This entire crisis: it's not an economic disaster. It's a disaster of human psychology. Over an over again, we make huge mistakes in ways that we have evolved to.

We evolved in very different times, times where optimism rather than realism, generalization rather than deep reflection - or even plain doubt - were the most effective cognitive strategies. No necessarily because they give you a better answer, but because to someone with the resources and knowledge available in a small village in the middle of nowhere, they gave you a more survivable answer.

'Yes the crops failed, and yes my brothers and sisters are all dying of the plague, but it's going to be all right because we are the jujube god's chosen people, and as long as I don't go out at night and wrap beads around the totem, the tigers won't get me.'

Check out books like Stumbling on Happiness http://www.randomhouse.com/kvpa/gilbert/ or Kludge - the book http://klugethebook.com/.

So it seems the whole "mark to model" thing means the entire banking system is one great big "pig in a poke."

Because no one will come clean and "mark to market":

Banks don't know which, if any, banks are solvent, so they won't lend to each other;

J6P doesn't know if his own bank is solvent, and neither does his employer;

Government doesn't know how bad, in exact numbers, the solvency problem is, so it would naturally be difficult for them to decide on a course of action;

Government, if it decided to act, would have no factual basis for evaluating the cost of a solution--since they can't get honest numbers about the dollar amount of the problem;

Those of us out here messing in our drawers while we watch this unfold have no realistic basis for evaluating the extent of the problem. Even if we agreed that government should ante up some assistance (which I don't), we have no basis for deciding how much it would cost or what form it should take.

In short, how is anyone supposed to decide what (if anything) to do about this problem, if the perps refuse to disclose the extent of the problem? This is like a family member telling you that the local authorities are going to condemn their house and throw them out on the street, unless they bring the place up to code, but they won't tell you what the exact issues are. Will ten bucks cover this? Is the reason they're asking for $100 because that is the approximate cost of a bus ticket to Vegas?

And this is just talking about the banks--where, presumably, we can figure out approximate upper limits of the problem by assuming that all Level 2 and Level 3 assets are worth exactly zero.

What about the unregulated segments of the financial "industry"? Does anyone have any way of putting a reasonably accurate dollar amount on the extent of THEIR problems? (The reason I ask this is because I don't know.)

There literally can be no rational decision making without accurate information. No decisions should even be attempted until we have it.

Sharon: Yep.

The bottom line here is that if these "mark to market" prices were outrageously low and did not reflect true value - there was much more value than propounded - there wouldn't be ONE PENNY of hedge fund money on the sidelines.

They would be falling over themselves to buy this paper.

These guys can take their time and analyze. They've had a year and a half to do it. They can run discounted cash flow analysis on this paper and figure out what its worst-case value actually is.

If MTM is understating its value on that basis, they would be buying the **** out of it. They're not.

That's all I need to know.

Well it won't matter if they use it or not because those who lend money to them based on their balance sheet will use it.

You don't need cash it'll allow you to survive without being technically bankrupt, you need cash in a constricted enviroment the lenders will just do the mark to market for you and say no thanks on your loan.

BW, the $3.5 trillion is actual cash - no leverage required.

These clownfaces in DC are claiming 40% appreciation potential. You get 5% of that and the leverage cash will come back instantly, and you'll be able to gear it.

That's all you need to know, if your purpose is to decide whether to invest in something, or whether to support a bailout.

What a lot of us are interested in knowing is, are we looking at a 70s-style recession, GD2, or Mad Max?

It seems to me that, when you come right down to it, these questions are most likely to be answered by applying rigorous accounting principles to the problem at hand.

The failure to do so kind of leaves us twisting in the wind. Has the problem been exaggerated to induce panic and facilitate looting? Has the problem been understated to head off justified panic, or to make us think all they need is lunch money? Should our kids be taking out student loans, so as to prosper when all this blows over, or should we all be getting our passports in order? Or should we be stocking up on food and ammo?

Personal decision making is in about the same place as national decision making: We have no accurate information.

We have plenty of accurate information - this paper is worth LESS than the current claimed "mark to market" value.

If it was worth MORE, people would buy it. If there was ANY CHANCE it was worth more, there would be SOME buyers of it.

The folks with the cash say "**** that", and this is all I need to know.

Right! Why aren't the top fund managers with plenty of cash, scooping up these wonderful bargains? Is the government smarter than top fund managers?!

Hey! Maybe the governement should be willing to buy my house from me at a 2006 price! After all, why should my house be marked down to a 2008 price, when the "govenment accounting model" says that housing prices are only meant to go up and never down!

