NationStates Jolt Archive

Except perhaps this time, it's going the other direction....

http://www.businessspectator.com.au/bs.nsf/Article/A-tsunami-of-hope-or-terror-LHRJP?OpenDocument
A tsunami of hope or terror?

As the world slips into recession, it is also on the brink of a synthetic CDO cataclysm that could actually save the global banking system.

It is a truly great irony that the world’s banks could end up being saved not by governments, but by the synthetic CDO time bomb that they set ticking with their own questionable practices during the credit boom.

[...]

Anyway, moving right along – some time after that an unknown bright spark within one of the investment banks came up with the idea of putting CDOs and CDSs together to create the synthetic CDO.

Here’s how it works: a bank will set up a shelf company in Cayman Islands or somewhere with $2 of capital and shareholders other than the bank itself. They are usually charities that could use a little cash, and when some nice banker in a suit shows up and offers them money to sign some documents, they do.

That allows the so-called special purpose vehicle (SPV) to have “deniability”, as in “it’s nothing to do with us” – an idea the banks would have picked up from the Godfather movies.

The bank then creates a CDS between itself and the SPV. Usually credit default swaps reference a single third party, but for the purpose of the synthetic CDOs, they reference at least 100 companies.

The CDS contracts between the SPV can be $US500 million to $US1 billion, or sometimes more. They have a variety of twists and turns, but it usually goes something like this: if seven of the 100 reference entities default, the SPV has to pay the bank a third of the money; if eight default, it’s two-thirds; and if nine default, the whole amount is repayable.

For this, the bank agrees to pay the SPV 1 or 2 per cent per annum of the contracted sum.

Finally the SPV is taken along to Moody’s, Standard and Poor’s and Fitch’s and the ratings agencies sprinkle AAA magic dust upon it, and transform it from a pumpkin into a splendid coach.

The bank’s sales people then hit the road to sell this SPV to investors. It’s presented as the bank’s product, and the sales staff pretend that the bank is fully behind it, but of course it’s actually a $2 Cayman Islands company with one or two unknowing charities as shareholders.

It offers a highly-rated, investment-grade, fixed-interest product paying a 1 or 2 per cent premium. Those investors who bother to read the fine print will see that they will lose some or all of their money if seven, eight or nine of a long list of apparently strong global corporations go broke. In 2004-2006 it seemed money for jam. The companies listed would never go broke – it was unthinkable.

Here are some of the companies that are on all of the synthetic CDO reference lists: the three Icelandic banks, Lehman Brothers, Bear Stearns, Freddie Mac, Fannie Mae, American Insurance Group, Ambac, MBIA, Countrywide Financial, Countrywide Home Loans, PMI, General Motors, Ford and a pretty full retinue of US home builders.

In other words, the bankers who created the synthetic CDOs knew exactly what they were doing. These were not simply investment products created out of thin air and designed to give their sales people something from which to earn fees – although they were that too.

They were specifically designed to protect the banks against default by the most leveraged companies in the world. And of course the banks knew better than anyone else who they were.

[...]

It is now getting very interesting. The three Icelandic banks have defaulted, as has Countrywide, Lehman and Bear Stearns. AIG has been taken over by the US Government, which is counted as a part-default, and Freddie Mac and Fannie Mae are in “conservatorship”, which is also a part default.

Ambac, MBIA, PMI, General Motors, Ford and a lot of US home builders are teetering.

If the list of defaults – full and partial – gets to nine, then a mass transfer of money will take place from unsuspecting investors around the world into the banking system. How much? Nobody knows, but it’s many trillions.

It will be the most colossal rights issue in the history of the world, all at once and non-renounceable. Actually, make that mandatory.

The distress among those who lose their money will be immense. It will be a real loss, not a theoretical paper loss. Cash will be transferred from their own bank accounts into the issuing bank, via these Cayman Islands special purpose vehicles.

The repercussions on the losers and the economies in which they live, will be unpredictable but definitely huge. Councils will have to put up rates to continue operating. Charities will go to the wall and be unable to continue helping those in need. Individual investors will lose everything.

[...]

As a bonus if you read the whole article, you'll find an actual piece of (de-)regulation you can cite next time I ask you. It was Clinton rather than Bush, but beggars can't be choosers.

