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While the financial crisis may have been triggered by subprime losses, the current problem is that losses from overleveraged toxic exotic assets such as synthetic CDOs are pushing large investment banks into insolvency.

More after the flip:

At this point, mortgages are little more than a talking point used to squeeze additional taxpayer dollars to cover losses from derivatives.

The subprime mortgages that started all the trouble have mostly been written down already and the capital replaced. What’s left on the balance sheets – the problem US Treasury Secretary Timothy Geithner is now trying to grapple with – are the collateralised debt obligations, and especially the synthetic ones.

Synthetic CDOs are securities backed by insurance (credit default swaps) instead of physical assets.

A Collateralized Debt Obligation is a financial product based on an asset, where the asset is an income stream (of the type being made by buyers of CDS to sellers).  To create synthetic CDO’s all that was necessary was to divide up the CDOs into groups which would enable buyers of CDOs to buy into a spread of payments from a range or portfolio of different companies rather than just one.  Unlike normal CDOs the synthetic variety didn’t need to own an underlying bond or equity...The wider CDS and CDO markets are estimated to be worth as much as $40-50 Trillion.

The companies involved represent some of the largest, and what were seen more than a year ago as the safest companies in the world.  Companies that were then seen as being a very remote chance of defaulting – think Freddie Mac, Fannie May, American Insurance Group, Ambac, MBIA, Countrywide Financial, Lehman Brothers, and Bear Stearns, to go with major corporates such as GM and Ford, and even international institutions such as Icelandic Banks – which have now either passed into history or which are fending off the prospect, remain parts of the portfolio for numerous synthetic CDOs.

The way that the synthetic CDO is often structured means that when an ‘event’ – which is often the default of a number of companies from a portfolio, often more than 100 companies - occurs the sellers are looking at paying off, with the size of the payoff varying according to the number of companies which are defaulting.  As an example - and a regular one - 33% when, say, 7 companies from the list are in default, 66% when 8 companies are in default, and complete redemption when 9 companies from the list are in default.

CDSs were the poison by which huge institutions such as Washington Mutual, Bear Stearns, and Lehman Brothers met their ill-begotten fate.

Under the rescue deal, JP Morgan Chase will take over Bear Stearns' $13.4 trillion contracts - lock, stock, and barrel.

But JP Morgan is already up to its neck in this soup, with $77 trillion of contracts. It will now have $90 trillion on its books, a sixth of the global market.

Risk is being concentrated further. There are echoes of the old reinsurance chains at Lloyd's, but on a vaster scale.

The most neuralgic niche is the $45 trillion market for credit default swaps (CDS). These CDS swaps are a way of betting on the credit quality of companies without having to buy the underlying bonds, which are less liquid. They have long been the bête noire of New York Fed chief Timothy Geithner, alarmed that 10 banks make up 89 per cent of the contracts.

The biggest issue with the default swaps is that their value exceeds the size of the market against which it insures.  (H/T to Jamess)

cds graph

cds chart

According to former Fed Director Bob Eisenbeis, the problem we are facing is neither liquidity or lending.  It is in fact an accounting problem.  He suggests that the solution is to turn off the Treasury / Fed spigot, and allow the FDIC to seize insolvent banks such as Citigroup.

The law, the Federal Deposit Insurance Corporation Improvement Act, was signed into law in 1991. In an interview with Financial Week, Bob Eisenbeis, a former research director of the Federal Reserve Bank of Atlanta, said the FDICIA contains more than enough tools for regulators to help stem the current financial crisis.

If regulators had applied FDICIA’s provisions once the solvency of major banks was first called into question, Mr. Eisenbeis said, many would already have been taken over by Uncle Sam.

That would mean that their good assets would have been separated from their bad and sold off to healthy institutions or other investors.  This, he claims, would have gone a long way toward solving the credit crisis.

The most obvious candidate for such a takeover is Citigroup, which is considered by many analysts to be insolvent because its liabilities are worth vastly more than its assets.  Christopher Whalen, principal in the financial consulting firm Institutional Risk Analytics, estimated on Friday that Citi needs roughly $200 billion in additional capital, and that this would become apparent after the bank reports further losses in the first quarter of this year.

