Repeat Sept 30 Thread Title BWAHAHAHAHAHA!

[beachmuffin]

FWIW, The following link is a report written earlier this year by the St Louis Fed on the home mortgage mess in the 1920 ies and the Federal response in the 1930 ies. Interesting read on the history of dealing with the results of the last great housing bubble.

 

http://research.stlouisfed.org/publication...05/Wheelock.pdf

[astral mike]

Goldbugs are fond of saying "Those with the gold make the rules."? Let me assure you: those with the guns make the rules.? They always have and they always will.? 

 

 

[DrStool]

Anyone think longer term rates will still rise,even if they cut short term rates to 1% again?

 

Mr. Hanky,

Not speaking for Doc, but the way I understand Doc' reasoning, the Fed does not set any rate. The Fed only follows the market.

The markets set rates.

 

If I am wrong Doc, Please don't squash me like a bug

696214[/snapback]

 

That's right, but the Fed has a lot to say about it. Now when investors are willing to lend money to the Treasury for nothing, and the Treasury in turn deposits that at the Fed for the Fed to do as it wishes, and the Fed then lends that out real cheap, that can only go on for as long as the peeps are willing to lend money to the Treasury for nothing. I suspect that that's going to wear thin after a while, but then I look at the Japanese public and I have to wonder if the rest of the world will be as patient with the US as the Japanese people were with their own Finance Minisitry.

[DrStool]

In my opinion that is the cause of the dramatic price declines in the last couple of months. The question in my mind now is, has most of the debt liquidation based sellng of bullion already occurred? Will demand continue to be strong enough to drive the premium for real metal higher?

 

Scully,

You need to hear the on line audio from Don Coxe with the Bank of Montreal. I think it was about 3 weeks ago. He says he has very good intelligence that the smash down of gold, oil and grains was an orchestrated effort by Hank Paulson to break the back of inflatioary commodity prices. Don is not one to bring "conspiracy theories" to the talbe and he has been spot on about many other things. I have listened to him for years and he does have some very well healed clients. Doc says in so many words that the Bank of Montreal is a POS....and maybe so. But every organization has a bright spot.

696218[/snapback]

 

 

I singled out National Bank, not BoM. But they have their share of problems too, I suspect.

[stevieo]

Been reading the bill for "The Facility" as they call it.

 

There's pretty much no restriction on what Treasury can buy in this bill. They can buy any asset, including senior debt and stocks from mutual funds and any other retirement account (pension funds). If it's not a mortgage or based on mortgages, Bernanke has to agree that the purchase is necessary to promote financial market stability, and Congress has to be notified in writing before making the purchase. (Congress can only stop it through a court injunction, and maybe they only have 3 seconds to file it.) Does this include corporate bonds created just for the purpose? There's even a clause that includes in "troubled assets" anything where expected future payments might cause losses in the future. If they buy from a financial institution, the institution also needs to issue warrants convertible to senior debt if the total purchases from that institution come to more than $100,000,000.

 

Then there's the change that allows the Fed to set bank's reserve requirements for transaction accounts to be 0. Who cares what fed funds cost if noone needs them. How are they going to handle that? Does the Fed automatically lend to banks when their reserves go below 0, or does the check not clear because the bank can't handle it?

 

I'll gladly pay you Tuesday for a hamburger on Saturday. I have money in the bank. Honest!

 

On second thought, none of that matters. They just change the rules evey day anyway.

[Pretzel Logic]

The dealer premiums have risen from 10% to over 40% for silver in the last few years. Also if you want the current selling price for ANYTHING go look at ebay. They clearly show folks will pay between $16 to $23/oz of silver depending on the form (JM bars, Eagles, etc.). This is the "tell".

The spot market price and the real market price are distinctly different by a large margin. Looking at supply vs. demand, the picture is even brighter.

 

JMHO.

696212[/snapback]

 

I said this in the bugs forum, but I'm sure no one there agrees with me: this type of buying panic looks a LOT more like a top than a bottom. It reminds me of the Beanie Baby craze a few years ago. And the ebay behaviour tells me that John and Mary Lunchbucket are now gold and silver "investors." As Buffet says, in any trend you have the three "I's": the innovators, the imitators, and the idiots. The idiots (obviously) are the ones who come along at the end and buy from the smart money as the party is ending. Where would you place the ebay crowd?

 

It was telling to me that the huge day gold had last month was "the biggest gain since 1980." What happened to the gold market shortly after 1980?

