Faith, Hope And CHARITY

Treasury Secretary Henry Paulson said Monday the American people can remain confident in the "soundness and resilience in the American financial system."


The Ultimate Wall Street Nightmare
by Martin D. Weiss, Ph.D.
In the wake of Lehman's demise, Fed Chairman Bernanke and Treasury Secretary Paulson will try to put out the word that it's no great trauma.

But it's a lie and they know it. If they openly admitted that the Lehman collapse will paralyze Wall Street, torpedo the stock market and sink the economy, they'd have to pony up $100 billion or more to support it. Instead, their agenda was to push big banks to put up the money. And they failed to do so.

We've lost count of how many times the authorities have virtually sworn on a stack of Bibles that "our financial system is fundamentally sound."

But no one could possibly lose count of their recent desperate efforts to prevent the system's collapse — actions which directly belie their words:

One — the coordinated efforts by central banks to flood the global economy with liquidity in the summer of 2007.

Two — the hasty bailout of Bear Stearns in March of this year.

Three — the giant Fannie and Freddie rescue announced just eight days ago.

Each time they intervene, they say "we must not reward CEOs who deceive the public and walk off with multibillion dollar bonus checks." And each time they say it's the "last time we'll make an exception to that rule."

But then they go ahead and do it anyhow, not only breaking their own word ... but also trashing the long tradition of restraint established by their predecessors since the Great Depression.

Why? Because they had neither the courage nor the audacity to confront Wall Street's ultimate nightmare: A collapse in the giant mountain of derivatives.

Here's the great dilemma: The tangled web of bets and debts linking each of these giant players to the other is so complex and so difficult to unravel, it may be impossible for the Fed to protect the financial system from paralysis if just one major player defaults. And if Lehman is not that player, the next one will be.

To understand why, put yourself in the shoes of a senior derivatives trader at a big firm like Morgan Stanley (which has $7.1 trillion in derivatives on its books and about $10 billion in capital).

Let's say you're personally responsible for $500 billion in derivatives contracts with Bank A, essentially betting that interest rates will decline.

By itself, that would be a huge risk. But you're not worried because you have a similar bet with Bank B that interest rates will go up.

It's like playing roulette, betting on both black and red at the same time. One bet cancels the other, and you figure you can't lose.

Here's what happens next ...

Interest rates go up, reflecting a 2% decline in bond prices.

You lose your bet with Bank A.

But, simultaneously, you win your bet with Bank B.

So, in normal circumstances, you'd just take the winnings from one to pay off the losses with the other — a non-event.

But here's where the whole scheme blows up and the drama begins: Bank B suffers large mortgage-related losses. It runs out of capital. It can't raise additional capital from investors. So it can't pay off its bet. Suddenly and unexpectedly ...

You're on the hook for your losing bet. But you can't collect on your winning bet.

You grab a calculator to estimate the damage. But you don't need one — 2% of $500 billion is $10 billion. Simple.

Bottom line: In what appeared to be an everyday, supposedly "normal" set of transactions ... in a market that has moved by a meager 2% ... you've just suffered a loss of ten billion dollars, wiping out all of your firm's capital.

Now, you can't pay off your bet with Bank A — or any other losing bet, for that matter.

Bank A, thrown into a similar predicament, defaults on its bets with Bank C, which, in turn, defaults on bets with Bank D. Bank D has bets with you as well ... it defaults on every single one ... and it throws your firm even deeper into the hole.

So now do you understand why bookies belong to the Mafia and why gamblers who welsh on their debts wind up at the bottom of the East River? It's because defaulting gamblers are a grave threat to the entire system, just like Lehman Brothers is today.
http://www.moneyandmarkets.com/Issues.aspx?The-Ultimate-Wall-Street-Nightmare-2234

...and that's just from the collapse of Lehman Brothers. Now consider the ramifications of the collapse of AIG. AIG insures all the bets...it pays when the betting parties can't. AIG fails, nobody pays and nobody collects, but everybody loses. The biggest loser? The American taxpayer. Billions of non-existent dollars are tossed around by the Fed and the US Treasury like confetti at a New York City parade. NONE of this money has been appropriated by the US Congress...the sole government authority authorized to appropriate the American taxpayers money. The Federal reserve is NOT A GOVERMENT ENTITY. Yet they throw the taxpayers money all over Wall Street. The US Treasury prints money and dispenses it globally, yet they have absolutely NO authority to do so. Where is the US Congress? Why are they not looking out for the interests of the American taxpayers? These dumb asses need a wake up call NOW. The ENTIRE US CONGRESS is up for re-election this fall. Consider it your civic duty to vote OUT the incumbent in your district. Every congressman on the Hill, except Ron Paul, should be arrested and held for dereliction of duty and treason.

