Dear Jim,
All I can say to this is hallelujah… let’s get on with the regulation ASAP. This is actually useful information.
Respectfully yours,
Monty Guild
www.GuildInvestment.com
Subject: FW: Gremlins & Soros-interesting write up from our rates strategy team
From Patrick Perrett-Green: Citi Strategy Team
This is a piece that has been sitting in my draft folder for some time. But reading the article by Soros in yesterday’s WSJ gave me the necessary kick to finish it off. So read Gremlins first then his piece on CDS, bear raids and regulation.
GREMLINS
Gremlins was a classic movie released in 1984. Most of you will be familiar with the plot. A man desperate for a Christmas present for his son manages to buy an exceptionally cute fluffy animal called Mogwai from a mysterious Chinese trader. But attached to the sale are conditions. It must be kept away from bright light, it must never be fed after midnight and most important of all it must never be exposed to water.
Of course all these events happen and a host of evil creatures are spawned. Result? Chaos.
And this brings me to CDS.
When CDS were first invented the idea was simple – to give lenders some insurance on loans or securities. A perfectly reasonable idea, in fact quite cute just like Mogwai.
What CDS looked like when they began:
Unfortunately they morphed into a super traded beast. Instead of being the equivalent of buying fire insurance on your own home they allowed everyone else to bet on the probability that your house would burn down. With that it was naive to believe that there were no arsonists out there.
As the market grew at an exponential pace one got CDOs and CDOs squared based on packages of credit default swaps and even stranger investments. Moreover CDS effectively gave everyone a get out of jail free card. Credit analysis became less rigorous as the concept of the biggest fool came to dominate.
Ultimately CDS gave the credit boom a super steroid injection, driving excesses to new extremes. Unfortunately the majority of participants, and by that I mean banks, investors and regulators had failed to realise that their cute, lovely little Mogwai had not only got soaking wet but had gorged after midnight. When the bubble burst the reality was that CDS had come to look like this – worse still they became a key tool in financial arsonists’ destruction kits. Exempt from short selling restrictions, it can be argued that it was the CDS markets that ultimately lead to the dramatic deaths of Lehman, Bear Stearns and others.
And what they became
Some will, no doubt, feel that this comparison is unfair. But the majority of those are likely to have their careers intimately related to CDS and turkeys don’t vote for Christmas. Nevertheless, I have little doubt that if CDS were invented today they would probably be banned.
Looking ahead I believe that CDS is a market in terminal decline. As regulation increases, along with disclosure requirements and CDS exposures are forced on to exchanges the market will become increasingly hounded. Turnover will steadily fall. Investors will shy away from them as liquidity shrinks and so on. As they do, a return to the more disciplined approach of proper analysis and making a more simple decision of whether to buy something or not, or make a loan, will gather pace. After all what was so wrong with that approach in the first place?
Ultimately just like in Gremlins, the sun will shine.
Good Luck,
PPG
Dear Jim,
This splendidly delivered 3 minute explanation of the economic policies of Prime Minister Gordon Brown in the UK could be repeated almost verbatim about the current poorly managed US economic situation. The Parliamentarian who delivered the speech, Mr. Daniel Hannan, is clearly a brilliant speaker and he pulls no punches. We expect to hear similar speeches in the US congress about the disastrous economic recovery plan currently being implemented,
the consequences of which have already led to a loss of US global economic and financial status, and the follow on effects of which will lead to immense burdens on unborn generations of Americans.
Respectfully yours,
Monty Guild
Jim,
Is this even possible?
CIGA BJS
Freeze The $1.5 Qaudrillion Derivatives Bubble As The First Step To Recovery
By Webster Tarpley
3-25-9
WASHINGTON, DC — On the eve of the long-awaited London conference of the G-20 nations, we are rapidly descending into the chaos of a Second World Economic Depression of catastrophic proportions. In the year since the collapse of Bear Stearns, we have moved toward the disintegration of the entire globalized world financial system, based on the residual status of the US dollar as a reserve currency, and expressed through the banking hegemony of London, New York, and the US-UK controlled international lending institutions like the International Monetary fund and the World Bank. This is a breakdown crisis of world civilization, prepared over decades by the folly of deindustrialization and the illusions of a postindustrial society, further complicated by the deregulation and privatization of the leading economies based on the Washington Consensus, itself a distillation of the economic misconceptions of the Austrian and Chicago monetarist schools. If current policies are maintained, we face the acute danger of a terminal dollar disintegration and world hyperinflation.
