Financial Armageddon

[landrovered]

It just seems tha LTCM was handwritting on the walls and then the markets ignored the lessons learned and jumped on the bandwagon in a big way.

 

[noee]

^^Greed is a strong motivator.

 

[MarkP]

Q: Should anything be done about the huge potential value of derivatives that are currently in existence in the market. If these funds start to tank the cumulative value of the derivatives exceeds the value of the world GDP. Sounds like a recipe for disaster to me.

It seems like after the Long Term Capital Management fiasco, the market moved to internalize the mistakes of LTCM and make adopt their methods industry wide.

Kind of like...they got bailed out maybe we should get into this because there is no downside if we fail in a big enough way.

Your question seems to indicate something can be 'done' about derivatives, that the value can be controlled. I'm not a financial person but I doubt the government or anyone can control the perceived price. The problem is the underlying asset and for today, it's deflating value. Social engineering drove real estate prices much higher than the traditional 28/33, 20% down, PITI relationship to household income. Until asset prices return to those levels they will continue to deflate, regardless of outside attempts to 'stabilize' real estate prices.

The problem is that lending institutions know this and are unwilling to loan money that is collateralized by a deflating asset. Why loan when you KNOW your going to lose money if there is a default? The Fed can pump money into banks all day long and in reality that money will probably just sit in an account.

The huge derivative market is going to correct and it will probably overcorrect. In realtiy assets DO have value and the derivatives do have value. What is it? That's the question on the table.

As far as LTCM, stock market and real estate the market and people have internalized the lessons of the Fed, privatize profits and socialize risk. Another bailout reinforces that behaviour. Until we move to privatize profits AND risk the problem will remain.

In the end isn't the socialization of risk simply just socialism? Through our financial markets the failure of socialism is demonstrated again.

 

[MarkP]

You think the stock market and investment is down today? Just let the Democrats have access to your money.

Democrats to kill 401(k)s for … privatized Social Security?

. . . why are Democrats now looking to partially nationalize existing 401(k) plans into the exact same kind of private/public pension system?

Powerful House Democrats are eyeing proposals to overhaul the nation’s $3 trillion 401(k) system, including the elimination of most of the $80 billion in annual tax breaks that 401(k) investors receive.

House Education and Labor Committee Chairman George Miller, D-California, and Rep. Jim McDermott, D-Washington, chairman of the House Ways and Means Committee’s Subcommittee on Income Security and Family Support, are looking at redirecting those tax breaks to a new system of guaranteed retirement accounts to which all workers would be obliged to contribute.​

. . . That means your employer can no longer write off their contributions to your 401(k), and your capital gains would be taxable year-on-year. In other words, it becomes just another investment or savings account, with no tax benefit at all, and no employer contribution. Instead, Uncle Sam would give you your “matching” funds — up to a whopping $600 per year! Whoopee!

. . . It’s in The Lockbox, defined by politicians as Locked Away from You but Accessible to Us. [government] It goes there along with 5% of your gross earnings, apparently to play with the 7% of your gross earnings that already goes to Social Security. And what do they do with the money? They give you government bonds as your only investment option.​

Talk about killing an economy that relies on investment. What do they think the 401K money does? Just sit in some account? Hey idiots, it's INVESTED in companies that produce JOBS!

I suspect they are eyeing the $3T just as Argentina just did, sieze pension plans. Government spending is out of control and they are no plans to slow down, short of financial collapse.

 

[noee]

This was inevitable. First, they've seized the banks with this latest bailout bill. If they own the banks now, then that means they can seize your money. Simple.

If this gets any teeth, there will be a catastrophic departure of capital. So, are these guys completely stupid or are they just totalitarians? This is the kind of event that will lead to the breakdown of the society, perhaps that is their goal afterall?

 

[landrovered]

The huge derivative market is going to correct and it will probably overcorrect. In realtiy assets DO have value and the derivatives do have value. What is it? That's the question on the table.

As far as LTCM, stock market and real estate the market and people have internalized the lessons of the Fed, privatize profits and socialize risk. Another bailout reinforces that behaviour. Until we move to privatize profits AND risk the problem will remain.