Further insurance of toxic assets would be a complete waste of public money, as the debt is being valued at less than 10 cents per dollar in the market.  Under the Financial Stability Plan, taxpayers could lose an additional trillion dollars.

Public-Private Capital: This new program will be designed with a public-private financing component, which could involve putting public or private capital side-by-side and using public financing to leverage private capital on an initial scale of up to $500 billion, with the potential to expand up to $1 trillion.

Its likely that the public will give up at least 70% of that investment since that is the current spread between the treasury’s price (80c per dollar) and the market price (10c per dollar).

Beyond the fiscal problems, there is widespread crime hiding behind the derivatives market bailout. Offshore accounts were used as a go-between for derivatives and their insurance.  

In a recent Financial Times article, Lloyd Blankfien, CEO of Goldman Sachs, noted that in January 2008 there were 12 triple-A rated companies worldwide. At the same time, there were 64,000 structured financial instruments, such as collateralised debt obligations rated triple-A. A significant portion of these CDOs (an acknowledged source of much pain in the current situation) were domiciled in offshore jurisdictions.

Sites such as the Caymans where special purpose vehicles for derivatives were setup are home to trillions in tax evasion.

The Cayman Islands – Caribbean territories under ultimate UK control – are currently the target of reformers. Alastair Darling was yesterday challenged in the Commons over allegations that UK banks have been using the Caymans for massive tax avoidance schemes. Barack Obama, before he reached the White House, was one of the senators who singled out the islands as a blot on the US fiscal landscape which ought to be investigated.

Elmer says his interest is in the network of tax havens. "People don't know how the system works. They may hear of some case, but the big picture always disappears into bank secrecy, professional secrecy with lawyers and accountants, and tax secrecy. But they need to know that this is a system which undermines our society, our democracy." He has lodged copies of files with Jack Blum, a veteran lawyer in Washington DC and an outspoken critic of the behaviour of tax havens.

Lawyers and accountants make up a tenth of the 52,000 population of the Cayman Islands, which are English-speaking, politically stable, in the US time zone, and with zero taxes. This British Overseas Territory with palm trees and luxury hotels, measuring less than 100 square miles, is the fifth largest financial centre on the planet. Tax Justice Network campaigners estimate that tax havens collectively hold more than $11.5 trillion. Some comes from tax avoidance. Each year the US may lose a total of about $100bn in potential taxes, France about $50bn, Germany $30bn, the UK between $20bn and $80bn - and the developing world loses up to $800bn in stolen capital. But in the Caymans, a prison sentence awaits anyone who discloses bank information.

As Markopolos testified, offshore sites are seeded with between 5 – 50% money from organized crime.

Major players in the derivatives market such as AIG are being investigated for fraud.

Set up by Cassano, who ran it until he left in March, AIG-FP wrote billions of dollars of CDSs, largely insuring against potential default rates on parcels of corporate debt and home loans known as "collateralised debt obligations" (CDOs).

Between 2004 and 2007 the notional value of CDS contracts across the global markets ballooned from $8.4tr to $62tr. London was a major hub for the trade. AIG-FP reportedly paid staff $3.56bn in the last seven years. The unit had 377 people.

The SFO's inquiries are being conducted in co-operation with the Financial Services Authority and with US authorities, which are probing the same business. In November AIG told shareholders "certain public disclosures, transactions and practices of AIG and its subsidiaries" were being reviewed by the SEC and the Department of Justice. Investors were told attention has been focused on "AIG's valuation of and disclosures relating to the AIG-FP super senior credit default swap portfolio".

Its time to plug the taxpayer drain, seize the insolvent banks (no matter the size) and arrest any firm which refuses to disclose proper accounting for their role in the derivatives market.  We have to bury the zombie banks before the remainder will regain their health.

Originally posted to The Anomaly on Mon Feb 16, 2009 at 02:17 PM PST.