Anyways, I thought this was a nice article giving another heads-up on what might happen next. There's a lot of weird, murky stuff out there - you've probably heard it a million times, but this is a concrete example. It's also got all sorts of implications for the rescue packages pushed through by various governments - if a bank like Citi which has received many billions already in bailouts suddenly hits the jackpot in the way described by the article, what do you think the government should do?

Yes, well this may be all good and well for everyone else, but my money is safe. I got my $100,000 hidden in my mattress. It was much more, but the initial crisis took me by surprise, no more, listen to me people, take your money out of banks, and to your mattresses, or if you have a fear of all that money being stolen, or burning when your mattress catches fire, buy a big safe, one too heavy for someone to carry away, just to be safe, dig a hole in your basement, fill it with concrete, and sink a steel beam into it, then weld the back of your big safe to the steel beam, ensuring that it isn't going anywhere fast. It's fool proof, and safer than banks, or investments. Though your best bet, is to turn your worthless currency into something valuable, such as gold, silver, platinum, or diamonds, as they hold their value much better when the world economy crashes. You could always buy other things, things that would be useful in a barter system, where gold and silver wouldn't, like bottled water, and canned food. They will be the currency of the future, along with alcohol and matches. Stock up, before the depression, learn from the mistakes of the past, that bombshelter might not protect you from a nuke, but it can protect you from economic depression.

-snip-
Hmmm, tell you what: I set up a business where I buy myself a big safe, and I offer a service where I take your money and store it there - in whatever form you want - and in return you pay me some fee. Maybe a fee proportional to the amount you store with me.

Now, what would I call this brilliant business idea...

Yes, well this may be all good and well for everyone else, but my money is safe. I got my $100,000 hidden in my mattress. It was much more, but the initial crisis took me by surprise, no more, listen to me people, take your money out of banks, and to your mattresses, or if you have a fear of all that money being stolen, or burning when your mattress catches fire, buy a big safe, one too heavy for someone to carry away, just to be safe, dig a hole in your basement, fill it with concrete, and sink a steel beam into it, then weld the back of your big safe to the steel beam, ensuring that it isn't going anywhere fast. It's fool proof, and safer than banks, or investments. Though your best bet, is to turn your worthless currency into something valuable, such as gold, silver, platinum, or diamonds, as they hold their value much better when the world economy crashes. You could always buy other things, things that would be useful in a barter system, where gold and silver wouldn't, like bottled water, and canned food. They will be the currency of the future, along with alcohol and matches. Stock up, before the depression, learn from the mistakes of the past, that bombshelter might not protect you from a nuke, but it can protect you from economic depression.

lol, Great post Beatus, I agree with you. I will start with my mattress $, lol.

I see Neu Leonstein is a great businessman.

Hmmm, tell you what: I set up a business where I buy myself a big safe, and I offer a service where I take your money and store it there - in whatever form you want - and in return you pay me some fee. Maybe a fee proportional to the amount you store with me.

Now, what would I call this brilliant business idea...

Hmmm, tell you what: I set up a business where I buy myself a big safe, and I offer a service where I take your money and store it there - in whatever form you want - and in return you pay me some fee. Maybe a fee proportional to the amount you store with me.

Now, what would I call this brilliant business idea...

That's the kind of thinking that got us where we are right now. You've described the basis of a bank. I will stick to putting my money in anything I can find. My mattress, a cigar box buried in the back yard, next to the PVC Pipes I have my guns hidden in, in the cookie jar, under my hat, as gold fillings in my teeth (a rather good hiding place, if I don't say so myself), in the gold trim I added to my fireplace, which I then painted over with Hot Pink paint, to make it look cheep. See, you need to disguise your money too. How can someone take it, if they don't know it is worth anything. You wouldn't steal a pack of gum, when robbing someone, would you? No of course not, making it a perfect place to hide diamonds.

If the list of defaults – full and partial – gets to nine, then a mass transfer of money will take place from unsuspecting investors around the world into the banking system. How much? Nobody knows, but it’s many trillions.
Doesn't that assume that these "unsuspecting investors" actually have the requisite trillions to pay up? Isn't it more likely that a whole bunch of charities and such are just going to be dragged into bankruptcy court?