 

It was also telling to me that my sister, whom I'd been advising for YEARS to buy gold, FINALLY called me three days ago and said, "Hey, I wanted to talk to you about buying some gold now." I told her to stay the hell out of it for the time being.

 

I've been bullish on gold for some years... but i'm not bullish anymore. I tend to believe we are headed into a deflationary period. I suspect that inflation is further down the road, and I will look to load up on gold again when that time comes.

 

Just my two cents, FWIW.

[stevieo]

The auction on Monday is for Fannie corporate paper. If Fannie or all the mortgages are backed by the government, the likelihood of default seems small. So this auction is more of a bet on whether the government will take on all agency obligations, or just run them as a company in receivership and let the defaulted mortgages flow through to investors. If the debt sells for less than par (wrong word), money may need to be paid to make up the difference. This difference is what's guaranteed by the credit default swap. The auction is sponsored by The International Swaps and Derivatives Association, Inc. (ISDA) http://isda.org/ They're having this auction because Fannie and Freddy went into receivership, which qualifies as a credit event for the purposes of covered derivatives.

 

Many derivatives are traded, and there are standard contracts for them. These are regulated by the International Swaps and Derivatives Association, Inc. (ISDA). http://isda.org/ Among other things, they can rule on whether something is or isn't a credit event.

 

Derivatives contracts remain in effect until they expire, or a credit event occurs. A credit event is one of the following:

1. Bankruptcy

2. Credit event due to the result of a merger or transfer of assets

3. Cross acceleration: default by the entity on some other issue causing this issue to go into default

4. Cross default: default by the entity on some other issue allowing the holder to declarare default on this issue

5. Credit rating downgrade

6. Failure to pay

7. Repudiation

8. Restructuring: of the issue, not the issuer

 

References:

http://www.isda.org/publications/isdacredi...f-sup-comm.html

http://www.credit-deriv.com/isdadefinitions.htm

[stevieo]

This amateur (you've been warned) has been doing a little research, starting with a simple premise. What happens if the government buys mortgages directly, not through structured vehicles?

 

The simplest alternative is for the Treasury to buy various MBS outright. This is a simple purchase of securities, and has no implications for the security or any parts within it, other than possible affecting the price of the security. The Fed seems to be doing this lately.

 

An alternative is to help the issuing company merge. A merger is not a credit event. It can cause a credit event if the resulting entity has a lower credit rating than the separate entities. There's already been a ruling by ISDA in one case (I forget which merger) that it's not a credit event. This is because the resulting institution has a higher credit rating than either institution separately.

 

The next alternative is to take over the issuing agency, as they did with Fannie, Freddie, and FHLB. These were not mergers, but receivership (effectively, bankruptcy), so these cause a credit event. The ISDA is sponsoring this auction to establish the price of the bonds. This price will be used to detrmine the resulting loss to be payed out on credit default swaps.

 

If they directly buy mortgages that are securitized through a CMO, they first need to break apart the security. That causes a credit event for everything inside the securitization, including credit, standby letters of credit (probably backed by subordinate tranches), and credit default swaps. Goodbye to millions of SPVs. I doubt the Treasury takes this road, although it would keep accountants and lawyers in business for years. Maybe instead they buy some junior tranches of an MBS from Wells Fargo Mortgage-Backed Securities 2001-4 Trust. Since noone's buying them, they can make up any price, even if their true value is 0. It may also pave the way for proceeding with foreclosures that may have been impossible while the mortgage was part of a package.

 

Background

 

O, what a tangled we we weave, when first we practice to deceive

 

A typical mortgage can go through as many as 7 different hands. At each stage, there's some kind of financing vehicle, many of which have derivatives such as credit default swaps. Here's an example of a typical private label mortgage from a book. GNMA mortgages are even more convoluted.

* Some local bank originates a mortgage.

* Wells Fargo Home Mortgage Inc. buys that mortgage.

* They pool them and sell them to Wells Fargo Asset Securities Corp, a wholly owned subsidiary (SPV).

* They in turn, sell them to Wells Fargo Mortgage-Backed Securities 2001-4 Trust.

* The trust finances its purchases by issuing 22 classes of MBS.

* A commerical bank buys the MSB to use as collateral for a CMO.

* The commercial bank reallocates principal and interest payments and adds derivatives to hedge the risk.

* They create and sell tranches of these payment streams and obligations.

* Someone else repackages these, adds more derivates, and sells them as CDO^2.

