Global financial system implosion begins

[Kaka Tim]

6% wiped off the FTSE already and it s not even lunch time. What time does wall street open?

Can't belive Im checking for updates on the stock market - but the title of this thread has gone from sounding over dramatic to looking more like understatement.

Anyone who knows what their talking about any idea how bad this could get? Could we see major economies bankrupted by the end of the week?

 

[poului]

57tguyb7uk

Looks like the banks are taking another massive hit.

FTSE down 270 points!

 

[Talkie Toaster]

My official sources tell me that the German government is not legislating to formally increase protection for savers. What Angela Merkel did, they say, was give a "political" commitment that no German savers would lose a penny - which is more-or-less identical to the commitment given by our Chancellor of the Exchequer, Alistair Darling

From: http://www.bbc.co.uk/blogs/thereporters/robertpeston/2008/10/what_the_germans_did.html

So a "political" commitment is not something that actually means something. Looks like it will backfire fairly spectacularly though as other European nations all start guarunteeing all savings thus forcing Germany and the UK to do the same.

 

[newbie]

I can see a difference between a political commitment to banking stability and a legal requirement that the poor will guarantee the assets of the very rich.

Dunno about Germanyu but in the UK, only 4% of savers have savings above £50,000, so to make the guarantee will require the other 96% of us to look after the richest individuals. How can that be reasonable?source

 

[gosub]

Just to keep it in perspective:

The largest the CDS market ever got was US$70trillion not a quadrillion, is around US$56trillion now. If you had read any of Bob Woodward's books, whilst there is considerable waste in the Pentagon, the 25% was arrived at by Rumsfeld himself in order to justify the increasingly tight reign he put on the Pentagon.

 

[gosub]

From: http://www.bbc.co.uk/blogs/thereporters/robertpeston/2008/10/what_the_germans_did.html

So a "political" commitment is not something that actually means something. Looks like it will backfire fairly spectacularly though as other European nations all start guarunteeing all savings thus forcing Germany and the UK to do the same.

It only worked when there was Ireland doing it, kept quite while reading the "government bailing out the rich stuff" on Fridayish. Would have worked quite the opposite was about attractiing the rich in to act as an umbrella for Joe public. Once everybody starts doing it no competitive advantage and the likelihood of positions being called...

Now is looking like Oct '29. Expecting to see the emergence of Union of Debtors before the spring.

 

[TomPaine]

Having come up in another thread I was just wondering of the failures in Iceland are there equivelant of the Darien expedition. A financial failure so huge it ultimately destroys your sovereignty . The fishing rights are dwarfed by the debts and the currency is under imense pressure.

I can see this as a possibility. The Icelandic government has resisted joining the EU, however the Unions are pro-EU. Currently the Unions are being asked to bring their pension funds back into Iceland in order to bolster the economy, however they are using the "Join the EU" card as a bargaining chip.

So yes it is a possibility that Iceland will join the EU. However no doubt they will have their own little "red lines" one of which may be more control over their fishing grounds and quotas.
I can't see Brussels saying no to Iceland joining in return for that guarentee. Like everything in the EU, it will be undermined in time, and the Icelandic people will realise they have been fucked over when it is too late.

TomPaine

 

[elbows]

Oh blimey the FTSE is now down more than 7% and Darlings words of reassurance have not helped.

Its times like these I really wish Id bought some gold 4 year ago instead of just thinking about it.

 

[kyser_soze]

No one seems to be making the point too loudly that the EU has already stated that any and all of the national guarantees might not be legally binding - as one bod pointed out after Ireland, 'At least the UK asked us first'.

This could potentially be worse for the EU politically than economically in the long run - lots of people pissed off with Ireland (whom they were pissed with anyway for being a zero-tax nation so lots of German, French etc companies relocating HQs there) for starting this ball rolling...

 

[zion]

Words and big gobs of mystical who-knows-where-it-will-come-from cash are not going to solve this one.

A clear commitment to regulations that will prevent this kind of confidence trick in the future would be better.

