Wall Street, we have a problem.....

[WCGreen]

The credit bubble is just starting to unwind, a credit-derivative insider says. And while U.S. borrowers are being blamed for the mess, they were really just pawns in a global game.

(more)

Now it may seem hard to believe, but much of the past few years' advance in the stock market was underwritten by CDO-type instruments which go under the heading of "structured finance." I'm talking about private-equity takeovers, leveraged buyouts and corporate stock buybacks -- the works.

So to the extent that the structured finance market is coming undone, not only will those pillars of strength for equities be knocked away, but many recent deals that were predicated on the easy availability of money will likely also go bust, Das says.

That is why he considers the current market volatility much more profound than a simple "correction" in prices. He sees it as a gigantic liquidity bubble unwinding -- a process that can take a long, long time. While you might think that the U.S. Federal Reserve can help prevent disaster by lowering interest rates dramatically, as they did Wednesday, the evidence is not at all clear.

http://articles.moneycentral.msn.com/Investing/SuperModels/AreWeHeadedForAnEpicBearMarket.aspx


It's worth the fifteen or so minutes to read and think about to get a handle on what is really happening in the wide world of financial speculation...

As usual, the mavens of Wall Street have concocted another in a long series of legal Ponzi Scheme's that are threatening to unravel and wipe out all the economic gains of the past five years...

These CDO's (collateralized debt obligations), this decade's version of the Milken Junk Bonds, have been sold and resold so many times around the world and back again that no one, not even the Great Bernanke, will be able to unwind this freakin' mess...

Funny that this happened under the "adult" supervision of a megalomaniac who, just yesterday, lied about his B in Econ 101, he earned himself a c-...

Anyway, read it and weep...

'Nuff Said....

[NMDemDist2]

1. rec #3

[Phrogman]

2. Its like a virus isn't it? The globlal financial system has has a destructive virus running

its going to crash the system?

Am I wrong?

Its what it sounds like.

[WCGreen]

3. It's gonna unwind....

the catch is gonna be how fast and how widespread the problem paper goes...

[Journeyman]

4. K&R. . .

thanks. bookmarked to read in the morning.

[liberation]

5. "threatening to unravel and wipe out all the economic gains of the past five years..."

... what economic gains? Adjusted for inflation, the DOW has barely propped itself back to where it was almost a decade ago. Breaking even is not a gain, it is a parity.

Also adjusted against international money markets, if you do an adjustment against the Euro, the US economy has then lost over 30% of its value in the past 5 years alone.

We work more to earn less -when things are adjusted for inflation- than a couple of decades ago. While the people who don't do real work get to earn more... I for one welcome the future adjustment. It is going to be a bumpy ride, but as long as you actually have some real assets you should be fine. I will buy ear plugs to deal with the legendary hissy fit that all the speculators are going to be throwing real soon.

In any case, when dealing with economic crisis it is always better to use some Monty Python wisdom to look at the bright side of life: "you come from nothing, you become nothing... what have you lost? Nothing!"

[Greyhound]

7. Different concepts of "the economy". From Wall Street's perspective,

the economy has been good because they have sucked enormous amounts of capital out of working people's pockets.

From our perspective it has been steadily downhill for at least 35 years. The unacknowledged class war is coming to a head, they've been preparing, we've been pretending it doesn't exist.

[tech3149]

6. Thanks Green! That's why I love DU

I could never dig up 1/10 of the important news I find here.

[unblock]

8. structured products are here to stay and are barely to blame, if at all

structured products usually feature credit enhancement and other investor protections so that they can get out intact even when the underling collateral underperforms.

the conduits that are really in trouble are the ones who did NOT invest in structured products and instead bought up whole pools of subprime mortgages with no protection beyond simple diversification within the subprime sector. but diversification within subprime doesn't help if all of subprime is tanking.

true, in the short-term, all conduits are being tarred with the same brush, but soon enough investors will realize where they need to put their money and they can't keep it in treasuries forever.


all markets are cyclical, and yes it's turning. but not ever market turn is a calamity.

[Adelante]

9. k

:kick:

[fasttense]

10. Borrowing to buy CDOs, then borrowing against those CDOs.

"Here's how it worked: In olden days, like 10 years ago, banks wrote and funded their own loans. In the new game, Das points out, banks "originate" loans, "warehouse" them on their balance sheet for a brief time, then "distribute" them to investors by packaging them into derivatives called collateralized debt obligations, or CDOs, and similar instruments.

The more loans that were sold, the more they could use as collateral for more loans, so credit standards were lowered to get more paper out the door

Buyers of these credit risks in CDO form were insurance companies, pension funds and hedge-fund managers from Bonn to Beijing. Because money was readily available at low interest rates in Japan and the United States, these managers leveraged up their bets by buying the CDOs with borrowed funds.

So if you follow the bouncing ball, borrowed money bought borrowed money. And then because they had the blessing of credit-ratings agencies relying on mathematical models suggesting that they would rarely default, these CDOs were in turn used as collateral to do more borrowing.

The liquidity factory was self-perpetuating and seemingly unstoppable. As assets bought with borrowed money rose in value, players could borrow more money against them, and it thus seemed logical to borrow even more to increase returns. Bankers figured out how to strip money out of existing assets to do so, much as a homeowner might strip equity from his house to buy another house.

These triple-borrowed assets were then in turn increasingly used as collateral for commercial paper -- the short-term borrowings of banks and corporations -- which was purchased by supposedly low-risk money market funds."

Now who was it that said the cause of the Great Depression was that speculators borrowed money to buy stocks, and that is illegal today?

Here is something I never knew:

"CDOs were first widely used back in the late 1980s by Drexel Burnham Lambert junk-bond king Michael Milken to sell off damaged and previously unsellable debt in a way that was more palatable to customers."

[Le Taz Hot]

11. THANK YOU

for explaining this so clearly! I tried to read the article but confess I understood about 10% of it. Could you kindly pop in on all the financial threads and offer clarification? Thanks in advance. ;-)

LTH

[CaliforniaPeggy]

12. K&R...