Why is it so difficult to value this paper?

I thought it was because it was all derivatives, like CDSes, that were dependent upon counterparties of unknown solvency because they, in turn, held massive amounts of "assets" that could not be valued.

But, no... I'm told "it's all backed by mortgages". How difficult can it be to open up these tranches and sort out the mortgages? Here's the pile of prime debt, here's the pile of Alt-A, and here are the subprimes. A price can be attached to each mortgage, or each pile of mortgages.

What am I missing?

**** it. If I didn't have children and responsibilities, I'd be gone. Take my money and be banging Costa Rican twenty year olds and eating oranges and mangos off the trees or whatever. I am beside myself with rage.

Torches and pitchforks at 1600 Pennsylvania anyone?

The Million Pitchfork March. Come on who's with me?

Yep, Mortgagedude, I often think it's the kids and responsibilities that keep me mired in inaction--oops!--and the job, which presumably would not exist elsewhere, and may not exist here after awhile.

You don't have to leave the country.

A country as large and diverse as the US is composed of many tranches, and affirmative action is like the derivative fraud in the financial markets, where they pretend all pieces of paper are equal.

There are many good local tranches, we just have to separate the wheat from the chaff.

Either defeat the system legally or put yourself in local communities where it's reach is dilluted to the point of being a irrelevant technicality.

I'm in Mdude

Thanks KD and all the smart people here on TF for the free education.

I'm an engineer, not a CFA, I'm still trying to figure out this whole FAS 157 thing--this ticker makes it a bit less murky for me.

hmmmmn..............did i just hear someone say "manufactured fear by the Bush administration?"

I couldnt agree more - however i do recall such statements being slapped down hard as tinfoil around here only a couple months ago.

Great ticket Gen!

"If it was worth MORE, people would buy it. If there was ANY CHANCE it was worth more, there would be SOME buyers of it.

The folks with the cash say "**** that", and this is all I need to know."

Gen - some people are buying it. There was just a SIV based in London that had to liquidate 27billion of assets ranging from MBS, HEQ, Credit Card receivables to corporate bonds and bank loans. Investors were very quick to scoop up AAA rated MBS, HEQ, and Credit Card receivables for 85 cents on the dollar that were part of the 27 billion pool.

Hedge funds are, for the most part, not committing their cash to buy these products because a) they "know" more de-leveraging is to come resulting in much better entry points and b) the hedge funds that have hard cash on hand may not be "structured finance" focused.

I'm not saying that all these assets are worth par, but there's a good number out there that are trading anywhere from 70 cents to 85 cents on the dollar that are money good, but are victims of the "great unwind"


There are numerous examples of assets in the fixed income world that are trading not on fundamentals but on technicals. The one that made everybody's head spin yesterday was the 30yr EURO swap rate trading through the 30yr German Bund rate. You can't make this **** up.

MrNome, if there are nonsense things happening there are opportunities - big ones - and there's lots of cash out there on the sidelines too.

The problem is that the filth is mixed in and the lies are still ongoing. Like, for example, Wells saying they never did subprime or stated income.

Horse****.

Wells never did subprime my ass. Where the hell did you read that? I've got files in my office that I could show you went to Wells Fargo at 560 fico, 95% LTV. They had account representatives who specifically sold this.

I ripped off Hedgie's rate sheet and its going in the evening video.

They claimed to not have done it on air this morning.

Yeah, I know, its bull****. Just more lies.

And we wonder why the credit markets are locked up?

Jonjr: What am I missing?

Many things:

They are ripe with fraud. Can you believe some of the homes used for lending DON'T EVEN EXIST!

Some of the people who's names appear on the paper as having borrowed money to purchase the homes DON'T EVEN EXIST. We call them "straw buyers". many of those who do exist moved back to their old homes in Mexico after losing their construction jobs (etc). here.!

Some homes were sold more than once.

Many of the tranches contain a "special" blend of Student, Auto, and Boat loans in addition to MBS! Some might even include loans made for the "Betties" sent to Iraq and other military equipment!

Some homes were sold more than once.

Many of these loans NEVER RECEIVED A SINGLE PAYMENT!

Most of these "ARMs" will be in default if they are not now...

..... And yes, there's more....

Well, I think I have seen the answer as to where this country is going.

http://www.zmag.org/znet/viewArticle/189....

This link was posted among the comments to Roubini's latest analysis:

http://www.rgemonitor.com/roubini-monito....

Here's the comment, which quotes directly from the first link:

Quote:

Excellent article, illuminates the bigger picture, I'm only providing snips, suggest reading the whole thing at the site linked...and Outer Beltway, I'm thinking you might especially be interested in this as you look for better models going forward toward justice.