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Comment Preferences

  •  tip jar (24+ / 0-)

    "Chance has put in our way a most singular and whimsical problem, and its solution is its own reward." -Sherlock Holmes

    by The Anomaly on Mon Feb 16, 2009 at 02:17:23 PM PST

  •  A humorous but basically accurate explanation (6+ / 0-)

    of how it all started.  
    Subprime Primer

    You have to "play" the Powerpoint.  I also recommend "full-paging" it.

    "The extinction of the human race will come from its inability to EMOTIONALLY comprehend the exponential function." -- Edward Teller

    by lgmcp on Mon Feb 16, 2009 at 02:19:38 PM PST

  •  Can someone tell me (3+ / 0-)
    Recommended by:
    stagemom, lgmcp, yellow dog in NJ

    where Fannie Mae and Freddic Mac fit into all of this?  My conservative brother says that this whole mess is the fault of the Dems because they allowed FM/FM to buy up bad loans. I don't know enough about the whole business side of this cause it just isn't my bag. I do want to smack him down though.

    •  Check out that slide show I mentioned ... (4+ / 0-)
      Recommended by:
      burrow owl, stagemom, xaxado, pstoller78

      It was all about profit being skimmed at every level while raising risk, not about some kind of excessive zeal for helping people afford houses.

      "The extinction of the human race will come from its inability to EMOTIONALLY comprehend the exponential function." -- Edward Teller

      by lgmcp on Mon Feb 16, 2009 at 02:37:10 PM PST

      [ Parent ]

    •  Freddie and Fannie wrote shitty mortgages. (2+ / 0-)
      Recommended by:
      lgmcp, sensibledemocrat1964

      Those shitty mortgages were then bundled and securitized into MBSs and CDOs.  

      IIRC, Freddie and Fannie's shitty assets were around 30% of the total shittiness.  A problem, but not the major problem.

      We are building a team that is continuously being built. - Sarah Palin

      by burrow owl on Mon Feb 16, 2009 at 02:59:35 PM PST

      [ Parent ]

    •  Fannie and Freddie were the original backers of (2+ / 0-)
      Recommended by:
      lgmcp, xaxado

      subprime mortgages  through CDO's- however
      They had stringent lending standards.  They required originators to have more than adequate documentation, and the subprime market worked well with them initially.
      However, once Wall St. was able to get in the game (through the repeal of Glass-Steagall), the system ran amuck. CDO's were backed by trash (no doc loans, liar loans, etc)

      It was Wall St that bastardized a process that Fannie/Freddie had used since 1938.
      link

      The goal of life is living in agreement with nature. - Zeno

      by yellow dog in NJ on Mon Feb 16, 2009 at 03:02:34 PM PST

      [ Parent ]

      •  Glass-Steagall didn't impact this. (1+ / 0-)
        Recommended by:
        sensibledemocrat1964

        Freddie and Fannie could always sell their mortgages to I-banks to be securitized and sold off.

        It was Andy Cuomo in the Clinton HUD that eased documentation standards for GSE loans and allowed their portfolio to get crappier.

        We are building a team that is continuously being built. - Sarah Palin

        by burrow owl on Mon Feb 16, 2009 at 03:06:40 PM PST

        [ Parent ]

        •  Credit & Futures Modernization Act of 2000 (0+ / 0-)

          IIRC.

          This is the law that created the financial instrument called the credit swap.

          So yes, Glass Steagall didnt impact.

          FDR 9-23-33, "If we cannot do this one way, we will do it another way. But do it we will.

          by Roger Fox on Mon Feb 16, 2009 at 03:12:42 PM PST

          [ Parent ]

          •  It didn't create the swap, it declined to (0+ / 0-)

            require swaps to be on regulated exchanges.  Credit swaps had been in existence since the '80s, IIRC.