Oh, and Beatus, I suggest investing in diamonds and then eating them. No one can steal your colon! Unless they're organ thieves, which is possible, I guess. The main problem is that you have to keep "reinvesting your dividends," if you know what I mean, but you can get used to that in time.

It offers a highly-rated, investment-grade, fixed-interest product paying a 1 or 2 per cent premium.

I swear I'm selling my 15 year old crappy Ford Escort as a highly-rated, investment-grade vehicle, so it has no wheels and the transmission's falling out, I'm sure it won't break down anytime soon.

Just to make myself feel better, I'll sell it to a charity, they should be grateful really.

That's the kind of thinking that got us where we are right now. You've described the basis of a bank. I will stick to putting my money in anything I can find. My mattress, a cigar box buried in the back yard, next to the PVC Pipes I have my guns hidden in, in the cookie jar, under my hat, as gold fillings in my teeth (a rather good hiding place, if I don't say so myself), in the gold trim I added to my fireplace, which I then painted over with Hot Pink paint, to make it look cheep. See, you need to disguise your money too. How can someone take it, if they don't know it is worth anything. You wouldn't steal a pack of gum, when robbing someone, would you? No of course not, making it a perfect place to hide diamonds.

I like you. You're funny.

Yes, well this may be all good and well for everyone else, but my money is safe. I got my $100,000 hidden in my mattress. It was much more, but the initial crisis took me by surprise, no more, listen to me people, take your money out of banks, and to your mattresses, or if you have a fear of all that money being stolen, or burning when your mattress catches fire, buy a big safe, one too heavy for someone to carry away, just to be safe, dig a hole in your basement, fill it with concrete, and sink a steel beam into it, then weld the back of your big safe to the steel beam, ensuring that it isn't going anywhere fast. It's fool proof, and safer than banks, or investments. Though your best bet, is to turn your worthless currency into something valuable, such as gold, silver, platinum, or diamonds, as they hold their value much better when the world economy crashes. You could always buy other things, things that would be useful in a barter system, where gold and silver wouldn't, like bottled water, and canned food. They will be the currency of the future, along with alcohol and matches. Stock up, before the depression, learn from the mistakes of the past, that bombshelter might not protect you from a nuke, but it can protect you from economic depression.

I LOLed.

Except perhaps this time, it's going the other direction....

http://www.businessspectator.com.au/bs.nsf/Article/A-tsunami-of-hope-or-terror-LHRJP?OpenDocument


As a bonus if you read the whole article, you'll find an actual piece of (de-)regulation you can cite next time I ask you. It was Clinton rather than Bush, but beggars can't be choosers.

Anyways, I thought this was a nice article giving another heads-up on what might happen next. There's a lot of weird, murky stuff out there - you've probably heard it a million times, but this is a concrete example. It's also got all sorts of implications for the rescue packages pushed through by various governments - if a bank like Citi which has received many billions already in bailouts suddenly hits the jackpot in the way described by the article, what do you think the government should do?

If they get this payout, the government should force them to return their bailout money and use that bail out money to bail out everyone else...

Either that or start arresting/shooting all the bankers that have created this incoming mess, and the previous mess.

Except perhaps this time, it's going the other direction....

http://www.businessspectator.com.au/bs.nsf/Article/A-tsunami-of-hope-or-terror-LHRJP?OpenDocument


As a bonus if you read the whole article, you'll find an actual piece of (de-)regulation you can cite next time I ask you. It was Clinton rather than Bush, but beggars can't be choosers.

Anyways, I thought this was a nice article giving another heads-up on what might happen next. There's a lot of weird, murky stuff out there - you've probably heard it a million times, but this is a concrete example. It's also got all sorts of implications for the rescue packages pushed through by various governments - if a bank like Citi which has received many billions already in bailouts suddenly hits the jackpot in the way described by the article, what do you think the government should do?
If the banks that have received bail out money get a sudden influx of cash, the government should take their money back and use it to bail out the investors, especially if, as was suggested, many of those investors will turn out to be charities and other groups being forced into bankruptcy by this.