This is going to sound unsympathetic. Even that won't stop the banks and other firms heavily invested in mortgage CDOs from going under. Good. They were stupid, they deserve it, and they should lose their jobs for it. And the people who invested in those banks were also hoping that they would make a killing before the lights went out. Party's over, dudes. Invest your money better next time.

 

[Talkie Toaster]

I can see a difference between a political commitment to banking stability and a legal requirement that the poor will guarantee the assets of the very rich.

Dunno about Germanyu but in the UK, only 4% of savers have savings above £50,000, so to make the guarantee will require the other 96% of us to look after the richest individuals. How can that be reasonable?source

My point was really about political commitments vs real commitments. You're right though, guarunteeing that last 2% could cost a lot.

 

[paolo]

Another grim day at the wharf, the Reuters ticker doing a roaring trade in down-arrows.

On many of the previoslus 'Black' days, the bars have, oddly, been thriving. Perhaps it has been that British response to a crisis - let's go to the pub. Today though it seems markedly subdued. Perhaps it's all finally sinking in.

 

[elbows]

Well that was the biggest one day fall since the 1987 woes. Politicians appearing increasingly impotent today. Europe will meet again tomorrow and try to offer something a little more united & concrete I presume.

 

[elbows]

Also eyebrow raising how last weeks crash was blamed on Congress, yet once they passed the bill things have slid further.

At least TINA is dead. The free market fools now look even sillier when they try to blame government regulation for this mess. Discredited overnight, they will remain in denial for a while, but few can now doubt that politics is back, the neoliberal concensus of 'there is no alternative' is all washed up.

 

[newbie]

surely the logic is that money in stocks & shares might lose but money in (some) banks is guaranteed not to lose. So sell, sell, sell

 

[zion]

Congressional inaction on the bailout was not the problem. Congressional deregulation of the financial markets, and lack of will to assertively re-regulate them, was and is the problem. A willingness to raise taxes to pay for some of this would also signal a degree of fiscal responsibility of which they have hitherto shown themselves incapable, but hey, let's see what we can get.

 

[gosub]

Well that was the biggest one day fall since the 1987 woes. Politicians appearing increasingly impotent today. Europe will meet again tomorrow and try to offer something a little more united & concrete I presume.

Even ignoring the origins, they are/have been a big part of the problem. liquidity crisis(es) has been caused first by banks realizing there was a problem and not wanting to play, and the politicos throwing money at it without addressing the fundamentals, like some fruit machine addict whose dipped into the rent, then thinks the only way out is to keep pumping money in til it pays out. Then they come up with vague half arsed solutions which have a similar effect to giving Rolf Harris a large canvas and a 9" roller, the market sits and waits til after the "can tell what it is yet moment" when it becomes clear it is not the master piece they have been waiting for.

If as has been patiently clear, they have no idea, they should stop pissing tax payers money away, sit down, have a cup of tea, and work out how best to apply a dust pan and brush to the insolvency crisis that will occur once the dust has settled.

 

[elbows]

Im not sure its so much that they have no idea, as there may just not be a solution. Its not like there is anything in particular that the markets can be told that will restore the amount of faith, trust & confidence thats been lost in the last year or so.

 

[big eejit]

There's some very good analysis of what's going on in the comments on this story from today's Guardian website,

http://www.guardian.co.uk/business/2008/oct/06/marketturmoil.banking

Particularly good stuff from someone called Golem XIV, such as:

"WHY won't the banks lend to each other? That is the questions that needs an answer.

They won't because each knows the others are insolvent. they're not 'having liquidity' problems, their INSOLVENT.

If they were having 'liquidity' problems then the crisis would be over because more than enough hundreds of billions has ALREADY been put into the system. It hasn't solved the crisis.

The banks aren't lending because they all know they are insolvent and therefore all know any one of them could be the next to go. Taking with them anything another bank had been foolish enough to lend them. Hence, no one will lend.

How can they possibly be really insolvent? After all they have all those 'assets' that are just waiting for the market to re-value, right. That's certainly the official line. But it is actually the fiction that lies at the heart of the crisis. And it's not hard to understand.

