And to the wonderful people who offered suggestions, here is your challenge, should you choose to accept it: write a Christmas story on your blog!
Yesterday someone tried to insult me by saying ‘you don’t even pretend to be nice’. I took that as a huge compliment, because seriously? People who pretend to be nice, suck. We all know people like that - women like that. As someone I know puts it, they throw the rock and hide the hand. It’s all ‘bless my heart’ and ‘my, we don’t talk like that here’ and then it’s stabbity stabbity and flying monkeys as soon as they’re crossed.
Around 20 masked officers had raided the centre this morning, dropping from helicopters onto the roof, in an operation dubbed Operation Black Tornado.
WE DON'T LIKE HYPER-FAST EDITING, YOU HOLLYWOOD MORONS!
There are many types of of structured instruments including asset-backed securities (ABS), mortgage-backed securities (MBS), collateralized debt obligations (CDOs) and collateralized loan obligations (CLOs) all of which provide a revenue stream from loans that were chopped into tranches and turned into securities. There are many problems with these complex securities, the biggest of which is that there is no way to unravel the individual pools of loans to isolate the bad paper. That's why subprime mortgages had such a destructive affect on the secondary market, because--even though subprimes only defaulted at a rate of roughly 5 percent--MBS sales slumped nearly 90 percent. Why? Former Secretary of the Treasury Paul O'Neill explained it like this: "It's like you have 8 bottles of water and just one of them has arsenic in it. It becomes impossible to sell any of the other bottles because no one knows which one contains the poison."
Exactly right. So why weren't these structured debt-instruments "stress tested" before the markets were reworked and the financial system became so dependent on them?
Greed. Because the real purpose of these exotic investments is not to provide true value to the buyer, but to maximize profits for the seller by increasing leverage. That is the real purpose of MBS, CDOs and all the other bizarre-sounding derivatives; higher profits with less capital. It's a scam. Here's how it works: A mortgage applicant buys a house for $400,000 and puts 10 percent down. His mortgage is sold to Wall Street, chopped into pieces, and stitched together in a pool of similar loans. Now the brokerage can use the debt as if it were an asset, borrowing at ratios of 20 or 30 to 1 to fatten the bottom line. When Fannie Mae and Freddie Mac were taken into conservatorship by the government, they were leveraged at an eye-popping 100 to 1. This shows that nearly an infinite amount of debt can be precariously balanced atop a paltry amount of capital. This explains why the $4 trillion aggregate value of the 5 big investment banks and the $1.7 trillion value of the hedge funds is now vanishing more quickly than it was created. Once the mighty gears of structured finance shift into reverse, deleveraging begins with a vengeance pulling trillions into a credit vacuum.
This crisis was neither a failure of laissez-faire capitalism nor Ayn Rand's ideas, it was a failure of intensive regulation —with Greenspan's hypocritical contributions.
So far, the Federal Reserve has provided nearly $2 trillion through its lending facilities just to keep the financial system upright. The Treasury is currently distributing $700 billion to key banks and other financial institutions that are perceived to be "too big to fail". In truth, the "too big to fail" mantra is a just public relations hoax to conceal the web of counterparty deals that make it impossible for one institution to fail without dominoing through the rest of the system and wreaking havoc. That's why AIG is still on life-support with regular injections of taxpayer money; because it had roughly $4 trillion of credit default swaps (structured "hedges" that are not traded on a regulated exchange) for which AIG does not have sufficient capital reserves. In other words, the taxpayer is now paying the debts of an insurance company that didn't set aside the money to pay its claims. (As yet, No SEC indictments for securities fraud) In fact, the Fed and Treasury are now providing a backstop for the entire structured finance system which is frozen solid and shows no sign of thawing any time soon.
Rome is burning. It's time to stop tinkering with a failed system and move on to "Plan B" before it's too late.
If you think this weekend’s G-20 meetings in Washington are only about designing short-term fixes to the financial system and regulatory reforms for banks, hedge funds, brokers, mortgage companies and investment banks … think again.
Behind the scenes, a far more fundamental fix is being discussed — the possible revaluation of gold and the birth of an entirely new monetary system.
It would be a strategy designed to ease the burden of ALL debts — by simultaneously devaluing ALL currencies … and re-inflating ALL asset prices.
That’s what central banks and governments around the world are going to start talking about this weekend — a new financial order that includes new monetary units that helps to wipe clean the world’s debt ledgers.
