Posts Tagged ‘bailout’

Bloomberg has unveiled that the Fed  “Pumped” liquidity for 770 BILLIONS (*), to the American Banks, go get over the financial crisis. That is, they pushed a button and created value from thin air. They did it covertly, in a way that wouldn’t set the markets on High Alert mode. So, I’m wondering if, instead of giving all that money to the banks, they gave it to the People? After all, It’s the PEOPLE that can’t pay their mortgages, not the banks, right?.

Now, in America there are more or less  528 millions people. So it will be about $15000 each. Not much.

But this line of thought doesn’t work very well, because we are giving the money even to the newborn. So, let’s move the thought to the FAMILIES, that are about 115 millions. That will bring the amount to roughly $67000 per family. Better already. With $67000, a family can start a business, work and create jobs… Restarting the economy in the process.

If we restrict the “Gift” to only the families in trouble, or potentially in trouble because involved in the damn subprime, then you will understand that the problem would have been solved altogether. Moreover, everybody would have a home, no foreclosures, people would have been working and happy.

Yep… But doing things this way would have caused the collapse of several banks

(*): From Milano Finanza:

In the latest Global Financial Stability Report, the International Monetary Fund updated to $410 Billions the total amount of loss of the world financial institutions in the 2007-10 period. The losses are relative to the total of financial institutions.

 « Nel recente Global Financial Stability Report, il Fondo Monetario Internazionale ha aggiornato a 4.100 miliardi di dollari l’entità delle svalutazioni del totale delle istituzioni finanziarie su scala mondiale per il periodo 2007-10. Le perdite si riferiscono al totale delle istituzioni finanziarie.»

Well, if the ALL THE FINANCIAL INSTITUTIONS lost $410 Billions… Where did the $700 Billions that the Fed gave to the banks IN THE USA ONLY, go? In other words, WHO THE HELL STOLE $360 Billions???


Wall Street ruins lives for that Blood Money
In Iraq shoulders dying for that Blood Money

Politicians committing crimes for that Blood Money
Fox News telling lies for that Blood Money

We ignoring human rights for that Blood Money
The environment sacrificed for that Blood Money

We all going to pay the price for that Blood Money
Thats what they want from me

14 years old. The English teacher asks him to write what “Courage” means to him, and… GOOD BOY!  🙂

 By: Keith Fitzgerald

Do you want to know the real reason banks aren’t lending and the PIIGS have control of the barnyard in Europe?
It’s because risk in the $600 trillion derivatives market isn’t evening out. To the contrary, it’s growing increasingly concentrated among a select few banks, especially here in the United States.

In 2009, five banks held 80% of derivatives in America. Now, just four banks hold a staggering 95.9% of U.S. derivatives, according to a recent report from the Office of the Currency Controller.

The four banks in question: JPMorgan Chase & Co. (NYSE: JPM), Citigroup Inc. (NYSE: C), Bank of America Corp. (NYSE: BAC) and Goldman Sachs Group Inc. (NYSE: GS).

Derivatives played a crucial role in bringing down the global economy, so you would think that the world’s top policymakers would have reined these things in by now – but they haven’t.

Instead of attacking the problem, regulators have let it spiral out of control, and the result is a $600 trillion time bomb called the derivatives market.

Think I’m exaggerating?

The notional value of the world’s derivatives actually is estimated at more than $600 trillion. Notional value, of course, is the total value of a leveraged position’s assets. This distinction is necessary because when you’re talking about leveraged assets like options and derivatives, a little bit of money can control a disproportionately large position that may be as much as 5, 10, 30, or, in extreme cases, 100 times greater than investments that could be funded only in cash instruments.

The world’s gross domestic product (GDP) is only about $65 trillion, or roughly 10.83% of the worldwide value of the global derivatives market, according to The Economist. So there is literally not enough money on the planet to backstop the banks trading these things if they run into trouble.

Compounding the problem is the fact that nobody even knows if the $600 trillion figure is accurate, because specialized derivatives vehicles like the credit default swaps that are now roiling Europe remain largely unregulated and unaccounted for.


To be fair, the Bank for International Settlements (BIS) estimated the net notional value of uncollateralized derivatives risks is between $2 trillion and $8 trillion, which is still a staggering amount of money and well beyond the billions being talked about in Europe.


The right answer to the debt crisis is simple. And it only requires two steps.

1. Do not give bailouts to nations, even if that means they default. This isn’t good news if you bought, say, Greek or Portuguese bonds, but there are two big advantages of default. First, it means that the bailouts come to an end so the debt bubble doesn’t get even worse. Second, it forces the affected governments to move – overnight – to a balanced-budget rule.