The essence of this crisis is that a few years ago the banks got fed up being limited by the government controlled flow of money ( euro's pounds, dollars etc) They came up with a simple money making plan. Invent a new currency that was not regulated at all. They called variously, Mortgage backed securities and debt backed paper. It is just like real money. It has a promise to pay the bearer on it. Only it's not the government of a country promising to pay the bearer based on future tax revenue, its some blokes in America who promise to pay their mortgage.

Sounds dodgy now, but back then it was literally a license to print money. Which they did. They got carried away. At the start the 'paper' was backed by solid gold AAA rated mortgages. People who would absolutely be able to pay. But soon the bankers did what very greedy idiot in history has done, they decided to debase the currency so as to be able to print more. They started writing mortgages to people who would not be able to pay. Think of these mortgages as the equivalent of tin. They mixed these tin mortgages into the solid gold ones (that is, they sliced up the mortgages, slicing up AAA with rubbish) and sold the lot on.

The people they sold this paper to, took it at the value the seller claimed. Just like you do when you get a ten pound note. Only the 'real' value of these bits of paper was and is false.

They knew this full well at the time. That is why when they first sold this paper, they had to insure it. This is where credit defaults comes in. The buyers knew the paper wasn't gold plated. So the sellers said, don't worry' we'll insure it against default. That way you're covered. Credit defaults made everyone even more money and 'spread the risk'. Lovely phrase. It means all the banks and brokers and insurance companies like AIG tied themselves firmly together, so that, as is now happening, when one falls over carrying his anvil of dodgy debt and worthless paper he pulls everyone down after him.

That is why the bail out will not work. It does not address the real problem."

More good stuff from him and others on the page I linked to.

 

[elbows]

Well in that sense the US bailout was designed to address one of the underlying problems - it was supposed to take the bad toxic debt off the banks, and therefore they would start to trust eachother again.

 

[big eejit]

Well in that sense the US bailout was designed to address one of the underlying problems - it was supposed to take the bad toxic debt off the banks, and therefore they would start to trust eachother again.

The poster on the Guardian addresses the point about the bank's toxic debts in another post further down the page. This is the relevant bit - sorry for the long C&P but I found his explanations very clear and quite convincing::

"Everyone is hoarding real money -the hedge funds, the money Market funds, the banks. Because they all know the debt currency is dead and cannot be resurrected.

They say, 'Oh when the economy picks up the value will return'. They know this is a lie. Apart from the fact that value cannot return for most of the paper (Most of the paper isn't directly valued by some house waiting for property prices to go up. Most of it is highly structured and many time removed, from anything of real use value) . But there is a more fundamental point that hasn't been talked about AT ALL.

All these banks may have these 'assets' but so long as they have to wait for years and years before they can use them - then the economy based on those 'assets' on that debt backed money, is frozen and cannot come back to life. Which means as long as these assets are on the books AT ALL the economy tied to them will remain in crisis. How long can an economy that must produce employment and basic goods survive when its credit system is frozen?

AND YET there is real money out there. Pounds, dollars and euros. Insitutions have piles of the stuff. BUT they won't release it into the same pool as poisoned by the other stuff.

So we, ordinary people and the businesses we rely on, cannot get our hands on real money that is out there. And we won't UNTIL the debt backed poison stuff is flushed away.

There is enough money to get a new banking system working. But it won't get put into circulation until the banks who hold the poison stuff are forced to let it die on the open market.

No one has the balls or the clout to say this out loud and force it to happen. I think Mervin King knows this and is one of the few I think who might even be arguing for it. The US is so in the pockets of the insitiutions who hold the bad stuff they cannot make it happen.

We are all being held to ransom by people who hold worthless assets but who have the power to refuse to admit it.

WHat the US bail out plan is, is an attempt to make sure everyone is roped tightly to the doomed institutions so that we all get pulled down together."

