So where have all these billions of dollars gone?

[lakemac]

two words brty "origininating lender"

not all banks are created equal.

Merchant banks are normally not "originating lenders". In other words they are not the original source of the credit/goodwill.

You may be aware that the two merchant banks left standing in New York (kind of like musical chairs really, or pass the parcel of CDO's ), have just asked the SEC to convert themselves into "holding banks" which mean they can take deposits from the public.

They don't really want the deposits, what they want is to be a "real" bank. A bank that is an originating lender. Originating lenders are the ones that get to play the game "fractional reserve banking". To play that game you have to have a fraction (the fraction is set by the central bank) of your capital on deposit with the central bank obstensibly in case there is a "run" on your bank. The remaining fraction allows you create credit such that the ratio of your deposit with the central bank to your lending does not exceed a certain limit. Have a look at the YouTube video "Money as Debt" it explains it quite well.

The key here is these toxic loans (collaterised debt obligations - CDOs - a euphemism for dodgey borrowers) were impaired (ie less than trustworthy from the start). To spread the risk they were lumped together like a bunch of celery then the good bits sliced off. As you slice more and more off, you eventually get nothing worth having.

One of the culprits in all this is the rating agencies that gave each slice a credit rating. eg. AA+ BB- etc etc. If the whole debt is toxic slicing it up is not going to remove it toxicity. However the ratings agencies decided that the first tranche or slice must be the best quality and so down the celery stick we go. Everybody thought this was a great idea. Personally I don't trust rating agencies in the same way I don't trust politicians. No one is asking the question how come they gave these CDOs such good ratings.

Not all of Lehman et al is CDO. CDO lending is but one of many an varied instruments on which the merchant bankers hung themselves. Of course like most booms everybody (even prudent organisations such as our own banks and local councils bought into the hype). It all comes down to extreme due diligence when you invest.

Due diligence as I have mentioned elsewhere is the sorting of fact (provable, hard data) from opinion (hype, spin, marketing etc). Exactly what you guys should be doing with the info I am giving you. Don't trust what I am saying - verify it for yourselves. Get educated. Get responsible. (Sorry the soap box got in the way )

I don't have all the answers.
What I do have is 8 years of my own research and an economic model of the world (stretching back 400 years I might humbly add ) that seems to explain a lot of world history and the events that we think are just disconnected happenings.
I am not an economist (although I think I could give a classical economist a run for their money - or is that credit???).
What I do have is a thirst for knowledge.
And an insatiable desire to ask questions and question/verify the veracity of the answers I get back.

Maybe this will rub off on you guys. There is still a lot to learn out there.
To paraphrase SBS TV:
"The internet is an amazing place"

 

[brty]

Hi lakemac,

I didn't mention merchant/investment banks, I know they are toast.

It is the 'originating banks' that I am asking about. There share price has been plummeting due to supposed exposure to the toxic debt. Even if they did lend it to the merchant banks, then why is there such an issue, why can't the debt disappear back into thin air??

brty

 

[lakemac]

It will. Just give it time...

Originating banks get hammered because of market sentiment and/or they bought into (as NAB did) the mess in the first place. NAB used their real assets to buy in. Hence the hammering they got.

You also have to remember why people buy any share - profits. In a bank profits = interest + fees. If you can't get the interest on your thin air/goodwill then your profit drops, therefore your perceived share price drops.

You also have to remember most people (even so called sophisticated) don't have the time to delve into the depths of the banking field. They will just lump all banks together and call them toxic.

Looks like a duck, waddles like a duck, smells like a pig. I say its a duck...

 

[Macquack]

Hi lakemac,

I didn't mention merchant/investment banks, I know they are toast.

It is the 'originating banks' that I am asking about. There share price has been plummeting due to supposed exposure to the toxic debt. Even if they did lend it to the merchant banks, then why is there such an issue, why can't the debt disappear back into thin air??

brty

The money that a bank "creates out of thin air" has a corresponding "deposit" which that bank is liable to pay interest on. The debt cannot "disappear back into thin" because the deposit on the other side of the ledger will not disappear.

 

[lakemac]

oh don't we all wish Macquack.

In a strict accounting sense left and right must always balance.
However under fractional banking left and right will still balance but balance against what.

You have to remember that banks don't actually need deposits except for what the central bank requires of them (their fraction) to be kept with the central bank. Additional deposits act as a lever in a fractional banking system allowing the bank to extend it goodwill/credit multiple times the deposits on hand.

The best explaination for this is the "Money as debt" video on YouTube.

Most people refuse to believe this is what is going on. But it is exactly what happens in fractional reserve banking systems.

 

[Macquack]

Conversely can money be destroyed (the answer by the way Macquack is yes it can be destoryed and I don't mean shredded I mean removed from the economy).

Lakemac, can you give a good example of how money can disappear?

 

[mayk]

Lakemac, can you give a good example of how money can disappear?

Government collect the money ( old notes) and burn them .... Ashes to ashes dust to dust, air to air...

 

[Macquack]

Government collect the money ( old notes) and burn them .... Ashes to ashes dust to dust, air to air...

Yes, and they replace them with new ones.

 

[brty]

Hi lakemac,

NAB used their real assets to buy in.

Why??

If they can create money from thin air, then why use 'real' assets??

And also, why not just shuffle paper from 'thin air money creation' to any dodgy loans/purchases?? Realistically, why would they use real assets when they don't have to??

I thought I had a handle on this until the losses issue. Basically I can't see how they would lose anything if they can create money from thin air, therefore I must be missing part of the picture, or there really are some type of conspirictorial games going on to fleece the small shareholders.

brty

 

[Sir Osisofliver]

Lakemac would you mind explaining what securisation is in relation to your theory? I'm not making judgements or arguing with what you say, but I think you've oversimplified somewhat. I'm genuinely interested in what you think Securitisation is and how it works towards the creation of "thin air" as you put it.



