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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It really could be the end of the world as we know it
This  is NOT good.The veneer of civilization will soon begin to become incredibly thin. It's an insurance issue. If you have insurance on your house, for example, and it gets damaged, the insurance company has cash reserves created from the payment of premiums of all of the other policy holders who have not submitted claims at the same time as you did. In other words, claim payments are based on the probability that a common disaster will not affect all policy holders at once. Policy holders pay their premiums and create a pool of money with an insurance company to share risk. Every policy holder pays a premium value that the insurance company thinks will provide enough of a reserve pool of cash sufficient to pay claims based on a normal claims history.
Please consider that bank assets are not things like machines and stuff, they are financial instruments and securities and these have been destroyed by the current market volatility. The insurance companies that issued the policies have to pay the difference between what the assets are currently deemed to be worth, meaning what the creditors recovered from the defaulted debtor, and their insured value. The market auction basically stated that Lehman's assets are worth 10 cents on the dollar, but they were insured for $1.00. As such the insurance companies now have to pay-out, in cash, the difference of 90 cents for every dollar of assets they insured to the creditors.
The total market value of the CDSs market world wide, including Lehman Brothers, is thought to be @ $63 trillion dollars (some say $55 trillion, but it is a huge sum of money, nonetheless). Up to these current times, the CDS system was never required to pay as no defaults have occurred. As such, this derivative market instrument has never been tested. CDS are derivatives. This means their value is "derived" from the market value of another underlying asset. If the underlying asset is crap, the CDS must still pay the face value of the insurance on crap. In addition, this market was never regulated and there is no clear market mechanism for settling CDS contractual arrangements (no transparency). The Lehman Brothers auction was the first such transaction and given the market conditions, of late, you can imagine the impact these CDS derivatives will have on the current world market if the insurance companies cannot pay out their policy obligations ... which they can't. In other words, the market support mechanism for corporate loan defaults around the entire world does not work and cannot work within the context of this common disaster. Put another way, it means the US market has no back-up other than the Fed/Treasury printing trillions of dollars in support of market assets which have no real market value. Stagflation + asset devaluation = deep recession/depression. Did I explain this clearly enough? By the way, Lehman Brothers used to be Goldman Sachs' biggest competitor. Henry Paulson, US Treasury Secretary, used to be G-Sax's CEO. Hmmm -- makes you wonder why Lehman was the only investment house that was not helped by a gov't bailout... The Canadian PERMANENT LINK  | Latest entry | Recent entries | Older entries | |
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