Inspired Real Estate For Today

Ok, bookmarking this post to come back and write a long comment when I have time.  Yeah, there is a reason Warren Buffett has referred to derivatives (such as credit default swaps) and "Weapons of fincial mass destruction".  It's a house of cards and nobody even the counter parties understand the full implications because of how complex and interelated they all are.  Once a large counter party does default on these things, we will find out in a hurry.  This is part of the reason the FED was so keen to keep Bear Sterns from failing as they were a counter party on tens of billions of derivatives.

Matt, thank you for stopping by my blog today. This story had me transfixed as I began to digest the implications. In light of recent events, Freddie Mac & Fannie Mae failing was destructive beyond imagination. I think it would have made Bear Stearns look like child's play. Question in my mind is...what's next? The other shoe has yet to drop on this one.

Each round of information in the inter workings of the financial markets makes me more concerned that people in positions of leadership are doing what is best for themselves and not concerned with the typical consumer. We have not seen the end of the countries financial problems. Thanks for the link to the article.

Lola,

Thanks for the post. It boggles the mind to think of what lengths people and companies will go to create these schemes. Global implications are pretty clear from the mortgage meltdown. On the surface of it, counter parties and derivatives, would appear to have a far more devastating impact.

Just came back and watched the BBC video linked to the post, it was pretty good and I would encourage people to watch it.  They get into the crux of the problem at the eight minute point.  The market is completely unregulated and the writers of these credit default swaps don't even have to prove they can pay up in an event of the swaps failing.  A failure to pay will cause another counter party to fail to pay and so on.  As the video cited there are now over $50 trillion (up from only $800B in 2001), the total derivatives market is over $500 trillion right now. 

30% of these these have been written by completely unregulated hedge funds who are very likely to not even be in business by the time they have to make good on payments.  And then all you need to do is look at the monolines such as MBIA and Ambac who are backing around $1.5 Trillion in bonds with just a couple billion in capital. Fannie and Freddie essentially wrote trillions in credit default swaps against mortgages and then hedged their risk by purchasing protection from the likes of MBIA and Ambac.  From an accounting standpoint they can say they have almost no risk because if they have to make good on paying their swaps it will be covered by others who they're purchased insurance from (but won't be able to pay)  Based on this accounting they claim their adaquatly capitalized to survive this crisis, but that assumes their counter parties, the counter parties counter parties, don't default.

It's not a question of if but when a major player does default.  Yeah, they put their finger in the dike with Bear Stearns and another with Fannie and Freddie but there won't be enough fingers to patch all the holes.  It's all one big Enronish financial scheme, in fact it was similar derivatives linked to energy markets that allowed Enron to get into the mess they did.  We've just got dozens of Enrons out in our financial markets right now hiding behind accounting loopholes that have allowed them to book massive "phantom" financial gains the last five years, while at the same time significantly understating their risk they took.

Unfortunatly the problem is so complex, so hard to explain and so gigantic, it mostly gets ignored.  Everybody sticks there head in the sand just tells themselves Wall Street is smart they wouldn't really do something this fundamentally stupid and fraudulent.  But just remember they referred to the financial schemers at Enron as "The smartest guys in the room"

Lola~ Just watched the video. I got the feeling that despite the idiocy (greed?) of human beings, nature remains the ever-present referee.

Terry...A very unsettling A~ha moment isn't it? I'm increasingly convinced that elections aren't nearly as important as an educated electorate. Most of us don't have a clue about what is going on. I have the feeling that the more we learn, the more we will come to the conclusion that you arrived at in your comment.

William, we're slowly beginning to gain a more clear understanding about why the mortgage meltdown has financial implications on a global scale. Every new revelation sheds additional insight. It's, well... Unnerving...

Matt, isn't there a book about Enron entitled "The Smartest Guys in the Room?" I had the same sinking feeling @ minute 8 when it became clear that not only was this an unregulated business but investors did not even have to have an ownership interest. This added to the fact that the investments were highly leveraged is a tinderbox.

I'm not a financial guru at all, but simple common sense is all you need to come to the conclusion that this is not good at all. And it's likely not to go a way because we'd rather not know that this was going on. I've often wondered if/when/how pension funds would come into play in this whole debacle. Because that domino collapsing will be terrible.

Thank you for adding perspective to the accounting issues involved. What are your thoughts on the recent JP Morgan buyout? I watched a recent interview in which Daimon, the CEO of JP Morgan talked about manipulation of the markets by some analyst. Watching and reading more about what's going on in Wall Street gives me some insight as to why a meltdown could be a highly profitable to a certain type of investor in an unregulated environment.

