products. The crimes are so pervasive that Goldman Sachs was buying insurance (CDS) on the CDO's they were selling, hoping to gain when (not if. they knew it would) that CDO collapsed.
2) Establishing a system for the orderly removal of level3 accounting rules and all level3 assets, namely structured debt based derivatives.
Yes, many of the names on the above chart, as well as countless other corporations, will instantaneously fail. But, most of the ones that fail had the biggest part in building our financial structure to this point. They will fail in as much as they helped cause the problem.
Then, and only then, can we begin to recapitalize those that are strong, and create new entities that are unencumbered by debt. Confidence can be guaranteed, because all would have full disclosure.
Because of this problem, which all governments and those at the top in corporations are intimately familiar with, nobody trusts anyone else. Even those in the media don't get it. I recently spent a good deal of time with an economic writer for a major global newspaper explaining derivatives to him and how corporations are valuing them. He has a degree in economics, and did not understand.
Well, the market in turmoil is making everyone a believer.
The big money has no confidence in a safe haven. Treasuries, all short term (the US government has been the largest buyer of long term for weeks now), will be sold en masse if gold begins its expected march. That will hurt the dollar, and we lose the ability to manage our debt, ie we will not be able to meet the interest payments on the bonds we have already issued. Then it is game, set, match.
Any, and I emphasize ANY ACTION that does not immediately tell the global financial world that we will not allow liars, cheaters and thieves to prosper, will have calamitous effects.
There is very little time left to deal with this issue.
1 comment:
I have forwarded your site to several of my friends -- thank you so much for your insights -- very few seem to get it -- sadly my family and friends are actively preparing for the worst -- I wish we could say we are hoping for the best -- but unless our officials get it (which I doubt)-- our nation is going to change drastically. Janis
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