Houses on Sand

Valerie suggested that the whole Scary Financial Monster can be slain if the US government, using its vast knowledge of markets and ability to control them, were to buy up mortgage securities, separate their components, and sell them for their true value. Because, you know, those poor li’l Wall Street guys don’t really understand all that stuff as well as government regulators.

However, James B. Kelleher suggests that the beleaguered companies knew exactly what they were doing: trying to make a quick buck by playing hot potato with credit default swaps. The players typically did not perform due diligence, did not have adequate reserves on hand, and did not expect to ever actually have to pay out on these reinsurance schemes. They expected to just keep passing them around, with each pass causing them to increase in value forever, thus perpetually creating wealth from nothing.

When the credit default market began back in the mid-1990s, the transactions were simpler, more transparent affairs. Not all the sellers were insurance companies like AIG — most were not. But the protection buyer usually knew the protection seller.

As it grew — according to the industry’s trade group, the credit default market grew to $46 trillion by the first half of 2007 from $631 billion in 2000 — all that changed.

An over-the-counter market grew up and some of the most active players became asset managers, including hedge fund managers, who bought and sold the policies like any other investment.

And in those deals, they sold protection as often as they bought it — although they rarely set aside the reserves they would need if the obligation ever had to be paid.

(“Buffett’s ‘time bomb’ goes off on Wall Street,” Reuters)

That’s right:  These phony insurance deals are worth over $46 trillion dollars in total. That’s why everyone is so scared. The pain could go on and on for a long time, and swallow up a lot of financial services companies that have fake assets and underestimated liabilities. Am I supposed to feel sorry for these jerks?

“This is the derivative nightmare that everyone has been warning about,” says Peter Schiff, the president of Euro Pacific Capital at the author of “Crash Proof: How to Profit From the Coming Economic Collapse.”

“They booked all these derivatives assuming bad things would never happen. It was like writing fire insurance, assuming no one is ever going to have a fire, only now they’re turning around and watching as the whole town burns down.”

(“Buffett’s ‘time bomb’ goes off on Wall Street,” Reuters)

“But,” you say, “so many other people are dependent on them! They are just too big to fail!” No, they are not too big to fail. They are too big for their britches, and doomed to fail. Their houses are built on sand, and now they will be swept away.

A lot of innocent people may suffer, but that is not new. These companies have been externalizing costs for years, and attaching fake value to things, and building up companies on credit, and deceiving consumers and investors, and pressuring regulators to ignore their crimes . . . and now they want to be paid for their fake assets.

Screw them all.

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2 thoughts on “Houses on Sand

  1. It’s more like a holographic image of a pyramid that doesn’t exist anymore. One indication of the hypocrisy is how some claim that simply revaluing all the securities by a different method will eliminate the problem. That shows that the “crisis” is entirely fictitious.

Instigate some pointless rambling

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