Tuesday, September 16, 2008

AmericanGoy analyzes the market - the common man version

After the Bear Stearns fiasco, which I blogged about a few months back, the mood on Wall Street, on CNBC and other propaganda TV networks was upbeat.

The worst was over, and we could go on with making money.

Off of bullshit, as usual.

You, see, market is smoke and mirrors stuff these days.

Here's how it works.

You have heard by now that AIG is in the shit, that it is dying. Why is that so important?

Because AIG, American International Group, is an insurance company. And what they do is that they insure everything - and I do mean everything.

Some of their business - a big chunk of - is AIG insuring banks.

Let me explain, using a BBC blog article - link is here.

The title is "How banks depend on AIG".

Lets get it on!

Ken Lewis, the chief executive of Bank of America, said yesterday that "I don't know of a major bank that doesn't have some significant exposure to AIG".

Every major bank depends on AIG.

Why would banks depend on an insurance company, you ask? Good question.

Light is shed by an insightful bit of research by Sandy Chen of Panmure Gordon.

He has found the following paragraph in AIG's US regulatory filing:

"Approximately $307bn (consisting of corporate loans and prime residential mortgages) of the $441bn in notional exposure of AIGFP's super senior credit default swap portfolio as of June 30, 2008 represented derivatives written for financial institutions, principally in Europe, for the purpose of providing regulatory capital relief rather than risk mitigation. In exchange for a minimum guaranteed fee, the counterparties receive credit protection with respect to diversified loan portfolios they own, thus improving their regulatory capital position."

If you managed to read to the end of that, your reaction is probably "you what?"

Well, I'll tell you what.

AIG is saying here that it has insured $307bn of corporate loans and prime residential mortgages that are on the balance sheets of banks, mostly European banks.

Oh, AIG has its hands in American banks too, don't you worry.

So basically here is how the bullshit works - banks were giving away more and more loans during the bush bubble economy, as Bernanke cut more and more rates to keep the bubble going (interesting that the bubble was timed to puncture when Bush the retard is going away - but this is tinfoil and conspiracy stuff, now, right?).

These bullshit loans could be then made into profit on their accounting books (don't ask me how, that is too much even for me to understand - google "creative accounting" if you must, but be warned, only for the strong of heart and soul).

More profit on the books meant more money pouring in, more people buying your stock, which meant more money to loan out and "invest" which meant more "profit" on the accounting books...

To placate government investigators and regulators, banks started to take out insurance on these shitty loans they gave away, to reassure all and sundry.

Why, lookee here, we got da biggest insurance company insuring our loans! It's all good! It must be, since AIG is insuring it!

Well, a shitty loan is a shitty loan, a bad investment if you will.

But everybody made money - by creative accounting and shuffling of papers, banks invested and loaned 10, 20 or 30 dollars for every dollar that they kept in the safe.

Bear Stearns was an exception to the rule, as I blogged about here; they leveraged their money 167 times.

That is they loaned out and invested $167 to every dollar that they kept in the safe.

That is beyond greedy and irresponsible... that is almost Bush "W" stupidity and failure.

So, going back to the AIG situation:

the downgrades of AIG's credit rating that we saw last night automatically increased the perceived riskiness of loans made by banks that have insured credit with AIG.

Which means those banks' balance sheets become weaker - and that could mean that they'll be forced by their regulators to raise additional capital.

AIG was downgraded, and by law is now required to raise cash. I mean it - when a company gets downgraded like that, they have to, by law, have more dollars in the safe than they had before.

To reassure the government and investors.

But, you see, this is hard to do when you "invest" 10, 20, 30 dollars to each one you keep in the vault (Bear Stearns is a fucking record, 167 times leverage boggles the mind).

So how does that affect the banks?

The loans that the banks had "insured" at AIG are no longer insured, which might force the government regulators to downgrade these banks (see, they have no insurance now to cover their incredibly stupid loans) and so after AIG dies the banks will have to, after being downgraded, look for cash.

But, you see, this is hard to do when you "invest" 10, 20, 30 dollars to each one you keep in the vault (again, Bear Stearns is a fucking record, 167 times leverage boggles the mind).

Do you see the problem here?

And the article was updated. Re: the American banks not being affected by AIG:
I suspect that Sandy Chen has found only a part of AIG's credit protection business, since I am told that US banks are more exposed to AIG than are European banks (which is not what the regulatory filing spotted by Chen shows).

And here's a compelling wrinkle. AIG writes its credit default swaps contracts (its loan insurance business) through a French banking subsidiary.

Even so, the possible collapse of AIG isn't a French problem. What AIG needs to obtain is financial support from the American taxpayer at the top holding company level in the US - and it would then use these funds to recapitalise the French bank it owns.

