The banking crisis is on the verge of ending overnight - but what then?

142857

Here is one of the most curious and disturbing articles I have come across.

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

A general summary:

- Synthetic CDS's are these shrink wrapped, complicated thingys that investors buy to earn a yearly return
- But they're basically a giant fraudulent scheme
- There are trillions and trillions worth here, businesses, charities, individuals everywhere have bought into them
- Each CDS is tied to about 100 different giant companies "unlikely" to go bust
- If 9 of these companies go bust, all liabilities transfer to the buyer, who has to pay them to the banks
- Several of these companies have already gone bust; a couple more and CDS' worldwide get owed to banks
- When this happens it's some form of D-Day where people around the world have to give all their trillions of liabilities to banks
- This may technically end the credit crisis by flooding banks with so much capital they don't know what to do with it

My question is, what then? There are tens of trillions of liabilities attached to this. How many businesses, public companies, charities, and investors are invested, intentionally or not, in these derivatives....? What happens to the real economy when the banking sector calls them in, and what happens to businesses etc who can't pay? Do banks seize them?

The banks insured themselves against collapse of this bubble certainly; very smart; but it seems like it could have the unintended consequence of complete devastation in the real economy, a paradigm shift and transfer of wealth unprecedented in our lifetimes; all while the banks capital becomes so plentiful and robust. Am I wrong?

nyarlothothep

I think one of the outcomes would be total, pure panic in the markets. Global economic meltdown on an inconceivable scale, governments and public freaking out completely, this could lead to very bad things happening at a political level as there could well be a breakdown in society of the sort which would be accurately described as zombie apocalypse chaos. I read that article, its very scary.

DJDC

I believe you are talking about synthetic CDO's. Most banks (I know GS and JPM do),do their marks each night so its BS that the whole debt structure is somehow going to collapse overnight. Also a lot of banks during the easy credit period became big seller of CDS's so its not that obvious what would be the fall-out from rising defaults leading to tranche collapses.
I dont have time to read the article so either its tabloid nonsense or you are misquoting it, I assume the former.

142857

DJDC wrote: »

I believe you are talking about synthetic CDO's. Most banks (I know GS and JPM do),do their marks each night so its BS that the whole debt structure is somehow going to collapse overnight. Also a lot of banks during the easy credit period became big seller of CDS's so its not that obvious what would be the fall-out from rising defaults leading to tranche collapses.
I dont have time to read the article so either its tabloid nonsense or you are misquoting it, I assume the former.

I'm not sure what about it you are actually countering.

Simply put; if 9 institutions of these 100 collapse, all synthetic CDO liabilities have to be paid to the banks.

Is this true or false? And what would the effects be?

Blackjack

142857 wrote: »

Here is one of the most curious and disturbing articles I have come across.

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

A general summary:

- Synthetic CDS's are these shrink wrapped, complicated thingys that investors buy to earn a yearly return
- But they're basically a giant fraudulent scheme
- There are trillions and trillions worth here, businesses, charities, individuals everywhere have bought into them
- Each CDS is tied to about 100 different giant companies "unlikely" to go bust
- If 9 of these companies go bust, all liabilities transfer to the buyer, who has to pay them to the banks
- Several of these companies have already gone bust; a couple more and CDS' worldwide get owed to banks
- When this happens it's some form of D-Day where people around the world have to give all their trillions of liabilities to banks
- This may technically end the credit crisis by flooding banks with so much capital they don't know what to do with it

My question is, what then? There are tens of trillions of liabilities attached to this. How many businesses, public companies, charities, and investors are invested, intentionally or not, in these derivatives....? What happens to the real economy when the banking sector calls them in, and what happens to businesses etc who can't pay? Do banks seize them?

The banks insured themselves against collapse of this bubble certainly; very smart; but it seems like it could have the unintended consequence of complete devastation in the real economy, a paradigm shift and transfer of wealth unprecedented in our lifetimes; all while the banks capital becomes so plentiful and robust. Am I wrong?

I've read it. IMO, it's a crock of ****, Tabloid nonesense. If you want to believe it, fine, run for the Hills, bring batteries and sell everything you can for Gold bullion.

142857

Blackjack wrote: »

I've read it. IMO, it's a crock of ****, Tabloid nonesense. If you want to believe it, fine, run for the Hills, bring batteries and sell everything you can for Gold bullion.

You've read it? So you're aware that the author himself takes a relatively optimistic view, saying that although we don't know for sure, he arrives, albeit uncertainly, at the conclusion that this would be a good thing, quickly alleviating much of the economic crisis?

Specifically, which assertions are ****? I'm trying to find out as much of this as possible, and although I've run into criticism itself elsewhere, I haven't received any specific refutations of any assertion in the article yet.

I have no problem with anyone's opinion on how right or wrong it is, I just want to know if anyone can provide some information that can assist forming a perspective on the issue. Thanks.

I refer to post #4 for my simple specific questions and answers if anyone wants to help.

"Simply put; if 9 institutions of these 100 collapse, all synthetic CDO liabilities have to be paid to the banks.

Is this true or false? And what would the effects be?"

DJDC

"Simply put; if 9 institutions of these 100 collapse, all synthetic CDO liabilities have to be paid to the banks.