It won’t be an easy deal to broker, since the U.S. is the world’s largest debtor. But remember: Debts are now going bad all over the world. So everyone would benefit.
The Big Question: What gold price would be legislated to reflate the U.S. and global economy?
I can’t tell you what gold price the G-20 would ultimately agree to. But here’s what they will be looking at …
* To monetize 100% of the outstanding public and private sector debt in the U.S., the official government price of gold would have to be raised to about $53,000 per ounce.
* To monetize 50%, the price of gold would have to be raised to around $26,500 an ounce.
* To monetize 20% would require a gold price a hair over $10,600 an ounce.
* To monetize just 10%, gold would have to be priced just over $5,300 an ounce.
Those figures are just based on the U.S. debt structure and do not factor in global debts gone bad. But since the U.S. is the world’s largest debtor and the epicenter of the crisis, the G-20 will likely base their final decision mostly on the U.S. debt structure.
Second, I do NOT advocate a fully convertible gold standard. Never have. There isn’t enough gold in the world to make currencies convertible into gold. It would end up backfiring, restricting the supply of money and credit.
In one of his most important books, America's Great Depression, Murray lists six ways government could delay market adjustment, which he says would create the "favorite 'anti-depression' arsenal of government policy." These include the following:
1. Prevent or delay liquidation
2. Inflate further
3. Keep wage rates up
4. Keep prices up
5. Stimulate consumption and discourage saving
6. Subsidize unemployment
“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.
It pains me deeply to announce that, despite the massive government rescue, yesterday’s collapse of Citigroup could ultimately lead to a shutdown of the global banking system.
For many years, I hoped this would never happen, and I thought we might be able to avoid it.
More recently, in the wake of the biggest financial failures in history — Bear Stearns, Lehman Brothers, Washington Mutual, Wachovia and others — rather than liquidate the failed firms’ bad assets, the authorities have been engineering shotgun mergers. The end result is that they have been sweeping most of the bad assets under the carpet of larger banks like Bank of America, Citigroup, and JPMorgan Chase, each of which already had abundant bad assets of its own. Adding insult to injury, Treasury Secretary Paulson’s decision this month — not to buy up the bad assets from many of these banks — has only heightened this concern. Rather than dispose of the toxic waste, the regulators have been rolling up the garbage to the larger banks.
And now, here we are, nearing the end of the road with the largest banks of all endangered and with no larger bank that can swallow them up. It’s a day of reckoning that leaves me no choice but to issue this three-part warning:
* Despite the U.S. government’s massive Citigroup bailout, it is going to be difficult for the global banking system to survive the shock to confidence for very long.
* Even if insured depositors do not pull out their funds, uninsured institutional investors are likely to run with their money, threatening to bring the system down.
* And alas, even if you have your money in a safe bank with full FDIC coverage, you could be adversely impacted.
Derivatives are bets made mostly with borrowed money. They are bets on interest rates, bets on foreign currencies, bets on stocks, bets on corporate failures, even bets on bets. The bets are placed by banks with each other, banks with brokerage firms, brokers with hedge funds, hedge funds with banks, and more.
They are often high risk. And they are huge. According to the U.S. Comptroller of the Currency (OCC), on June 30, 2008, U.S. commercial banks held $182.1 trillion in notional value (face value) derivatives. And, according to the Bank of International Settlements (BIS), which produced a tally six months earlier for the entire world, the global pile-up of derivatives, including institutions in the U.S., Europe and Asia, was more than three times larger — $596 trillion.
That was ten times the gross domestic product of the entire planet … more than 40 times the total amount of mortgages outstanding in the United States … nearly 60 times greater than the already-huge U.S. national debt.
The Mafia knows all about systemic meltdowns of gambling networks. In the numbers racket, for example, players place their bets through a bookie, who, in turn is part of an intricate network of bookies. Most of the time, the system works. But if just one big player fails to pay bookie A, that bookie might be forced to renege on bookie B, who, in turn stiffs bookie C, causing a chain reaction of payment failures.
The bookies go bankrupt. The losers lose. And even the winners get nothing. Worst of all, players counting on winnings from one side of their bets to cover losses in offsetting bets are also wiped out. The whole network crumbles — a systemic meltdown.
As I warned at the outset, at some point in the not-too-distant future, governments around the world may have no other choice but to declare a global banking holiday — a shutdown of nearly every bank in the world, regardless of size, country, or financial condition.