What this shows is the fearful complexity of AIG's corporate structure, which just adds to the difficulty in negotiating a rescue.

Good times!

On the even more funny side of the news, the AIG stock had a short, but significant rally today. Turns out CNBC reported that the government would bail out and/or step in to help AIG, and going by that rumor the investors bravely snapped up AIG stock.

Nothing materialized... and reading the CNBC article, the statement "according to sources" is used. Which probably means that the source was Jim Cramer's ass, or perhaps someone at CNBC, or someone who had a stake to pump the stock up for an hour or two so they could sell it at 50% or more profit, fooled this "news" station.

And the herd, so easy to fool, fell into the trap.

Someone made billions in a few seconds.

I just made a few measly hundred. Oh well.

One thing that most professional analysts are missing here is the growth of JP Morgan.

Remember Bear Stearns?
JP Morgan bought them.

And just recently, WaMu, the Washington Mutual?
JP Morgan bought them.

What is JP Morgan?
Another of those smoke and mirrors specialists, aka an investment banking firm.
They also own your credit card (Chase Visa and Mastercard, etc) and by implication, you.

We shall see if the coming credit crunch (not the one happening now, but the one that will happen soon, when people default on their credit card payments en masse) will not bite them in the ass hard... and then, like AIG and Bear Stearns, their strategy will be "We're too big to fall; it will negatively impact American and global economy; so, American taxpayers, please give your work checks directly to us!".

Good times, I say.

One thing that is not mentioned on TV much, and which ties up very nicely with my blog's motto ("can't see the forest for the trees"), is this:

All the investment banks are failing. All of them.

The smoke and mirrors system of bullshit, of shuffling papers and buying and selling papers, where when you finally buy a piece of paper that states that you are entitled to a piece of paper, that then links to another piece of paper that then states that you are tied to a loan insurance paid for AIG...

That era is now gone.

The bullshit. It has exited the market, stage left.

Three out of five.

Bear Stearns, now Lehman and Merrill Lynch.

No more smoke and mirrors.

So, what is left?

Goldman Sachs, which has just seen its quarterly profit drop 70 percent and JP Morgan, which aggressively buys everything in sight.

Again, JP Morgan is the flag bearer of bullshit, because by buying their competitors at fire sale prices they show the following:

1) We are strong enough to afford those billions of dollars we pay which leads to
2) Market and consumer and government confidence that this firm is well managed and is somehow an exception to every other investment bank failing.

News for you: JP Morgan is the same like the four others, it is full of itself, it just recognized that since the whole marketplace operates on perception instead of reality, it operates on bullshit, may the best bullshitter win.

And by boldly bluffing and buying everything, JP Morgan stock price and shareholder confidence did not drop.

That will happen when, as I said before, the REAL credit crunch hits and Americans stop paying their credit card bills.

Good times!

Oh, and it was so easy to predict. If only you stopped to smell the bullshit.

The warning signs were there, and so were actual, real, honest to goodness experts - the ones that are not ever, ever, never, admitted on CNBC and other TV stations.

Experts like Nouriel Roubini, interviewed on MONDAY, AUGUST 4, 2008.

Barron's: Unfortunately for the rest of us, you have a pretty good track record. How much more misery lies ahead?

Roubini: We are in the second inning of a severe, protracted recession, which started in the first quarter of this year and is going to last at least 18 months, through the middle of next year. A systemic banking crisis will go on for awhile, with hundreds of banks going belly up.

Which banks, specifically, will fail?

I don't want to name names, but many, given the housing bust, will become insolvent. Their losses are mounting because they have written down only their subprime loans so far. They haven't started writing down most of their consumer-credit losses, and reserves for losses are much less than they should have been. The banks are playing all sorts of accounting gimmicks not to recognize them. There are hundreds of millions of dollars outstanding in home-equity loans that eventually could be worth zero, too.

Here is that "creative accounting" thing again. And yes, those home equity loans - being worth zero dollars - why, the guy was on the money. For two years before today.

The U.S. consumer is shopped out and saving less. Debt to disposable income has risen to 140% from 100% in 2000. Hit by falling home prices, the consumer no longer can use his house as an ATM machine.

The American Joe Schmoe cannot borrow against his house, which is not paid for anyway, which means... that it is not his house - he is just lending it from the bank , who is the real owner. The days of smoke and mirrors are over. And so no more second and fourth Playstations, no more rims on your truck, no more extra shoes.

But more debt, which you, Joe Schmoe, won't be able to pay.

And finally you will say fuck it, and not pay the credit card (or, smarter Joes, will strike a deal with the lenders, and pay cents on the dollar), which will prove me, AmericanGoy, right about the coming credit crunch, and really fuck up the global system of bullshit.

