The Promise That Was Once Rome

The Roman Empire was truly great at its height. Ruling most of the known world, Rome stretched from the north Atlantic Ocean to the Indian Ocean. Due to the sense of superior government, fair laws and blessings of the Gods, Rome expanded its borders knowing all those that came under its rule would be better. With many neighbors they shared trade and commerce, enriching not only themselves, but those they were at peace with. Rome became the place to seek your fortune. It was the envy and hope of the world. 

Though they practiced slavery for some time, they also had a representative republic. Every Senator came from Quaestors which were elected in local provinces. Senators then sought favor for their home lands. Senators also controlled the finances, foreign affairs, assigned military commands and provinces, and debated and passed decrees for the Empire.

Through the military, which was the largest and best trained the world had ever seen, the enemies of the Empire were kept at bay. Many legionnaires were committed to troubled areas not only to keep order, but to prevent enemies from amassing within its borders. 

By the beginning of the 3rd century, the Roman Empire had become broken. Senators were considered hedonistic and greedy, with charges of corruption commonplace. Taxes were high to support the massive military and largess of the Senate. With the exception of Marcus Aurelius, the last few Emperors turned what was a beneficent relationship with far provinces into one of greed, with the army to extract more taxes. 

As the Emperor, Senate and the privileged demanded more monies to supply their lifestyles and bring more gifts home, the army was increased and sent to Africa and the Middle East to extract more taxes. Once friendly neighbors grew weary of the demand for greater profits from Rome. Skirmishes and small wars were frequent. Increasingly, more and more resources were committed to far provinces to maintain the money supply. The threat along the northern borders from nomadic tribes from the east was given little thought. There were no peoples in the north to extract goods or taxes from. They were barbarians, to whom money meant nothing. So, more legionnaires were sent where the money was. 

Rome had one-quarter of her military in the Middle East when Alaric and his barbarians sacked Rome in 410. Again in 455 and 472 Rome was invaded. In each instance, a large portion of the military was elsewhere, trying to control diverse cultures while draining Rome of desperately needed resources.

Rome eroded. 

No more would Rome conquer in the name of bringing light to the world. 

Now Rome was being invaded. All the better parts taken. Left with a shadow of her former self. 

Just for the sake of debate, imagine Rome and the US being analogous. Due to human traits and behaviors, assuming equal conditions for advancements in knowledge and technology, where is the US at equivalence with the Roman Empire in its life? With a greater understanding of Roman history than above, how do the two empires compare, if at all? Has the religious intolerance in the Middle East only been a factor for Rome and the US? If the Romans couldn't control the Middle East, is it correct to assume it is controllable today?

Forgive me. I forgot it was silly of me to ask. I am not a journalist. If it were worth asking, a journalist would have asked it. You know, the people who go to university for 4 years to study how to ask very good questions. They have gotten the important answers. 

I just hope Brittany and Paris can be friends again.

Lipstick on Pigs

Building up to the election, it is hard to find news.

I am not talking about CNN and MSNBC. You can watch both all day long. Unless something horrific, such as monster hurricanes and train wrecks (no, really), all I hear are opinions, on the viewpoints, of what the existential meaning is of an utterance by a tired politician on the campaign trail.

I believe a direct conversation of the economy, more specifically banks and the taxpayer money being used to replace their bad bets, is in order. Is it right to use taxpayer money to cover the bad bets of Wall Street and Main Street Bankers?

From CNBC.com;

The end result of the global economic slowdown may be the U.S. announcing national bankruptcy as the government cannot afford the bailouts that it promised and the market will not bail out the government, Martin Hennecke, senior manager of private clients at Tyche, told CNBC on Thursday.

"We expect a depression in the United States. We expect a depression, very possibly, also in Europe," Hennecke said on "Worldwide Exchange."

The estimated $300 billion cost of the Fannie/Freddie bailout will probably be considered as a loss that the government will have to take, therefore passing it on to taxpayers, he explained.

"We already have $3 trillion of debt, as far as the U.S. government is concerned. These debt figures across the U.S. economy are rising very sharply."

When the government can no longer pass the United States' "immense debt" on to taxpayers, it will turn to the holders of U.S. dollars, leading to the eventual downfall of the currency, Hennecke said.

"Definitely, it (the dollar) is not a safe place to be invested in, as real inflation is closer to 10 or 11 percent than the actual inflation numbers given by the U.S. government," Hennecke said on "Worldwide Exchange".

Investors should avoid exposure to debt and stay away from leveraging on any investment or asset, including property, Hennecke advised, adding that "banks have been too highly leveraged in the past, private households, everybody."

Following is one of the issues the candidates are desperate to avoid. They know the less people realize, the fewer tough questions they are forced to answer. It is a complicated issue, but is the most important issue right now, just edging out Iraq;

MBS and the derivatives built on them
There are somewhere around $700+ Trillion in derivatives, globally. Most are built on the backs of US Mortgage Backed Securities and other debt such as credit card debt, auto loans, and even student loans.
MBS are derivatives of the first order. The issuer of the MBS gathers multlple mortgages, usually similar in nature (ie. Nov. 2006 first lien ARMs) and bundles them together. The bundles can represent $20 million, $100 million or more in mortgages. This is called securitizing, and creates a bond for the issuer to sell. This new bond of MBS actually owns the underlying mortgages. Should a mortgage contained within an MBS go into default, and subsequently be liquidated, through short sale or foreclosure sale, the MBS is first in line to get the money from those proceeds.
CDO's, CLO's, CMO's, SIV's and the like are derivatives of the second order. A CDO is usually made up of several MBS issues (and may include other forms of debt that have been securitized), each portion called a tranche. Each tranche is calculated to offer a certain rate of return. Most often, a few of the tranches in a CDO have very risky MBS, such as subprime mortgages, which have a higher rate of return, thus raising the overall rate of return of the CDO. CDO's squared, and all things similar, are derivatives of the third order. CDO's squared contain two or more CDO's put together.