            We are building a team that is continuously being built. - Sarah Palin

            by burrow owl on Mon Feb 16, 2009 at 03:20:57 PM PST

            [ Parent ]

            •  Repeal of Glass Steagall (2+ / 0-)
              Recommended by:
              xaxado, The Anomaly

              Gramm-Leach-Bliley

              Glass-Steagall

              Financial events following the repeal
              The repeal enabled commercial lenders such as Citigroup, which was in 1999 then the largest U.S. bank by assets, to underwrite and trade instruments such as mortgage-backed securities and collateralized debt obligations and establish so-called structured investment vehicles, or SIVs, that bought those securities. [14] It can therefore be argued that the repeal of this act is directly responsible for the Global_financial_crisis_of_2008–2009
              The year before the repeal, sub-prime loans were just 5% of all mortgage lending. By the time the credit crisis peaked in 2008, they were approaching 30%

              Gramm-Leach-Bliley Act

              The Gramm-Leach-Bliley Act, also known as the Gramm-Leach-Bliley Financial Services Modernization Act, Pub.L. 106-102, 113 Stat. 1338, enacted November 12, 1999, is an Act of the United States Congress which repealed part of the Glass-Steagall Act of 1933, opening up competition among banks, securities companies and insurance companies. The Glass-Steagall Act prohibited a bank from offering investment, commercial banking, and insurance services.
              The Gramm-Leach-Bliley Act (GLBA) allowed commercial and investment banks to consolidate. For example, Citibank merged with Travelers Group, an insurance company, and in 1998 formed the conglomerate Citigroup, a corporation combining banking and insurance underwriting services under brands including Smith-Barney, Shearson, Primerica and Travelers Insurance Corporation. This combination, announced in 1993 and finalized in 1994, would have violated the Glass-Steagall Act and the Bank Holding Company Act by combining insurance and securities companies, if not for a temporary waiver process [1]. The law was passed to legalize these mergers on a permanent basis. Historically, the combined industry has been known as the financial services industry.

              The goal of life is living in agreement with nature. - Zeno

              by yellow dog in NJ on Mon Feb 16, 2009 at 03:32:26 PM PST

              [ Parent ]

        •  Repeal of Glass-Steagall (2+ / 0-)
          Recommended by:
          xaxado, Roger Fox

          is how Investment Banks were able to get into the mortgage industry

          Fannie Mae was created in 1938 as part of Franklin Delano Roosevelt's New Deal. The collapse of the national housing market in the wake of the Great Depression discouraged private lenders from investing in home loans. Fannie Mae was established in order to provide local banks with federal money to finance home mortgages in an attempt to raise levels of home ownership and the availability of affordable housing.

          Initially, Fannie Mae operated like a national savings and loan, allowing local banks to charge low interest rates on mortgages for the benefit of the home buyer. This lead to the development of what is now known as the secondary mortgage market. Within the secondary mortgage market, companies such as Fannie Mae are able to borrow money from foreign investors at low interest rates because of the financial support that they receive from the U.S. Government. It is this ability to borrow at low rates that allows Fannie Mae to provide fixed interest rate mortgages with low down payments to home buyers. Fannie Mae makes a profit from the difference between the interest rates homeowners pay and foreign lenders charge.
          link

          The goal of life is living in agreement with nature. - Zeno

          by yellow dog in NJ on Mon Feb 16, 2009 at 03:14:20 PM PST

          [ Parent ]

    •  If the only problem was... (1+ / 0-)
      Recommended by:
      The Anomaly

      mortgages, the problem would have been solved a long time ago.  The primary problem is that the investment houses were engaging in gambling on a massive and massively leveraged scale--trillions and trillions (they could have used any kind of bad loan as the vehicle--they chose home mortgages.  A bit of a financial history lesson is in order here.

      The big investment bankers at Citi, B of A, Wells Fargo, Hanover Trust and J.P. Morgan used bad loans to Third World countries during the "Third World Debt Crisis" which they engineered and pushed on developing nations to get usurious rates of interest from some of the poorest people in the world.  In the mid-80s, Citi was making half of its profits off of Third World debt (and the corporate officers were paying themselves extremely generous bonuses from it).  When the loans eventually outstripped the ability of the poor countries to pay they appealed to the US government to bail them out and succeeded.  