Good times!

Oh, and about JP Morgan - remember how they are the one investment bank that seems strong when all others are dying?

It seems someone in the America government likes them:
Why did the Fed buy $29 billion of the most toxic securities, and essentially bail out JPMorgan Chase (JPM), which bought Bear Stearns?

Because JPMorgan was a counter-party?

Exactly. The government bailed out everyone. Even the unsecured creditors of Fannie and Freddie should have taken a hit. Sometimes it is necessary to use public money to rescue institutions, but you do it in a way in which you're not bailing out those who made the mistakes. In each one of these episodes the government bailed out the shareholders, the bondholders and to some degree, management.

Again, brilliant strategy by JP Morgan. He who bullshits more, wins. By somehow convincing the US government to buy out the bullshit loans while JP Morgan took control of Bear Stearns, well...

Like I said, the strategy for JP Morgan, the smartest bullshitter, is to become so big they can't be allowed to fail. And you do that by expanding... no matter what.

And The Economist seems to agree with me:

BARRY RITHOLTZ, a prominent financial pundit, writes with tongue not entirely in cheek that the first lesson from the government’s bail-out of Bear Stearns in March was to “Go Big”. “Don’t just risk your company, risk the entire world of finance. Modest incompetence is insufficient—if you merely destroy your own company, you won’t get rescued. You have to threaten to bring down the entire global financial system.”


And now lets go off the deep end.

The brave U.S. Treasury Secretary, the all American Paulson, is making a statement - there will be no help from the FED for AIG.

Oh... Well, there will be something else though.

Here's this something else, from Reuters, Mon Sep 15, 2008:

The U.S. Federal Reserve on Sunday said it would begin accepting equities as collateral for emergency loans for the first time ever, as it laid out a series of steps to calm financial markets and brace for the expected collapse of investment bank Lehman Brothers.

Got that?


The Fed will "lend" money to companies and accept the investment banks'... word that they will repay.

Yes, really.

Wikipedia definition of collateral:

Collateral (finance) in finance means a security or guarantee (usually an asset) pledged for the repayment of a loan if one cannot procure enough funds to repay.

Do you see what is going on here?

There will be no taxpayer money used to help out AIG and investment banks.

Says the brave, heroic, patriotic U.S. Treasury Secretary chief Paulson.

Even though they were just downgraded (or about to be) to the level that by law they need more money in their vaults or die (literally die - file for bankruptcy because they will become insolvent), let them die, free market, free market, take responsibility for your actions, says the brave, heroic, patriotic U.S. Treasury Secretary chief Paulson.

Meanwhile, take this money for a piece of paper, says the not so heroic, not so brave U.S. Treasury Secretary chief Paulson.

In exchange for a piece of paper stating that "we will repay all this... someday", and probably the words IOU scribbled in a crayon somewhere, here's taxpayer money.

So yes, Joe Schmoe, it is your tax money used to bail out all these banks and other companies, and yes, basically this means that the TV "experts" and the FED and the newspapers are lying to you (again).

And I'll leave it at that - I feel that I rambled on and on, but my aim was just to simplify this whole crisis to you, my readers, and myself, when all is said and done.

Good night.

The world of smoke and mirrors and bullshit just took a tremendous hit. We shall see if the governments of the world put in more common sense rules to safeguard us, the world citizens, from stupidity, greed and venality of the Wall Street (the movie) type ruthless, criminal managers, CEO's and CIO's.

Don't count on it.


Leila Abu-Saba said...

Here's a question:

An American consumer who never uses credit to buy anything; who has kids in public school but is willing to homeschool if schools collapse (a possibility); who pulled 1/4 of IRAs into cash a month ago, and is willing to draw those down; who owes much less on the house than it is worth even after devaluation; who has 10 years left on a 15 year fixed rate mortgage, has a job, and could refi to a 30 yr to get a lower payment, because the loan is with a big bank not currently failing... and this consumer is still employed although nothing is set in stone; and this consumer lives beneath their means, i.e. saves about 11% of earnings although admittedly in 401K; and this consumer's family cars are in good order and paid for; and this consumer lives near four bus lines and has room for a garden out back, and a bit of stream, too--

why should such a hypothetical consumer be worried? OK job could go away, but everybody's job could go away. Health insurance - yeah, drag. What else? Barbarian hordes on the streets?

Seriously. Can you explain to me why this is so completely awful? ARen't regular folks tapped out anyway, and the real losers will be all those guys at the top with multi-million dollar stock portfolios?

I know this makes me sound like John McCain, but somehow I'm just failing to see how this correction is so bad. We needed a correction, a big one. It will be bumpy. But... we'll all manage... I am just not worried today.