 

Fannie normally does this a little different. They actually sell bonds to buy mortgages. (I think they also do the securitization thing.) Technically, these aren't mortgage backed, but just plain old corporate paper.

 

There's a difference between mortgages, pools of mortgages, corporate debt of mortgage lenders, and asset backed securities (MBS & CDO). The contracts that create the derivatives have a lot of variations, even within the traded ones. There's a lot more private stuff, and noone knows what those contracts look like. The parties that wrote them probably don't completely understand them. Behind all of this are probably a lot more derivatives internal to each player and how they finance or account for their positions. One important point of many structured finance vehicles (but not necessarily asset backed securities) is that the investors have no relationship with the consumer. This is what the investors want. The point is, the specific contract matters greatly.

 

Because investors don't want a relationship with homeowners, some of these vehicles are not directly tied to the mortgages. In these cases, even if every mortgage in a package went into forclosure, the holder of the security is unaffected as long as all the parties in the contract make the required payments. For example, if the government decides to back FNM paper, it doesn't matter if all the mortgages default: the income streams flowing into FNM-issued MBS will be payed, making good all the paper derived from it. More generally, if the company that receives payment from the consumer can supply the cash flows into the structured vehicle, there's no basis for a credit event. Of course, at some point, the company would probably have its credit rating downgraded if not worse, and that would constitute a credit event. This separation has had the side effect that in a few well publicized forclosure cases, noone was able to come up with the title to the house, so they couldn't forclose.

 

But not all vehicles work that way. Many are valued on (1) the mark to market value of the collateral, and (2) the actual income stream. In collateralized debt obligations (CDO), there are compliance tests to ensure that collateral and receivables are sufficient to meet the risk profile set up for the CDO. If a CDO fails a compliance test, restrictions come into play that, if the situation isn't rectified, eventually lead to selling off the portfolio. Synthetic CDOs include credit derivatives to cover losses. These can be covered (collateralized) partly or wholly or not covered. At some point, failure to meet the compliance tests results in a credit event.

 

"The Facility" allows for outright purchases of assets, but seems primarily directed at setting up a price insurance mechanism. My guess is this will be used first to try and keep the securitization market from unravelling.

[lineup32]

An interesting, thought-provoking post. 

 

I have to disagree with your presentation of the third "choice" because, IMHO, nothing destroys wealth faster than hyperinflation (which I arbitrarily define as inflation greater than 10% a year).  The hoarding of all sorts of commodities that invariably accompanies high inflation produces massive and unpredictable distortions in the real economy that dramatically undercut productive investment.  No first world country that I am aware of has ever chosen hyperinflation.  And no, the Weimar Republic was not a first world country; it was an economic disaster area that was ungovernable under the terms imposed by the victors of WW 1.  Hyperinflation was tantamount to abdication there, as it is everywhere except in third-world hellholes like Zimbabwe where a tiny elite huddles in presidential palace behind high walls and a phalanx of thugs.

 

High inflation also transfers large amounts of real wealth to those who are hedged and are skilled at hedging from everyone else.  In the U.S., everyone else consists of a politically potent group that includes the one-third of all homeowners with no mortgage at all plus the sizable percentage who have mortgages that are entirely manageable.  It also includes most of the wealthiest individuals and families in the country -- few of who are goldbugs -- but many of who are on a first name basis with their CONgrease critters, cabinet officers, etc. etc.  The notion that these folks and the army of lobbyists, lawyers, flacks and politicians on their payrolls will somehow be outmaneuvered by a minority of precious metal hoarders and speculators who have wisely foreseen and hedged against the coming destruction of the world's reserve currency strikes me as singularly naive.  Goldbugs are fond of saying "Those with the gold make the rules."  Let me assure you: those with the guns make the rules.  They always have and they always will. 

696224[/snapback]

 

excellent post!

[Jimi]

In the intraday forum, Doc invited feedback on his interpretations of the Fed's H.4.1 table, the Treasury's borrowing program, etc.  This subject is important to me because it says something about the future of my gold and silver bullion holdings.  I spent all day yesterday sifting through data and struggling to understand what it means.  In summary, I reached the same conclusions as Doc, just not as quickly. My findings are in this post, for anyone who is interested.

 

For those who might be new to the board, here is some background info.  The credit bubble has burst.  For myself, it is helpful to establish roughly how big the bubble was, and therefore at least a rough order-of-magnitude estimate of how much money is needed to make the problems go away.  The Fed publishes a helpful report called Z.1 Flow of Funds at the following link.  In table L1, at the end of June 2008, folks in the US owed $51T.  The top half of the report lists who the debters are, and the bottom half lists who the lenders are.  By subtracting the bottom half from the top half we can determine who the net lenders and debters are.  I will summarize them into only three categories, which is adequate for our purposes in this posting.

