Sunday, April 26, 2009

What Caused the Economic Crisis? What is So Powerful About the letters "C & D & S" & Whither Y-O-U & Bank of America NOW?

C D S. Three little letters - which are the acronym for Credit Default Swaps. In the hands of very dangerous, self-serving men.

CDS are like an insurance contract, where the purchaser buys "insurance" that a company won't go out of business from a seller. If the company stays in business, the purchaser pays premiums to the seller, but if the company goes belly up, the seller has to pay the face value of the CDS "policy".
Yes, Warren Buffett said they were “Weapons of Mass Destruction” in 2003. And he would have known. He got as far away from those businesses as his investment steeds would carry him.
Former Federal Reserve Chairman Alan Greenspan - after being one of their biggest cheerleaders - now says they are dangerous.
CDS's have been credited with bringing down Bear Stearns, AIG and other giant financial companies. But were three little letters really the culprit for what brought us this worldwide financial crisis? Alexander Floum says what's dangerous about them is that they allow "the financial players to pretend that they had less risk, less stretched-too-thin leverage, and more stability then they really did." And is this part of the debacle now in check?
Not exactly . . . Credit default swaps continue to bring down large companies, partly because they make it less likely that the companies can restructure. And one of the main reasons that banks have been hoarding the bailout money instead of lending to consumers it because of CDS. Wall Street firms and banks have been hoarding cash. As the Financial Times wrote on October 7th: Banks are hoarding cash in expectation of pay-outs on up to $400bn (£230bn) of defaulted credit derivatives linked to Lehman Brothers and other institutions, according to analysts and -dealers. . . . Massive positions are just starting to be unwound in the Credit Default Swaps market as tens of billions of dollars worth of these contracts are now getting settled in the aftermath of several high-profile flops. Banks are hoarding cash in expectation of expected payouts on anywhere from $200 Billion to $1 Trillion – no one knows the amount, adding to volatility – for defaulted credit derivatives linked to the collapse of Lehman Brothers, the government’s seizure of mortgage giants Fannie Mae and Freddie Mac, the government’s rescue of American International Group, and the failure of Washington Mutual. And guess where most of the AIG bailout went? Yup - to corporations which bought CDS from AIG. $13 billion dollars worth of the bailout money paid to AIG went to Goldman Sachs for CDS contracts. $40 billion dollars worth of AIG's bailout money (and see this) went to foreign banks for CDS contracts. (Even AIG's former chief said that the government used AIG "to funnel money to other institutions, including foreign banks"). Unless something is done to change things, taxpayers may have to continue shelling out bailout money to keep bailing out CDS contract-holders.
And have the regulators brought this situation under control so that it can't continue causing financial damage indefinitely?
Unfortunately, regulators have so far caved into lobbying pressure from those in the CDS industry, and have failed to take any decisive action to reign CDS in.
In Newsweek we read (and if Newsweek says this without fear of retribution, how much power do you think these guys have solidified already?):
Major Wall Street players are digging in against fundamental changes. And while it clearly wants to install serious supervision, the Obama administration—along with other key authorities like the New York Fed—appears willing to stand back while Wall Street resurrects much of the ultracomplex global trading system that helped lead to the worst financial collapse since the Depression. At issue is whether trading in credit default swaps and other derivatives—and the giant, too-big-to-fail firms that traded them—will be allowed to dominate the financial landscape again once the crisis passes. As things look now, that is likely to happen. And the firms may soon be recapitalized and have a lot more sway in Washington—all of it courtesy of their supporters in the Obama administration... The financial industry isn't leaving anything to chance, however. One sign of a newly assertive Wall Street emerged recently when a bevy of bailed-out firms, including Citigroup, JPMorgan and Goldman Sachs, formed a new lobby calling itself the Coalition for Business Finance Reform. Its goal: to stand against heavy regulation of "over-the-counter" derivatives, in other words customized contracts that are traded off an exchange . . . . Geithner's new rules would allow the over-the-counter market to boom again, orchestrated by global giants that will continue to be "too big to fail" (they may have to be rescued again someday, in other words). And most of it will still occur largely out of sight of regulated exchanges... The old culture is reasserting itself with a vengeance. All of which runs up against the advice now being dispensed by many of the experts who were most prescient about the crash and its causes—the outsiders, in other words, as opposed to the insiders who are still running the show.
So, three little very powerful letters (and their promulgators) still rule over a weak, unorganized and relatively out-of-financial-luck electorate. With this situation continuing unchecked, you can bet on a deepening economic crisis with recovery being put off many more years in the future for those at the bottom of the payout pyramid. Thank you Mr. and Ms. Lobbyists (who must already live on secure, secret islands). And speaking of those who don't worry about living among the taxpaying masses:
Bank of America 'forced to conceal' Merrill rescue facts Pressure from Fed and Treasury chiefs to complete purchase of Merrill Lynch despite 'staggering' losses . . . Ken Lewis's position at the helm of Bank of America looked increasingly uncertain on Thursday after it emerged he stopped short of pulling out of the deal to buy loss-making Merrill Lynch after Treasury Secretary Hank Paulson threatened to oust him and his entire board. Mr Lewis BoA's chairman and chief executive, also knowingly hid the state of Merrill Lynch's "staggering" losses from shareholders at the behest of former Treasury Secretary Paulson and Federal Reserve chairman Ben Bernanke. The revelations were contained in a batch of BoA board minutes and testimony from Mr Lewis and Mr Paulson sent by New York Attorney General Andrew Cuomo to the Securities and Exchange Commission and Congressional leaders Chris Dodd and Barney Frank. Mr Cuomo, who released details of the exchanges yesterday, has been investigating BoA after Merrill paid $3.6bn (£2.45bn) of bonuses to its staff just days before the acquisition was completed on January 1. He believes he has uncovered "facts that raise questions about the transparency" of the Treasury's $700bn bank bail-out programme "as well as about corporate governance and disclosure practices at Bank of America." Investors have already expressed serious concern that BoA did not attempt to pull out of the merger with Merrill, given the investment bank racked up losses of $15.84bn in the fourth quarter of 2008. The loss required BoA to take on an extra $20bn of Treasury funding as well as an $118bn loan-loss guarantee. The documents paint all three men in a bad light. Mr Lewis, though initially keen to pull out of the Merrill deal after revealing the extent of what he calls the "staggering amount of deterioration in its finances," claimed he caved in after being threatened by Mr Paulson on December 21, ten days before the sale was due to complete. "That makes it simple. Let's deescalate," Mr Lewis told Mr Paulson, with reference to his original plan to invoke a Material Adverse Clause (MAC) to get out of the Merrill deal. Mr Paulson later testified to Mr Cuomo that he only threatened Mr Lewis "at the request of Chairman Bernanke." As part of his testimony, Mr Lewis claimed that he was told by the two men not to disclose that he had considered invoking the MAC, and admitted that over the short term BoA shareholders were being asked to shoulder some of the damage from the Merrill losses. At a later board meeting, on December 30, the BoA board stressed it was not influenced by the threat of removal and that it was only going along with the government's requests because of "serious concerns regarding the status of the US financial services system" were it to pull out of the Merrill deal. The disclosures will provide investors already seeking to oust Mr Lewis at next week's annual general meeting on April 29 extra ammunition. A BoA spokesman said: "We believe we acted legally and appropriately with regard to the Merrill Lynch transaction."
Dr. Michael Hudson informs us that "The Financial Barbarians" are already "at the Gate." You are making a mistake if you don't click on the link above. Self defense you know. Suzan ________________________

No comments: