Dear CIGA Green Hornet,
The Guarino article on Black Scholes model, derivatives in general and market forecast stands on a premise that is totally incorrect.
This article can be characterized as the “Black Hole” thesis. It says that all the bailout funds disappear into some loss entity within the balance sheet of the losing side of the derivative.
If that thesis does not hold then it shifts to a concept that says all these funds revolve back to the Fed as a practice of holding all the free reserves of member banks.
The writer somehow assumes that Motors, AIG and the like are members of the Federal Reserve system.
This writer entirely ignores the swaps done by the Fed to bail out non USA entities by providing dollars to other central banks who in turn use those funds to bail out their own non USA entities.
The writer would be better advised to use the statistic that can be obtained by subscription to www.shadowstats.com.
The writer should know that a loser on a derivative does not hold the funds on account for the winner.
The writer would be well advised to study the history of hyperinflation that always occurs directly in the middle of what appears to be his definition of deflation.
The writer would also be well advised to study what happens to the velocity of money in every hyperinflation scenario as they all occur in a depression economic setting. Velocity in these circumstances explodes. Hyperinflations are currency events and not economic events.
Every cent of bailout funds lies latent in the economy in the hands of the new shadow trillionaires. These shadow trillionaires now have a serious problem. Their enormous wealth is all paper.
The bailout money in all these entities comes in the front door of the loser and goes immediately out the back door to the winner on the derivative. The firms identified as the winner is not the principle on the trade. It is the broker only. You will never know who the principle is, ever.
There is no Black Hole that devours all the bailout money nor does it flow back into the Federal Reserve System.
The article’s conclusions are invalid because the premises supporting those conclusions are totally wrong. There is a complete misunderstanding of what an OTC derivative is.
The article has neither historical understanding of hyperinflation nor the role velocity of money plays. The writer does not understand that hyperinflation is a currency event, not an economic event and stands on confidence in the currency only. Because of this the writer’s conclusions are off the wall.
Please read the following New York Times article. The writer should also read it.
Cuomo Widens His A.I.G. Investigation
March 26, 2009, 6:17 pm
Attorney General Andrew M. Cuomo of New York said Thursday afternoon that he was widening his investigation of the American International Group to examine whether its trading counterparties improperly received billions of dollars in government money from the troubled insurer.
Those counterparties include Goldman Sachs, which received $12.9 billion, as well as Société Générale of France and Deutsche Bank of Germany, which each received nearly $12 billion.
“Our investigation into corporate bonuses has led us to an investigation of the credit default swap contracts at A.I.G.,” Mr. Cuomo said in a statement. “CDS contracts were at the heart of A.I.G.’s meltdown. The question is whether the contracts are being wound down properly and efficiently or whether they have become a vehicle for funneling billions in taxpayers dollars to capitalize banks all over the world.”
Other counterparties that received money from A.I.G. include Barclays of Britain ($8.5 billion), Merrill Lynch ($6.8 billion), Bank of America ($5.2 billion), UBS of Switzerland ($5 billion), Citigroup ($2.3 billion) and Wachovia ($1.5 billion).
As you know, these folks have been pretty accurate in past forecasts. This is a link to the March 16 update which includes a frightening chart of what is in store for Americans.
On March 24, an open letter was issued to G20 members with recommendations for mitigating the crisis into a 3-5 year time frame. The call for an IMF audit of Wall Street/Washington, London and Zurich is an eye opener.
If your readers believe the USA chart is even half accurate and don’t convert dollars to gold while there is still time, their future is going to be very uncomfortable.
Derivatives have destroyed our economic system at nearly every level of the economy.
N.C. Judge Blocks Wachovia Shopping Center Foreclosure
North Carolina Judge Blocks Wachovia Foreclosure in Lawsuit Involving Derivative Interest Rate Swap and Alleging Extortion, Fraud, Unfair and Deceptive Trade Practices.
GREENSBORO, N.C., March 26, 2009 (PRNewswire via COMTEX) — A judge in Guilford County, N.C., today entered a preliminary injunction preventing Wachovia Bank, N.A., from foreclosing on a Greensboro shopping center owned by an affiliate of Granite Development, LLC.
The order by Superior Court Judge Richard W. Stone blocks Wachovia from foreclosing on property developed by the Granite affiliate until a trial on claims that Wachovia wrongfully terminated a derivative interest rate "swap" agreement, over Granite’s objection, which was designed to provide a fixed interest rate for permanent financing. Wachovia has argued it is entitled to a $5.48 million termination fee.
The lawsuit, filed by Granite Development affiliates last month and recently amended, asserts Wachovia has engaged in extortion, fraud, and unfair and deceptive practices. It asks that the swap agreement be rescinded or modified and the "contrived and unwarranted" termination fee demanded by Wachovia be declared an unenforceable penalty.
Judge Stone found that there are "serious issues" regarding Wachovia’s right to pursue foreclosure against its customer, and that the Granite affiliate owning the center would suffer irreparable harm if the foreclosure were not prohibited. He also ordered that Wachovia cease efforts to collect rent from shopping center tenants.