Lehman collapse means all bets for the financial system are now off
Lehman Brothers' bankruptcy has dealt the money markets another crippling blow, incapacitating them for who knows how long. Since the crunch struck last year, the markets have been in seizure. But, with the careful nursing by governments and central banks, they appeared to be on the slow road to recovery. No longer.

Fears about other banks' exposures to Lehman and renewed uncertainty as to where the crisis may strike next will freeze the wholesale markets up again. The crunch is back with a vengeance.

It's not hard to see why. Lehman's collapse into bankruptcy protection is the biggest corporate debt default in history and, in the complex interwoven world of modern banking, no one properly understands where the risks lie.

Lehman bonds and loans that were trading at 80 cents to 90 cents in the dollar last week on fears of collapse are this morning worth little more than 40 cents, according to credit market experts.

In other words, about $70bn of Lehman debt held by other institutions has been wiped out. The holders of that debt, therefore, are facing huge potential losses with untold ramifications of their own.

The scale of the potential crisis is exacerbated by the credit default swap (CDS) markets. CDS's are insurance contracts for holders of corporate debt that guarantee to pay back the loan in the event of the company's bankruptcy.

Most of these products are offered by other banks to low-risk institutions like pension funds. Sandy Chen, a banks analyst at Panmure Gordon, reckons this is "where the real stress will come from".

He estimates that the "CDS market as a whole had notional contracts worth four times greater than the underlying debts issued". By his calculations, which differ slightly to the credit analyst's above, that would make "$350bn in CDS's written on Lehman debts".

As to the size of the counterparty risk - defined as other banks that have complex financial instruments held through Lehman - no analyst or credit market expert could hazard a guess as to the likely cost. Mr Chen said Lehman had $729bn of "notional derivatives contracts" that

Lehman believed in May were worth $16.6bn.
Again, any losses will have to be punched into the complex, interlaced banking system to work out where the liabilities ultimately may lie.

At the very least, the collapse of Lehman is potentially as costly as the $200bn initial estimate of the US sub-prime mortgage fall out.

Given where that has left the world's banks - in terms of losses, writedowns, capital raisings and share price falls - there's every reason to be worried.
http://www.telegraph.co.uk/money/main.jhtml?view=DETAILS&grid=A1YourView&xml=/money/2008/09/15/bcnbank115.xml

Do you feel confident in the American financial system now? LOOOOOOOOOOOOOL!!! People, the fuse has been lit, the big bang is all that remains. Helicopter Ben has the fleet airborne. Billions are being dropped around the clock. Billions of Dollars of taxpayer money never appropriated by the the US Congress...money the US Federal Reserve has effectively STOLEN from the American taxpayer. I don't know about you, but I'm volunteering for the Lynch Mob. The criminals have got to pay for destroying the country.

Anxious central banks pump billions more into markets
FRANKFURT (AFP) — Central banks pumped billions into money markets for a second day Tuesday as worries grew that US insurance giant AIG might follow investment bank Lehman Brothers into bankruptcy and spark a global meltdown.

A day after Lehmans collapsed and Merrill Lynch, another Wall Street titan once considered invincible, was sold, central banks in Europe and Japan provided a desperately needed 160 billion dollars in liquidity.

In the United States, the Federal Reserve injected 50 billion dollars, adding to Monday's 70 billion dollars and taking the total amount injected by central banks since the weekend to more than 300 billion dollars.

The collapse of Lehmans, the fire-sale of Merrill Lynch and worries about AIG have contributed to concerns that money markets, where banks secure short term financing, might dry up.

To counter this the European Central Bank said it allotted 70 billion euros (100 billion dollars), more than double the 30-billion-euro injection it had provided on Monday.

It also said it had lent 150 billion euros to commercial banks in a regular weekly refinancing operation in which markedly higher lending rates reflected increased market tensions.

The Bank of Japan meanwhile carried out two injections, the first of 1.5 trillion yen (14 billion dollars, 10 billion euros) and the second of 1.0 trillion yen.

