Mommy, What's A Credit Derivative?

Hey, you default geeks, you MBS-CDO-CDS groupies, your Dissembler has found the motherlode! Every day in thousands of articles and op-eds about the economy the words 'credit derivative' appear again and again with the assumption that everyone has a working definition when in fact hardly anyone does! 3 years ago when I was simply intrigued about "the Market" I bought a book called Confidence Games by Mark C. Taylor which presented these 'instruments' as complex equations that even the informed layman (i. e. me) could never comprehend. Finally, the shroud has been lifted! In simply the BEST writing I have ever seen on the financial crisis, James Lieber in the Jan. 27th Village Voice (online, of course) parses this heart of darkness with a micro-scalpel. Here's 4 money paragraphs; go out and read this article again and again infinitum 'till it's seared into your cerebral cortex:





What Cooked The World's Economy? (Excerpts)

by James Lieber

..... Derivatives weren't intially evil. They began as insurance policies on large loans. A bank that wished to lend money to a big, shaky venture.... could hedge its bet by buying a credit derivative to cover losses if the debtor defaulted. Derivatives weren't cheap, but in the era of globalization and declining American competitiveness, they were prudent. Interestingly, the company that put the basic hardware and software together for pricing and clearing derivatives was Bloomberg.


...... unregulated and opaque derivatives trading was countercultural in the sense that low or no risk led to quick, astronomically high rewards. By plunking down millions of dollars, a hedge fund could reap billions once these fatally constructed securities plunged. Again, the funds did not need to own the securities; they just needed to pay for the derivatives - the insurance policies for the securities. And they could pay for them again and again. This was known as replicating. It became an addiction.


...... Last year, the Bank For International Settlements, a consortium of the world's central banks based in Basel (the Fed chair, Ben Bernanke, sits on its board), reported the gross value of these commitments at $596 trillion. Some are due, and some will mature soon. Typically, they involve contracts of 5 years or less.


Credit derivatives are breaking and will continue to break the worlds' financial system and cause an unending crisis of liquidity and gummed-up credit. Warren Buffet branded derivatives the "financial weapons of mass destruction". Felix Rohatyn, the investment banker who organized the bailout of New York a generation ago, called them "financial hydrogen bombs".



So basically we can throw trillions at the financial sector and it will all DISAPPEAR. Of course, the "informed" Mainstream Media has found the culprit; the problem is YOU. On thursday 2/26 NPR continued their deceitful and pathetic coverage of the Great New Depression (Remember back in Sept. when their 'financial correspondent' asserted that the only people affected by the meltdown would be folks with 3 homes and a getaway cottage in Bermuda? I do.) by blaming the American people and their miscreant overspending. The penance, of course, will be higher taxes. Never mind that real wages adjusted for inflation have remained stagnant for over 30 years. Never mind that the economy grew thanks to a $8 trillion housing bubble that noone in charge recognized or was willing to regulate. And never mind that hedge fund masters made billions off of credit derivatives providing they had tens of millions to play with. It's the American taxpayer's fault! At times like this I'm tempted to agree with my neo-con dopplegangers that National Public Radio should be defunded and put out of its misery!

Credit Card Debt - The New Toxin/More Billions For Bank "Stimulus"

Here at the D.O.E. we're not to fond a' The Huffington Post. Next to Ariana's 5-star meta-edifice, Dissembler resembles the blogosphere equivalent of a Sri Lankan fishing village. And we could so do without all the celebrity gossip/video she wastes byte space on. But occasionally the Huff empire justifies the opulence. Such is the case with Ariana's Feb. 24th post about the impending credit card debt meltdown. Why isn't anybody else covering this story? We'll go green for the highlights:

As more and more Americans default on their credit card debt, banks will find themselves faced with a sickening instant replay of the toxic securities meltdown from the mortgage crisis. In another example of Wall Street 'creativity', credit card debt is routinely bundled together into 'credit card receiveables' and sold to investors - often pension funds and hedge funds. Securities backed by credit card debt is a $365 billion market....

Earlier on she mentions that the total c.c. debt for 2008 was $951 billion! Holy Ben Bernanke, Batman! We'll be underwater at Wayne Manor!


