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XMFSinchiruna (27.51)

Please don't be fooled by this RTC nonsense... there's no silver bullet for the derivatives mess

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September 18, 2008 – Comments (10)

What a ridiculous comparison!!!!!!! 

Comparing the notion of a black hole of debt to collect the toxic instruments that are behind this whole mess with the Resolution Trust Company (created in 1989 for the unwinding of the savings & loan issue) as like comparing Milli Vanilli to Mozart. There are no parallels here whatsoever, so don't be fooled for a second into thinking there is "precedent" for this. Nothing about this crisis has precedent at anytime in history that matches the scale and dynamics of the present depression event.

First of all, the total price tag of the entire savings and loan thing was $153 billion, of which the thrifts chipped in $29 billion, leaving the taxpayer with a $124 billion price tag. Accounting for inflation to convert to today's dollars, that sum is the equivalent of $216 billion today. Now, I've lost track of the price tag to date in this financial crisis, but considering that $568 billion has been thrown into the black hole of leveraged debt instruments just this week alone, I think few would argue that we're well over the $1 trillion dollar mark already. Just as we were initially told $50 billion would cover the entire Iraq war, and the savings & loan victims were told $30-$50 billion would cover the mess... so too were we prepped to be okay with the $1 trillion price tag some months ago by media reports that were posted to my blog. But ohhhhhh Fools.... that $1 trillion is just the tip of the iceberg.

Ready for this? The global total tally for the derivatives market, according to the Bank for International Settlements, is $1.14 quadrillion! That's $1,140 trillion... or 120 times the U.S.' entire national debt!! If we're talking about a systemic deleveraging process like we saw in the first Great Depression, then this first $1 trillion was merely the prologue of a Steven King novel. I

So, clearly, the difference in scale between the S&L crisis and our present predicament is so vast as to make any discussion of 'precedent' not only disingenuous but blatantly false.

Second, the structure of the RTC and whatever iteration of that general approach they might be considering for this debacle would be so fundamentally different, again, as to make any comparison meaningless. As a commentator on CNBC was quick to point out today, RTC was a repository for ASEETS... the seized assets of institutions as they were forcibly shut down by regulators. Since this was prior to the invention of the types of instruments out there today, these were not portfolios of meaningless securitized debt instruments, but rather actual long-term mortgages that the institutions had just leveraged too far relative to their cash position as the interest rate environment quickly grew less favorable. In the present day scenario, this black hole would contain no assets, since the true value of all these derivatives will ultimately be shown to be... zero!

Having once sported inspirational notional values, and now sporting mark to market values of pennies on the dollar, as the appetite for risk continues to disappear in the face of global financial uncertainty, the true value of these instuments will deleverage their way down to zero. Far from what the spin will present... a portfolio of debt instruments that the government will sit on until they become valuable enough to sell at a profit... this move to create a black hole for derivatives is nothing more than a direct pillaging of the taxpayer by the criminal and greedy minds that invented and propagated these useless pieces of paper.

How do you feel... knowing that the guys who built up the market for derivatives will walk away with untold billions in wealth while you and I will end up paying for it for a thousand generations. Again, if we were already concerned with the nations ability to pay down the $9+ trillion national debt over the course of several generations.... how indeed can we be expected to reasonably shoulder the burden of another 100 times that sum?? If a mechanism like this is in fact instituted, then every American taxpayer and every successive generation for eons will essentially become indentured servants to an insurmountable mountain of debt. And you thought the question of solvency for the social security fund was a critical danger lurking in the shadows?

The U.S. dollar is toast. Foreign nations will not bankroll this kind of debt. To the contrary, I believe they will flee the USD due to the implications of this. If the credit agencies had an ounce of objectivity, they would place the greenback on negative watch to signal the implications of such a plan. Instead, the Treasury, with a nod from a corrupt and clueless Congress will inflate the currency as needed to service the debt. Deflationists... I'm sorry... you really must consider the possibility that your interpretations of the events unfolding no longer tread water.We are heading into a hyper-inflationary depression because unfathomable quantities of U.S. currency will have to be created if the black hole is ever to be filled in.

Gold and critical commodities will soar in price as the dollar weakens and nations nationalize or otherwise act to secure access to resources before the prices get out of control.

