Friday, March 27, 2009

The Big Takeover

The Rolling Stone image says it all but more importantly, read Mike Taibbi's The Big Takeover to learn how we have been shafted by the best in the business.

"No empire can survive being rendered a permanent laughingstock, which is what happened as of a few weeks ago, when the buffoons who have been running things in this country finally went one step too far. It happened when Treasury Secretary Timothy Geithner was forced to admit that he was once again going to have to stuff billions of taxpayer dollars into a dying insurance giant called AIG, itself a profound symbol of our national decline — a corporation that got rich insuring the concrete and steel of American industry in the country's heyday, only to destroy itself chasing phantom fortunes at the Wall Street card tables, like a dissolute nobleman gambling away the family estate in the waning days of the British Empire."

To get another dose of reality, Cenk Uygur's excellent piece about Naked CDS Deals should be a wake up call for us to take back our country before it's too late.

"The size of our national economy this year is roughly $15 trillion. The size of the Credit Default Swaps (CDS) market is $64 trillion. The whole world GDP is about $56 trillion [1]. How could the CDS market be larger than the world GDP combined? That doesn't make any sense.

The minute I read that many months ago, I realized that there was something unreal going on in the CDS market. By "unreal" I mean something that is given value even though it is not attached to real assets. And the more I researched, the more I realized that was true.

CDS are basically supposed to be insurance on a group of assets. So, if you have a collection of mortgages, loans and other assets, and you would like to insure their value, you get a CDS. This makes sense since some of these underlying assets turned out to be quite risky.

What doesn't make sense is for the insurance market to be many times larger than the value of all of the underlying assets combined. Well, it turns out there is a reason for that. It's called the "naked" CDS. These deals are not attached to any underlying asset. They are not collateralized. They are not attached to anything of real value. They are simply bets. As in wagers. As in gambling."

Last but not least, Simon Johnson's thoughtful article The Quiet Coup, in The Atlantic, sounds another clarion call about the takeover.

"The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time."

There's somethin' happenin' here
What it is ain't exactly clear
There's a man with a gun, over there
Tellin' me I got to beware

(I think it's time we)
Stop, children, what's that sound?
Everybody look - what's goin' down? -

For What It's Worth - Buffalo Springfield

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