Sorry. But I just can't get enough of this shit. And I'm sure there'll be more to come. As Obama said - 'Its probably going to get worse before it gets better.'.
Now if you have been paying attention you will know that I have already qualified myself a few times now as to the fact that I fully acknowledge - I am just beginning to learn about all of this stuff, and as such am far from an authority. But that said if you watched the last part of that last video you would have noticed the lecturer make the point that he felt that one of the reasons that the Credit Default Swap market grew to be so large was because there were many "investors" making these "swaps" because they clearly saw that so many of the original "assets" were in such obvious trouble, and in that trouble lay an incredible opportunity for them to make some serious money without ever having to own the original asset in the first place. Indeed, they did have to pay premiums, but much of the money that they ultimately used to pay these premiums was borrowed money in the first place.
A kind of informed gambling on the eve of destruction - no?
(If I'm wrong about any of this I would implore anyone who knows better to please explain to me how.)
As blogger masaccio points out in this November 14, 2008 post - Bailout Money Used to Pay Off Gamblers in Credit Defaults:
When Lehman Bros filed bankruptcy, it had $155 bn in debt, but the notional value of the CDS related to its debt was $400 bn. Obviously, not everyone who bought protection against the failure of Lehman actually held its debt. They were speculating that it would fail.
Suppose I held a CDS from AIG that would pay off if Lehman failed. I would have a real incentive to see Lehman fail. I might even engage in short-selling in an effort to cause that failure. Of course, there is no evidence that anyone did that. But there are at least two things that might make a competent regulator/investigator ask questions. First, the regulations that restricted short-selling were substantially repealed. The last of these, the up-tick rule, was repealed in 2007 by the SEC. This rule was put in place in 1938, for the express purpose of preventing a bear raid, an attack on a company, designed to weaken or destroy it. Second, in the immediate aftermath of the collapse of Lehman Bros., the SEC imposed a ban on short-selling of financial stocks.
Taking all this together, it appears that by bailing out AIG, us taxpayers are making sure that a bunch of gamblers are going to get paid off on bets against the solvency of a whole lot of companies.
Could this be one of the reasons, for instance, that the U.S. Treasury is refusing to identify the recipients of almost $2 trillion dollars in emergency loans - a state of affairs that has now caused Bloomberg news service to sue the government:
The Federal Reserve is refusing to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral.
Fed Chairman Ben S. Bernanke and Treasury Secretary Henry M. Paulson said in September they would comply with congressional demands for transparency in a $700 billion bailout of the banking system. Two months later, as the Fed lends far more than that in separate rescue programs that didn't require approval by Congress, Americans have no idea where their money is going or what securities the banks are pledging in return.
Bloomberg News has requested details of the Fed lending under the U.S. Freedom of Information Act and filed a federal lawsuit Nov. 7 seeking to force disclosure.
The Fed made the loans under terms of 11 programs, eight of them created in the past 15 months, in the midst of the biggest financial crisis since the Great Depression.
Indeed, as this LATimes blog post from 11.10.08 notes:
The Fed, of course, can argue that it has a good reason for keeping borrowers’ identities secret: It doesn’t want to risk another banking panic by giving stock traders and depositors a list of institutions that would immediately be seen as the weakest links in the financial chain. No regulator wants to force a failure if there's a decent chance an institution could survive, with time.
Especially if it would be possible to then in turn to purchase more CDS's on these "institutions" that are the "weakest links", if this in fact is what is really going on, so as to make more profits out of their imminent demise, profits that would now be coming directly out of the U.S. Treasury, which in turn would be borrowing the money.
I should reiterate once again that I am basically coming at all this stuff from the position of wondering about all the enormous opportunity costs now fading brutally into the proverbial sunset:
Opportunity cost or economic opportunity loss is the value of the next best alternative foregone as the result of making a decision.
Remember Obama's energy plan that called for a $150 billion dollar investment over ten years which was designed to "end America's dependance on Middle Eastern oil", "create 5 million new green jobs", and even possibly the creation of an entire new "green" electricity grid?. The environmental dividends that this action alone could pay for future generations are absolutely enormous. So it sounds like a good idea to me, unfortunately it seems that the first order of business is going to require paying off Buddy's Hedge Fund. Sorry, kids. Let Daddy try and explain ...
The World Bank estimates that the cost of achieving the Millennium Development Goals is between $40-60 billion dollars a year until 2015. The idea only being to end "extreme poverty", and like, you know, basically save the world.
Unfortunately, as I pointed out in my last post on this subject the cost to the American taxpayer of this "Credit Crunch" bailout so far is presently - $7.8 trillion dollars. And all of that, borrowed money basically.
