15 Steps to a Total Financial Collapse
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.