Saturday, September 21, 2013

FIRST FINANCIAL INSIGHTS: CREDIT BUBBLE BIGGER THAN 2008

FIRST FINANCIAL INSIGHTS: CREDIT BUBBLE BIGGER THAN 2008
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CREDIT BUBBLE BIGGER THAN 2008 (Also Read Recent "The Telegraph" Article )  How could credit circumstances be worse than 2008? Did we not le...

"Why would you ever trade government guaranteed bonds for highly-levered, riskier, de facto bank equity that poses as a debt instrument? Is there a smell of personal interest here?" 
International Bank Regulator - 2013

Did you ever wonder who was selling all those long treasury bonds to the Fed? Where was all that money going? Bonds? Investments? Bonuses?  Well, gleaning from the content, in both the FFI and The Telegraph articles, the money trail looks pretty clear. Here is what we make of it, in a nutshell.

Big Banks sell their bonds to the Fed, then take the proceeds and buy other Banks' debt, that may be converted to equity should the other Bank's ratio fall, say, below 10%. An event that is almost certain to occur once rates spike upwards and all the Banks have to mark to market monetary assets. Marked to market accounting of these assets is sure to result in write-offs that correspondingly affects each Bank's capital structures. These debt instruments are simply a clever way to inject capital into the banks, so that they remain solid even as the rest of us suffer when interest rates rise.


This is also what you call a "Country Club Bail-Out' that quietly escapes the attention and scrutiny of  the media, pundits, public and, of course, our brilliant politicians. So under the radar, Uncle Ben is shelling-out up to $85 Billion monthly, to shore up Banks prior to the much anticipated interest-rate driven write-offs - "without congressional authorization." Nice trick. What's worse? Even if you explained this simple shell game to those political wizards, sadly there is no guarantee they would show even a slight flicker of understanding. 

For the stability of the financial system this is, however, a good move and should avoid the recording of losses by Banks provided that the conversion price provides for an equal dollar for dollar exchange of securities. Afterwards though, the capital positions of these Banks could be exposed to market fluctuations - so it is still fraught with risk issues down the road.


Banksters should also be personally happy with this short-term bail-out insurance, provided to protect their loans, businesses and  huge bonus entitlements  Who loses? Well, in the end it's the taxpayers who are quietly bailing out the Banks, without anyone being the wiser simply because they are doing it ahead of time with an invisible financial wand. Real estate will also get clobbered, unless owners have hedged their positions; say, by shorting long bonds. And long-term the economy and future generations will get to pay the biggest price!    

Just clever, sneaky or magical finance? Or fraudulent tricks? Hmm.


Dr Peter G Kinesa

September 21, 2013  


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