I couldn't agree more on the privitization of risk. This has been my beef with Southern Company. They built a lake here for hydro power which seems very nice and green. The problem is that they have two lakes and they empty water from one into the other. Then they pump the water back up to the first lake. The daily excersize consumes more power than is generated. It is a net consumer of energy. The reason that they do this is to take advantage of the difference in price between the peak rates when they sell power and the lower nighttime rates when they do the pumping.

They are making money on arbitrage not from generating electricity. This would be fine with me except for the fact that if the bet wrong and lose money, the taxpayer will pay for their losses in the form of higher rates. All they have to do is go to the public service commission and get permission. Since they have a government approved monopoly they get what they want. it is not like someone else is going to replace them.

So if they bet and make money, they take it in the form of profit, if they lose then they raise their rates. It is pure bullshit.

So the question you raised is a very good one...What is the value of the derivatives in the market. The simple answer is; whatever someone is willing to pay for them on any given day.

It is scary to think that the equivalent value of the world GDP is tied up in derived financial instruments that at their core rely on the mathematical validity of the Mandlebrot set.

I like fractals but this is the greatest bammboozle that the world has every had perpetrated against it.

 

[MarkP]

. . . The daily excersize consumes more power than is generated. It is a net consumer of energy. The reason that they do this is to take advantage of the difference in price between the peak rates when they sell power and the lower nighttime rates when they do the pumping. . . . . . . .

By some analysis so is ethanol production. The motivation? It is subsidized.

Reply to other thread - didn't know there was a question in your post. I viewed it as an "I agree" and statements. As for privatizing risk, good luck. Our society is moving towards socializing risk, reduced personal responsibility. The government is the answer. In all of history the end is always the same, unless this trend is reversed.

 

[landrovered]

Thanks but No I was refering to the value of derivatives. I know the simple answer what is the bigger view and its ramifications?

 

[MarkP]

Thanks but No I was refering to the value of derivatives. I know the simple answer what is the bigger view and its ramifications?

So here I'm outside my knowledge but I would think the derivitives market will shrink. Apparently Greenspan was "shocked" by what has happened. Really? Shocked? Whatever Alan. He called for firms that bundle loans into securities for sale be required to keep part of those securities. That should result in a contraction in derivatives and in the end a contraction in credit markets that leverage the multiplicative effects of derivatives.

Then there is the risk side of the equation. The cost of risk management and insurance is now higher also reducing the credit markets. I "think" all roads lead to asset valuation and credit availability, or in this case unknown asset valuation and reduced credit availability. Once assets stabilize we will still be left with reduced credit availability for a variety of reasons.

 

[landrovered]

I guess what I am learning is that credit default swaps were functioning much as bond insurance had been in guaranteeing the value of underlying assets.

I know in my field of project development, financing would be hindered without the ability to guarantee bond repayment in the form of insurance. Bonds were only available to the best financed operations after that you had to go into private equity markets which is bloody expensive, they take 80% of the project which is an internalized but greedy risk assesment.

Asset valuation is indeed key, what I am pondering is the valuation of the more exotic derivatives. It is like the old "how many angels can sit on the head of a pin" question.

I can't see the appetite for these exotics growing which would lead to deflation of their valuations. What I don't want to see the amount iof leverage they took on as becoming the next LTCM style bailout.

If wallstreet guys want to bet on which direction the next car driving down the street will come from then go for it, but don't borrow money to maximise the upside potential unless you intend to pay it back.

 

[p m]

http://www.nytimes.com/2008/10/24/business/economy/24panel.html?_r=1&hp&oref=slogin

"Facing a firing line of questions from Washington lawmakers, Alan Greenspan, the former Federal Reserve chairman once considered the infallible maestro of the financial system, admitted on Thursday that he “made a mistake” in trusting that free markets could regulate themselves without government oversight. "

 

[gugubica]

This was inevitable. First, they've seized the banks with this latest bailout bill. If they own the banks now, then that means they can seize your money. Simple.

