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| |  THE TRILLION DOLLAR MELTDOWN -
- or - I explain in detail what's going on with our economy -
This book was written an eternity ago in the course of the economic meltdown. It was finished in late 2007. Back in late 2007;
1) Countrywide was still in business.
2) So was Fannie Mae, Freddie Mac, AIG and Bear Stearns... as well as WAMU and a lot of banks.
3) There was still such a thing as an investment bank.
And the author showed that - even in an "orderly" deleveraging of the massive credit bubble, using very very conservative estimates, there was about a trillion dollars that was going to be wiped out. His thesis was that it has to happen, but once it does, if it does so "transparently" (as in, honestly and without bullshit)_, then the U.S. financial system would take this one-time hit and recover because the U.S. has a reputation for safeguarding investments. Thanks to your dumbass President Bush, and Secretary Paulson, they did a great dog and pony show that completely fooled the U.S. House and Senate, and the American people.
The U.S. has a reputation of not being a "rogue" country that is corrupt, and therefore foreign investment dollars would still find the U.S. desirable. We have had a history of safety because of oversight and prudent management. We had regulatory commissions that protected investors. Until the last eight years, anyway.
Let's look at what happened since this book got written. Paulson comes screaming to Congress and convinces it that the markets will unwind if taxpayers don't cough up 700 billion dollars in additional taxes right away. Congress believed him because HE'S THE TREASURY SECRETARY. It's his job to know when we are in danger, just like it was Secretary Colin Powell's job to tell us that Iraq possesses WMD's. We trust cabinet members because they have access to information we don't have. We don't think that high-ranking Presidentially appointed cabinet members are going to lie to us! And when a high-ranking official tells you that you have to do something or else, there is an inherent trust in that person.
Congressional members and senators don't spend the hours and hours a day reading financial news from around the world like I do, so I can't expect them to understand exactly why the $700 billion dollar rape and pillage of the middle and lower classes was voted. I just wish I could've had half an hour to give a powerpoint presentation before they voted. I am absolutely positive I could've convinced them that the bailout was the worst moment in U.S. history, and will most likely destroy it.
I will explain what happened to the collapse of the credit markets in as simple way as I can. Motives and knowledge of individuals are stated as opinions, rather than fact. First let me introduce the players:
1) Richguy1 - starts an investment fund called a "Mortgage Backed Security"
2) Richguy2 - starts a hedge fund
3) Stupidguy1 - is an investment bank
The current financial system is based in IOU's. When you swipe a credit card at a gas station, the gas station goes on the trust that the money will wind up in the owner's bank account, and he can buy a jug of milk. Rarely is cash even used, and cash is completely never used in complex investments.
When you bought a house, you issued an IOU called a mortgage. This IOU was something the bank could use to take your house away if you didn't pay on time. But here's the thing - the bank could sell "that" IOU to somebody else. Let's say it sold your promise to pay the bank back to a person we'll call "Richguy1". Richguy1 takes your mortgage, and a bunch of your neighbor's mortgages, and puts them in a big pot, splitting them up into five packages and offers these packages to investors in smaller investment shares. Richguy1 creates what is called a "Mortgage Backed Security". It's like buying stock in a company, but in this case the company is simply a company that buys mortgages from banks. OK? Ok.
The "good" mortgages (belonging to people with high credit ratings, and good secure jobs) are in the high package, offering low risk, but also low rates of return. The "risky" mortgages, which consist of mortages of people with low credit scores, etc. get packaged up and sold with a description of higher risk, but promising higher returns.
The low risk packages are easily sold by the Richguy1 to big investment funds, like the people who just tanked your 401k or pension plan. Large investors want low risk, but safe returns. That's an easy sell. Low-risk packages go to the big guys.
Well now who the hell is going to buy the high risk crap? I used to think small investors would buy the high risk stuff (looking for higher returns) but that wasn't who was soaking up all of the "toxic" debt. IT WAS THE HEDGE FUNDS.
That's right. The hedge funds would be assembled by Richguy2. Richguy2 would get a bunch of millionaires (in order to invest in hedge funds, you have to be a millionaire because the law prevents little guys from getting hurt in non-publicly traded companies) together and go up to Richguy1 and says, "hey Richguy1, I bet you would like to unload that lousy, high risk, subprime group of mortgages at liquidation value. Tell you what, I'll guarantee that in five years, I'll give you 60% of the original value (liquidation value). All I ask is that you give me a tiny deposit of 10% cash now (in exchange for the risk I'm taking), in cash. This is what is known as a credit default swap. If the "toxic" debt goes over 60%, the owner of the credit default swap wins. Stupid bet, right? Right now it would be, but in an economy where real estate was still going up - who knew if it was super smart or super stupid?
Richguy1 thinks, you know what? Richguy2 is making me one hell of a deal. Because I am making so much money on the top packages by selling my safe stuff to big institutional investors, I can for sure cough up 10% of the liquidation value of the bad stuff, with a promise that in five years I'll get it all back. OK, Richguy2 - deal! I'll pay you 10% for the insurance that this toxic debt is off my books... gone.
Now, Richguy1 benefits, because he now has less toxic debt on the books. Richguy1 is really in business, making tons of money because he's buying up mortgages from banks, (including bad subprime mortgages) but unloading the subprimes to hedge funds who buy Credit Default swaps.