      The Third World Debt Crisis worked out so well for them that they thought, this time they'd do it with our very own poor people and leave the American taxpayer with the tab if it didn't turn out well (and they were warned at least five years ago that it would not turn out well).  But, initially, just as with the Third World Debt Crisis, everything was going swell --they were awash in record profits.  The corporate officers again rewarded themselves handsomely.  And then the loans started going sour. Now, once again, they want the taxpayers to bail them out instead of facing their gambling losses and their insolvency.  They are whining for more and more money from the taxpayers.  On top of that, have the nerve to demand their previous excessive rate of compensation from the till (the till is being subsidized by the taxpayer, mind you).  They are outrageous and if there was any justice in the world, they would all be tarred and feathered and run out of town on a rail.  I wouldn't expect that to happen any time soon though.

  •  garbage in garbage out (2+ / 0-)
    Recommended by:
    lgmcp, yellow dog in NJ

    stoopid people using things they do not understand to try and make a buck

    •  Stupidity is not the word I would use, greed (4+ / 0-)

      is much more appropriate IMHO. These guys knew what they were doing and by putting these "assets" on their books it resulted in massive stock price increases which triggered massive bonuses tied to stock prices of high ranking corporate insiders and other creeps. Garbage in cash out to insiders. They walked away with billions and the taxpayers clean up their mess.  Evil, greedy but not stoopid. Only will I consider it stupid if they are brought to justice and given orange jump suits, but I don't think that is going to happen.

      •  The wonderful thing about the financial collapse: (1+ / 0-)
        Recommended by:
        burrow owl

        There are no clean hands here. Greedy homebuyers, greedy mortgage brokers, greedy bankers, greedy investors, greedy politicians. It would not have been possible without this chain. Each party lies along the way and/or does not conduct the diligence he or she ought to have. That's why it has been such a thorough and far-reaching collapse.

        Only now when these poisonous actions have begun to affect others do we have innocent victims.

      •  Eh, most of them didn't do anything illegal. (0+ / 0-)

        We are building a team that is continuously being built. - Sarah Palin

        by burrow owl on Mon Feb 16, 2009 at 04:46:57 PM PST

        [ Parent ]

        •  Well, it was illegal here at one time... (0+ / 0-)

          they just managed to buy the influence they needed in Congress and they licked their chops in anticipation of the rip-off of the Treasury that they were going to perform.  The guy who robs a bank of a few thousand gets put away.  These guys have already gathered their ill-gotten gains and have played so fast and loose with their investor/depositor's money that they have bankrupted their firms.  They should suffer the consequences--but guess who will pay the consequences?  Not them--anyone and every one but them.

      •  Not stupidity, not even simple greed... (0+ / 0-)

        greed like gangsters have.  That is why they should be known as Banksters.

        •  Banksters (0+ / 0-)

          While I do agree the ones that have done the most harm are the bankers who developed these structured financial products, do not make the mistake of laying all, or even most of the blame, on their doorstep.

          Buyers lied about their income on credit applications. Mortgage brokers did not even do credit checks. Congress certainly knew who they were getting into bed with when they repealed, among other legislation, Glass-Steagall. (If we needed it in the 30s, why not now?) Investors never asked where the money was coming from as long as it kept coming. There's plenty of blame to go around.

          I would argue, however, bankers, politicians and mortgage brokers since they have greater bargaining power were greedier. Moreover, since they are more sophisticated, they ought to have known the potential downside - believe me, they were not all that surprised when this happened. Additionally, since they have greater resources, they should be made to disgorge their benefits.

          What's interesting is that there is this hedge fund guy in TX that saw this coming 18 mos ago. He went to Goldman Sachs and spoke with their risk department. They essentially told him to mind his own business. He subsequently made a killing betting against the markets.

