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"The key point is that neither the public, the Fed nor the Treasury seem to understand is that the CDS contracts written by AIG with these various non-insurers around the world were shams - with no correlation between "fees" paid and the risk assumed. These were not valid contracts as Fed Chairman Ben Bernanke, Treasury Secretary Geithner and Economic policy guru Larry Summers claim, but rather acts of criminal fraud meant to manipulate the capital positions and earnings of financial companies around the world. "
"The significance of this for the US bailout of AIG is profound. If our surmise is correct, the position of Feb Chairman Ben Bernanke and Treasury Secretary Tim Geithner that the AIG credit default contracts are "valid legal contracts" is ridiculous and reveals a level of ignorance by the Fed and Treasury about the true goings on inside AIG and the reinsurance industry that is truly staggering."
"neither AIG nor the counterparties believed that the CDS would ever be paid"
Only when we understand how AIG came to be involved in CDS and the fact that this seemingly illegal activity was simply an extension of the reinsurance/side letter shell game scam that AIG, Gen Re and others conducted for many years before will we understand what needs to be done with AIG, namely liquidation. Seen in this context, the payments made to AIG by the Fed and Treasury, which were then passed-through to dealers such as Goldman Sachs (NYSE:GS), can only be viewed as an illegal taking that must be reversed once the US Trustee for the Federal Bankruptcy Court for the Southern District of New York is in control of AIG's operations.
Oh, this is not good.
Go read the latest AIG Ticker again. Specifically, this paragraph:
As with the phony reinsurance contracts that AIG and other insurers wrote for decades, when AIG wrote hundreds of billions of dollars in CDS contracts, neither AIG nor the counterparties believed that the CDS would ever be paid. Indeed, one source with personal knowledge of the matter suggests that there may be emails and actual side letters between AIG and its counterparties that could prove conclusively that AIG never intended to pay out on any of its CDS contracts.
Now consider this.
There is some gross "notional" (or face) value of $683.7 trillion dollars outstanding as of the end of June 08 (last data available.)
The lions share of those are not "CDS" on individual names or CDOs like what is going on here with AIG. They are instead interest-rate products of one sort or another; $458 trillion worth.
If even a couple of percent of those swaps are in fact "private lettered" out in the fashion that AIG is alleged to have done with their CDS.....
(Hint: This is how "notional" amounts end up becoming realized losses!)
Our Congress had better dig into this hornets nest right damn now because if in fact there is any material amount of this crap going on in the OTC derivative market the $170+ billion blown on AIG trying to cover it up will be a mosquito on an elephant's ass in comparison to what's about to happen to the world's economy and banking system.
If, in fact, it cannot be proved that this is not the case, given the extraordinary lengths that both government and private parties have gone to in order to cover up what IRA alleges AIG was actually up to, we must ring-fence and cut off any part of the financial system impacted by a potential detonation of that market right now, including the US Federal Government, as such a detonation will, if it occurs, destroy any part of the financial system it infests at the time the unwind occurs.
No I'm not kidding.
This really is that serious and the extreme measures taken to attempt to hide this, assuming the IRA article is correct, implies strongly that there is a lot more of this going on that we're simply unaware of.
Oh Crap: (Triad)
The insurer, which put itself into run-off and ceased writing new mortgage insurance policies in the middle of last year, said late Wednesday that it had received a corrective order from its regulator, the Illinois Director of Insurance, limiting its payout on claims to 60 percent. The remaining 40 percent of a claim will essentially take the form of an IOU, or a deferred payment obligation (DPO), meaning the lender/investor will not recover the full amount of its claim.
This is going to result in insane severity increases on losses taken by Fannie, Freddie, and anyone else in the mortgage business that has wraps (PMI) written by Triad (think BAC, WFC, etc)
If this spreads then it of course gets even worse.
Worse, policyholders will still be required to make full premium payments!
How would you like to make a full premium payment on your house insurance and then get paid only 60 cents, with the other 40 cents being an "IOU" of dubious value?
This is going to get ugly - imminently.
Hattip Kingfish on the story.
Yep...Uh Huh...sure...right...'nuff said...nod...nod...wink...wink...
