Billions and Billions - Yep hear it all the time - Why it will mean something Soon.

This is an admirable piece of work, QA, as usual. I will be pacing tonight.
I hope to goodness you are wrong on this one. Sept. 30th is coming way too soon.

But I do appreciate the insights, no matter how grim and depressing it might be. Think I'll take up smoking again.

[edit on 9/13/0909 by ladyinwaiting]

reply to post by questioningall


Thought I might clarify something for you considering im studying the black arts of finance. A derivative is a financial instrument whose price is reliant (or based on) an underlying security. So an option on IBM would get its price owing to 4 things;

-The time to expiry for the option to be exercised,
-The price of the underlying security which in this case is IBM
-Strike price or exercise price of the option.
-Supply and demand of the option itself

There are other kinds of derivates.. it isnt strictly speaking a calculas exercise as it is more a Risk Transfer tool or "Side Bet" as some see it.

Hope that contributes something to the conversation.

Dave

EDIT to add another point on pricing

[edit on 13-9-2009 by daptodave]

reply to post by venividivici


In simple laymans terms a CDO is a box of various loans.. when a bank issues a loan is requires X amount of reserves per Y amount of loans.

When a bank buys a box of loans, the ratio of reserves is consumed to back the loans. Buying a CDS is insurance saying if it defaults, the CDS provides Z amount of funds to cover Y amount of loans without touching X amount of capital, freeing the bank to use X capital to invest in other ventures... thus the loans are not liabilities, they are assets, income is guarenteed. Puting this on paper doesn't prove anything, the banks already disclose this they just don't like people knowing the How its done.

My point being is that its overleveraged exotic instruments such as these that cause crashes, which the biggest crash has occured, and big banks are fully hedged against another collapse while smaller banks are not.. so as defaults rise small banks are wiped out of the market, but the effect won't be felt like it was in Oct 08 because the biggest banks are the biggest lenders, clogging their reserves froze credit markets while if a small bank fails the business can be consumed by another bank no problem.. thus derivatives are not a true danger imo, but the continued deflationary ddirection of the economy..

Hope that makes sense..

So let me get this straight...

The banks, according to their books, didn't even technically loan the money out, but they get to add the amount they loaned to the total amount they had before they even loaned it out.

You would think if they loaned $900 out of $1,000 they would only have $100 until they got paid back, plus interest. But they never really loaned the money they just wrote the number into the customers bank acct.--like you said--and the customer spends this $900 that doesn't even really exist not only to the bank but to a vendor.

Wouldn't this severely compound the problem ESPECIALLY if customer A can't pay the $900 back? This would mean that if the bank then assumed that they were getting paid back and therefore were able to loan even more out, since they only have to hold onto 10%, they weren't technically able to loan that larger amount out because they wound up not getting paid back. They would have only been allowed to still loan only $900 as opposed to $1,700.

So what does this mean exactly for the rest of us? I can't put it into perspective.

reply to post by nunya13


This is true except according to the banks the funds do exist, in the form of hypothetical insurance... the insurance companies hold the capital, ergo companies like AIG have the largest leverage, hence AIG's massive collapse cost.

The cost is laudering CDS payments to cover collapsed derivative contracts.

Originally posted by Rockpuck
reply to post by nunya13

 

The cost is laudering CDS payments to cover collapsed derivative contracts.

Exactly. I was lead to believe ( Frontline expose') that the credit default swaps are trillions of dollars. Apparently no one really knows how much. What happens when that 'cost' is realized? An more importantly when will it be realized. The magic Sept 30th date?

I should also state the biggest problem with the CDO CDS contracts is this:

Bank A buys a CDO package.
Bank A buys a CDS contract to cover the CDO
Bank B feels Bank A is over leveraged and buys a CDS on Bank A's CDO
Bank C and Bank D follow Bank B's lead
Bank A's CDO defaults, and cashes a CDS in with the insurance company.. Banks A, B, C and D all get payments, A breaks even and banks B-D reap a large profit while the insurance company goes bankrupt....

This is what happened to AIG

reply to post by venividivici


Insurance companies and investment banks are not regulated by the same laws that regulate "bank holding companies" .. so CDS issuers for the most part will be immune.. it will be very clandestine.

reply to post by Rockpuck


So the insurance companies insure that banks get to hold on to their capital in the event of a default? That's what made them collapse because they suddenly had to cover the banks defaulted loans?

So the insurance companies fell first, now it's going to be the banks themselves because now the banks aren't so well insured anymore? Is that right?

Also, what is so "magical" about the Sept. 30th date. I know QA said that this is the day they have to put this on the books but is that something that is set in stone? Some kind of new rule/law that goes into effect on that very day?