I want to be sure I understand this....

Bank goes to company/charity and says: We will pay you 2% of 1 billion dollars if you sign this.

Company/Charity goes: OK.

Bank says: Thank you so much sucker!

Eventually the Company/Charity is in dire financial peril and the Bank shows up: You owe ME 1 billion dollars.

right?

- if a bank like Citi which has received many billions already in bailouts suddenly hits the jackpot in the way described by the article, what do you think the government should do?

Weeeell: the inventors of these CDOs clearly never expected them to mature, so they weren't taking any risk that they knew of ... so they don't deserve the money.

On the other hand, anyone with investments based in the longevity of said CDO's have clearly made incompetent investment decisions, and deserve to be punished for that.

Soooo, the government should take the money, and set about a major project to breed a chomping, stomping Tyrannosaurus Rex by the year 2020.

"Avalanches above, business continues below."

There's something genuinly evil about these bankers.

There's something genuinly evil about these bankers.

I'm not sure if it's stupidity, or maliciousness, tbh.

That's the kind of thinking that got us where we are right now. You've described the basis of a bank.
Oh, shoot. ;)

Doesn't that assume that these "unsuspecting investors" actually have the requisite trillions to pay up? Isn't it more likely that a whole bunch of charities and such are just going to be dragged into bankruptcy court?
Not really. It's councils, individuals, funds of all sorts, other banks, corporations whose treasurers didn't have enough oversight and so on.

I want to be sure I understand this....

Bank goes to company/charity and says: We will pay you 2% of 1 billion dollars if you sign this.

Company/Charity goes: OK.

Bank says: Thank you so much sucker!

Eventually the Company/Charity is in dire financial peril and the Bank shows up: You owe ME 1 billion dollars.

right?
Wrong. The charity is just necessary because the SVI can't be created by the bank itself, because the bank can't make these CDS contracts with itself. The charity gets asked to be the initial owner of the SVI, with which the banks then make the contracts so that they're on the SVI's books. Then the bank goes and sells the SVI off to investors, and gives the charity a fraction to reimburse it for this service. Those charities are already out of the deal basically and got their money.

It is however not impossible that other charities were among the buyers of the SVI afterwards. They're the ones who will then be liable for the CDS contracts should a few more firms go bust, because by owning the SVI you're basically the counterparty to the CDS contracts. But I would tend to think more traditional types of investors are the majority, plus local councils and municipalities who for some reason thought this was a good place to put their surplus money (or, worse, their borrowed money).

Weeeell: the inventors of these CDOs clearly never expected them to mature, so they weren't taking any risk that they knew of ... so they don't deserve the money.
The article suggests that they were part of a hedging strategy. If you hedge, it doesn't mean that you actually intend to use it, or even make money on it - but that doesn't mean you shouldn't get the pay-out if your main line of business doesn't. Remember also that someone has been paying all the investors into the SVIs interest for years now. Plus, they did take an additional risk, namely in underwriting the SVIs in the first place.

There's something genuinly evil about these bankers.
I think a few people may have misunderstood just what the charities were doing in all of this. Unless they bought into other SVIs, or retained a share in them rather than selling it off (which some will no doubt have done), they're not liable for anything.

Anyways, I fail to see what's evil about any of this. It's not like anyone was lied to.

The more i watch of this credit crunch the more it angers me (there is a lot that angers me in this world)

greedy bankers lend badly because there is no real control over the economy

a few rich wankers screw up and suddenly me the taxpayer has to pay billions in bail outs to undeserving companies.

now there is an argument for socialism if ever I saw one!

Not really. It's councils, individuals, funds of all sorts, other banks, corporations whose treasurers didn't have enough oversight and so on.
Um, ok. That doesn't change my main question: Wouldn't this just be like trying to get blood from a stone (or a sack of stones, whatever)? In the current environment, how can the smaller investors be expected to cover their debts if things continue to head down the crapper?

