The Cellar - View Single Post

tw · 11-25-2008, 12:32 AM

God Awful Market Economics.

In so many previous posts in Current Events and as summarized in a post in Politics entitled Why is it OK to bailout Citi, but not auto companies? are so many examples from a closed loop system we know as the stockmarket meltdown. In all those examples and summaries, many may still not have a sound byte grasp. This is maybe the best I can do.

Imagine your home; a real asset. Now we create financial contracts so that you could buy that home (mortgage) and protect your ownership (insurance). Once these contracts were not assets. Contracts were valued because they were connected to a real asset - your house.

Another asset is a company. We own that company by purchasing stocks. Like the house, those stocks represent something tangible - the company.

A farmer has crops. He surrenders part of a profit margin to protect his cash flow - a derivative called crop futures. Again, a financial contract connected to something real and to provide the farmer with financial security. He surrenders part of a future asset to protect his cash flow – to stay solvent.

Deregulation made it possible to rename that mortgage, insurance, and futures as assets. So we renamed contracts as equities. We pretend new financial contracts are tied to tangible values equivalet to as houses, companies, and crops. Then we created new layers of contracts based on a fictitious real asset - what were once only called contracts.

Had regulation been properly applied (which is what Basel 2 tried to do and was not implemented in America), then many of these fictitious assets would have required financial institutions to also hold real assets - ie cash. Instead, George Jr's administration even let investment banks to increase their debt to equity ratios from 12 to 30. Basically, the investment banks were nothing more than hedge funds. As if we learned nothing from the meltdown of Long Term Capital Management (LTCM).

Since all those financial contracts were now considered assets like homes, companies, and crops, then those debt obligations now increased America’s net worth. Assets were invented. Enron accounting made it possible to claim debts as assets. Even debts were now added to homes, companies, and crops as additional wealth.

And if that were not bad, Enron accounting now permitted bad debts to be removed from the balance sheets by creating new companies. Companies that were nothing more than shelters of debts were then listed on the home company's balance sheets as another asset. Just another way of claiming debt as an asset.

In short, we created wealth using fiction and then rewarded those who were creating these myths. Wall Street executives now 'deserved' $tens of millions in bonuses. After all, look at all the wealth that was created!

Damning is so little useful facts from those here who work in the finance industry. They cannot really comment. They don't really have a grasp of what they have helped create. After all, they are really nothing more than salesman. Yes, these Enron accounting schemes were created by salesmen. Salesmen who had no idea of risks and had insufficient knowledge to measure that risk. So they developed computerized risk models that 'proved' stablity. After all, it runs on a computer. It must be true. Salesmen are excellent at inventing things - reality be damned.

AIG had maybe $1trillion in newly invented debt obligations with almost no cash. No wonder AIG has now eaten through $140billion of government money and will still need more. An example of why in the next paragraph.

The homeowner defaults on his mortgage. For every $1 in that default, suddenly tens or maybe hundreds of dollars of debt obligations (contracts) that were once called assets are now worthless. Suddenly $100 of assets just disappear from the company spread sheets. When the $1 mortgage failed, then $100 of contracts suddenly have no value. Or insurance on those contracts (once called assets) suddenly changed from a small income source to a massive debt obligation. Welcome to the house of cards made possible by deregulation.

The stock market is desperately looking for the real value of America. Appreciate the market's problem. Which asset is really a fictitious credit obligation? Which loan was backed by collateral that was really nothing more than a contract? Nobody knows. Especially since 2000, we have been inventing assets using the new Enron accounting scheme. How do you value any company when there is no way to evaluate the risks? Suddenly things once listed as small income earners are now a massive debt obligations - because some homeowner in Iowa could not pay a mortgage so many months ago.

How many $trillion of contracts must be completely re-evaluated to determine their actual value? One Collateralized Debt Obligation (CDO) was typically defined by maybe a 200 or 400 page document. Nobody could actually know what that CDO value was. No problem. Salesmen selling to salesmen created a Ponzi scheme as long as the underlying asset - the house, company, or crop - remained solvent.

Risk models designed to measure risk were developed by your peers in school who were the lesser intelligent students – but were so popular. Who do not even know how their own risk measurement tools work. How does he really evaluate risk on a contract of 200+ pages? When the only real asset is buried in layer upon layer of contracts. When even the mortgage backed security contained only NINJA (No Income No Job Apparent) loans. And when the equity trader never bothered to notice those mortgages were ARMs.

These salesman are excellent at promoting themselves as smart. As proof, they put forth that 200 page CDO to demonstrate that only they understand finance. Nonsense. They have no clue what was in the CDO. They only know what laws cannot be violated without SEC prosecution. Just another reason why financial firms and their stock brokers must be highly regulated. They will only be as honest as the law requires them to be.

For every $1 in a mortgage or a commodity tied into a futures contract, how many layers of invented assets exist in what would otherwise be called a contract? Appreciate the scale of Enron style accounting that now must be paid for by mortgaging America to foreigners.

BTW, what foreigner will loan us the money considering how widespread this finance industry scheme has been. When risks are high, expect to pay that foreigner heavily to borrow some dollars. Our Treasury alone needs to borrow $7trillion from a world worth maybe $70trillion. Those interest payments for the next 30 years will be steep. Then the American standard of living will correct accordingly. This is how great empires fall quickly.