 

[elbows]

Well I agree with some of that, but I figure we are roped to the failing institutions anyway because they are banks. And Im not exactly sure what flushing the toxic debts involves, how eactly is that achieved? I thought they were being unwound gradually via the bailouts and bank collapses.

Its not like the real economy was looking healthy anyway, so there are plenty of factors other than the debt insanity that mean we should all be feeling a lot poorer for decades to come. Some of the bank debt insanity in recent years has propped up the real economy, postponed the dotcom bust pain for years, inflated other bubbles like housing. Now that things have gone bad it will amplify the pain, but I wont forget that it wasnt just a few bad institutions and crazy risk-taking bankers that got us into this mess. The system & politics wanted them to behave that way to plaster over other economic cracks that were forming.

Anyway hopefully they will deal with the toxic unreal debt/money and I can learn what the solution to that problem actually is, but the damage is done now so even with that fixed we are going to face many other serious problems that need fixing. I anticipate we will end up with a very different economic system once all is said and done, and the political implications are immense, but its early days so I guess I'll just keep watching day by day and try to learn something.

 

[darkfibre]

WHat the US bail out plan is, is an attempt to make sure everyone is roped tightly to the doomed institutions so that we all get pulled down together."

Or as one blogger put it today: 'this is akin to lashing a dingy to the Titanic to prevent it from sinking'.

 

[david dissadent]

Dow closed below 10 000.

 

[elbows]

The FT has some news on the CDS front.

http://www.ft.com/cms/s/0/7a268486-93cd-11dd-9a63-0000779fd18c.html

The Federal Reserve will meet dealers, investors and exchange executives in New York on Tuesday to try to speed the creation of a central counterparty for the credit derivatives sector.

and

On Monday, defaulted credit derivatives linked to Fannie Mae and Freddie Mac were settled at 92 to 93 cents in the dollar. With up to $500bn of credit derivatives linked to them, this could mean pay-outs of about $35bn by sellers of default protection.

 

[david dissadent]

link

More on the CDS.

Today’s auction of credit default swaps connected to Fannie Mae and Freddie Mac is a vital step in valuing what the complex financial instruments are worth. The auctions may also give the financial markets a glimpse of whether the swaps provide proper credit protection against risk of default—or whether they actually destabilize credit markets.

...

Today’s auctions are critical because they set the price of the payouts on the swaps. If the payouts are too expensive, several more financial institutions may be in jeopardy of falling into bankruptcy.

...

Similar auctions of credit default swaps have been held since 2005 with few problems. But today’s auctions—and those that will follow in the next few week—are tied to the string of financial institutions that failed in September.

Observers said that because Fannie Mae and Freddie Mac are under conservatorship and the U.S. government said it would back their bonds, the swaps being auctioned today still have some value.

“Those obligations still represent a right to future payment that will probably be made by the federal government,” said a securities lawyer who chose to remain nameless.

It is unclear how credit default swaps for Lehman Brothers and Washington Mutual will be valued, because those two businesses went into bankruptcy without backing from the U.S. government.

It is estimated that swaps payments on Lehman Brothers bonds, which will be auctioned on Oct. 10, could be worth $350 billion. Auctions for credit default swaps for Washington Mutual will be held Oct. 23.

If the valuations arrived at in these auctions prevent swaps sellers from meeting their obligations, expect to see lawsuits.

“Because of the lack of precedent and the complexity of the legal instruments, there is the possibility that buyers and sellers are not going to see the process in the same way,” said Mr. Swett. “We are dealing with virgin territory in a lot of ways here.”

Within a month we should have a better idea of how this will all pan out.