          •  The banksters at the big investment... (1+ / 0-)
            Recommended by:
            Southside

            houses knew that this would not turn out well the whole time they were doing it--they just assumed the government would allow them to rob the Treasury to cover their losses--were they wrong?  They had done it before.  See my comment further up in the thread as to their cupidity in the Third World Debt Crisis.  They were also warned at least five years ago by other central bankers.  David Dodge, the retired Governor of the Bank of Canada said recently that he and others had warned Wall Street back in 2003 that they were headed down a dangerous road.  They told him and the others to mind their own business.

  •  diaries like this are bumping ones like this (7+ / 0-)

    off the roll!!!
    cut and pasted below, in its ENTIRETY!!!

    (updated) Whoever that idiot was on Hardball a few seconds ago well...he's a idiot. Hotlist
    by electronicmaji [Subscribe]
    Mon Feb 16, 2009 at 02:17:17 PM PST

    They're coming out of the woodwork...

       * electronicmaji's diary :: ::
    *

    Totally Owned. That's what I would call it.

    This little Republican Shill, ex congressman, whatever. Who the hell knows his name please?

    Anyways. He got his ass handed to him by the facts. And it looked like it hurt.

    •  We need a midrange rec list (0+ / 0-)

      the recc'd diaries at the top, the middle list for diaries with maybe 25 minimum comments, the lower one for the ramblings, musings, pooties and other stuff that is worth reading but not worth bumping the more substantive researched diaries until people get a chance to see and recc them.

  •  Thank you Anomaly (3+ / 0-)

    Great presentation!

    Reinflating house prices will do nothing for the banks, now.

    The top banks need to be taken into receivership.

    Too big to fail is too big to exist.

    The goal of life is living in agreement with nature. - Zeno

    by yellow dog in NJ on Mon Feb 16, 2009 at 03:06:38 PM PST

  •  Toxic Exotic Credit = Massive Fraud (3+ / 0-)

    Can we please call it what it is?

  •  Excellent explication of a complex subject. (2+ / 0-)
    Recommended by:
    The Anomaly, Wings Like Eagles

    One reason why Geithner keeps hedging his answers with respect to how the forthcoming bank bailouts will work is that there really isn't anyone, ANYONE in the WORLD, who really knows the extent of the number of CDOs, how they work and what they're worth.

    CNBC had a truly disturbing special called House of Cards describing the securitization of mortgage obligations and various and sundry other structured financial products that are out there. It's on again on Monday.

    The 2 points that struck me were 1. even Alan Greenspan did not understand some of the more complex products (with access to like 100 PhDs) and 2. a town in Iceland (Finland, maybe) had gone broke investing in CDOs. What was weird though was that they thought they were investing in mortgage-backed securities, but it turned out they invested in another type of  bundled securities. Apparently nobody bothered to read the offering statements, and they had no idea what they were buying.

    They also detailed the hair-raising development of the subprime mortgage market in California. Talk about the Wild West.

  •  Time to hit the "reset" button (2+ / 0-)
    Recommended by:
    xaxado, yellow dog in NJ

    All the world's debt has to be cancelled and the world financial sector liquidated; the system is that broken.

    The bursting of the debt hyperbubble has put an end to cheap credit, the artificial inflation of prices, and all the economic activity based upon them, triggering a deflationary spiral of job losses and consumption declines.

    The total amount of debt on the world's books runs into the hundreds of trillions of dollars; many times more than the annual GDP of the whole planet. There simply isn't enough money to plug that hole.

    The bulk of the assets of the worlds' banks and investment banks are all but worthless, and that means the banks are insolvent - that's why they aren't lending. They all know it, but they don't want it exposed, because cascading cross-defaults would destroy them all and take the rest of the world's economy with them. That is also why the banks are just sitting on the bailout money, or giving it away as bonuses; it's not enough to recapitalize them and never will be.

    Without new debt, it becomes impossible to sustain the price bubbles that we've been living in for almost 30 years now. As prices collapse, jobs are cut, and people without jobs don't buy very much, forcing prices down further.

    The system is broken. Washington can't save it; the IMF can't save it; Wall Street certainly can't save itself. All we can do is tear it down and start over: brand-new banks with clean balance sheets.