CIGA BJS,
It was possible two or three years ago, but is no longer a viable option.
The reasons are:
- It would take a Presidential Order of an Economic Emergency to put contract law into limbo.
- After the Economic Emergency is declared over, the crap will still be there. A Presidential Order of Economic Emergency suspends contract law, but does not evaporate it.
- So much money has passed into the hands of the winners (most of the now 9.5 trillion) on the OTC derivatives, the loser would have to admit to the losses still hidden from view by the opaque nature of the OTC derivative.
- It would bankrupt most of the banks in the system by recognition of the then "no value" of their assets.
- It would require nationalization of practically all the US Fed member banks. The smaller institutions would be write offs.
- The US dollar, due to abrogation of contract law, would suffer the pains of hell.
- The worst part of all would be that the full faith guarantees of US Treasuries would be drawn into question. Agencies would simply be fried to smithereens.
Conclusion:
This article is academically correct and in a practical market sense impossible.
There simply is no practical solution to this disaster outside of its eventual working through the entire system. No government nor any group of governments with all their printing presses can equal the size of the problem given to us by the madness of the bankster’s greed.
Regards,
Jim
Mr. Sinclair,
I wonder when this will escalate in the USA. I have heard reports that some people are protesting outside Finance companies official’s homes but it doesn’t seem to make news in the US papers. How odd!!
Kindest Regards and appreciation for all you do,
CIGA Jeff
Vandals Hit Home of Ex-Chief of Bank
By JULIA WERDIGIER
Published: March 25, 2009
LONDON — The house of Fred Goodwin, the former chief executive of the ailing Royal Bank of Scotland, was vandalized early Wednesday and windows of his car were smashed.
Mr. Goodwin attracted criticism for keeping his £703,000, or $1 million, pension despite a string of ill-timed acquisitions under his tenure that brought the bank under government control and calls from Prime Minister Gordon Brown to surrender the payment.
At least three windows on the ground-floor level of his house in an affluent suburb of Edinburgh, Scotland, were smashed and a black Mercedes S600 parked in the driveway was vandalized. It is unclear if Mr. Goodwin was in the house at the time.
“We can confirm we attended at an address in Oswald Road at 4.35 a.m. on March 25 and inquiries are ongoing,” a spokeswoman for the Lothian and Borders Police said in a statement. No one has been arrested or charged and the police have asked anyone with information about the incident to step forward, she said.
Jim,
Dan Norcini as a modern bard or current affairs narrator of history in the making:
"This shift in sentiment away from the Dollar is momentous. It is the rare breed that is able to spot turning points in history while they are indeed occurring. It is generally only after the fact that the majority are able to point a finger at a particular occurrence and state; “history was made here”. Nonetheless, we are getting a ringside seat and observing the events transpire that will alter our way of life here in the United States forever."
Or how unimaginable things just a few months ago, can be said almost "by the way". Truly impressive.
Best as ever,
CIGA Richard M.
"We may be at the beginning of a loss of confidence (in the U.S. dollar reserve system)," he said. "I think there is support for some sort of global reserve system."
Geithner Plan Will Rob US Taxpayers: Stiglitz
Reuters | 24 Mar 2009
The U.S. government plan to rid banks of toxic assets will rob American taxpayers by exposing them to too much risk and is unlikely to work as long as the economy remains weak, Nobel Prize-winning economist Joseph Stiglitz said on Tuesday.
"The Geithner plan is very badly flawed," Stiglitz told Reuters in an interview during a Credit Suisse Asian Investment Conference in Hong Kong.
U.S. Treasury Secretary Timothy Geithner’s plan to wipe up to US$1 trillion in bad debt off banks’ balance sheets, unveiled on Monday, offered "perverse incentives", Stiglitz said.
The U.S. government is basically using the taxpayer to guarantee against downside risk on the value of these assets, while giving the upside, or potential profits, to private investors, he said.
"Quite frankly, this amounts to robbery of the American people. I don’t think it’s going to work because I think there’ll be a lot of anger about putting the losses so much on the shoulder of the American taxpayer."