The issues brought up in relation to the Banks loaning money they don't have is nothing more than fractional reserve banking. That's been going on for a very long time, its a very common practice, it's not some exotic under-handed process. Well... it is but its not like a CDO, Collateralized Debt Obligation and CDS, Credit Default Swaps, those are very risky and are in fact what I believe to be the cause in a our nations economic state.

CDO's are high-risk loans banks jumble togather and sell. Banks have made a ton of money bunching their high-risk loans and selling them off for profit. It removes them from any risk and the bank turns a profit form high-risk loans.

CDS's are a creation of the J.P. Morgan Mafia. (Google it). CDS's are an instrument used to get around regulations and banks requirements with the fractional reserve method. Here is an example. Bank A gives a 500K loan to Citizen Joe. Bank A wants to hedge their bet on Citizen Joe in case Joe defaults. So Bank A buys CDS assurance and protection from their friend Bank B. Bank A pays Bank B either a lump sum of money or they may have opted for a set-monthly payment schedule, just like we all do with our insurance. Bank B agrees to pay Bank A the full loan for Citizen Joe if he defaults. Bank A is covered if Citizen Joe defaults and Bank A makes their money back in interest charged to Citizen Joe. All the while Bank B sees a nice profit from the premium they are paid by bank A.

As banks all bought and sold one another large groupings of these high-risk loans and credit values dropped, the crash began. As a net result companies and investment properties went under, people lost their jobs. As the first dominos began to fall Banks began to panic, the Fed starts printing money like crazy, loaning it out....but not fixing anything. There is what, 3 Trillion unaccounted for at last count I believe. States are going broke, tent cities are popping up, home invasions here in colorful Colorado Springs are on an alarming surge. Is there anything that can be done? Who knows, I think this issue is far to large for anyone or any group to fully grasp.

Everyone says grow your own food, move to the hills, buy more ammo. Respectfully, none of that is reasonable. We do not have the skill set as a society or individuals to grow our own food. Try to tend a garden/green house to the point in which you can feed your family and see how nearly impossible that is. Lets say that by chance you succeed at that, how will you keep your foodstuffs safe from those that are hungry? As for moving to the hills, I simply say, what good would that do? What makes you think other people don't have the same natural reaction. Ammo, for what? To become a rioting criminal? Oh, to protect yourself and your family, okay, I understand and respect that. How long, how hungry must you get until you release your morals and ethics before you turn into the criminal you protect your family from with the ammo you have? My point is, no matter what, if this thing with our economy falls apart and we all wake up in food lines like the Russians did when their nation collapsed in the late Eighties... the best we can do is form local community groups to take care of one another.

Ohhh, and for everyone commenting on the Gold Standard and how we should have kept it. I don't believe, with the number of people in this country now as compared to when the Gold Standard was in place, that the value of Gold would support the value of all domestic and foreign wealth of this county now. I don't think there is enough gold around to support the 'gold standard' any more. Yes, the value of gold would be raised to match the value of the nations assets/monies, but that ratio would be so out of alignment that it would not balance with other nations in the world market.

Does anyone have any idea what's with all of these gold companies and their around the clock commercials asking to buy peoples gold?

[edit on 13-9-2009 by Mr.Hyde]

reply to post by nunya13


Yes, a new banking regulation is going into effect.

There are other issues about Sept. 30th also. That is the fiscal year end of the Fed. That is why they have been putting up the most ever in bond sales the last couple of months.

The problem is, those bond sales have been having "indirect" buyers for them. What are indirect buyers, well simply put, they don't have to be disclosed individually - so as it is considered, since the U.S. has the majority of the buyers of bonds now as indirect buyers the Fed, is buying the debt themselves. Why? Because they need the U.S. to look strong right now to everyone. If no one was purchasing the bonds, imagine what a chaotic scene that would become.

They are printing the money and through their friends the bonds are being purchased.

You don't hear about China, Japan, or other countries showing up anymore to buy the bonds.

The reality is, the insiders of stock are selling like mad - people in the "know" know that something is coming down the line - right away.

Also, we have been in a slow burn for a year, things have been constantly swept under the carpet. Well, the game is over now - the items under the carpet are starting to show through the edges.

Honestly, if people have been paying attention, then they are prepared and not going to freak out. Those who have not been paying attention are going to be the ones to go bonkers, over the sudden turn of events.

reply to post by nunya13


Insurance and investment banks fell first, like lehmans and bearsterns .. when CDS providers collapse, CDO holders were exposed.. the banks didn't "collapse" so much as they had to add all those loans as liabilities at once bringing reserve ratios to absolutely nothing.. unable to loan etc, valuations of current loans collapsed, hence every headline mentioned "write downs" ...

