The Market Ticker
Commentary on The Capital Markets- Category [Musings]

I've posted a handful of locked-comment Tickers lately (yes, I still do add features once in a while to the software, and this is one of the recent additions -- the ability to pre-lock a submission so it's read-only.  Fancy that.) and have had a couple of people ask via an invite-only BBM channel I set up "what's dat."

Well, here's part of it.

Derivatives that helped inflate the 2007 credit bubble are being remade for a new generation.

JPMorgan Chase & Co. is offering a swap contract tied to a speculative-grade loan index that makes it easier for investors to wager on the debt. Goldman Sachs Group Inc. is planning as much as 10 billion euros ($13.4 billion) of structured investments that bundle debt into top-rated securities, while ProShares last week started offering exchange-traded funds backed by credit-default swaps on company debt.

Here we go again.

At their core these instruments are frauds because they are essentially counterfeiting of the currency.  So are "ordinary" loans the way banks actually make them, along with government deficit spending.

We don't call it counterfeiting nor do we prosecute it as counterfeiting, but we damn well should because that's what it is.

These "instruments" spring up when you can't find enough suckers, er, borrowers for conventional counterfeiting.  You thus are compelled to obfuscate things to a greater and greater degree, along with piling leverage upon leverage.  It's a scam because the person on the short side of the trade doesn't have to post up enough actual money to cover the position.

If you remember back in 2007 I put forward a simple solution to all this chicanery: No off-exchange, "private" derivatives or other instruments -- everyone has to post margin in actual funds every night.

See, you and I have to do that.  If I trade on margin my account is balanced every evening against the value of whatever I have open, and I had better have the available securities or cash on deposit to cover anything that's underwater.  If not then my phone rings and I get the dreaded margin call, demanding cash right now, by wire, "or else" (with the "or else" being the liquidation of my positions.)

But we don't enforce that across the board.  We still have properties in the "marketplace" that banks are holding and not selling ("Zombies") because they can't get a bid for the amount of the outstanding note on the property.  By refusing to sell they are claiming the property is worth more than any offer they can receive for it, which is a factual fraud; anything is worth only what you can sell it for to an arms-length buyer at that instant in time!

This is an out-and-out scam because the liability on the other side of the balance sheet is a known figure and yet to mark the asset to the market means that the institution would have to have the difference in real funds either as retained earnings, proceeds from sold equity or actual funds borrowed from someone else.

Business cycles are not something new and neither are the risks associated with them.  The frauds are not new either, but the reason we keep seeing them is that they go unpunished; alleged "enforcement", "regulation" and "supervision" are nothing more than a bad joke.

Back in 1998 I saw the same things building at an outrageous rate.  It took another year and change before it all blew up, but the outcome wasn't in question.  The only question was whether you could withstand the blast if you were in the middle of it, or whether you could get to minimum safe distance first.

Likewise, in 2007 the same crap was blatantly apparent if you decided to actually look.  Washington Mutual's "decision" to pay dividends with money they did not have, claiming "earnings" that were in fact capitalized interest and paying some of that out to shareholders, was just one of the more-visible aspects of this.  The firm failed and "nobody saw it coming" simply because nobody cared to look.

Now we're seeing the same thing, and what Bloomberg argues in this puff piece is that it's happening because of "central bank repression."  Nonsense; it's happening because there is no demand for ordinary counterfeiting-by-lending at a level sufficient to keep the fat guys in slop at the trough so they invent ever-more-clever means of robbing one another by claiming value that does not actually exist.

The problem with these sorts of schemes is that like all oscillations fed with energy during each swing the amplitude gets worse in each following iteration.  2000 was kinda crappy, 2007/08 was awful and how far out from that last event are we now, with an even higher amplitude bubble having been inflated from the last time?

That's what I thought.

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2014-08-09 21:17 by Karl Denninger
in Musings , 374 references


Just askin'.....


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