In other news, looks like the Mishter was on the money with his "100 cuts to the taxpayer" theory of how Barry and the Shysters are gonna finagle more billion-dollar 'stimulus' to the banking sector. Here's Dean Baker on 'stress tests':

... the baseline scenario for the stress tests is that the unemployment rate rises to 8.4% and home prices fall 14%. The worst case scenario is that unemployment rises to 8.9% and house prices fall 22%.
OK, unemployment will almost certainly reach 8% and possibly 8.1% in February. It might cross 8.5% in March. The worst case scenario is that it hits 8.9% by the rest of the year? Remember, this is the same crew that told us there was no housing bubble. ... The stress tests indicate that our economic policy makers are still in a serious state of denial.

I think the salient point here is that Obama, the Federal Reserve, and the Treasury consider the welfare of shareholders in Citigroup, Morgan Stanley, AIG, etc., etc. far outweigh the economic interests of the American people. If the government moves against said shareholders (i. e. nationalization) they'll crash the market and then Barack will sure have some 'splainin' to do.

Bernanke Placates The Shareholders - Obama Plays To The Cheap Seats

I was going to spend the evening Googling to compile a thumbnail sketch of that Louisiana Scalliwag, Bobby Jindal, who yesterday refused $100 million of stimulus money to extend unemployment benefits because it would drive up buisness taxes. This kind of blind obediance to financial elites got Dubya all the way to the Oval Office (along with his last name, of course) and you can be sure B.J. has studied the playbook backwards and forewards. Jindal also has a leg-up on Bush's legacy because of his fully engaged performance during last summer's "mini-Katrina" that admittedly did severe damage to the Gulf Coast area. So I'm going on record to predict Governor Jindal has the inside track to the GOP nomination in '012 unless he massively f***s up.



However, real-time crisis has trumped your Dissembler's ambition. Today Ben Bernanke went before the Senate and stated that the, uh, recession will end by the end of '09 if, if, if, if (you get the drift). More importantly to the top 5%, the Duke of Liquidity assured the shareholders that there will be no outright nationalization of the major insolvent banks, so the stock market is saved! As I'm typing President Obama is firing up the troops, er, citizens with 2 parts BS, 1 part clear-eyed vision of what lies ahead (austerity unless you're well-off, more bailouts for critical industries, comprehensive health care that won't contain costs) etc., etc.



So while Barry asks a debt-ridden, overworked, totally stressed-out adult population to go back to college, let's whirl around the economic blogosphere to see what the "experts" are saying about Chairman Ben's Nostradamus routine:

Calculated Risk - 2/24/09
If the banks are seriously insolvent, this sounds like the zombie bank approach and rewards existing shareholders at the expense of taxpayers. If the banks are not seriously insolvent, this is a reasonable approach. But how does Bernanke know the solution before the data is available from the stress tests?

Paul Krugman - 2/24/09
... does anyone think the reason banks are crippled is that they are tied down by their obligations to preferred stockholders, as opposed to having too much plain vanilla debt? I just don't get it. And my sinking feeling (is) that the administration plan is to rearrange the deck chairs and hope the iceberg melts just keep getting stronger.

Mish's Global Economic Trends Analysis - 2/24/09
The game Bernanke is playing will allow the Fed to slowly bleed taxpayers to death by 100 tiny cuts. Each cut will allow the Fed to inject taxpayer blood (capital) to the banks while pretending the cancerous patient is in good health. ... This is essentially the same model that left Japan's economy stagnating for over a decade.

Econbrowser - 2/24/09
(Quoting Bernanke's remarks) - " If actions taken by the Administration, the Congress, and the Federal Reserve are successful in restoring some measure of financial stability - and only if that is the case, in my view - there is a reasonable prospect that the current recession will end in 2009 ...
... That's a giant, honking, humongous, get-down-on-your-knees-and-pray-for-salvation "if".