What happens Sept 30th? Imo absolutely nothing.

reply to post by questioningall


If banks displayed everything their methods of operation wouldn't change, the only change would be from investors... you are assuming investors react rationally.. but this is an irrational market, a big bank could declare bankruptcy and investors would jump onboard.. if we follow economic fundementals the economy would have collapsed years ago..

Sept 30th is a non issue

" Honestly, if people have been paying attention, then they are prepared and not going to freak out. Those who have not been paying attention are going to be the ones to go bonkers, over the sudden turn of events. " - Questioningall

What difference would it make if people pay attention? What's going to happen? No one knows. Everyone in this county, on this message board, in our conversations with friends and family have nothing but their own suppositions.

We are going forward with blinders on, not knowing what's ahead. Nobody knows what to expect or what's going on. We all operate with same snippets of pieces of information. We, no matter how much we pay attention, really have no idea what's going to happen.

I for one hold on to hopes that everything turns around and works out. I don't think anyone here can state they are ready for an economic collapse of the United States. Most everyone I know is looking forward to the next Iron Man movie not the economic hardships (or potential of) that surrounds them. You can't teach people to care. People not wanting to evaluate the world around them can not be convinced to harbor an interest in such matters. We, as Americans have a way of life, a standard of living... and now that it's Football Season again, most everyone around you will be in a near catatonic state over this very fact.

[edit on 13-9-2009 by Mr.Hyde]

Originally posted by questioningall
Derivatives Meaning = Lets say: A bank has a deposit of $1000 - they then are suppose to then only lend up to 90% of that deposit out. So they then lent $900 out to someone, now they then add that $900 loan to "deposits" - because it is seen as money in the bank. So, now they took that $1000 and made it to $1900 as deposits. So now they are able to loan 90% of $1900 - so they loan $1710 to someone else. Once that happens, again they can add that $1710 as money in the bank.....

Hi questioningall. That's a worthy description of fractional reserve banking....but that we might better understand your important topic , derivatives = structured financial products. They fall under two catagories: Standardized exchange traded derivatives like futures contracts (mark-to-market) , or , more complex , over-the-counter derivatives such as credit default swaps (mark-to-model).

The financial system is threatened by an explosion in the toxic , unregulated OTC variety - no clearing facility , no active market , thus , no ability to perform anywhere near their [fabricated] mark-to-model valuations. *Mark-to-model represents a bank's own internal assumptions of value , as opposed to actual market value.

Originally posted by questioningall
Do you now understand, banks have not put those derivatives on their books - but come Sept. 30th 2009 - due to new banking standards - derivatives need to be put on the books and when that happens - the banking industry will most likely come crashing down.

The day of reckoning was avoided back in Nov 2007. I remember we were on the edge of our seats , when at the 11th Hour , the Financial Accounting Standards Board postponed the implementation of FASB 157....

The Day that Was – November 14th 2007


They caved again last April....

FASB Eases Fair-Value Rules Amid Lawmaker Pressure


In spite of some recent saber-rattling regarding more stringent Level 3 M2M reporting , I haven't found any information in the new guidance ; FASB ASC effective Sept 15 , 2009 , that supports Dr. Van de Meer' claim....

The Wall street banksters that own the Fed are being forced to put all their derivatives garbage on the books by September 30th.

Full Text

And imo , this statement from that link; "Bernanke and Geithner are desperately calling the people who own the gold and asking for some but they have been told they will not get even one ounce."

is just plain wonky

There is so much misguided information in this thread, it makes my head spin. I don't even know where to start.

First, everyone needs to make a huge differentiation between banks on Wall Street and banks on Main Street. There is a massive difference between Wall Street "investment" banks like Goldman Sachs, and your neighborhood retail bank.

Let's get that perfectly clear. Your local bank is rarely, if ever, engaged in derivatives trading, unless they are owned by a big Wall Street bank (like Chase).

Secondly, I have no idea where this absolutely ludicrous idea originated that banks "create money out of nothing". If you buy a piece of real estate for $100,000, I can assure you that the seller of the real estate receives a bonafide check for $100,000 at closing. It's real cash. If it weren't, the closing would be mortgage fraud.

Where does the bank get the money to close a real estate loan? Deposits. Thousands of them. Ever hear of Certificate of Deposits (CD's), Checking accounts, Savings Accounts? Your average local retail bank location has tens of millions of dollars in deposits. A small mortgage loan for $200,000 for a house hardly makes a dent in these deposits - at a well-capitalized bank, mind you.

Banks also have assets of their own. They earn interest - profits, mind you - that they can utilize to reinvest in their business - the business of banking which is lending money at interest.