Mortgage-originating banks are happy because they have NO risk. They unload everything to Richguy1. Richguy1 unloads the crap toxic debt to Richguy2. So it sounds like Richguy2 is stupid right? He's not. There's a third, stupid guy I haven't introduced yet. Richguy2 is plenty smart. Only problem is, if you do the math, Richguy2 is extremely leveraged.
Now you're wondering why Richguy2 (the owner of the hedgefund) would be so stupid as to buy crap at 60% off. It's because he GETS CASH. Cash upfront to get rid of the "toxic" debt, and then goes to the investment bank to lend the next 30%.
The investment bank I will now call "stupidguy". The investment bank writes a check for 30%. What does stupidguy get? Well, fees, and lots of them. But stupidguy has a worthless contract with Richguy2. Richguy2 promises to borrow only a fixed ratio of the toxic debt. If lots of those mortgages in the "subprime" package default, then Richguy2 has to send $$$ to Stupidguy1. (This is called a margin call).
As house values fall, more mortgages went into foreclosure. As that happened, Richguy2 had to send money to stupidguy1. Richguy2 (the hedge funds) didn't have the $$$ because he was leveraged to some ridiculous amount, like 100 to 1. So the hedgefund goes tits up. Stupidguy1 (the investment bank) loses its entire 30%. That's a bummer, but what happens when this happens with every freaking single deal it does? The investment bank goes tits up. No more stupidguy1.
Richguy1 made out ok. While there's no more CDO's to create anymore, Richguy1 made a ton of money. He got cash out of the mortgage that is now being used to foreclose on millions of hard-working "Joe Sixpacks" so they can be sent to move in with their relatives.
Stupidguy1 is gone, but now what happened to Richguy2 - the hedge funds? Wouldn't it be nice if somebody could bail out the hedge funds?
I know! How about one of the former CEO's of one of the stupidguy1's! Wow, that's weird, he's now the secretary of the treasury! He controls the taxpayer's money! Let's get him to convince Congress and Senate (the dumbass President will do whatever, but he won't eat sweets and he won't golf until this war is over) to get the taxpayer to fork over $700 billion dollars to buy up the toxic debt!
Let me introduce Stupidguy2. It's the taxpayer. IT'S YOU! You've all heard of the "$700 bailout plan to unload TOXIC DEBT". That's you, the taxpayer - left holding the bag on the toxic debt that the hedge funds bought!!!!! Do you see why I was so mad about the bailout plan?
That high-risk package that got bought up by Richguy2, that cost Richguy2 a lot of money, makes Richguy2 very mad, and he's connected to the President and the Treasury secretary! Let's get "Joe Sixpack" to work in the factory to pay back the money Richguy2 lost!
So there's no way Joe Sixpack will ever be able to pay this debt off. Bush knows this, Paulson knows this. But the government will cash Richguy2 out now, and bankrupt the treasury someday later. Bush and Paulson know that this will just completely bankrupt the treasury - but they don't care. Bush will be long gone, and McCain said he WANTS TO KEEP PAULSON ON!
Now here's what's going to happen in this situation. The asians, who own over half of all of the treasury debt are getting fucking pissed off and are getting ready to ditch the U.S. dollar as the official reserve currency. Once this happens, the U.S. dollar will completely collapse, it will appear to Joe Sixpack as unbelievable inflation, jobs will completely go, gas will be $40/gallon.
GM, Chrysler, Ford, all history and very soon. U.S. Treasury? Bankrupt. Paulson will not be Treasury secretary because Obama will win, and I really hope he's up for the challenge because there is very little he can do before running out of time. And when does time run out? When does the fat lady sing? When China gives up on the USD and starts trading its currency for a "basket" of international currencies EXCLUSIVELY, like it already has started to, quietly.
China is not stupid. It's not going to announce that it's ditching the dollar because then the dollar will collapse and China now owns more than half of the US Dollars. It's diversifying out if it, preparing for a new world order that does not include the U.S., and once it feels like it can take the hit, it will be out of the USD.
I am staring at a black hole where I can't tell where the bottom is. But I know on the way to the bottom will be a complete financial destruction of the U.S. - far greater than the great depression, and lasting between 45-90 years.
You know, as bad as this unending war with Iraq, the outing of Valerie Plame, the loss of Afghanistan back to the Taliban, quitting the search for Bin Laden, the Katrina disaster, the torture of prisoners at Abu Gharaib, the taking of Clinton's budget surplus and turning it into a record deficit, the collapse of the economy, the mission accomplished carrier landing, earning him the highest unfavorable rating of any US President in history, the one thing I absolutely cannot forgive Bush for was the moment recently when he stood up in front of the American people and said, "we must act now" to avert a collapse in the markets.
We acted now, and the markets are collapsing.
By the time he took the podium, nobody was listening to him anyway, but he still had the swagger to do it. He couldn't have ended with a more terrible legacy in history, and to top it off, he pitched to the American people the biggest bailout in history to give money back to the hedge fund managers, money that they lost ripping off the American homeowner.
And the US will be completely absolutely a thing of the past. And that is going to happen, exactly when - who knows, but it's going to happen.
| | | Posted 10/27/2008 9:03 PM - 4654 Views - 43 eProps - 64 comments
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