All derivatives of the second order are bets on the performance of the underlying MBS or whatever debt is contained in the original securitization. 

All derivatives of the third order are bets on the performance of derivatives of the second order.

Almost all derivatives of the second and third order are owned by commercial banks, investment banks and central banks. Why? In creating the underlying MBS, they withheld portions of the subprime rate of return, which, if they owned that portion, would make them more profit. They then assigned that portion to the CDO's and other derivatives. They then sold these to other banks, and themselves. 

MBS and CDO’s are distinctly different. 

I hear many people tell me they "know" what a derivative is. I know they have no idea what a derivative is. How do I know? They keep buying financial stocks, just before they tumble.
$13 Trillion MBS. 

$700 Trillion Derivatives. 

$600+ Trillion in bets on the performance of the $13 Trillion.

Is it sinking in yet?

Most of the twenty-five largest banks have exposure to derivatives and blown MBS representing 300%, 400% and some many more times, their hard assets. Chase is the single largest holder of derivatives in the world. There are somewhere around $700 Trillion in derivatives, globally. Most are built on the backs of US MBS and other debt. In Sept 2007, Chase had $92 Trillion in derivative holdings, almost 1/7 of all derivatives. Their hard assets in Sept 2007 were $ 1.3 trillion. Bank of America, before Countrywide, had $42 Trillion in derivative holdings with hard assets a little over $1 Trillion. After Countrywide, that spread widened considerably.

Theoretically, even with only a haircut of 5%, on paper, they are insolvent. The losses on derivatives, as a whole, will be no less than 50% across the board. They are bets on the performance of MBS. The derivatives of the second or third order do not own the mortgages, they are only bets on the performance of those mortgages contained in the original MBS. The MBS is still there, intact, and it owns those mortgages. The owner of a CDO cannot assume the property of a foreclosure represented within one of its tranches, because the CDO is only a bet on whether that mortgage would perform and reach maturity.

Already proven in court in Cleveland, CDO's have no claim to the underlying mortgages. The owners of over $1 billion in CDO’s issued by Deutschebank tried to get the foreclosed properties represented in the issues they bought. The judge, once it was explained to him what the CDO’s were, laughed and tossed their case out. The attorneys could not produce any documents to show the owners of the CDO’s held the notes to those properties, because they don’t. The holders of the underlying MBS to those CDO’s hold the notes, and they aren’t giving them to the buyers of CDO’s.

The ability of mainstream media to tell us about lipstick is amazing. Hats off to Matthews, I would never have guessed that was important. I would have thought the loss of the commodities markets, the loss of AAA rating on US treasury notes and the bankruptcy of America were more important.

Recovery 2008?

Hats off to Dr. Housing Bubble. A great read on why the US economy cannot bounce quickly back.

The Dr. gives us ten reasons for a languishing (optimistic view) economy through the remainder of this year.

Reason #10 - Federal Reserve: A Paper Tiger

Reason #9 - Energy Prices: Still at Record Highs

Reason #8 - Education Getting More Expensive

Reason #7 - Elections and Political Calculus

Reason #6 - Lenders are Stuck

Reason #5 - Employment Still Faltering

Reason#4 - People Don’t Believe the 10% Solution

Reason #3 - Consumer Psychology

Reason #2 - Too Much Debt

Reason #1 - Housing is Nowhere Near a Bottom

I would venture to add two more.

Reason #11 - Asset Redistribution; The destructive quality of false value in the trillions of dollars in derivatives will pave the way for foriegn central banks and sovereign funds to buy long treasured US institutions. Anheuser Busch is a prime example. Because every US bank and most US corporations and equity funds are saddled with toxic derivatives, none could match InBev and its offer price. The profits these newly transferred entities represent will now go into foriegn bank accounts.

Reason #12 - FIRE Economy. The Dr. touches on the FIRE economy (Finance, Insurance and Real Estate), but it is the crux of our problems. The economic model the US has adopted over the past 40 years, that of trading good paying manufacturing jobs for cheaper imports is at its end. We no longer have enough good paying manufacturing jobs to keep that train going. For a short time, we were able to create new good paying jobs in the FIRE industries, but over the last two years, those industries have been laying off people at record rates.

The US had tried to establish itself as the banker for the world. Our currency was the defacto world currency. Our stock market was robust, financing was readily available, and emerging economies were just that; emerging.

Now oil is traded in Euros as much as in Dollars. Brazil, India, Russia and China have learned to trade around us. Many Central Banks are busy in their own countries bailing out those entities which bought derivatives based on US debt. Other than intellectual properties, the US has little of real value to sell the world. China, India and some others are showing a greater disregard to international patent rights, so our ability to sell intellectual properties will diminish over the coming years.

The FIRE economy has also given us record debt. Since the FIRE industries are shrinking, and we have little manufacturing to sell, the ability to manage that debt is increasingly becoming more difficult.