That's the kind of thinking that got us where we are right now. You've described the basis of a bank. I will stick to putting my money in anything I can find. My mattress, a cigar box buried in the back yard, next to the PVC Pipes I have my guns hidden in, in the cookie jar, under my hat, as gold fillings in my teeth (a rather good hiding place, if I don't say so myself), in the gold trim I added to my fireplace, which I then painted over with Hot Pink paint, to make it look cheep. See, you need to disguise your money too. How can someone take it, if they don't know it is worth anything. You wouldn't steal a pack of gum, when robbing someone, would you? No of course not, making it a perfect place to hide diamonds.

So what's your address?

As a bonus if you read the whole article, you'll find an actual piece of (de-)regulation you can cite next time I ask you. It was Clinton rather than Bush, but beggars can't be choosers.

Thank you.

This is something I have been saying was part (not the only one) of the reason for the current crisis. I will admit though I was talking about other deregulation during the Clinton Administration.

But whenever I did mention it those Democrat supporters didn't want to hear a word of it, because their party can never do anything wrong. :rolleyes:

Thank you.

This is something I have been saying was part (not the only one) of the reason for the current crisis. I will admit though I was talking about other deregulation during the Clinton Administration.

But whenever I did mention it those Democrat supporters didn't want to hear a word of it, because their party can never do anything wrong. :rolleyes:

It was only signed by Clinton, it was made and pushed by Republicans.

One of the tragedies of the Clinton administration is that the Starr Enquiry meant that America did not have a fully functioning president from '97 onwards as Bill Clinton was distracted by the whole Whitewater-Lewinsky situation. This legislation was huge, unread and the consequences were not thoroughly thought through, it was a push to give greater leeway to investing.

So, smacks the ball back over the net :)

It was only signed by Clinton, it was made and pushed by Republicans.

One of the tragedies of the Clinton administration is that the Starr Enquiry meant that America did not have a fully functioning president from '97 onwards as Bill Clinton was distracted by the whole Whitewater-Lewinsky situation. This legislation was huge, unread and the consequences were not thoroughly thought through, it was a push to give greater leeway to investing.

So, smacks the ball back over the net :)

Well Clinton being the President and ultimately responsible for legislation that is made and abolished considering he has right to veto should be the one that takes some of the blame. Regardless unlike what the left think or those that have no idea and is trying to be cool by blaming it on Bush this is not the case at all.

Are you saying that Clinton in his last three years (almost an entire term) was hopeless and a poor President?

Returns on the volley :)

I like you. You're funny.

Thank you.

I LOLed.

And thank you.

So what's your address?

124 Fake Street, Nowheresville, Montana, 54321, United States of America.

It was only signed by Clinton, it was made and pushed by Republicans.

One of the tragedies of the Clinton administration is that the Starr Enquiry meant that America did not have a fully functioning president from '97 onwards as Bill Clinton was distracted by the whole Whitewater-Lewinsky situation. This legislation was huge, unread and the consequences were not thoroughly thought through, it was a push to give greater leeway to investing.

So, smacks the ball back over the net :)

Yes, yes this was all about giving greater leeway to investors, and the whole thing with people getting loans who shouldn't have been, what was that? Wouldn't that be good 'ol President Clinton, and getting every hard working American their own home, even if they can't really afford it?

Well Clinton being the President and ultimately responsible for legislation that is made and abolished considering he has right to veto should be the one that takes some of the blame. Regardless unlike what the left think or those that have no idea and is trying to be cool by blaming it on Bush this is not the case at all.

Are you saying that Clinton in his last three years (almost an entire term) was hopeless and a poor President?

Returns on the volley :)

Not sure about hopeless and poor, distracted certainly.

A president doesn't have absolute power, and he must be mindful of Congress in a game of give and take, healthcare taught him that pretty quickly. So when one's trying to gain brownie points due to being in a precarious position, one's ability to be entirely effective is hampered.

Did the Republicans exploit that opportunity, create it even?

Ultimately, Bill Clinton shouldn't have screwed around, but I can hardly place the blame fully at his door over this when it was conceived and pushed by the Republicans.

Personally, I don't think a modern president is equipped to deal with the complexity of the markets, I don't have a solution either, I just suspect the world has become too unwieldy for many governments.

George Bush extended this, the philosophy being that by freeing credit and money supply, the overall GDP will grow, that's been the mantra since the early 80's.