Fed gets no bids for TSLF for first time
NEW YORK (MarketWatch) -- The Federal Reserve Bank of New York received no bids for loans through its Term Security Lending Facility, it said Thursday. The central bank got no takers for $25 billion in Treasurys. The TSLF program was started in March 2008 to help banks access liquidity and improve the functioning of financial markets. The program offered 28-day loans in exchange for appropriate collateral from the Fed's 16 primary dealers, the biggest bond traders, which includes most of the biggest U.S. banks. Many of the last several operations have drawn demand for less than the Fed offered to loan. The declining participation is "a sign that dealer financing needs are being met through other means," said Tony Crescenzi, chief bond market strategist at Miller Tabak. It also illustrates how some of the Fed's programs will unwind naturally, he said.
BY: CRISIS MANAGER
The last days of operational markets (Part 1)
We have experienced great decades of freedom and growth. If one looks back in the history of mankind this is a very unusual combination. Rarely such a long period of freedom was experienced in Europe and the rest of the western world. Enormous wealth was created by people and through the security and viability of the system, this freedom could be maintained for a very long period of time. One should keep this in mind, when looking at the recent financial and economic crisis.
Now, in the last days of March 2009, we experience a bear market rally. But there is an increasing chance that very soon this rally will turn into a disastrous downturn of the markets. For those who have forgotten about history, this will most likely become a costly lesson.
Remember what happened after the start of the First World War. Stock markets were closed around the world. Protectionism and attack of capital rights shocked investors – and if the war itself would not have come as a greater concern to many, it would have cost outrage in the streets. You might also recall that it took years for the stock markets to operate again.
Last year Nouriel Rubini predicted that markets would have to be closed. With his blunt statement he scared many people. Now he was amongst the first ones to warn of a bear market rally. In case he will be proven right, then we can anticipate that the markets will experience severe and more trouble than in 2008.
Another prediction which comes to match Roubini´s prediction somehow was my prediction on server market turmoil between April 7th and 5th of May 2009. There is little time left to go and the signs seem to confirm my deepest concerns.
The issues which piled up the last days are so massive that no one half way intelligent should consider this bear market rally as a sign for economic recovery.
We have utilized unprecedented expansive monetary and fiscal policies.
So far stimulus and bail outs show no sign of slowing down the deflationary pressures. Even the UK goes into deflationary mode, after having had negative deflation in Q1 2009.
The UK was also the first large country where central bankers and the prime minister got into discussions about the end of fiscal policy options. That means there is no room to maneuver.
Citizens in all western economies are increasingly unsatisfied with socialism for the rich. Some pessimists can even hear the sound of the Marseilles and the run on “la Bastille”.
The latest declarations on GM and Chrysler will significantly reshape the landscape of business and the bond industry. If these companies go into bankruptcy, as I predicted back in 2007, then a horrible mixture of losses in Bond markets and forced selling will hit the markets.
In this situation bank failures will be the consequences of the game, leading to the worst depression in western history.
Hold, one might say. Don´t be so pessimistic about the future. In reality, I have lost hope that anyone can solve the crisis from getting worse at this moment of time. Policy makers have maneuvered their economies directly into a no return situation. The spending of resources on failed banks and businesses drained the economic resources, which would have been of great help in the "real economy". It further drained trust, motivation and destroyed room for political maneuvers and joint actions. Protectionism will be a result of this.
What will happen in April?
Expect the bond markets to tank. Huge redemptions will strike hedge funds and drive down the leverage in the system, even further. This will create the need for banks to ask the government for more money. The money injected in the financial system to have stabilized the financial system will vanish like a drop of water on a hot stone. The funds the financial system will need to survive will make the former bail outs look like peanuts. In the first phase of the crisis, equity markets became insufficient in helping companies to raise fresh and adequate funding. In April the fire will jump to the bond markets sucking the last oxygen out of the lungs of the financial system. Within an environment where governments have already guaranteed commercial paper, this will collapse the chance for any kind of governmental support to businesses.
Most governments themselves will feel the heat, especially the Anglo-Saxon ones. The amount of debt which has to be issued and bought this year is exceeding demand by far. In an environment where the bond market collapses, investors will hold back even further, as they will expect the bond yields to raise within the short term future. This will become the precursor of significant inflation and state bankruptcy.
Keep further in mind that it wasn´t the year 1929 in which the US faced the most bank failures. It only started in 1930. Bank failures started to spark off as resources got scarce! The fastest way to reduce your resources is to throw them into fire and burn them, instead of keeping them away.
In April investors will experience that their flexibility will be frozen. This It will change the landscape and break with another paradigm. Bank failures of too big to fail institutions will take place or will at least be discussed. Stock markets will tank along with bond markets. Large, known companies will go out of business. Massive lay-offs will be announced. Bond markets will eventually be closed, even though governments need them to work.