 

[zoltan]

This is long overdue ^^^

The futures markets , say in LOndon, Ae guaranteed by the central counterparty - this means that although you do a deal with dealer XYZ, your liability novates to the LCH, who acts as the counterparty to both legs. The LCH has something like £25Bn swilling about in its coffers, extracted from each member on a daily changing basis, depandant on the size of their positon - if XYZ goes under, then its not really a problem, as they have already lodged their commitment - no ifs, no buts - every single day - their cash libaility is covered in a worst case scenario - it also allows transparecy - THEY know what your positions are , as well as everybody elses

THis ensures that confidence remains with trading members and it works - take the barings implosion for example - Leeson ( who I used to use on the Singapore exchange ) fucked his bank, but not the banks counterparties - he lodged pretty much the whole cash reserves of the bank on his spiralling positions in the wake of the Kobe earthquake

This has its limitations , as it can only cover a pre-determined number of simple transactions in a transparent market

The problem is that its hard to make stupid money in a transparent market without taking huge risks & financial commitment to play - big volume houses make OK money, but they cant meet shareholder expectations of year on year growth in such a public & relatively open arena alone. The Banks who have remained "secure" Are the ones who have played the game and looked at long term steady revenue, as opposed to what could be described as financial alchemy - Plodders are not glam - sexy, big swinging dicks are. We may cry foul at these people - maybe rightly so - but each one of us who has shares or a pension or a unti trust blah blah blah is equally responsible for demanding better returns - otherise we would stick or cash into premium bonds or low interest savings accounts, otheriwise, what would be the point ?

The CD market is , quite frankly, mostly outside the auspices of such an authority for many deals - the complexity can be huge - no 2 deals are the same - there is no benchmark to measure against, no market to gauge risks against - but this doesnt mean that it cant be done


It irks the deal makers to have to back their alchemy with hard cash lodged as a bond with a secure third party

The pressures of developing even more complex and niche products to exploit a wide array of disparate events has lead to this explosion of ad hoc deals, each set up to meet its counterparties specific , exact, needs - and this is its downside, this is what we are seeing now

I do feel if we have to accept capitalism as a basic system - this isnt the time for philisophical debates on the matter, as its what weve got and its not likely to change on the near future - then active & proactive regulation is the key & expectations have to be brought in line to accomodate this

Everyone is happy when their few hundred shares are pumping out 10% a year dividends or their market invested pension pots are rising by 20% PA, but the failure to realise that we mostly all in some way, willing parties to the whole crisis, with our innate greed and avarice

We are all to blame. Some of us anyway.

um

 

[elbows]

Well a rather large adjustment to our expectations is also what the energy, environment & climate change woes require in order that we may actually be sustainable. Just a shame its going to suck so much and there is no cert that we'll end up with anything fairer in the end.

 

[bendeus]

Speech by the PM of Iceland accepting the inevitable. This is terrifying stuff

http://eng.forsaetisraduneyti.is/news-and-articles/nr/3035

Thus a decision on wide-ranging rescue measures for the Icelandic banks is not only a matter of tax payers shouldering a heavier load temporarily, but concerns the position and future of the Icelandic nation as a whole.

in the perilous situation which exists now on the world’s financial markets, providing the banks with a secure life line poses a great risk for the Icelandic nation. People must bear this in mind when there is talk about the Icelandic state taking on loans of thousands of billions to defend the banks in the rough waters which they now find themselves in. There is a very real danger, fellow citizens, that the Icelandic economy, in the worst case, could be sucked with the banks into the whirlpool and the result could be national bankruptcy.

The position has today altered completely and for the worse. Major credit lines to the banks have been closed and it was decided this morning to suspend trading with the banks and with the savings funds in the Icelandic Stock Exchange.

If there was ever a time when the Icelandic nation needed to stand together and show fortitude in the face of adversity, then this is the moment. I urge you all to guard that which is most important in the life of everyone of us, protect those values which will survive the storm now beginning. I urge families to discuss together and not to allow anxiety to get the upper hand even tough the outlook is grim for many. We need to explain to our children that the world is not on the edge of a precipice and we all need to find an inner courage to look to the future.

That. Shits. Me. Up.

 

[rich!]

Speech by the PM of Iceland accepting the inevitable. This is terrifying stuff

http://eng.forsaetisraduneyti.is/news-and-articles/nr/3035

That. Shits. Me. Up.

I can faintly hear the swelling of rousing martial music, and I'm sure I saw some flags waving...