Hey Matt...the graphic says 'nervosa' How fitting. :)

janeAnne...intriguing concept. What part of nature are you referring to? The fact that a hungry, sly fox will always find a way to out maneuver the dimwitted? :)

Lola I don't know about everyone else, but this sounds pretty scary and risky to me.

Thanks for the heads up

Lola - I'm not a financial guru at all, but simple common sense is all you need to come to the conclusion that this is not good at all.

Unfortunatly wall street rarely operates on common sense, brought to you buy the guys that thought selling 100% no-doc option ARMS during the height or a real estate bubble was a smart move :)

Boy do I want to read the books that will come out on the Bear Stearn collapse years in the future, it should be some plot line.  I've been of the opinion for some time that several of the large investment banks on Wall Street (Bear Stearns RIP, Lehman, Merril, Morgan) are truly insolvent and it's just accounting games like off balance sheet entities, the whole credit default swaps mess, that create the illusion of solvency.  There exposure to not just mortgage backed securities but lots of other types of debt which is starting to default at increasing rates is massive. 

Bear Stearns would have eventually collapsed purely on its own, but there is a lot of evidence surface of plenty of uh, Wall Street hanky panky in it's demise.  Absolutely massive amounts of CDS's and put options were purchased on them weeks before their final collapse as some major speculators tried to cash in on their failure.  Incidentally the speculators that purchased all the CDS's correctly speculating Bear was in trouble ended up not getting anything from it, as they never defaulted on their debt which would have triggered a pay out.  You have to wonder in JP Morgan may have been one of those parties writing a ton of credit default swaps on Bear Stearns pocketing the premium, hummmm.

There were many rumors floating around Wall Street about Bear Stearns that caused a run on them by big funds and triggered the final collapse.  In the same way that bank run that finally forced Indymac under, but was not necissarily the root cause (Indymac was insolvent).  Lots of fingers are pointing at the trading desk of Goldman Sachs as the source of many of these rumors.  Goldman's trading desk is notoriously ruthless, these were the guys that sold tons of securitized mortgage backed securities to pension funds only to turn around and short the same securities, making money as they fell in value.  Why was there never a congressional inquiry into this?  Bear Sterns was also the only major investment bank that refused to participate in the bail out of the LTCM hedge fund back in 1998, which generated a lot of bad blood with the other investment banks.  It could have partially been akin to a mob hit, as these Wall Street participants decided to seek some revenge. 

JP Morgan also happens to be the the largest player in the global derivatives market, its very possible Bear Stearns may have been a major counter party to some of these derivatives, and they could have been the first domino in line to fall in Bear Stearns went down.  So yeah, there's a lot going on here we may never know about...

Matt, Following the trail of dollars in this dizzying mess may prove to be impossible not merely due to the complexity of the issues, but perhaps more importantly, the moral grit which is necessary to uncover the truth and the courage to fight upstream against such huge financial interest. The fox in the hen house analogy...

George, We should all be concerned.  Thanks for stopping by to read and comment.

That fox is adorable! Love those ears!!!!

As for debt worldwide, it is an unbelievable mess! Thanks for this post!

Lola, This is an interesting post; I watched the BBC video, and then read the commentary here. I'll be doing some more reading this afternoon on this. Thanks! Mike in Tucson

Lola,
Oh my!  Seems the more is revealed, the more complicated and widespread this mess is.  The saying "sly as a fox" seems pretty apt to your analogy.

Mike, it's quite an education. Watching the BBC story was quite enlightening. Who would ever have thought that the mortgage crisis might potentially end up affecting pension plans? The most devastating aspect (IMO) is that the biggest losers would be average people like you & me... and in order to win, the 'investors' would be banking on the system failing. The current banking crisis may be just the tip of the iceberg. I'm praying for wisdom for those tasked with figuring this out.

Lola, thank you for bringing this to our attention. I wish more had read and commented on it! How do we, the consumer, protest this process and bring this to the attention of everyone? This makes me even more nervous about the future of our economy and feeling even more like a pawn in a chess game!

Cynthia, it's extraordinary to think that this type of transaction is largely unregulated. Add to this the fact that our understanding of the potential implications is practically non existent and you have a most unsettling proposition. There's money to be made...unfortunately, it may be at the expense of some unsuspecting 'chickens.' (added in the spirit of the analogy)

Diane, Thanks for stopping by to read, watch and comment. Our education has to start somewhere and I suppose every little contribution in a blog like this counts. We don't have to be pawns...informed, aware citizens are the backbone of the greatness of democracy.