What could happen in the banking holiday? In the past, we’ve seen some financial shutdowns that eventually helped resolve the crisis. And we’ve seen others that only made it worse. Often, savers are forced to leave their money on deposit, giving up a substantial portion of their interest income for many years. And, in other cases, the only way they can get their money back sooner is by accepting an immediate loss of principal. But no matter how it’s resolved, when banks have made big blunders and suffered large losses, it’s the multitude of savers that are invariably asked to make the biggest sacrifices and pay the biggest price. No one else has the money.
Question #4. “Throughout history, many governments have defaulted on their debts in a more subtle way — by devaluing their currency. Why are you recommending Treasury bills, which are denominated purely in dollars, if one of the consequences of this disaster could be a decline in the dollar?”
The trend today is toward deflation, which means a stronger dollar. But even if that changes, the solution will not be to abandon the safety and liquidity of Treasury bills. It will be to separately set some money aside and buy hedges against inflation, like gold or strong foreign currencies that tend to go up in value when the dollar falls.
I started my first novel after tossing aside a piece of dreck and thinking, I could write a better novel than that. Then the compulsive part of my brain said, Oh yeah? Prove it. So I spent a couple of weeks brainstorming and outlining a novel, then sat down and cranked it out in about three months. It wasn’t publishable, but it was better than that piece of dreck that somehow made it into print.
The Carter had buried his wife and children, with the exception of one son, who grew to manhood and helped him in his little business. Then the thing happened. The son, a man of thirty-one, died of the smallpox. No sooner was this over than the father came down with fever and went to the hospital for three months. Then he was done for. He came out weak, debilitated, no strong young son to stand by him, his little business gone glimmering, and not a farthing. The thing had happened, and the game was up. No chance for an old man to start again. Friends all poor and unable to help. He had tried for work when they were putting up the stands for the first Coronation parade. 'An' I got fair sick of the answer; "No! no! no!" It rang in my ears at night when I tried to sleep, always the same, "No! no! no!"' Only the past week he had answered an advertisement in Hackney, and on giving his age was told, 'Oh, too old, too old by far.'
It seems that not only the man who becomes old is punished for his involuntary misfortune, but likewise the man who is struck by disease or accident. Later on, I talked with another man, -- 'Ginger' we called him, who stood at the head of the line -- a sure indication that he had been waiting since one o'clock. A year before, one day, while in the employ of a fish dealer, he was carrying a heavy box of fish which was too much for him. Result: 'something broke,' and there was the box on the ground, and he on the ground beside it.
At the first hospital, whither he was immediately carried, they said it was a rupture, reduced the swelling, gave him some vaseline to rub on it, kept him four hours, and told him to get along. But he was not on the streets more than two or three hours when he was down on his back again. This time he went to another hospital and was patched up. But the point is, the employer did nothing, positively nothing, for the man injured in his employment, and even refused him 'a light job now and again,' when he came out. As far as Ginger is concerned, he is a broken man. His only chance to earn a living was by heavy work. He is now incapable of performing heavy work, and from now until he dies, the spike, the peg, and the streets are all he can look forward to in the way of food and shelter. The thing happened -- that is all. He put his back under too great a load of fish, and his chance for happiness in life was crossed off the books.
As an illustration of how a good worker may suddenly become inefficient, and what then happens to him, I am tempted to give the case of M'Garry, a man thirty-two years of age, and an inmate of the workhouse. The extracts are quoted from the annual report of the trade union:I worked at Sullivan's place in Widnes, better known as the British Alkali Chemical Works. I was working in a shed, and I had to cross the yard. It was ten o'clock at night, and there was no light about. While crossing the yard I felt something take hold of my leg and screw it off. I became unconscious; I didn't know what became of me for a day or two. On the following Sunday night I came to my senses, and found myself in the hospital. I asked the nurse what was to do with my legs, and she told me both legs were off.
There was a stationary crank in the yard, let into the ground; the hole was 18 inches long, 15 inches deep, and 15 inches wide. The crank revolved in the hole three revolutions a minute. There was no fence or covering over the hole. Since my accident they have stopped it altogether, and have covered the hole up with a piece of sheet iron . . . . They gave me £25. They didn't reckon that as compensation; they said it was only for charity's sake. Out of that I paid £9 for a machine by which to wheel myself about.