Explain to me a bit more why folks who are prudent need to worry...

Anonymous said...

Good lord you are an idiot.

There are so many holes in your argument I don't even know where to start...so I won't.

You guys keep up your conspiracy theories and bitching, and I'll keep your financial system running.

- I work on Wall Street

Anonymous said...

Is it "anti-semitic" to point out the GROSSLY disproportionate role played by Zionst Jews in the financial industry which now is imploding after perpetuating the biggest ripoff of common folk ever?

Not only are many of the industry's top (and grossly overpaid) honchos Zionist Jews but so are all Federal Reserve Governors now bailing out their Wall Street breathren.

So it is not only on foreign policy matters that it is DANGEROUS to allow Zionist Jews excessive wealth, power, and influence.

ThePoliticalCat said...

AG, good piece. Nice research and reportage, and a certain zing! of passion. Incidentally, you probably already know that the Feds have propped up AIG with an 80 per cent investment. I'm off to find my anti-depressants now.

Anonymous said...

For the conspiracy minded:

JPMorgan= David Rockefeller

This is the "diversity recession". Goofy laws designed to make banks lend to very uncreditworthy minorities (even for home equity loans over the value of the damned house when the borrower didn't have hardly any equity in the first place), LIAR LOANS in which the potential borrower had to only STATE THEIR INCOME and not PROVE their income with W-2's, that enabled UNCREDITWORTHY MINORITIES to get into homes they could in no way afford, and the new general willingness to allow people to buy homes with no money down (thus not being invested in them and able to walk away), and the oversupply of homes (builders, drunk on illegal alien labor and thus making more profit on them than ever before, wanting to build as many as they can) have conspired to get us in this mess.

One more thingy.......ARM loans. Nuff' said.

AmericanGoy said...

Well, Leila, lets keep it simple.

In a bad economy caused by bad stockmarket, people get laid off, fewer jobs are created, people buy less, credit is harder to get...

And that 401K might be hit bad, and also other investments you might have...

You can email me if you want specifics.

Tim said...

Next, look for generated memes pushed through the media that somehow blame the public - just like that old meme that the Great Depression was caused by "a run on the banks"

It was always the responsibility of lenders to ascertain the borrowers ability to pay back a loan. And it should be.

This time, I truly hope the entire system collapses.

Leila Abu-Saba said...

I've spent a couple of years reading peak oilers and Sharon Astyk; and many many years not using consumer debt. I've got three months' supply of staples in the cupboards, and am making plans to get a 55 gallon water barrel, too. So I've done something to be prepared. No I don't have a garden or a solar panel or a wheat mill...

401(K) - well, if it goes, it goes. Everybody else's will go, too.

I worried about all this stuff for so long BEFORE it happened, that now that it's happening, I'm just not worried.

I've seen my Lebanese relatives deal with civil war, losing homes & town, murder, financial collapse, forced relocation.... It costs you, psychically as well as financially and physically. And people survive. You survive and you keep having weddings, babies, celebrations, life.

OK so I also have a really scary illness and much practice not worrying about what's not happening right this minute. If I'm not dying today then that's a good thing, and I won't worry about whether I might die next week or next year. Maybe I won't die for two decades. Cool.

It comes back to what's in front of you and what are you doing. You are breathing. You could lose your 401K and still have a decent life. The whole country could halve its consumption of everything and we'd all still be OK.

I would like to see consumption redistributed so the starving have decent food to eat and shelter. The poorest among us don't deserve to have their consumption halved. We all deserve basic medical care, and I'd like to know why the government can't do single-payer now that it's bought AIG. But we may not get any of these good things because of our political set-up.

Folks will still survive. This may really suck but at the same time, I am here to tell you that life can still be good and sweet even if lots of things seem to suck. Take it from me, I just finished 33 infusions of chemo in 10 months. My life is damn good and I'm happy to be here.

Be cool, everybody, and stock up on board games as well as pasta. You'll want to have some friends over for parties when there's no money for bars and such.

Anonymous said...

AmGoy- Thanks for writing about this stuff and trying to explaine it all to random Joe Schmoe Americans like myself. I was particulary interested in your small comment about a comming credit card crunch crisis. I tried to find some more about it on the web but I could not find much. Now that you've pointed it out, it seems only logical. I know there are folks who have low paying jobs or are out of work who are using the card to buy food and gasoline. And I also know jokers who buy every new techno crap gadget that come off the market and these guys have amassed a huge CC dept into the tens of thousands. This sure does look like a house of card just waiting for the first really good wind to blow it down. And, it's been really windy lately.
Dayton, OH