Real Time Economics (Wall Street Journal) -2/25/09
Banks do not have enough capital on their books as they are loaded with toxic assets. They are basically insolvent. If the government injects fresh capital, it will highly dilute the common shareholders, at best, effectively government getting more than 50% of the banks. This is nothing but nationalization, if Bernanke agrees it or not. (Comment by Bill Johnson)

Obama's Mortgage Refinancing Plan - It Won't Fly

Normally it would be a cold day in Hades when Bob Simpson, president of Imarc Investors Mortgage Asset Recovery Co. of Irvine, CA and Greg Palast, BBC Reporter/Progressive Muckraker would agree about anything, but apparently the mother of all ice storms has hit the Devil's Lair. Yesterday in the online version of the Orange County Register Mr. Simpson delivered a scathing rebuke of President Obama's mortgage bailout plan. Here's the highlights:
.... The problem is, we peaked at about $635,000 (in Orange County) average home and now we're below $400,000. So we've got a ton of people who owe $500,000,$600,000, $700,000 and they can't be helped. This plan won't work in California, Florida, Arizona, and Nevada -which account for more than 60% of foreclosures nationwide, because the values have fallen too far. .... It is going to fall apart. Loans are worse than anybody realizes. There was the program under Bush, HOPE for homeowners, and the number of people it helped was infinitesimal. At this point, people have to understand there isn't enough money for everyone who wants to keep their house. People who make $200,000 and bought a $500,000 home that's now worth $300,000, I feel sorry for them. They didn't lie and their house fell in value. .... Probably anyone who bought a home after 2000 is going to be underwater. I don't think that's a stretch.
Today I was listening to the semi-popular Left-wing radio program Best of Flashpoints, where Mr. Palast lambasted Obama's plan for totally different reasons, primarily having to do with the President's co-optation by the financial sector (principally disgraced sub-prime lender Penny Prisker, who coincidentally was the first major backer of Obama's Senatorial campaign) and Barry's subsequent timidity in dealing with the banks. (I'll be paraphrasing here, but in the interest of visual symmetry, let's go back to blue.)
.... Obama's offered the banks $1,000 apiece for each of their bad mortgages, while pleading with them not to do any more foreclosures .... and these guys are so greedy they're not buying it! ... FDR didn't plead with these people; he declared a bank holiday and then made them reorganize on his terms, and it's totally within Obama's power to do this. ....These sub-prime lenders are essentially loan sharks who hid the increase in interest after 2 years in the total value of the mortgage itself and then sprung it on the unsuspecting homeowner. ....You don't plead with loansharks like Countrywide Financial, who are owned by Bank Of America. They've taken $50 billion dollars of taxpayer money and now you're going to give them more and plead with them not to do foreclosures? How about demanding that they stop destroying our country!
So from both a "boots-on-the-ground" and a populist ideological perspective, it appears that saving the homes of the majority of honest folks in trouble isn't happening. When this stark reality becomes apparent in 6-18 months, undoubtedly Obama will be back with a plan that hopefully offers less supplication to Bank Of America and their ilk and more FDR-style cojones', ese'!!!

Writing Down The Principal - Another Far-Out Lefty Idea Moves Into The Mainstream

Recently I happened upon 2 sites/blogs providing up-to-the-minute coverage of our ongoing economic catastrophe: Calculated Risk and Economist's View, each more main-stream than what the D.O.E. usually reads about the financial sector. The gargantuan amount of links to related sites/blogs was astonishing: now I wish I had taken that Econ minor at Pitt all those years ago. Anyway, on Thursday 2/19 Calculated Risk ran a video clip from the Charlie Rose Show: 4 economists (including N. Roubini; yay!) and analysts discussing Obama's mortgage refinancing bill. After having to listen to Fortune Magazine's Nina Easton's unceasing mea culpas to Laurence Summers, the new Alan Greenspan whose "operational experience" places him head-and-shoulders above the President's political advisors, who actually show a degree of concern for people who aren't Wall Street players, I heard Mark Zandi of Moody's.com say an amazing thing. The next time Obama comes around to ask for more mortgage relief (generally assumed to be later this year) writing down the principal will have to be the focus. Wow! 6 months ago the idea of writing down actual debt was dismissed as sheer lunacy, the kind of thing the IMF and the World Bank did when they wanted to suck up to Bono. Surely well-respected Wall Street insiders would never consider an idea formerly advocated by far-left economists and pundits like Michael Hudson and Mike Whitney; but there it was, dangling in the breeze, and here's a Moody's rep actually saluting it!!!