I was laboring at the time I got my legs off. I got twenty-four shillings a week, rather better pay than the other men, because I used to take shifts. When there was heavy work, to be done I used to be picked out to do it. Mr. Manton, the manager, visited me at the hospital several times. When I was getting better, I asked him if he would be able to find me a job. He told me not to trouble myself, as the firm was not cold-hearted. I would be right enough in any case . . . . Mr. Manton stopped coming to see me; and the last time, he said he thought of asking the directors to give me a fifty-pound note, so I could go home to my friends in Ireland.
Poor M'Garry! He received rather better pay than the other men because he was ambitious and took shifts, and when heavy work was to be done he was the man picked out to do it. And then the thing happened, and he went into the workhouse. The alternative to the workhouse is to go home to Ireland and burden his friends for the rest of his life. Comment is superfluous.
All of which is hard enough. But the thing happens; the husband and father breaks his leg or his neck. No 9 cents a day per mouth for food is coming in; no 9 1/2 mills' worth of bread per meal; and, at the end of the week, no $1.50 for rent. So out they must go, to the streets or the workhouse, or to a miserable den, somewhere, in which the mother will desperately endeavor to hold the family together on the 10 shillings she may possibly be able to earn.
Old age, of course, makes pauperism. And then there is the accident, the thing happening, the death or disablement of the husband, father, and bread-winner. Here is a man, with a wife and three children, living on the ticklish security of twenty shillings ($5.00) per week -- and there are hundreds of thousands of such families in London. Perforce, to even half exist, they must live up to the last penny of it, so that a week's wages, $5.00, is all that stands between this family and pauperism or starvation. The thing happens, the father is struck down, and what then? A mother with three children can do little or nothing. Either she must hand her children over to society as juvenile paupers, in order to be free to do something adequate for herself, or she must go to the sweat-shops for work which she can perform in the vile den possible to her reduced income. But with the sweat-shops, married women who eke out their husband's earnings, and single women who have but themselves miserably to support, determine the scale of wages. And this scale of wages, so determined, is so low that the mother and her three children can live only in positive beastliness and semi-starvation, till decay and death end their suffering.
Yet this mother and her three children we are considering, have done no wrong that they should be so punished. They have not sinned. The thing happened, that is all; the husband, father, and bread-winner, was struck down. There is no guarding against it. It is fortuitous. A family stands so many chances of escaping the bottom of the Abyss, and so many chances of falling plump down to it. The chance is reducible to cold, pitiless figures, and a few of these figures will not be out of place.
To the young working-man or working-woman, or married couple, there is no assurance of happy or healthy middle life, nor of solvent old age. Work as they will, they cannot make their future secure. It is all a matter of chance. Everything depends upon the thing happening, the thing with which they have nothing to do. Precaution cannot fend it off, nor can wiles evade it. If they remain on the industrial battlefield they must face it and take their chance against heavy odds. Of course, if they are favorably made and are not tied by kinship duties, they may run away from the industrial battlefield. In which event, the safest thing the man can do is to join the army; and for the woman, possibly, to become a Red Cross nurse or go into a nunnery. In either case they must forego home and children and all that makes life worth living and old age other than a nightmare.
Misfortune and misery are very potent in turning people's heads, and drive one person to the lunatic asylum, and another to the morgue or the gallows. When the thing happens, and the father and husband, for all of his love for wife and children and his willingness to work, can get no work to do, it is a simple matter for his reason to totter and the light within his brain go out. And it is especially simple when it is taken into consideration that his body is ravaged by innutrition and disease, in addition to his soul being torn by the sight of his suffering wife and little ones.
Frank Cavilla lived and worked as a house decorator in London. He is described as a good workman, a steady fellow, and not given to drink, while all his neighbors unite in testifying that he was a gentle and affectionate husband and father.
His wife, Hannah Cavilla, was a big, handsome, light-hearted woman. She saw to it that his children were sent neat and clean (the neighbors all remarked the fact) to the Childeric Road Board School. And so, with such a man, so blessed, working steadily and living temperately, all went well, and the goose hung high.
Then the thing happened. He worked for a Mr. Beck, builder, and lived in one of his master's houses in Trundley Road, Mr. Beck was thrown from his trap and killed. The thing was an unruly horse, and, as I say, it happened. Cavilla had to seek fresh employment and find another house.