So what’s the downside? There isn’t one. The aforementioned bondholders won’t be happy. They gambled in the expectation that bailouts would enable them to get high returns, but that’s their problem. Overpaid government workers and greedy interest groups in the affected nations doubtlessly will be very upset because the gravy train gets derailed, but that’s a feature, not a bug.

2. If banks become insolvent because they recklessly lent money to governments  that default, those financial institutions should be allowed to fail. More specifically, they should be put into something akin to receivership (similar to what the U.S. did 20 years ago with the S&L crisis and a few years ago with WaMu and IndyMac, and also like what Sweden did in the early 1990s). This automatically prevents financial crisis since the financial sector gets recapitalized, but without the moral hazard and/or zombie bank problems associated with TARP-style bailouts.

So what’s the downside? There isn’t one, at least compared to the alternatives. Governments would be holding harmless depositors at the failed banks, so there would be additional debt. But this debt would be a one-time burden for a policy that actually stops the bleeding, and there would be no moral hazard since shareholders, bondholders, and senior management at the failed banks would get nothing.

This raises an obvious question. If my proposed solution is so simple, why aren’t governments choosing this option?

Part of the answer is that simple solutions aren’t necessarily easy solutions. We know how to fix America’s fiscal crisis, for instance, but that doesn’t mean it will happen. Governments will sometimes do the right thing – but only after they’ve exhausted every other option.

Europe isn’t quite at that stage. Yes, Greece is being allowed to default, which is a small step in the right direction, but the political elite hope that the right blend of additional bailouts and patchwork reforms can fix the problem.

I suppose that might happen, especially if the world economy somehow begins to boom. But don’t hold your breath.

Credit-default swaps on U.S. banks climbed on concern that the slowing economy was weighing on financial institutions’ balance sheets after Goldman Sachs Group Inc. (GS) reported its second quarterly loss in 12 years.

Contracts protecting the debt of the New York-based company increased 6 basis points to a mid-price of 375 basis points at 9:45 a.m. in New York, according to broker Phoenix Partners Group. Contracts on Bank of America Corp. (BAC) climbed 23.5 basis points to 413.5 as of 8 a.m., according to data provider CMA.

“Market concern over the continued impact of a slow economic recovery is intensifying pressure on BofA and Goldman,” Diana Allmendinger, research director at Fitch Solutions in New York, said in a statement. In the past three months, swaps on Bank of America have widened more than 100 percent and those on Goldman Sachs 126 percent, according to Fitch.

Investors pushed bank credit swaps higher after Goldman Sachs reported a third-quarter loss of $393 million, or 84 cents per share, compared with a profit of $1.9 billion, or $2.98, a year earlier, and Charlotte, North Carolina-based Bank of America had net income of $6.23 billion, or 56 cents a diluted share, skewed by one-time pretax gains including $4.5 billion in fair-value adjustments of structured liabilities and $1.7 billion tied to changes in value of the company’s debt.

Average Climbs

Credit-default swaps on the six biggest U.S. banks had climbed to an average of 360 on Oct. 4 on concern that bank margins are declining and that Europe’s sovereign debt crisis will infect balance sheets, before falling as low as 248 on Oct. 12, according to CMA. The average increased to 294 basis points yesterday. (more…)

If you want to understand the economic crisis, there are several hundred 250-page books for you to read. If, on the other hand, you want a one-page explanation, this is it.

Beginning in the 1990’s, the U.S. became infatuated with homes as investments. The government encouraged home ownership. Private entities — Fannie Mae and Freddie Mac — were pushed to provide liquidity to the residential mortgage market. In return, the government provided an implicit backing (now $400 billion explicit) for Fannie and Freddie’s borrowings. All the smart journalists and financial writers advised Americans to drop everything they were doing and buy a house.

Really smart people — let alone ordinary Joe’s — began to believe that housing prices were like flubber — working against gravity. A commodity that had basically bounced along at a point or two over inflation for 50 years began to appreciate at 10% per year or more. With +/- 90% financing, the result was a doubling of equity every year.

With Americans wanting more and bigger houses, banks and non-banks found ways to lend them money. Lender creativity in making loans to people who could never afford them was exceeded only by lender greed. Loan officers and mortgage brokers were incented to just move money out the door.

Lenders had little reason to worry about loan repayment. Loans were sold to investment bankers. The lenders made a profit on these sales and had no ongoing risk of repayment. Then the lender went back to doing what it did well… making more ridiculous loans. Unfortunately, many banks got caught holding mortgage loans or securities before they could be foisted on others (think Citibank).

The investment bankers bundled these loans into mortgage securities (a financial instrument divided into risk levels) and sold them off into the investment community, making money in the process of course. However, these sales would not have been possible without the compliance of the ratings agencies who blessed these toxic packages with AAA ratings, and oh yes, collected their fees from the investment banks selling the mortgage securities.