Will someone from South America adopt me please

In Guatemala, the Eisenhower administration overcame the threat of democracy and independent development by violence. In Bolivia, it achieved much the same results by exploiting Bolivia's economic dependence on the US, particularly for processing Bolivia's tin exports. Latin America scholar Stephen Zunes points out that "At a critical point in the nation's effort to become more self-sufficient [in the early 1950s], the U.S. government forced Bolivia to use its scarce capital not for its own development, but to compensate the former mine owners and repay its foreign debts."

The economic policies forced on Bolivia in those years were a precursor of the structural adjustment programs imposed on the continent thirty years later, under the terms of the neoliberal "Washington consensus," which has generally had disastrous effects wherever its strictures have been observed. By now, the victims of neoliberal market fundamentalism are coming to include the rich countries, where the curse of financial liberalization is bringing about the worst financial crisis since the Great Depression of the 1930s and leading to massive state intervention in a desperate effort to rescue collapsing financial institutions.

We should note that this is a regular feature of contemporary state capitalism, though the scale today is unprecedented. A study by two well-known international economists 15 years ago found that at least twenty companies in the top Fortune 100 would not have survived if they had not been saved by their respective governments, and that many of the rest gained substantially by demanding that governments "socialise their losses." Such government intervention "has been the rule rather than the exception over the past two centuries," they conclude from a detailed analysis. [Ruigrok and von Tulder]

We might also take note of the striking similarity between the structural adjustment programs imposed on the weak by the International Monetary Fund, and the huge financial bailout that is on the front pages today in the North. The US executive-director of the IMF, adopt ing an image from the Mafia, described the institution as "the credit community's enforcer." Under the rules of the Western-run international economy, investors make loans to third world tyrannies, and since the loans carry considerable risk, make enormous profits. Suppose the borrower defaults. In a capitalist economy, the lenders would incur the loss. But really existing capitalism functions quite differently. If the borrowers cannot pay the debts, then the IMF steps in to guarantee that lenders and investors are protected. The debt is transferred to the poor population of the debtor country, who never borrowed the money in the first place and gained little if anything from it. That is called "structural adjustment." And taxpayers in the rich country, who also gained nothing from the loans, sustain the IMF through their taxes. These doctrines do not derive from economic theory; they merely reflect the distribution of decision-making power.

The designers of the international economy sternly demand that the poor accept market discipline, but they ensure that they themselves are protected from its ravages, a useful arrangement that goes back to the origins of modern industrial capitalism, and played a large role in dividing the world into rich and poor societies, the first and third worlds.

This wonderful anti-market system designed by self-proclaimed market enthusiasts is now being implemented in the United States, to deal with the very ominous crisis of financial markets. In general, markets have well-known inefficiencies. One is that transactions do not take into account the effect on others who are not party to the transaction. These so-called "externalities" can be huge. That is particularly so in the case of financial institutions. Their task is to take risks, and if well-managed, to ensure that potential losses to themselves will be covered. To themselves. Under capitalist rules, it is not their business to consider the cost to others if their practices lead to financial crisis, as they regularly do. In economists' terms, risk is underpriced, because systemic risk is not priced into decisions. That leads to repeated crisis, naturally. At that point, we turn to the IMF solution. The costs are transferred to the public, which had nothing to do with the risky choices but is now compelled to pay the costs - in the US, perhaps mounting to about $1 trillion right now. And of course the public has no voice in determining these outcomes, any more than poor peasants have a voice in being subjected to cruel structural adjustment programs.

A basic principle of modern state capitalism is that cost and risk are socialized, while profit is privatized. That principle extends far beyond financial institutions. Much the same is true for the entire advanced economy, which relies extensively on the dynamic state sector for innovation, for basic research and development, for procurement when purchasers are unavailable, for direct bail-outs, and in numerous other ways. These mechanisms are the domestic counterpart of imperial and neocolonial hegemony, formalized in World Trade Organization rules and the misleadingly named "free trade agreements."

Financial liberalization has effects well beyond the economy. It has long been understood that it is a powerful weapon against democracy. Free capital movement creates what some international economists have called a "virtual parliament" of investors and lenders, who can closely monitor government programs and "vote" against them if they are considered irrational: for the benefit of people, rather than concentrated private power.

Maybe that's why the IMF is planning to look into US finances.

They already have.
Paulson is a member of the Board of Directors of the IMF in addition to Treasury Secretary. That's why he can afford his arrogant attitude.

The plot thickens.