Lakemac - that last bit just makes you sound....um trippy? anti-semetic? racist? Paranoid schizophrenic? Kangaroo loose in the top paddock? Sorry I'm searching for a polite way of expressing myself here but don't think I'm doing a good job. How exactly do you think American jews inserted their mind control waves into Adolf Hitlers brain and made him orchestrate the murder of several million people? Should I be wearing my tinfoil hat?

Sir O,

Lakemac,

Was there are reason you ignored my post?

Sir O

 

[Buddy]

fimmwolf we obviously differ on our take of what the underlying forces are.

Before the advent of central banks, banking systems all around the world functioned perfectly well (there is one country today that does not have a central bank by the way - anyone know which country? They don't suffer the massive "business cycles" central bank economies do).

Is it Panama?
Do I win a prize? Money! Money! Money! or Cash! Cash Cash!
A very interesting and informative thread.

 

[Macquack]

Is it Panama?
Do I win a prize? Money! Money! Money! or Cash! Cash Cash!
A very interesting and informative thread.

Better than a prize.

Congratulations Buddy, your are awarded a 007 Banking License.

A license to print your own money.

 

[Macquack]

Where are you Lakemac?

There are a few people waiting for your answers.

 

[Julia]

The following is a fairly succinct explanation of events from Crikey.com.

--------------------------------------------------------------------------------

21 . Even if the bailout got through, $700bn is not enough. Here's why
By Adam Carr, senior economist with ICAP Australia:



It sounds like a lot of money and by any measure it is a lot of money. The US Troubled Asset Relief Program (TARP) proposes to spend $700bn of US tax payers money to effectively buy asset backed securities (mortgage or otherwise) that banks can’t get off their balance sheet. Whether that is "enough" depends on what you want it to be enough for. The concern expressed by Congress, as they voted the plan down last night, is that it would amount to an expensive bailout of Wall St without any meaningful impact on the broader economy.

It’s a complicated business and one that isn’t well understood. Yet to try and understand whether the TARP will be enough we have to understand what the problem actually is. So bear with me. Very basically, the issue is the huge amount of toxic assets that banks, investment funds and the like hold on their balance sheets. These assets are typically investments in mortgage related debt and other loans that were securitised by banks (or pooled to then resell into the secondary market). Now the problem is that a lot of these products were created at a time when interest rates were historically low. So the price paid for them didn’t reflect an accurate assessment of the risks (of default) associated for these assets. As interest rates went up, people and firms began to default, and so the value of these assets plummeted, and it became very difficult to sort the wheat from the chaff, as it were. So a lot of institutions found their asset base being eroded and profits being hit. To try and stymie that process, it was necessary for these institutions to "deleverage" – or pay down debts and lift their asset base by hoarding cash. They had to do this or face a big hit to shareholder equity.

As companies tried to shore up balance sheets with cash, money became more expensive and hard to find. It was bid up in price so that today, relative to official cash rate expectations, the price of money is at a record. This is why central banks around the world have been pumping money into the system – to ensure that there is sufficient money for companies to rebuild their balance assets without halting broader bank lending activities, essential for a well functioning economy. It’s not all big business that borrows money from banks. If coffee shops can’t borrow money to buy that coffee machine, a builder, that block of land or a manufacturer for that bit of equipment, eventually economic activity freezes up.

Just how much of these assets are floating around? The US Securities Industry and Financial Markets Association estimates that there is just under $8 trillion in mortgage related debt outstanding and another $2.6 trillion in other asset backed securities. So $700bn sounds like a lot of money and by any measure it is a lot of money. But it’s not even 10% of the underlying problem. $700bn might be enough to protect the solvency of a limited number of firms, and it will hopefully prevent the lending markets shutting down completely. But it can’t stop the process of deleveraging and that’s the key.

$700bn won’t increase investor appetite for asset backed securities given the real economic recession is yet to come – the uncertainty over solvency will consequently linger. This isn’t just about mortgages but other asset backed securities. In that context $700bn can’t forestall the looming recession.

 

[lakemac]

Egads I do have some life outside of these forums guys

Thanks for the prod (I think).

As you can imagine things have been rather hectic.
My puts are rather pregnant right now and clients also demand some time slices too

I am writing this at 1am just to let you know I have not forgotten you.
My wife I think, has forgotten what I look like - either that or thinks my laptop has merged with me in some borg kind of way. "Resistance is futile"

Detailed replies are going to have to wait for a bit.
Found an email I sent to my trading mentor back on 12th Dec last year (when I moved my super out of shares). In that I referred to an article in the SMH about China reducing credit. RED FLAG!!! RED FLAG!!!
http://business.smh.com.au/lending-dries-up-as-china-slams---brakes-on-banks/20071211-1gg0.html#

I notice another article about chinese steel demand going south.
http://business.smh.com.au/business/steel-industry-in-china-crumples-20080929-4qct.html
Get ready for the recession.
China is going down.

 

[lakemac]

A quick one on the American Jews theory.
I know it sounds out there - really out there.
Stranger things have happened.

Right now it is only a theory.
My starting point was the Warburg family (jewish).
Second entry point is the history behind Hitlers rise to power, particularly when references to Warberg et al start turning up.

There is no particular racial issue in this (I have a Jewish great grandmother - maybe thats where my money sense comes from - only wish I had more sense sometimes - oh its late and my mind is getting stupid).
I just asked the question (as I always do), what was behind Hitlers Jewish pogrom? As always I follow the money...