Wall Street Took Our Money - Now They Want The "Safety Net"

"Entitlement Reform"







Remember when President Bush, after stealing his 2nd election in '04 (rip-off in O-HI-O) wanted to privatize Social Security and put it on the stock market? If that had gone down, Jon Stewart wouldn't be making those "Clusterf**k To The Poor House" jokes. America would be the Poor House! And for many citizens, it already is (your Dissembler is teetering right on the edge this moment, but enough about me). Now President Obama is meeting with conservative pundits and saying he's open to the idea of caps and cuts to entitlements. This dovetails neatly with that constant rhetoric about "discipline" and "sacrifice". And after all, Barry's not about to raise taxes and jeopardize his chances for a 2nd term, now is he?


The con behind the scam, basically, is that the Federal government doesn't want to get caught with their pants down when the Baby Boomers start retiring en masse and wondering "dude, where's my social security benefits?" Although the system itself is basically solvent till 2041, the "Social Security surplus", estimated by William Greider in a recent Nation article as $2.5 trillion, has been looted time and time again (recently to help pay for our Imperial Adventure in Iraq) with the government essentially promising that "don't worry, we're good for it and we'll replenish it when the time comes". Well, that time is now and they're not good for it, aided by people like billionaire Peter Peterson who's the main sponsor of "entitlement reform" white papers that are wending their way through Congress. Peterson wants "up-or-down fast-track legislation" voting on these proposals to safeguard consenting politicians from public outrage. I don't have to tell you that aside from solemnly considering this ripoff the MSM is not informing working people who organized against Bush's privatization of Social Security. Anyone I've talked to about this scheme just rolls their eyes and wonders what can be done? Kill your television, forget about the Stillers, roll out of the bar, start to talk to your neighbors and organize, DAMMIT!!!

Is Robert Rubin Running The Treasury Department?

Tiny Tim's Rescue Plan
Nationalizing Insolvent Banks - Ixnay!
More Money From Main Street




Orders From Big Poppa
Rubin Protege Marches In Lock-Step





Looks like the insolvent financial sector can rest easy, if Tim Geithner's bank bailout plan becomes reality. In a vague and almost incoherent announcement Tuesday, which caused the market to tank while he was speaking, Geithner "detailed" important facets of a bank restructuring plan "too big to fail" (that phrase again). The key innovation was offering Federal loan guarantees to hedge funds and venture capitalists willing to purchase toxic (and almost certainly worthless) assets from bank portfolios that reportedly are preventing lending and the extension of credit. Said assets would be assigned a value by the Treasury, which would use up to $2.5 trillion of yes, our tax money to guarantee their worth. In addition, banks would have to undergo a "stress test" to determine their solvency, but Timmy Boy said it would be "unseemly" to then nationalize the failing institutions. In fact, he didn't say what if anything would happen to "stressed out" banks. It's interesting to note that all of a sudden the Mainstream Media have become ardent "nationalists" with articles both in the New York Times and The Washington Post (co-written by Dissembler fave Nouriel Roubini) advocating federal takeover, markets be damned. Your humble D.O.E.'s take on all this posturing is that Giethner's trying to implement a soft landing for the financial sector, probably on orders from Bob Rubin, Grand Financial Vizier without portfolio to the Saintly Barack, Banksta-In-Chief. Obama's even referenced the experience of Sweden, which nationalized their banking industry in the early 90's to climb out of a serious financial crisis. Of course, Barry claimed that since we have almost 6,ooo banks, that wouldn't be practical. Bullshit. There's only 6 major institutions that are facing the "stress test", and besides, the paradigm for nationalization is already well-known. As with so many other major issues early in his Presidency, Obama's too timid too try, fearing a market collapse. What the Reagan, Carter, and even the G.W. Bush (in the case of IndyMac) administrations did was send in the FDIC to audit the institution, determine its' solvency, remove the bank officers and staff, and appoint new people at every level to run the show. Methinks Mr. Rubin feels that's a bit too hard on the crony class in this instance, especially with everyone about to receive another bailout payday. Obama, meanwhile, is doing a great Dubya impersonation, staying away from the issue while the floundering Geithner takes the heat.