So thus my basic charge remains:
We have already seen in this time of the Administration of George W. Bush massive increases in money flowing out of the revenue column of the U.S Government for tax cuts for the most rich as well as to the full gamut of the Defense Industries (much of it to "private contractors", and much of it "classified") in all its assorted forms. And now in these twilight days we are now seeing these absolutely colossal, unprecedented cash outlays to the financial industry as well. And how much of that is going to effectively pay off somebody's bet?
And if this borrowed public money is now going to some very rich, very smart, very well connected people who basically saw all this coming for a while now and in turn devised a way to enrich themselves even further because well, because basically they could - just how fucking cynical is that?
And does this not then amount to basically one of the largest transfers of wealth ever?
And at any point - does this basically amount to theft? I'm pretty sure how I feel about it morally - but is there any question of criminality?
Just thinking out loud here.
The financial meltdown has made it impossible to ignore the blatant irrationality of global capitalism. In the fight against Aids, hunger, lack of water or global warming, we may recognise the urgency of the problem, but there is always time to reflect, to postpone decisions. The main conclusion of the meeting of world leaders in Bali to talk about climate change, hailed as a success, was that they would meet again in two years to continue the talks. But with the financial meltdown, the urgency was unconditional; a sum beyond imagination was immediately found. Saving endangered species, saving the planet from global warming, finding a cure for Aids, saving the starving children . . . All that can wait a bit, but ‘Save the banks!’ is an unconditional imperative which demands and gets immediate action. The panic was absolute. A transnational and non-partisan unity was immediately established, all grudges among world leaders momentarily forgotten in order to avert the catastrophe. (Incidentally, what the much-praised ‘bi-partisanship’ effectively means is that democratic procedures were de facto suspended.) The sublimely enormous sum of money was spent not for some clear ‘real’ task, but in order to ‘restore confidence’ in the markets – i.e. for reasons of belief. Do we need any more proof that Capital is the Real of our lives, the Real whose demands are more absolute than even the most pressing demands of our social and natural reality?
Compare the $700 billion spent on stabilising the banking system by the US alone to the $22 billion pledged by richer nations to help poorer nations cope with the food crisis, of which only $2.2 billion has been made available. The blame for the food crisis cannot be put on the usual suspects of corruption, inefficiency or state interventionism. Even Bill Clinton has acknowledged that ‘we all blew it, including me,’ by treating food crops as commodities instead of a vital right of the world's poor. Clinton was very clear in blaming not individual states or governments, but the long-term Western policy imposed by the US and European Union and enacted by the World Bank, the IMF and other international institutions. African and Asian countries were pressured into dropping government subsidies for farmers, opening up the way for the best land to be used for more lucrative export crops. The result of such ‘structural adjustments’ was the integration of local agriculture into the global economy: crops were exported, farmers were thrown off their land and pushed into sweat-shops, and poorer countries had to rely more and more on imported food. In this way, they are kept in postcolonial dependence, vulnerable to market fluctuations – soaring grain prices (caused in part by the use of crops for biofuels) have meant starvation in countries from Haiti to Ethiopia.
And now, this morning, with the possible impending bankruptcy of General Motors, I had to ask myself the obvious question - who stands to make a lot of money shorting GM debt through Credit Defalut Swaps? I mean they have to be out there.
The Depository Trust & Clearing Corporation reports that there are over $65bn in credit default swaps naming GM as the reference credit. According to its most recent financial statements, GM has a total of $36 to 38bn in outstanding long-term debt, the kind associated with CDSs. Obviously not all of the protection buyers hold GM debt. There is a lot of money bet against GM’s survival, and the holders of that protection have a real reason to want GM to fail. I’d call that gambling, and I explain why in this diary. It’s important to note that the losses won’t affect GM. Only the protection sellers will have to pay off the bets.
So, if I am reading this right, that is probably over half of GM's "long term debt" wrapped up in Credit Default Swaps - "holders" of which have a direct financial stake in GM's failure. (Are we going to read about and see this as the narrative in the main stream media? I doubt it, as I see now that the problem apparently lies with the Unions) That's certainly more than twice the cost of what the actual bailout would have been. And as Michael Moore explained on CNN - at its present price the U.S. Government could just buy "the company" (GM) for three billion dollars, and then they would own it outright. But of course then you would also own all that "long term debt" as well, with just so much of it coming from pure speculation.
Unfortunately, we have no idea who those gamblers are. The CDS market is private and hidden. The information provided by DTCC was the first public release of data about CDSs, which means there isn’t even any historical data from which we could figure out when all these gamblers bought their lottery tickets.
It's easy to think of people who might want GM to fail. One group might be those who want to buy the pieces cheap. That might include other car companies, or private equity funds. Another group might be hostile governments, who might like to see the US lose industries that can produce weapons and war-fighting machines. In either case, betting against GM provides a bunch of money to support whatever other goals those people might have.
Any other suggestions?
Update: I wonder if any holders of protection are lobbying against a bailout?