Greedy bankers and brokers played the ultimate game of roullette with the former reserve currency of the world, and we all will bear the consequences. Forgive me if I sound upset... I am!

 

10 Comments – Post Your Own

#1) On September 18, 2008 at 6:16 PM, XMFSinchiruna (27.51) wrote:

Looks like news of an "RTC-like" approach may have been premature speculation by CNBC. This Bloomberg article suggests another format is under consideration. My response to such a proposal would be very different from the above rant, but the mechanism Schumer describes would also have a decidedly inflationary impact on the USD.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=afIu492CyWMw

Paulson, Bernanke Weighing New Plan, Schumer Says (Update1)

By Alison Vekshin

Sept. 18 (Bloomberg) -- Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke are considering a new plan to address the credit crisis, said Senator Charles Schumer, who proposed an agency to pump capital into troubled banks.

``The Federal Reserve and the Treasury are realizing that we need a more comprehensive solution,'' Schumer, a Democrat who chairs the congressional Joint Economic Committee, told reporters in Washington today. ``I've been talking to them about it.''

Schumer urged forming an agency to inject funds into financial companies in exchange for equity stakes and pledges to rewrite mortgages and make them more affordable. His remarks indicate momentum is building for some wider plan after the Fed and Treasury's takeovers of Fannie Mae, Freddie Mac and American International Group Inc. this month.

Schumer advocated a Great Depression-era Reconstruction Finance Corp. model, different from the Resolution Trust Corp.- type plan others have floated. Another RTC, which was a 1990s agency that sold devalued assets in the Savings and Loan Crisis, would ``simply transfer excessive risk to the U.S. government without addressing the plight of homeowners,'' he said.

Treasury spokeswoman Michele Davis didn't immediately respond to a request for comment and Fed spokeswoman Michelle Smith declined to comment.

Fed's Roles

Discussions with the Treasury and Fed focus on ``trying to do something more permanent'' after the series of government interventions, the New York senator said. For the Fed, ``it's hard for them to do monetary policy, which is their primary task, and then run all these businesses,'' he said.

Fed officials announced an $85 billion takeover of AIG two days ago, hours after leaving their benchmark interest rate unchanged in a decision that rebuffed some investors' calls for a cut.

``There is some preliminary discussions about how to sort of encapsulate and separate the two -- both to keep focus on monetary policy by the main Fed leaders, but also to prevent any conflicts of interest,'' Schumer said.

Lawmakers are weighing responses to a crisis that prompted Treasury Secretary Henry Paulson to seize Fannie and Freddie and caused the bankruptcy of Lehman Brothers Holdings Inc. in the past two weeks. The Fed's takeover of AIG followed its March agreement to take on $29 billion of Bear Stearns Cos. assets to secure the company's takeover by JPMorgan Chase & Co.

`Systemic Disaster'

``The series of ad-hoc interventions in the market over the past 10 days were important to avoid a systemic disaster,'' Schumer said. ``But we cannot continue to act in such an uncoordinated and ad-hoc fashion.''

Under Schumer's RFC plan, ``the government would come first,'' he said. ``The government would get repaid before the others in the financial chain.''

House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, this week proposed Congress create a federal entity to buy bad loans. Senator Hillary Clinton of New York, a former candidate for the Democratic nomination for president, proposed resurrecting a 1930s-era agency to stem foreclosures.

``We need a modern day Home Owners' Loan Corporation,'' Clinton said in remarks at the Senate today. ``There will not be any semblance of a normal or orderly market'' without ``quarantining'' the devalued loans outstanding, she said.

The HOLC bought up outstanding mortgage and issued new, more affordable loans that helped people stay in their homes, Clinton said.

To contact the reporter on this story: Alison Vekshin in Washington at avekshin@bloomberg.net

Last Updated: September 18, 2008 15:58 EDT

 

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#2) On September 18, 2008 at 6:20 PM, blade5adj (< 20) wrote:

Great post.  I must say that the rally today was totally unfounded.  We´re headed in to some really scary stuff, and even though the government is injecting some confidence in to the market with these moves, it´s paying for it that I´m worried about.  At what point do you wonder how safe of a debtor the government of the United States is?  We have to see the dollar devalued in order for us to boost exports and start paying off this debt.  You may not like the sound of that, but at some point foreign capital can´t keep footing the bill.