Let's follow the money: $11.5 Trillion if this bank rescue goes through, including the TARP funds, plus more to come towards the end of the year when the Banksta realizes the financial cupboard is still bare. Stimulus 2.o? More like an early death knell for the audacity of the black Herbert Hoover.

Obama Dissembles On Executive Pay Restrictions, State Secrets

A few days ago our new President issued a stern warning to executives from the financial sector whose firms may receive government bailout money (in the future tense, that is; as far as the $8.6 trillion squandered already, that horse is way out the barn door). CEOs and their ilk will have to get by on 500k a year, baby. That's it, Fort Pitt! Now comes word from The Wall Street Journal that we'd better read the fine print; firms can still embellish salaries by changing executives' titles, restructuring pay packages, or simply letting shareholders vote on increasing compensation. Obama's edict does not apply to restricted stock, so PRESTO!, another loophole. Does this remind anyone of Clinton-era "triangulation"? Is Dick Morris advising Obama?
Far more disturbing is the continuation of a Bush-era legal argument in a recent "states' secrets" case involving Binyam Mohamed, an Eithiopian native, and 4 other detainees who filed suit against a subsidiary Of Boeing for arranging "extraordinary rendition" flights where terrorism suspects were secretly flown to countries that didn't even bother with a legal pretext against torture. The Bush administration argued for dismissal of the suit on the grounds that even discussing extraordinary rendition in court could threaten National Security (the first refuge of scoundrels) and relations with other nations. Although Obama harshly criticized Bush's treatment of detainees during the presidential campaign, on monday a government lawyer for the new administration, Douglass N. Letter, made the IDENTICAL states' secrets argument which even startled several judges on the Ninth Circuit of the U.S. Court of Appeals. Wow, talk about swinging to the Right! It's a sad fact that the majority of the American people have assumed that Obama will just naturally reverse so many of Bush's criminal abuses of the legal system and have returned to worrying about the economy. If change does come from the bottom up, us bottom-feeders have to be ultra-vigilant, because like it or not Obama is naturally cautious (I would say chickenshit) and a tool of the "center" (the undemocratic wing of the Democratic Party) who consciously or not will fall prey to this kind of subterfuge.

Dean Baker's Naivete'/ The Story Of America/ D.O.E. Gives IRON MAN Thumbs Up!

In an excerpt on Alternet from PLUNDER AND BLUNDER, Dean Baker's new book about our ongoing financial catastrophe, Mr. Baker (an economist your humble Dissembler greatly admires) states that "anyone with common sense, a grasp of simple arithmetic and a desire to go aginst the consensus should have seen the financial crisis coming." The key phrase of course is "a desire to go against the consensus". Not when it means your job, bucko! Anyone with the stones to be a whistleblower in our former (and perhaps at some misty point way down the road, our future) anything-goes financial sector had to know telling the truth was a one-way ticket to a new and way less profitable career. I mean, this is the story of American finance in general and the sacred "markets" in particular. When profits are skyrocketing for those on the inside and in the know, the idea of letting the chumps in on the con is utter sacrilege. The absolutely greater majority of working America outside Wall Street knows this instinctively; although very well intentioned, perhaps Mr. Baker is too close to the system he so incisively critcises to see the forest. Surely he didn't think an elevated egomaniac like Alan Greenspan was going to be honest.
Here's my Andrew Sarris impersonation:
Although your Dissembler readily admits he's 3-6 months behind the latest releases, I stay anachronistically up-to-date via Netflix. So I finally saw IRON MAN, and throughly enjoyed it! Normally D.O.E. has no use for CGI shoot-'em-up blow-'em-up extravaganzas, but I liked the vaguely anti-corporatist "message" (high-tech for the people instead of multinational weapons manufacturers) and Jeff Bridges (disguised as a bearded Daddy Warbucks) was great as the arch-villian. It also helped to have a real actor in the title role. Going from multiple heroin busts to portraying a Marvel Superhero in a mere 15 years is a career arc that only Robert Downey, Jr. could pull off.