Takes a break for orange juice

Yes, yes this was all about giving greater leeway to investors, and the whole thing with people getting loans who shouldn't have been, what was that? Wouldn't that be good 'ol President Clinton, and getting every hard working American their own home, even if they can't really afford it?

Yes, agreed to an extent, but I'm not sure the problem came from the risky lend in itself, it was packaging all that into high-grade, premium investment opportunities and up-selling them so that the investments were worth far more money than the underlying reality. The ability to create all these vehicles, unregulated, meant the problem lay hidden far longer than it should and had a far greater effect that was necessary.

Not sure about hopeless and poor, distracted certainly.

Well certainly distracted, maybe he was getting a blow job at the time of signing some bills and was distracted that way :p

A president doesn't have absolute power, and he must be mindful of Congress in a game of give and take, healthcare taught him that pretty quickly. So when one's trying to gain brownie points due to being in a precarious position, one's ability to be entirely effective is hampered.

Did the Republicans exploit that opportunity, create it even?

Ultimately, Bill Clinton shouldn't have screwed around, but I can hardly place the blame fully at his door over this when it was conceived and pushed by the Republicans.

Personally, I don't think a modern president is equipped to deal with the complexity of the markets, I don't have a solution either, I just suspect the world has become too unwieldy for many governments.

George Bush extended this, the philosophy being that by freeing credit and money supply, the overall GDP will grow, that's been the mantra since the early 80's.

Takes a break for orange juice

Well, I'm not going to say that Clinton is the one that we should be hanging here for the problem. While he was apart of the problem he isn't the only one and it isn't just governments and that includes non-American governments, the UK government should also take some blame that are at fault here, regulators, the US Fed, the banks themselves are also to blame. It does irk me when people say Bush is the reason behind this when it is simply not the case, it irks me more when I point out reason during the Clinton years and people go "Don't you be blaming Clinton he didn't do anything wrong".

While that deregulation that is mentioned in the article is partly to blame, it certainly isn't the only thing and there is a whole range of circumstances around the world that led to this.

Um, ok. That doesn't change my main question: Wouldn't this just be like trying to get blood from a stone (or a sack of stones, whatever)? In the current environment, how can the smaller investors be expected to cover their debts if things continue to head down the crapper?
I was reading some of the commentary/discussion of the article on the website, and it is slightly more complicated still than the article makes it sound. There's apparently a lot of capital already locked up in these SIVs in the form of treasury bills and so on - they pay the bulk of the interest to the owners and act as collateral. The bank pays the extra spread, and depending on how the value of the CDOs go, the amount of collateral changes (much like in a margin account).

Anyways, point being that a fair bit of money is already in the form of these treasury bills and other assets, which the bank would quickly seize. The rest - well, the point is that it isn't a few single entities which would owe that much money, but many thousands all across the world. Of course many won't be able to cover the debts because they didn't do their sums beforehand properly, but if there are a million holders of shares in these SIVs in the world, and you ask a million from each of them that's manageable for most of them and comes to a trillion in the end too. And of course, the smarter holders of the SIVs have also have hedged their exposure to them (or would at least want to have done so by now), so things keep feeding through the system that way.

And regarding the regulation debate, here's an article about the next set of Basel rules (http://www.businessspectator.com.au/bs.nsf/Article/Lock-up-your-profits-LKU4E?OpenDocument&src=sph), which are ultimately far more important for how the global system works than those of individual countries, since they form the basis for country-based legislation and can create some sort of floor beneath regulatory arbitrage. In theory, anyways.

I'm not sure if it's stupidity, or maliciousness, tbh.
Just remember, there are tens of thousands of people working in these institutions who didn't do anything wrong, who weren't involved in this stuff or who worked in completely different departments. But right now no one is asking whether a "banker" is in fixed-income derivative structuring, in forex dealing or in M&A corporate finance. There are a lot of people there caught up in this shitstorm too, and they have a lot of stuff to worry about even without people outside the industry painting "bankers" with that broad a brush.

And here's another article about banker pay, just because it won't fit anywhere else: http://www.economist.com/finance/displayStory.cfm?story_id=12650356&source=hptextfeature

"Avalanches above, business continues below."

Did I ever tell you the story about Cowboys! Bit bit bitches?