 

1. Domestic nonfinancial, includes households, government, businesses.  This group currently net owes $26.2T, up from $16.3T at the end of 2002, implying an annual debt growth rate of 9.0%.

 

2. Rest of the world, includes everyone not in the US.  This group is a net lender to the US with a current loan value of $5.7T, up from $2.2T at the end of 2002, implying an annual loan growth rate of 18.5%.

 

3. The US financial industry, including banks, finance companies, insurance companies, Fannie and Freddie etc.  This group is a net lender to the first group with a current loan value of $20.5T, up from $14.0T at the end of 2002, implying an annual loan growth rate of 7.1%.

 

I define the debt bubble as the massive growth in debt by the first sector, funded by money from the second and third sector.  In brief, the first sector has enjoyed the fun of a credit card binge, and now the bills are coming due and they are finding they cannot afford to pay them.  The incremental debt in the last 5.5 years alone for the first group is $10T.  Given the debt accumulated earlier, $10T is probably a reasonable guess as to how much money it will take to get things back to some semblance of normalcy.  In other words, $700B is not enough to even get started.

 

There are three choices to resolve the above problem.  The first is to allow mass default on the debts - basically announce Debt Freedom Day.  This will cause financial and legal chaos, as it will be very unclear who owns what anymore.  There are a few anarchists on this board who say this first option is going to happen.  Usually this is accompanied by a call to store ammo and non-perishable food in a bunker, get ready for burning pits of diesel, yadda yadda.  It makes for fun postings, but personally I think this outcome is very unlikely.

 

The second option, which was chosen by the US federal government when the last two debt bubbles burst (the Panic of 1873 and the Depression of 1930), is to allow a debt deflation.  Basically this means the first sector must pay back the second two sectors the slow old fashioned way, or else go bankrupt.  This requires the first sector to dramatically reduce spending, which in turn causes an economic depression.  Very high unemployment, lots of bankruptcies, folks losing their homes, riots and hunger, pretty nasty stuff.

 

The third choice, which has been selected by numerous countries around the world when their debt bubbles burst, is inflation.  Basically print money and hand it out to the people so they can pay down their debts.  People make jokes about dropping money from helicopters, but in reality the standard method is usually for the federal government to run gigantic deficits by handing out benefits to the people, with insufficient tax revenues coming from the people, and then use the printing press to make up the difference.  This debauches the currency and ruins the country's reputation for international trade, and it increases the price of imports of which oil is the most important.  It results in less misery for the average person who is a debter but more misery for the lenders, the latter factor meaning that probaby for at least a generation no one would ever lend money to the US again.

 

I don't see any choices except the above three options, or perhaps some combination of the three.

 

Even before the $700B package was approved, some very large sums of money have been sloshing around between the Fed, the Treasury and the Primary Dealers.  To illustrate this, consider the web page published by the Treasury which shows the size of the Federal debt, accurate up to the close of the previous business day.  I downloaded some data from this source and graphed it as attached at the bottom of this posting.  As can be seen, since mid September when the crisis erupted, the Treasury debt has exploded upwards by about $400B in only two weeks. Where is this money coming from?

 

The Fed's H.4.1 report is published weekly at the following link.  This report contains very current data.  Section 4: Consolidated Statement of Condition of All Federal Reserve Banks shows a balance sheet for the Fed.  I am not an expert, but it appears to me on this sheet, when they print money, it shows up in the Assets section as money loaned out to someone, and in the Liabilities section as Federal Reserve Notes.  As can be seen, this latter item has only grown by 3.4% over the last year and $7.9B since Sept 17th, so it would appear that the Fed is not printing much new money.

 

In Section 1A of the same report, it lists the Fed's holdings of securities on behalf of foreign central banks.  Since Sept 17th this has increased by $56.8B.  A fair bit of money, but still only 14% of the new Treasury debt.  We know that the on the whole the debtor group ("domestic nonfinancial") defined previously from the Flow of Funds report is tapped out and unable to access any new debt (the definition of a burst bubble), so the money could not have come from them.  We are left concluding that majority of the $343B unaccounted for must have come from the US financial industry.  This is very bad because it means that there is now $343B less money available to lend out to the domestic nonfinancial group.  In other words, the Treasury' borrowing program is just making the bubble burst faster and harder.

