Saturday, January 2, 2010

Ahh, some people are thinking, as sent to me from a reader;
Anonymous said...

the top 25 banks have a combined marekt cap of 8 trillion. these banks have 208 trilion of dirivative exposure.
i expect the majority of these is ultra safe. but, let's say 20% have SOME risk. if this risky group takes, let's say, a 25% hit, that exceeds the cap. then what?

I am going to ignore the typos and give this guy an 'A' for paying attention in class. Unless all of us start asking the questions that must be answered by the banks and bankers, they will continue to force the taxpayers (that means you and me) to reimburse them for bad bets they made.

Let's take what "Anonymous" wrote and break it down.

1) $208 Trillion in derivative exposure is only what they show in level 1 accounting rules, that does not include what is held by shell corporations in offshore accounts tallied in level3 accounting rules.

2)To assume most of the derivative exposure is "ultra safe" is just that, an assumption. I believe we have not seen the worst of this crisis yet. Remember this, the peak for resets of option ARM loans does not come until spring of 2011. Guess what that $208 Trillion in derivatives is built on, yep, those once considered "prime" option ARM loans that will reset and recast at a time when the housing market could well be 50% lower in value than when those loans were first originated. In order to refinance, your house must appraise at or above the amount you are wanting to borrow or refinance. My guess is we will be looking at tens of thousands of families walking away from their homes, which means those loans become non-producing, which means any CDO or CLO or CMO or any other derivative built on those loans remaining in the producing column, goes boom and more than likely becomes a 100% loss. That is where the CDS that AIG was writing comes in. More taxpayer money to the banks that created derivatives they KNEW would go bad, and we know they knew because they turned right around and immediately bought a CDS on a CDO they just sold to some dupe (bank, or worse, a pension fund), even though they no longer had any financial tie to that CDO.

3) There is great likelihood all of those banks will require massive bailout monies again. What happens to you if you take all of your savings, go to Vegas and lose it all? Should the guys that get paid millions of dollars a year get off scott-free when they do the same thing thing, With Other People's money? Isn't that why we built prisons? Bailout my arse, throw their arse in to a cell, and make sure their cell mate is big and lonely. We'll see how many of their successors will play fast and loose with the law and other people's money. I'd bet we wouldn't have another financial crisis, ever, if we would enforce the laws we have now.

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