Helen & Harry Highwater's cranky weblog of news and opinion.
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"News that's not known, or not known enough." Helen & Harry Highwater's cranky weblog of news and opinion. |
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Are Ponzi schemes behind the financial sector fragility we're seeing? by Marie K. SO, the Senate passed the bailout bill which I assume is basically the same as the bill proposed all along. It also has some unrelated "extras." It doesn't seem to be working. What was it intended to do? Why isn't it working?
INTENDED TO DO? As I've written before, a lot of mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs) along with asset-backed securities (ABSs) and collateralized mortgage obligation (CMOs) were sold. Each has its own cash flow, but what really matters is that if this flow is cut off, its full value is still obtained -- that was the "promise" of the credit default swaps (CDSs). They were the "brainchild" of the derivative people who placed a lot of bets on the other instruments. Of course, they called it providing "insurance," and they received "premiums" from every one of the contracts they made with MBS and CDO, etc. holders. Actually, they were betting that the mortgages/loans underlying those MBSs and CDOs, etc. would NOT default, but they did and are. This means that they are obliged to provide the full value of the MBSs and CDOs, etc. So, now all of those contract holders holding millions of MBS, etc. and CDS contracts are still waiting to be paid off. It seems pretty clear that they HAVEN'T been and that there's not much hope that they will be -- given that the banks and other institutions most "invested" in these "securities" and swaps are now failing. That leads me to believe that the CDSs were basically a Ponzi scheme -- i.e. all the money comes from the money put in by new "investors" UNTIL the promised payoffs are more than can be paid off and the scheme collapses. They ARE illegal. Perhaps technically I'm wrong and the reason the payoffs haven't been made is that too many defaults happened at one time. Clearly, though, something major has gone wrong given the frantic calls for the bailout and the illegal passage of the bailout bill. Some are now pointing out that with the death of the bill in the House, the Senate should not have been able to vote on it. As far as I can tell, the bailout seems to have several goals (as the articles listed below confirm):
WHY ISN'T THE BAILOUT WORKING? In the meantime, the foreign banks, etc. that are most in trouble are being bailed out by their own governments. If the US can't come through for them (they ARE responsible for this), the US WILL end up losing its dominance. SO, what has gone wrong? Why isn't the bailout working? As some articles have indicated, the bailout bill was very "limited" in its goals. There is NO intention of reforming or banning the instruments involved in this whole mess. As for reconsidering the whole idea of a "secondary mortgage market" that sees mortgages as a stream of future cash flows like bonds, I don't see much questioning going on. Then, there are all of those derivatives that are causing many problems from raising the prices of commodities to bankrupting banks, etc. given all of those CDSs NOT being paid off or REQUIRING pay off -- for example, WaMu provided CDSs. Perhaps the system COULD have handled just the MBSs as it has handled bonds, but it is too late now.
There is also the problem of "deregulation" which results in LACK OF REGULATION. So, we have the most Ponzi scheme like instrument, the CDSs, being completely unregulated. What's that all about? If trust and "confidence" in the sector is needed, then the very limited nature of the bailout is UNLIKELY to provide it. This excellent article (3) indicates both what Wall Street has done (somewhat) and then provides a timeline of what the government has done to "enable" the Wall Street "recklessness" (or worse). The bailout also leaves the taxpayers paying for all of this "rescuing" of the most wealthy ANGRY. If any sort of fraud has occurred, then those doing it SHOULD be punished. Actually, for We the People, a law WAS enacted on July 30, 2008 that is intended to help subprime borrowers. It is called the Housing & Economic Recovery Act of 2008. As far as I've understood it, it seems to involve insuring 30-year fixed rate primary-residence loans made prior to Jan. 1, 2008 up to 90% of appraised value in order to refinance an FHA loan made on or after Oct. 1, 2008 -- Sept. 30, 2011. The FHA loan requires at least a 3.5% down payment. Perhaps this will help some people -- but how many? How about those people with adjustable rate mortgage (ARM) loans? This important article (4) indicates that the bailout has ALREADY cost $1.8 TRILLION, describes some of the stuff dragged into the bill like the IRS being able to give out tax return info., and discusses some of the bill's loopholes. Importantly, there is this article (5) that points out the need for a major economic re-think by all Americans. One point made is that turning over Social Security (SS) funds to Wall Street (i.e. privatizing SS) would have bankrupted it. In fact, all major private pension funds HAVE lost from between 23% to 30% since Jan. 2008. A major point made is that investment should involve productive investing for "an advanced and diversified manufacturing economy" instead of trying to make money off of money (which is what the banning of interest by many religions was really all about). Fortunately, in Turkey the use of mortgages is still not widespread -- now I hope their use will be questioned or closely monitored. The old system has involved renting until the money needed is saved up or until everyone (friends, relatives, or work colleagues) pooling their savings in a group can one by one obtain the car/apartment each wants. Sometimes personal loans have topped up the savings. In other Muslim countries utilizing Muslim banking ideas, the focus IS on returns based on actual investing. These countries are mainly being hit by the recessions and slow down in trade from the countries with all of the problems. The same goes for the third world countries with banking systems that weren't "sophisticated" enough to use the derivative instruments -- lucky for them. Marie K. PERMANENT LINK P.S. I've already found some documents listing the purchases of US financial instruments by country -- who bought what and who bought the most--that I plan to write about. P.P.S. All 5 articles below (and mentioned above) are well worth reading--the best of many I went through! (1) Paulson Seeks Mortgage Value that Eluded Bear, Lehman (2) The Mechanics of the US Treasury Bail-Out Plan (3) A Memo Found in a Street (4) Bailout bill loops in green tech, IRS snooping (5) Lessons from the Collapse of Wall Street
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