It strikes me that a lot of media scarecrows (terrified because, if they only had a brain, they wouldn't be stuck long) think that bailouts will eventually end. That's wrong. They will never end.
The media misunderstanding stems from a basic misunderstanding of leveraged losses. Take Goldman Sachs, one of the most highly leveraged of any surviving gambling saloon. During the reign of an obscure CEO named Henry Paulson, they created the majority of toxic subprime CDOs and insured them through an obscure company named AIG. So far, they've "survived" because they ordered up a $320B government cash infusion. I can't remember the name of the Treasury dude who shoved the money in their pocket in the face of 100:1 citizen opposition, wasn't Hank it somebody?
Pundits think that since they only have around a trillion in debt underpinning, that means their losses are somehow contained to a number in that range. No. Their losses are uncontained, because their leverage is uncontained. And why not? They thought they could purchase a bailout for only tens of millions of dollars in campaign contributions. But there is this little inconvenient truth, one they never understood or fully considered: asset deflation.
The problem is that when you are leveraged 20:1 or even 40:1, which was typical for these gambling shams at peak stupidity, your loss potential levers right along with profit potential:
And so, we see why Goldman ordered congress to cancel Mark-to-Market rules. As long as they don't have to mark any assets down (Goldman has booked almost no write-downs on the largest subprime real estate and toxic CDO portfolio in existence) they can assign phantom value to their asset base. This hides the reality of the loss, until... the great margin call of 2010 forces liquidation. Coming soon, to an "investment" bank near you.
Got a few trillion more, taxpayers?
As a small down payment?
Another great and thought provoking post.
ReplyDeletePlease project what the U.S.looks like at
Dow 1000.
Will the people ever take back their country?
When do the margin calls start? I'm tired of waiting for something to happen. Also, as you said before, another bailout may not be politically feasible. What happens if Goldman doesn't get another bailout?
ReplyDelete"Will the people ever take back their country?"
ReplyDeleteLike our Founding Fathers facing insufferable central bank oppression, I think we have to answer that question ourselves.
"Prudence, indeed, will dictate that Governments long established should not be changed for light and transient causes; and accordingly all experience hath shewn that mankind are more disposed to suffer, while evils are sufferable than to right themselves by abolishing the forms to which they are accustomed. But when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security. — Such has been the patient sufferance of these Colonies"
"What happens if Goldman doesn't get another bailout?"
ReplyDeleteYa right.
"When do the margin calls start? I'm tired of waiting for something to happen. Also, as you said before, another bailout may not be politically feasible. What happens if Goldman doesn't get another bailout?"
ReplyDeleteWe saw the first round in 2008. Round two starts right now. (within weeks)
I don't know what happens when we realize that total Federal tax revenue falls well short of what AIG needs to shield Goldman's losses.
But I know that we are going to find out.
Anonymous wrote: "Will the people ever take back their country?"
ReplyDeleteI don't think it's likely. It's rare that I'm pleasantly surprised, but it does happen sometimes.
I suspect the people of this country have neither the incentive, nor the fortitude, nor the means to take back the country.
They're too busy watching "American Idol".
But maybe I'm wrong about that.
^IRX is now above the fed funds rate, what's this mean?
ReplyDeletehttp://research.stlouisfed.org/fred2/graph/?&chart_type=line&graph_id=0&category_id=&recession_bars=On&width=630&height=378&bgcolor=%23B3CDE7&graph_bgcolor=%23FFFFFF&txtcolor=%23000000&ts=8&preserve_ratio=true&id=DTB3,DFF&transformation=lin,lin&scale=Left,Left&range=1yr,1yr&cosd=2009-02-24,2009-02-24&coed=2010-02-24,2010-02-24&line_color=%23FF0000,%230000FF&link_values=,&mark_type=NONE,NONE&mw=4,4&line_style=Solid,Solid&lw=1,1&vintage_date=2010-02-28,2010-02-28&revision_date=2010-02-28,2010-02-28&mma=0,0&nd=,&ost=,&oet=,&fml=a,a
They're too busy watching "American Idol".
ReplyDeleteand "Jersey Shore"
If people wanted to fight back at the abuse of the Fed and fractional reserve banking in general, they could withdraw their deposits. I'm surprised this hasn't been suggested yet by any of the "Tea Party" folks. FDR, what do you say?
ReplyDeleteMaybe the Tea Party folks are a little smarter then that. After all, lets say they did tell everyone to withdraw their money, and the people listen.
ReplyDeleteBenny and the feds would blame the collapse on the tea party folks and not there own greed. I believe that would be the end of the tea party. The debt would still be there and govt would have to help even more because these anti american tea party people.
"Benny and the feds would blame the collapse on the tea party folks and not there own greed."
ReplyDeleteAny Party that doesn't agree the solution to all of our problems is...
...MORE DEBT MORE DEBT MORE DEBT, MORE INTEREST PAYMENTS MORE INTEREST PAYMENTS MORE INTEREST PAYMENTS, MORE LOAN GUARANTEES MORE LOAN GUARANTEES MORE LOAN GUARANTEES...
...is going to have a very, very hard time indeed. They'll be met with force if necessary.