 

What is the Treasury money being used for?  From the Oct 2 release of the Fed's H.4.1 table, Section 4 under Liabilities, there is a line item called U.S. Treasury, supplementary financing account, which as of Oct 1 was at $344B.  If you go to the Sept 18th release, you will find that as of Sept 17th, this line item did not exist on the Fed's balance sheet.  Therefore it would appear that the majority of the new Treasury debt is making it's way to the Fed.  In turn, what is the Fed doing with it?  In the Assets section of the same table, about $288B worth in the last two weeks went to a line item in the assets section called "other loans".  The other big winner was an asset category called "other assets" which grew by $219B in the last two weeks.  There is a footnote on the last category which say it might have something to do with foreign currencies, but other than that we do not seem to have much transparency on where the money going.  This is the point at which I gave up.  Doc has actually researched all the different programs that have been invented by the Fed in the last two weeks, but I don't have the time.  If we make the leap of faith that the beneficiaries of these two asset categories is the US financial industry (as opposed, to say, an offshore account for Gentle Ben), then I conclude we do appear to have the circle jerk already documented by Doc:

 

1. Financial industry loans money to Treasury, instead of American households and businesses.

 

2. Treasury loans money to the Fed.

 

3. Fed loans the money back to the financial industry.

 

Wash, rinse repeat.

 

I don't see any new money being injected into the system, either in the form of printed money, or in the form of foreign money coming in to the US.  Therefore, the current situation looks like it is headed for a debt deflation.

 

If I was in Gentle Ben's place, I would choose an inflation instead because I perceive it is less painful for the average person.  So far, he is not doing this.  My own guess is that he still thinks he can have his cake and eat it too.  I wonder how far along the debt deflation road we would have to go to change his mind.

 

As an aside, I wish at my job I could spend $219B + $288B = $507B and just put it into the "other" category of my budget.  Funny how business accountants usually want a bit more detail than that.

696208[/snapback]

Outstanding post.

I want only to add that in addition to the two historical examples you cite of U.S. policymakers "opting" for debt deflation (i.e.,1930s, and 1870s), you should include The Great Depression of 1896. (I put "opting" in quotations, because there may have been no real alterative.)

 

The 1890s were a period of debt-supported capital investment by midwestern farmers, who then saw the price fetched by commodities collapse. This left them incapable of earning the necessary income to service their loans.

 

Enormous political pressure was brought upon the president of the time, Grover Cleveland, to abandon the gold standard and to coin silver at the ratio of 32:1 (vs. then then 16:1). Cleveland - a hard money democrat - effectively lost control of the democratic party when the populists champion, William Jennings Bryant, won the party's nomination with his famous "cross of gold" speech. Economic populism lost out politically, however, and an era of republican presidencies was ushered in until 1912, when Woodrow Wilson finally reclaimed the White House for democrats.

 

That we have three examples of opting-for-deflation as the correction to a prior era's excesses in this nation should give Weimarians pause who insist, "Governments always do it."

[lineup32]

This amateur (you've been warned) has been doing a little research, starting with a simple premise. What happens if the government buys mortgages directly, not through structured vehicles?

 

The simplest alternative is for the Treasury to buy various MBS outright. This is a simple purchase of securities, and has no implications for the security or any parts within it, other than possible affecting the price of the security. The Fed seems to be doing this lately.

 

An alternative is to help the issuing company merge. A merger is not a credit event. It can cause a credit event if the resulting entity has a lower credit rating than the separate entities. There's already been a ruling by ISDA in one case (I forget which merger) that it's not a credit event. This is because the resulting institution has a higher credit rating than either institution separately.

 

The next alternative is to take over the issuing agency, as they did with Fannie, Freddie, and FHLB. These were not mergers, but receivership (effectively, bankruptcy), so these cause a credit event. The ISDA is sponsoring this auction to establish the price of the bonds. This price will be used to detrmine the resulting loss to be payed out on credit default swaps.

 

If they directly buy mortgages that are securitized through a CMO, they first need to break apart the security. That causes a credit event for everything inside the securitization, including credit, standby letters of credit (probably backed by subordinate tranches), and credit default swaps. Goodbye to millions of SPVs. I doubt the Treasury takes this road, although it would keep accountants and lawyers in business for years. Maybe instead they buy some junior tranches of an MBS from Wells Fargo Mortgage-Backed Securities 2001-4 Trust. Since noone's buying them, they can make up any price, even if their true value is 0. It may also pave the way for proceeding with foreclosures that may have been impossible while the mortgage was part of a package.