5. Centralisation of credit in the hands of the state, by means of a national bank with State capital and an exclusive monopoly.

I'm just saying...

 

[az_max]

http://www.nytimes.com/2008/10/24/business/economy/24panel.html?_r=1&hp&oref=slogin

"Facing a firing line of questions from Washington lawmakers, Alan Greenspan, the former Federal Reserve chairman once considered the infallible maestro of the financial system, admitted on Thursday that he ?made a mistake? in trusting that free markets could regulate themselves without government oversight. "

?I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms,? Mr. Greenspan said.

Yes, he is correct. It was the greed of the CxO's and shareholders that got them in that position. they should have looked and said "we're invested too much in high risk stock" and backed off. Instead they saw fast money and no repercussions. I don't know how to successfully put government regulation on greed.

 

[Blue]

Originally Posted by NYT
“I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms,” Mr. Greenspan said.

Yes, he is correct. It was the greed of the CxO's and shareholders that got them in that position. they should have looked and said "we're invested too much in high risk stock" and backed off. Instead they saw fast money and no repercussions. I don't know how to successfully put government regulation on greed.

Greenspan erroneously presumed that the organizations had their (i.e. the organizations') self-interests in mind. What we're finding out is that the officers of the organization had their own private self-interest in mind and they went ahead and ran their ships aground knowing that they all had luxurious mega-yachts as lifeboats. You're right that you can't necessarily regulate greed per se, but you can enact penalties for running your company into financial ruin (and of course yank the golden parachutes).

 

[MarkP]

Actually I think we've moved beyond the mortgage industry as the primary issue, on to the structural and confidence issues. Now that assets are difficult to value, no one trust the data. To this toxic mess add in the business / economic unfriendly policies of the Democrats and you have further erosion in confidence to feed the downward spiral.

There are some pretty pessimistic views coming forward.

Roubini Says `Panic' May Force Market Shutdown (Update2)
Bloomberg
By Alexis Xydias and Camilla Hall

Oct. 23 (Bloomberg) -- Hundreds of hedge funds will fail and policy makers may need to shut financial markets for a week or more as the crisis forces investors to dump assets, New York University Professor Nouriel Roubini said.

``We've reached a situation of sheer panic,'' Roubini, who predicted the financial crisis in 2006, told a conference of hedge-fund managers in London today. ``There will be massive dumping of assets'' and ``hundreds of hedge funds are going to go bust,'' he said. . . .​

Closing markets for a "week or more" will cause bank and investment house runs.

In other news both McCain and Obama have decided to drop out of the presidential race, citing cardiac issues.​

 

[GotRovr]

This is the kind of event that will lead to the breakdown of the society, perhaps that is their goal afterall?

Don't forget, part of their plan is to first take our guns

 

[SGaynor]

60 Minutes just did a piece on credit default swaps, for those who are interested in this gambling house of cards.

 

[MarkP]

:banghead:


Stop Paying Your Mortgage Today
The Market Ticker
Wednesday, October 29. 2008

Seriously.

Assuming your home is worth equal or less on the market today than your outstanding mortgage balance, of course.

You deserve to live free for a year, and you deserve to have your home price come way down so you can buy it back in a few years for much less.

You've already been taxed to the tune of $700 billion for a bailout for the bankers, even though you told Congress "no".

Now the FDIC and Treasury are "working on a plan to curb foreclosures."

In return I recommend that every American with a mortgage immediately stop paying.

Today. . . . .​

 

[MarkP]

Said this long time ago . . . .


Pension Time Bomb Explodes In US and Canada

Colorado's PERA models assumed a 8.5% return on investments, 30% higher than Buffet's Berkshire Hathaway. The ROI was chosen to make the fund look solvent.


The problem will be when these public pension funds ask the private sector, who's 401K's have dropped 50%, to make them "whole'.

 

[MarkP]

With the market down 700+ points after the election, where are we headed?

Jim Rogers: America is bankrupt (English version)
Dutch Television

and

video interview

To include perspective on Obama and McCain