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alstry (< 20)

15 Steps to a Total Financial Collapse



February 13, 2008 – Comments (2)

1.  In a relatively short period of time, loan trillions and trillions of dollars to individuals, corporations, and municipalities backed by "bubble" valued assets and "bubble" cash flow projections.

2.  Place those loans in financial institutions and investment accounts becoming the core of the world's assets.

3.  Insure those loans with even more trillions of credit default swaps that could never pay off if there was a massive default.

4.  At some point, the debt becomes so burdensome, individuals start having problems servicing their loans.

5.  The economy begins to slow and it starts affecting the revenues of corporations and municipalities.

6.  Corporations and municipalities start having trouble servicing their debt and the value of the loans begin to fall as defaults and the risk of default rises.

7.  As a result of the ever increasing defaults and deteriorating coverage conditions, swaps start crashing causing massive write downs on the books of financial institutions and investment funds around the world.

8.  Due to a rapidly deteriorating asset/reserve base, banks start tightening credit standards.

9.  The economy slows further and the pace of credit deterioration increases to the point that many banks become desperate for capital paying excessive interest rates for equity injections.

10.  Conditions get so bad that individuals, corporations, and municpalities cannot afford or simply walk away from their moral obligation to service debt due to the declining value of the underlying asset(ie-ones house).

11.  Funding loans becomes very difficult and hundreds of billions of private equity and municipal issues cannot find a buyer.

12.  The economy continues to slow and loans start defaulting on a massive scale.

13.  The value of debt crashes around the world and many financial institutions become insolvent.

14.  Few if any can pay off their credit default swap obligations.

15.  At this point, the system simply collapses under its own weight.

To put the above in perspective, the total combined debt of residential mortgages, HELOCS, commercial RE loans, Private Equity loans, corporate debt, municipal debt and credit default swaps substantially exceeds $50 Trillion dollars.

To put that number in perspective, China's dollar reserves that many are so worried about is about $1 Trillion dollars.

As we sit today, residential RE loans are defaulting at a record pace, residential mortgage backed securities are crashing in value, commercial RE loans are defaulting, Private Equity debt is having difficulty finding buyers, corporate debt spreads are widening as coverage weakens, and municpalities are now having trouble getting funding due to deteriorating revenue base.

Paulson says "the worst is just beginning."  Banks are already begging for equity infusions.  AIG is in a public argument with its auditors over how its valuing its assets.  If one of our largest financial institutions is having problems, what else rests in the weeds as audit season falls upon us.

Never in the history of the world has so much been loaned to so many to leverage inflated assets.  The process caused a world wide boom.  On top of it, incomes to our financial institutions were enhanced buy writing swaps that could never pay off in case of a massive default.  Those incomes were capitalized into stock markets driving the world's perceived wealth up even higher. 

Now the foundation, the borrowers ability and obligation to pay its debt is not being fufilled.  The system depends on such counterparty payments to be able to meet its obligations.  How close are we getting to the point where enough loans default or decline in value, there simply is not enough assets to meet the reserve requirements of the world's financial institutions?  If we print money to maintain instutional solvency, how do we get money to the people to afford their trillions in debt obligations as the economy continues to slow?

No wonder President Bush is now "concerned" about the economy.  How many others are now concerned.

2 Comments – Post Your Own

#1) On February 13, 2008 at 7:58 AM, alstry (< 20) wrote:

7:36[MTG] MGIC retained advisor to explore alternatives for capital7:35[MTG] MGIC says has adequate capital to meet claim obligations7:34[MTG] MGIC Investment Q4 includes $1.2B premium deficiency reserve7:33[MTG] MGIC Investment Q4 loss $18.17 a share vs $1.47 profitMGIC is a mortgage insurer.  The defaults in its portfolio are rising.  Now it is looking for capital.  Yesterday, the credit markets deteriorated accross most classes.  How many other financial institutions need capital?  How much capital will be needed to solve this mess, especially if the worst is just beginning?Residential mortgage debt alone increased $6 Trillion in the past six years, not including HELOCs.  What about municipal debt?  Corporate debt?  Commercial RE debt?  Once you pile the swaps on top of things, the numbers are staggering.Yes, the economy is strong.  But what economy wouldn't boom if you loaned out trillions with little regard to ability to repay.Now the banks want to be repaid.  What do you think is going to happen.  Just ask homebuilders, RE agents, Mortgage Brokers, Auto Dealers, Restaurant Owners, ect......and one more time, the worst is just beginning.

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#2) On February 13, 2008 at 9:10 AM, alstry (< 20) wrote:

How many people are defaulting?

Excerpt from MTG's earnings release today:

New insurance written in the fourth quarter was $24.0 billion, compared to $15.5 billion in the fourth quarter of 2006. New insurance written for the quarter included $2.4 billion of bulk business compared with $5.1 billion in the same period last year. New insurance written for the full year of 2007 was $76.8 billion compared to $58.2 billion for the full year of 2006 and includes $7.8 billion of bulk business compared to $18.9 billion in 2006.


As of December 31, 2007, MGIC's primary insurance in force was $211.7 billion, compared with $176.5 billion at December 31, 2006, and $170.0 billion at December 31, 2005. The book value of MGIC Investment Corporation's investment portfolio was $5.9 billion at December 31, 2007, compared with $5.3 billion at December 31, 2006 and December 31, 2005.

As of December 31, 2007, the delinquency inventory is 107,120. At December 31, 2007, the percentage of loans that were delinquent, excluding bulk loans, was 4.99 percent, compared with 4.08 percent at December 31, 2006, and 4.52 percent at December 31, 2005. Including bulk loans, the percentage of loans that were delinquent at December 31, 2007 was 7.45 percent, compared to 6.13 percent at December 31, 2006, and 6.58 percent at December 31, 2005.


MTG wrote a bunch of premiums in Q4 of this year compared to last year.  Recently written premiums are not likely to default yet total delinquincies grew by about 25%.

If the trend continues, then delinquincy rates will likely rise.  Clearly in the thoughts of management as they stated they have retained an advisor to raise additional capital.

The problem is not MTG per se.  It is the entire debt base outstanding on residential mortages.  Including HELOCs, it is well over $11 Trillion dollars, and the majority of that amount was from loans obtained in the last six years where many of the houses are  not worth the balance of the mortgage.

As loans default, they create additional inventory driving down the value even further creating even more defaults.  The cycle keeps going until affordibility comes back into balance.  The problem now is that with a slowing economy, where will that balance be?.

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