 

Background

 

O, what a tangled we we weave, when first we practice to deceive

 

A typical mortgage can go through as many as 7 different hands. At each stage, there's some kind of financing vehicle, many of which have derivatives such as credit default swaps. Here's an example of a typical private label mortgage from a book. GNMA mortgages are even more convoluted.

* Some local bank originates a mortgage.

* Wells Fargo Home Mortgage Inc. buys that mortgage.

* They pool them and sell them to Wells Fargo Asset Securities Corp, a wholly owned subsidiary (SPV).

* They in turn, sell them to Wells Fargo Mortgage-Backed Securities 2001-4 Trust.

* The trust finances its purchases by issuing 22 classes of MBS.

* A commerical bank buys the MSB to use as collateral for a CMO.

* The commercial bank reallocates principal and interest payments and adds derivatives to hedge the risk.

* They create and sell tranches of these payment streams and obligations.

* Someone else repackages these, adds more derivates, and sells them as CDO^2.

 

Fannie normally does this a little different. They actually sell bonds to buy mortgages. (I think they also do the securitization thing.) Technically, these aren't mortgage backed, but just plain old corporate paper.

 

There's a difference between mortgages, pools of mortgages, corporate debt of mortgage lenders, and asset backed securities (MBS & CDO). The contracts that create the derivatives have a lot of variations, even within the traded ones. There's a lot more private stuff, and noone knows what those contracts look like. The parties that wrote them probably don't completely understand them. Behind all of this are probably a lot more derivatives internal to each player and how they finance or account for their positions. One important point of many structured finance vehicles (but not necessarily asset backed securities) is that the investors have no relationship with the consumer. This is what the investors want. The point is, the specific contract matters greatly.

 

Because investors don't want a relationship with homeowners, some of these vehicles are not directly tied to the mortgages. In these cases, even if every mortgage in a package went into forclosure, the holder of the security is unaffected as long as all the parties in the contract make the required payments. For example, if the government decides to back FNM paper, it doesn't matter if all the mortgages default: the income streams flowing into FNM-issued MBS will be payed, making good all the paper derived from it. More generally, if the company that receives payment from the consumer can supply the cash flows into the structured vehicle, there's no basis for a credit event. Of course, at some point, the company would probably have its credit rating downgraded if not worse, and that would constitute a credit event. This separation has had the side effect that in a few well publicized forclosure cases, noone was able to come up with the title to the house, so they couldn't forclose.

 

But not all vehicles work that way. Many are valued on (1) the mark to market value of the collateral, and (2) the actual income stream. In collateralized debt obligations (CDO), there are compliance tests to ensure that collateral and receivables are sufficient to meet the risk profile set up for the CDO. If a CDO fails a compliance test, restrictions come into play that, if the situation isn't rectified, eventually lead to selling off the portfolio. Synthetic CDOs include credit derivatives to cover losses. These can be covered (collateralized) partly or wholly or not covered. At some point, failure to meet the compliance tests results in a credit event.

 

"The Facility" allows for outright purchases of assets, but seems primarily directed at setting up a price insurance mechanism. My guess is this will be used first to try and keep the securitization market from unravelling.

696237[/snapback]

 

All this paper pushing to generate massive credit leverage?

thanks for the post, makes wonder how many decades it will take to unwind all this crap!

[stevieo]

It's worth repeating what was said the other day. The notional value of derivatives is pretty much meaningless, aside from the fees they generate. Even if complete thermonuclear breakdown occurs in the derivatives market, the total losses are a small fraction of notional value.

 

In the mortgage example from that book (in post 263 above) there's probably derivatives of 16 times the notional value of the underlying mortgages, as each participant does an interest rate and credit default swap to cover their losses. If the underlying loss is covered 100% to the originator, they can make good in turn to all the other parties.

 

Of course, that's not counting swaps that are pure bets.

[tdultima]

 

Emini S&P 1093.75 -14.5 -1.31

Emini Nasdaq 1461.0 -16.5 -1.12

Emini Dow 10232 -132 -1.25

[DrStool]

New podcast posted on http://radiofreewallstreet.fm

[stevieo]

http://www.dailywealth.com/

How AIG's Collapse Began a Global Run on the Banks

Kind of backs up the idea that "The Facility" is a fraudulent insurance program to replace the likes of AIG.