11-25-2008, 12:32 AM	#1
tw Read? I only know how to write. Join Date: Jan 2001 Posts: 11,933	How the GAME is played. God Awful Market Economics. In so many previous posts in Current Events and as summarized in a post in Politics entitled Why is it OK to bailout Citi, but not auto companies? are so many examples from a closed loop system we know as the stockmarket meltdown. In all those examples and summaries, many may still not have a sound byte grasp. This is maybe the best I can do. Imagine your home; a real asset. Now we create financial contracts so that you could buy that home (mortgage) and protect your ownership (insurance). Once these contracts were not assets. Contracts were valued because they were connected to a real asset - your house. Another asset is a company. We own that company by purchasing stocks. Like the house, those stocks represent something tangible - the company. A farmer has crops. He surrenders part of a profit margin to protect his cash flow - a derivative called crop futures. Again, a financial contract connected to something real and to provide the farmer with financial security. He surrenders part of a future asset to protect his cash flow – to stay solvent. Deregulation made it possible to rename that mortgage, insurance, and futures as assets. So we renamed contracts as equities. We pretend new financial contracts are tied to tangible values equivalet to as houses, companies, and crops. Then we created new layers of contracts based on a fictitious real asset - what were once only called contracts. Had regulation been properly applied (which is what Basel 2 tried to do and was not implemented in America), then many of these fictitious assets would have required financial institutions to also hold real assets - ie cash. Instead, George Jr's administration even let investment banks to increase their debt to equity ratios from 12 to 30. Basically, the investment banks were nothing more than hedge funds. As if we learned nothing from the meltdown of Long Term Capital Management (LTCM). Since all those financial contracts were now considered assets like homes, companies, and crops, then those debt obligations now increased America’s net worth. Assets were invented. Enron accounting made it possible to claim debts as assets. Even debts were now added to homes, companies, and crops as additional wealth. And if that were not bad, Enron accounting now permitted bad debts to be removed from the balance sheets by creating new companies. Companies that were nothing more than shelters of debts were then listed on the home company's balance sheets as another asset. Just another way of claiming debt as an asset. In short, we created wealth using fiction and then rewarded those who were creating these myths. Wall Street executives now 'deserved' $tens of millions in bonuses. After all, look at all the wealth that was created! Damning is so little useful facts from those here who work in the finance industry. They cannot really comment. They don't really have a grasp of what they have helped create. After all, they are really nothing more than salesman. Yes, these Enron accounting schemes were created by salesmen. Salesmen who had no idea of risks and had insufficient knowledge to measure that risk. So they developed computerized risk models that 'proved' stablity. After all, it runs on a computer. It must be true. Salesmen are excellent at inventing things - reality be damned. AIG had maybe $1trillion in newly invented debt obligations with almost no cash. No wonder AIG has now eaten through $140billion of government money and will still need more. An example of why in the next paragraph. The homeowner defaults on his mortgage. For every $1 in that default, suddenly tens or maybe hundreds of dollars of debt obligations (contracts) that were once called assets are now worthless. Suddenly $100 of assets just disappear from the company spread sheets. When the $1 mortgage failed, then $100 of contracts suddenly have no value. Or insurance on those contracts (once called assets) suddenly changed from a small income source to a massive debt obligation. Welcome to the house of cards made possible by deregulation. The stock market is desperately looking for the real value of America. Appreciate the market's problem. Which asset is really a fictitious credit obligation? Which loan was backed by collateral that was really nothing more than a contract? Nobody knows. Especially since 2000, we have been inventing assets using the new Enron accounting scheme. How do you value any company when there is no way to evaluate the risks? Suddenly things once listed as small income earners are now a massive debt obligations - because some homeowner in Iowa could not pay a mortgage so many months ago. How many $trillion of contracts must be completely re-evaluated to determine their actual value? One Collateralized Debt Obligation (CDO) was typically defined by maybe a 200 or 400 page document. Nobody could actually know what that CDO value was. No problem. Salesmen selling to salesmen created a Ponzi scheme as long as the underlying asset - the house, company, or crop - remained solvent. Risk models designed to measure risk were developed by your peers in school who were the lesser intelligent students – but were so popular. Who do not even know how their own risk measurement tools work. How does he really evaluate risk on a contract of 200+ pages? When the only real asset is buried in layer upon layer of contracts. When even the mortgage backed security contained only NINJA (No Income No Job Apparent) loans. And when the equity trader never bothered to notice those mortgages were ARMs. These salesman are excellent at promoting themselves as smart. As proof, they put forth that 200 page CDO to demonstrate that only they understand finance. Nonsense. They have no clue what was in the CDO. They only know what laws cannot be violated without SEC prosecution. Just another reason why financial firms and their stock brokers must be highly regulated. They will only be as honest as the law requires them to be. For every $1 in a mortgage or a commodity tied into a futures contract, how many layers of invented assets exist in what would otherwise be called a contract? Appreciate the scale of Enron style accounting that now must be paid for by mortgaging America to foreigners. BTW, what foreigner will loan us the money considering how widespread this finance industry scheme has been. When risks are high, expect to pay that foreigner heavily to borrow some dollars. Our Treasury alone needs to borrow $7trillion from a world worth maybe $70trillion. Those interest payments for the next 30 years will be steep. Then the American standard of living will correct accordingly. This is how great empires fall quickly.