Please read up on CDO's and credit deriv's because at the moment you are coming across as a sensationalist attention seeker. When you have and can write cogent arguements then we can have a discussion. Learn the basics:
How does a CDO work, what the difference between a cash and synthetic CDO,are most banks sellers or buyers of CDS etc.

Time Magazine

142857 wrote: »

"Simply put; if 9 institutions of these 100 collapse, all synthetic CDO liabilities have to be paid to the banks.

Is this true or false? And what would the effects be?"

Be cautious of any finance article that states "the ratings agencies sprinkle AAA magic dust upon it, and transform it from a pumpkin into a splendid coach."

It's tabloid rubbish. "How much? Nobody knows, but it’s many trillions." But it doesn't give any reference, nor does it say who pays whom. It just threatens WWIII, without any particular cause. Unless someone has anything substantive, or any sort of evidence how this should impact on total output, this thread isn't going to live long.

Time Magazine

DJDC wrote: »

at the moment you are coming across as a sensationalist attention seeker.

Please keep it civil, thanks.

Blackjack

142857 wrote: »

You've read it? So you're aware that the author himself takes a relatively optimistic view, saying that although we don't know for sure, he arrives, albeit uncertainly, at the conclusion that this would be a good thing, quickly alleviating much of the economic crisis?

Specifically, which assertions are ****? I'm trying to find out as much of this as possible, and although I've run into criticism itself elsewhere, I haven't received any specific refutations of any assertion in the article yet.

I have no problem with anyone's opinion on how right or wrong it is, I just want to know if anyone can provide some information that can assist forming a perspective on the issue. Thanks.

I refer to post #4 for my simple specific questions and answers if anyone wants to help.

"Simply put; if 9 institutions of these 100 collapse, all synthetic CDO liabilities have to be paid to the banks.

Is this true or false? And what would the effects be?"

The Economist wrote: »

Be cautious of any finance article that states "the ratings agencies sprinkle AAA magic dust upon it, and transform it from a pumpkin into a splendid coach."

It's tabloid rubbish. "How much? Nobody knows, but it’s many trillions." But it doesn't give any reference, nor does it say who pays whom. It just threatens WWIII, without any particular cause. Unless someone has anything substantive, or any sort of evidence how this should impact on total output, this thread isn't going to live long.

there's your answer.

142857

DJDC wrote: »

Please read up on CDO's and credit deriv's because at the moment you are coming across as a sensationalist attention seeker. When you have and can write cogent arguements then we can have a discussion. Learn the basics:
How does a CDO work, what the difference between a cash and synthetic CDO,are most banks sellers or buyers of CDS etc.

Excuse me; I did not make any arguments.

I am politely asking questions, receiving not a single answer as of yet; excuse me for asking. I have done a lot of reading on CDO's and; am ashamed to admit; am simply not bright enough to make heads nor tails of it. This is why I am asking.

The Economist wrote: »

It just threatens WWIII, without any particular cause.

The article suggests that the crisis could be over in these circumstances...

If anyone wants to help answer my question, I'd be very grateful.

"Statement; if 9 institutions of these 100 collapse, all synthetic CDO liabilities have to be paid to the banks.

Is this statement true or false? And what would the effects be?"

Blackjack wrote: »

there's your answer.

I genuinely appreciate the response and opinion; I have received no answer to my question however; merely opinions on the article that don't answer my question either way I'm afraid...

Blackjack

It's congecture at best - he's focused the entire article on one example that he himself provides, and then goes off on the doomsday scenario:

" 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.
"

And Seriously - the writer contradicts himself many times in the same article:

"nobody has any idea how many were sold, or with what total face value.
"
"The total undoubtedly runs into trillions of dollars."

If no one has any idea how many were sold, how in the name of god can anyone say it "Undoubtedly" runs into any figure?.


Further, there is not one specific example of this type of product within the article - yet this "undoubtedly runs into trillions of dollars."

Time Magazine

142857 wrote: »

"Statement; if 9 institutions of these 100 collapse, all synthetic CDO liabilities have to be paid to the banks.

Nobody knows the exact details of the contracts being discussed. It's like asking us "does Sean Fitzpatrick's contract stipulate he's entitled to two prostitute per week for the first 3.7 months of retirement?" Nobody knows, but it's unlikely. If I made that claim without backing it up, nobody would be believe me.

A friend of mine manages a mutli-billion euro hedge-fund so deals with these sorts of instruments on a daily basis. I'll ask her tomorrow. If these "trillions" of potential gains/losses aren't rolling off the tip of her tongue, I really doubt there's much to the story.

Time Magazine

The Economist wrote: »

A friend of mine manages a mutli-billion euro hedge-fund so deals with these sorts of instruments on a daily basis. I'll ask her tomorrow. If these "trillions" of potential gains/losses aren't rolling off the tip of her tongue, I really doubt there's much to the story.

The things I do for this forum. She wasn't all that impressed with me bringing up CDS's during a stroll through a park on Valentine's Day :pac:

She "highly doubts" there's much truth to the story. She's familiar with the website that the story originated from and she said "it's crap".

daveirl

This post has been deleted.

dvpower

The Economist wrote: »

Sean Fitzpatrick's contract stipulate he's entitled to two prostitute per week for the first 3.7 months of retirement

Bloody fat cats have it all