I like how reducing the number of shorts available is supposed to add some sort of miracle ingredient to make everything better.  I will happily concede that point if they end up finding that I´m wrong, but to just stop financial shorts for the rest of the year like they did in the U.K. is amazingly stupid.  That´s what we like to call an overreaction, which will be met with an equally negative reaction. Yeah, you´re safe for the time being, but what if that bank actually was supposed to fail?  I´m all for liquidity and transparency, but when you step in to the market and flat out say ¨oh no you don´t¨, I think that´s definitely not even remotely close to a free market.  You take that away and you set a really bad precedent (moral hazard anyone?).

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#3) On September 18, 2008 at 6:24 PM, blade5adj (< 20) wrote:

Great post.  I must say that the rally today was totally unfounded.  We´re headed in to some really scary stuff, and even though the government is injecting some confidence in to the market with these moves, it´s paying for it that I´m worried about.  At what point do you wonder how safe of a debtor the government of the United States is?  We have to see the dollar devalued in order for us to boost exports and start paying off this debt.  You may not like the sound of that, but at some point foreign capital can´t keep footing the bill.

I like how reducing the number of shorts available is supposed to add some sort of miracle ingredient to make everything better.  I will happily concede that point if they end up finding that I´m wrong, but to just stop financial shorts for the rest of the year like they did in the U.K. is amazingly stupid.  That´s what we like to call an overreaction, which will be met with an equally negative reaction. Yeah, you´re safe for the time being, but what if that bank actually was supposed to fail?  I´m all for liquidity and transparency, but when you step in to the market and flat out say ¨oh no you don´t¨, I think that´s definitely not even remotely close to a free market.  You take that away and you set a really bad precedent (moral hazard anyone?).

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#4) On September 18, 2008 at 6:39 PM, russiangambit (29.27) wrote:

> I´m all for liquidity and transparency, but when you step in to the market and flat out say ¨oh no you don´t¨, I think that´s definitely not even remotely close to a free market.

Exactly. Not to mention that you are changing the rules of the game in the middle of the market trading with no prior notice. That amounts to market manipulation, only now it is done by our government.

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#5) On September 18, 2008 at 9:24 PM, goldminingXpert (29.44) wrote:

Exactly, this RTC proposal makes about as much sense as the gold rally, or the bond rally. Short GLD, short TLT, no position in stocks... that's the way to roll right now. Deflations take everything down, but too risky to short the market here with the government trying new garbage like this every day. Especially if there is a no short rule... dow may make it back to 12,500 before heading for 7,500.

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#6) On September 19, 2008 at 7:22 AM, dinodelaurentis (74.70) wrote:

oh TMFSinchiruna, my poor delusional Fool.

talk alllllll you want about what makes sense, and that you can't just wave a majic wand and make this go away, you still ignore the obvious.

If The Goverment Says So, It Must Be.

silly rabbit, tricks are for kids...

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#7) On September 19, 2008 at 10:52 AM, XMFSinchiruna (27.51) wrote:

dinodelaurentis

I hear Hank's cuckoo for cocoa puffs :)

goldminingXpert 

Well, at least we found ONE thing we can agree on:

"dow may make it back to 12,500 before heading for 7,500"

Deleveraging is not the same as deflation. Deleveraging funded by the Treasury and the Fed is INFLATIONARY. You heard Paulson today... this is a significant price tag for the American taxpayer... that means the dollar goes lower and gold goes higher... period.

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#8) On September 25, 2008 at 12:45 AM, TheGarcipian (47.07) wrote:

Excellent post, TMFSinch, even a week later. It gave me good background for understanding the other alternatives out there. Thanks for posting.

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#9) On September 30, 2008 at 6:02 PM, LovinMe (80.25) wrote:

It seems your insinuating that the entire derivatives market is about to become worthless. Do you honestly believe that?

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#10) On February 10, 2009 at 7:52 AM, XMFSinchiruna (27.51) wrote:

LovinMe

Yes. [even six months later]

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