This occurred eighteen months ago. For eighteen months he fought the big fight. He got rooms in a little house on Batavia Road, but could not make both ends meet. Steady work could not be obtained. He struggled manfully at casual employment of all sorts, his wife and four children starving before his eyes. He starved himself, and grew weak, and fell ill. This was three months ago, and then there was absolutely no food at all. They made no complaint, spoke no word; but poor folk know. The housewives of Batavia Road sent them food, but so respectable were the Cavillas that the food was sent anonymously, mysteriously, so as not to hurt their pride.
The thing had happened. He had fought, and starved, and suffered for eighteen months. He got up one September morning, early. He opened his pocket-knife. He cut the throat of his wife, Hannah Cavilla, aged thirty-three. He cut the throat of his first-born, Frank, aged twelve. He cut the throat of his son, Walter, aged eight. He cut the throat of his daughter, Nellie, aged four. He cut the throat of his youngest-born, Ernest, aged sixteen months. Then he watched beside the dead all day until the evening, when the police came, and he told them to put a penny in the slot of the gas-meter in order that they might have light to see.
The application of the Golden Rule determines that East London is an unfit place in which to live. Where you would not have your own babe live, and develop, and gather to itself knowledge of life and the things of life, is not a fit place for the babes of other men to live, and develop, and gather to themselves knowledge of life and the things of life. It is a simple thing, this Golden Rule, and all that is required. Political economy and the survival of the fittest can go hang if they say otherwise. What is not good enough for you is not good enough for other men, and there's no more to be said.
Federal regulators got a fresh inside look at Citigroup's books over the weekend—and it wasn't pretty.
The result: a new $306 billion federal bailout for the bank. On the one hand, it provides more clarity as to the lengths the government will now go to shore up the U.S. financial system. On the other hand, investors continue to be wary about whether Citi was worth saving from oblivion. Worse, some of them worry that if a bank with one of the highest capital ratios nearly went under, who's next?
"You had a tremendous amount of people looking inside at Citi in the last few days to figure out how bad it was, and they came away thinking that the capital markets can't handle this," says David Ellison, manager of the $185 million FBR Small Cap Financial Fund. "So, Citigroup wasn't a going concern. What does it tell you about the industry and everybody else all around the world that has the same assets?"
Under the guarantee, Citi will assume any losses on the $306 billion portfolio up to $29 billion on a pretax basis — meaning the government will assume 90% of any losses.
According to people familiar with the negotiations, the government struck a plan to "ring-fence" around about $300 billion in questionable assets, which will remain on Citigroup's books. That was the only group of assets for which the feds and Citi could agree on a potential value, sources say. That amounts to just 15% of Citi's total assets, which are a shade over $2 trillion.
The plan is not only good for the system, say those sources, but it provides cheap insurance for the government compared with the costs of a financial system in meltdown mode.
Sources also say that the calculations on the value of the portfolio were made on the "very unlikely event" that the U.S. economy has a downturn as severe as the Great Depression. The values of the assets in that $300 billion pool were based on projected cash flows for the life of the assets and not on their current and fluctuating distressed prices.
Worse, some of them worry that if a bank with one of the highest capital ratios nearly went under, who's next?
There's only one reason to agree to such terms, says Ellison: to stay alive. "There are capitalists all over the place, but no one wanted to do the deal," he adds. "This is chemo. They need this capital to stay alive."
By one measure — tangible common equity to tangible assets — Citi already was on life support. The ratio is a strict definition of shareholder capital (setting aside infusions from TARP or the government) compared with the book value of a bank's assets. It's not a number that necessarily defines the overall financial health of a bank, but it's one gauge to measure capital adequacy. A bank that ranks low on this measure doesn't necessarily rank low on other measures. For Citi, that ratio is 2.4% vs. a more typical ratio for big banks of 5% to 6%.
That means a 1% decline in the value of Citi's assets, or $20 billion, would reduce common shareholders' equity by about 42%. Says Bill Mann, financial analyst for Motley Fool: "What's scary is that it wouldn't have taken much for the bank to be wiped clean."
If Citi was in dire need of government intervention, what about other big banks? Joel Cohen, co-CEO of Sagent Advisors, a financial advisory firm and former co-head of global mergers and acquisitions at Donaldson, Lufkin & Jenrette, isn't encouraged: "There's still a lot of this bad stuff on banks' balance sheets."