You buy a house for $100,000. The bank hands a real live check for $100,000 to the seller of the house. You sign a mortgage for the house at $1,000 per month for 30 years. After 5 years, you've only repaid $60,000 ($1,000 x 60 months) - which the bank counts as interest you've paid (The first ten years of any traditional mortgage primarily goes towards paying interest and not reducing the principal balance). Numerically speaking, the bank is still in the hole for $40,000, and hasn't earned one red cent of interest.

Who's taking the risk here? The borrower or the bank? The bank. They walked their money out the door on a borrower's promise to repay. It's a huge gamble, and, what with job losses, high unemployment, etc. - It's amazing these banks still are in business after all the people that have defaulted on their loans.

And, after the borrower defaults, guess who gets to take the real estate back and try to re-market it at a huge discount now that real estate values have plummeted? The bank. The bank takes the hit, big time. Not to mention loss of interest, and ancillary costs like collection fees, attorney fees, etc.

It is only when you have broken through the $100,000 mark that the bank actually recoups their investment in the transaction - in terms of real hard cash. This typically doesn't happen until a decade or more has passes, depending on the loan terms. At any time, you can repay the loan without penalty before that time occurs.

The whole notion that banks just "create money out of thin air" is pure nonsense. The only semi-legit argument that I have heard is when this relates specifically to loans - meaning that you, the borrower, must repay - over the course of the loan - more than what the bank paid at closing.

This is no different from a manufacturer that manufacturers a car for $5,000 and sells it you for $10,000. That manufacturer didn't create "money out of thin air", now did he? No, he made a profit on the sale of his manufactured product. Banks are no different. Substitute profit for interest, and it's the same game.

I only ask that, if you are going to discuss derivatives, don't mix and match retail banks and Wall Street banks. You completely lose all credibility because you don't know what you're talking about. Apples and oranges.

And stop with these nonsense stories about creating money out of nothing. At the local retail bank level, that's not what happens. If you want to talk about the Federal Reserve printing more money and inflating the money supply, that's a different topic. Now continue your discussion.

Originally posted by CookieMonster09
And stop with these nonsense stories about creating money out of nothing. At the local retail bank level, that's not what happens. If you want to talk about the Federal Reserve printing more money and inflating the money supply, that's a different topic. Now continue your discussion.

So are you saying that these quotes from pg1 in the OP:

“[W]hen a bank makes a loan, it simply adds to the borrower’s deposit account in the bank by the amount of the loan. The money is not taken from anyone else’s deposit; it was not previously paid in to the bank by anyone. It’s new money, created by the bank for the use of the borrower.”
– Robert B. Anderson, Treasury Secretary under Eisenhower, in an interview reported in the August 31, 1959 issue of U.S. News and World Report

“Do private banks issue money today? Yes. Although banks no longer have the right to issue bank notes, they can create money in the form of bank deposits when they lend money to businesses, or buy securities. . . . The important thing to remember is that when banks lend money they don’t necessarily take it from anyone else to lend. Thus they ‘create’ it.”
– Congressman Wright Patman, Money Facts (House Committee on Banking and Currency, 1964)

are lies or are they just outdated and somewhere along the lines our banks stopped this practice and turned honest?

Originally posted by Rockpuck
reply to post by nunya13

 

This is true except according to the banks the funds do exist, in the form of hypothetical insurance... the insurance companies hold the capital, ergo companies like AIG have the largest leverage, hence AIG's massive collapse cost.

The cost is laudering CDS payments to cover collapsed derivative contracts.

Love it! Hypothetical insurance to cover imaginary loans to be paid for by your heirlings

And those who control this game made money off of every step that was made!.

I nearly hate this site. Awesome OP

Star anf flag

Originally posted by Rockpuck
reply to post by nunya13

 

Insurance and investment banks fell first, like lehmans and bearsterns .. when CDS providers collapse, CDO holders were exposed.. the banks didn't "collapse" so much as they had to add all those loans as liabilities at once bringing reserve ratios to absolutely nothing.. unable to loan etc, valuations of current loans collapsed, hence every headline mentioned "write downs" ...

What happens Sept 30th? Imo absolutely nothing.

I see your logic in downplaying the severity of whats ahead but China is not a small player and if they do default the consequences would not be avoidable no matter how many hat tricks we pullout. Right or wrong?

They arent the only ones either.

Originally posted by Rockpuck
What happens Sept 30th? Imo absolutely nothing.

Pretty much. If something ever does happen, I doubt it will have been predicted in specific detail (although I'm sure that won't stop lots of people from trying to take credit), but hey, we needed our monthly doomsday thread, and we got it.

I'm not complaining.

[edit on 9/14/2009 by SonicInfinity]