In Britain, the Bank of England injected 20 billion pounds (35.9 billion dollars), four times Monday's total.

Switzerland's central bank said it would supply liquidity "in a flexible manner and generously" to money markets. On Monday the Swiss National Bank injected twice as much liquidity as usual to the market.

After the Fed's latest 50-billion-dollar injection all eyes were on whether the US central bank might reverse its policy and cut interest rates to prevent the US financial system from toppling and dragging the economy down with it.
http://afp.google.com/article/ALeqM5gZQgSYLbWXus0xkpVsbtq9l4UDjQ

And I'm supposed to have faith in the financial system? Yeah right. Was I surprised to see the price of Gold plummet at the open of the CRIMEX this morning? NO. Was I surprised to see the price of Oil plummet? NO. Was I surprised to see the Dollar rise again? NO. These crooks are so desperate to save their asses I'm not surprised by anything anymore. Sadly, I now expect it. I think everybody does. And when everybody begins to expect the Dollar to rise when it should fall, and Gold to fall when it should rise...then it is just about time for "fundamentals" to finally reassert themselves and send the Dollar down and Gold soaring. The pressure to hold the beach ball under water has become to great. The impending destruction of the US Dollar is going to be massive. The rise of Gold, shocking.

Treasury International Capital (TIC) Data for July
Net foreign purchases of long-term securities were $6.1 billion.

Net foreign purchases of long-term U.S. securities were negative $25.6 billion. Of this, net purchases by private foreign investors were negative $20.7 billion, and net purchases by foreign official institutions were negative $4.9 billion.

U.S. residents sold a net $31.7 billion of long-term foreign securities.

Net foreign acquisition of long-term securities, taking into account adjustments, is estimated to have been negative $8.2 billion.

Foreign holdings of dollar-denominated short-term U.S. securities, including Treasury bills, and other custody liabilities decreased $8.4 billion. Foreign holdings of Treasury bills decreased $4.4 billion.

Banks’ own net dollar-denominated liabilities to foreign residents declined $58.1 billion.
Monthly net TIC flows were negative $74.8 billion. Of this, net foreign private flows were negative $92.9 billion, and net foreign official flows were $18.2 billion.
http://www.ustreas.gov/press/releases/hp1138.htm

These numbers are shocking to say the least, and they were completely ignored by the Forex markets today. Monthly net TIC flows were negative $74.8 billion. The global mass exodus from the US Dollar has begun. This data is grossly US Dollar negative. The US needs $2 BILLION every day from foreigners to finance the nations debt. In the month of July the country cam up $132 BILLION short. And the Dollar was up today? Absurd! The DEATH OF THE DOLLAR is clearly at hand. Prepare for the worst.

Fed Keeps Rates Steady; No Signal Of Imminent Cut
WASHINGTON -(Dow Jones)- The U.S. Federal Reserve on Tuesday held interest rates steady and, in a disappointment to Wall Street, didn't appear to signal that rate cuts are forthcoming anytime soon.

Officials continued to warn about inflation risks, and they also suggested that economic concerns have intensified in the wake of the collapse of Lehman Brothers Holdings Inc. (LEH) and a steep sell-off in equity markets Monday.

"The downside risks to growth and the upside risks to inflation are both of significant concern to the Committee," the Fed said in a statement that largely mirrored its previous one in August.

The Federal Open Market Committee voted unanimously to keep the target fed-funds rate for interbank lending unchanged at 2% for a third-straight meeting. The Fed took no action on the discount rate for loans to brokers and commercial banks, which stands at 2.25%.

The Fed said it will "act as needed" to promote economic growth and stable prices. But it didn't refer to "timely" action, a word Fed watchers usually associate with a willingness to cut rates between meetings. Financial markets had also hoped that officials would adopt an explicit bias toward economic weakness, which they didn't do.

"The statement could have largely been written before the events over the past week," said Marc Chandler, currency strategist at Brown Brothers Harriman.

One wrinkle is that Tuesday's statement said the Fed will monitor economic and financial developments "carefully." It didn't say "carefully" last month, just that it would monitor developments.
http://www.fxstreet.com/news/forex-news/article.aspx?StoryId=ae84161e-2eda-49de-8194-2e8e179b4079

"Act as needed"? "Timely"? "Carefully"? As if their "choice" of words is gonna make a damn bit of difference in all this. LOOOOOOOOOOOOL!

God, Bless America!