    You say you can't do something because you don't want to do it. Now ask yourself why, and realize you don't have a good reason.

    by Visceral on Mon Feb 16, 2009 at 03:58:03 PM PST

    •  Not all banks are insolvent (1+ / 0-)
      Recommended by:
      Wings Like Eagles

      We shouldn't punish those which lended responsibly.  The debt can be wiped out by seizing the insolvent banks without tanking the entire market.  The longer we wait however the worse it will get.

      "Chance has put in our way a most singular and whimsical problem, and its solution is its own reward." -Sherlock Holmes

      by The Anomaly on Mon Feb 16, 2009 at 04:40:09 PM PST

      [ Parent ]

    •  You don't quite understand, Visceral... (0+ / 0-)

      To wipe out all debt, means an end to our current monetary system.  We certainly need to write down some debt (mortgage debt) and write off other debt (CDSs and other derivatives). But there are many conservative banks in the world who did a good job of protecting their shareholders and depositors.  They and the world which depends on a sound banking system should not be punished along with the banksters.

  •  This is based in the outsourcing of our jobs. (0+ / 0-)

    With the outsourcing of our manufacturing base to China a market of huge and increasing proportions was created: how to fund each transfer of goods from China to the US and support the transit of those items from one country to the other.

    The Credit market exploded as the need to create import/export financing and the insurance to back the ever spiralling number of transactions.  Each contract is short term, had a low default rate and could be leveraged numerous times on the same principal (the mortgage notes).  That's how we got 30 times leverage on these things, they bought the idea that there was no more than a 1% or less loss rate per 30 contracts.

    That's until the mortgages dropped in value and then the economy slowed raising the default rates at both ends.  House of Cards.  Had they reinvested some of that income over the years instead of spinning into ever higher obligations and raiding the income for obscene bonses these investment banks may have had the cash on hand to manage the risk.

    •  Well, I agree with Krugman... (0+ / 0-)

      He said today that there has been no wealth creation since 2000.  The productive aspect of our economy has been crippled in favor of the FIRE sector (Finance, Insurance and Real Estate speculation).  The BRIC nations (Brazil, Russia, India, China) and other underdeveloped nations have been doing the real wealth creation and we have been robbing them of their profits via their subsidy of our dollar (in order to keep the ball rolling).  It is never a good idea for one country to allow another country to control their currency.  And the US, because it is the reserve currency of the world, has been able to control every other nation's currency.  To the advantage of our elites.  That is how they have gotten obscenely wealthy over the last thirty years.  The concentration of wealth among the elites has become more extreme (percentage-wise) than was the case among the aristocrats prior to the French Revolution.  We know how that turned out for the aristocrats.

  •  Bastille (2+ / 0-)
    Recommended by:
    The Anomaly, Wings Like Eagles

    Well done, Anomaly, many thanks!

    Synthetic CDO's are but one part of a shadow financial system that includes everything unregulated in financial markets -- securitization, hedge funds, tax havens, shell companies, etc.  Did I forget someone?  The shadow system is basically all fraud, all the time, and cannot stand the light of day.  Which is why the perps want government help but won't reveal anything important to the public.

    This reeks of criminal underworld activity.  As all other job markets implode organized financial crime will be the last employer standing -- by 'borrowing' our retirement savings.  

    The real challenge lies with -- punishment!  How do we try and incarcerate tens of thousands of people who knowingly stole our future?  Pushing unbearable financial burden onto the working people was how the French Revolution began, and we know how that went.

    At this point, I'm really starting to be concerned about anarchy.

    The Shock Doctrine by Naomi Klein -- best book ever, I nominate for a Nobel Prize!

    by xaxado on Mon Feb 16, 2009 at 05:01:39 PM PST

  •  We could begin by (0+ / 0-)

    forcing all management to disgorge the benefits they received in any year their financial institution lost money. Then we should force out current management.

    Obama's administration has indicated that he is unhappy with the limits on executive compensation; that's disturbing. If he tries to change the bill, the citizenry should rise up. Bank executives will just keep doing what they do. They have no consciences whatsoever.

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