Rebelion.org
To save the banks from disaster
Frédéric Lordon Aporrea
had to have a child's spirit, or taste so wonderful, to take seriously the position martial by U.S. authorities in dealing with the bankruptcy of investment bank Lehman Brothers, a position that the History did not take more than two days to make it a gesture of despair. The refusal to rescue this endangered investment bank was an extremely risky bet on time and to say it once, unsustainable, if what was expected to mark a strategic shift.
is true that current events are elements to confuse and the succession increasingly quick critical situations, each real-time perceived as a "summit" of the crisis, to be immediately erased by another even more serious and even more spectacular, it's like to sink into the abyss regulators of distress and disorientation.
the weekend of extreme urgency continues at a pace that is accelerating - March 16, Bear Stearns, on 12 July, the first act of Fannie Mae and Freddie Mac September 6, the second act of the latter (see article by Ibrahim Warde, and vocabulary), Sept. 13, Lehman Brothers and Merrill Lynch, Sept. 16 (did not wait even a week), American International Group (AIG) - and the binomial Federal Reserve and Treasury Department, which is increasingly believed to have been overcome, he discovers that it was not and that we must return all over again.
Otorguémosles to have, until now, chained spectacular performances, but perfectly futile if it was to put a definitive end to the collapse of American finance, and doing so at a cost that is not just financially, because neither the president Federal Reserve Ben Bernanke, or even less Henry Paulson, former chairman of Goldman Sachs, escutcheon absolute absolute capitalism, then become Secretary of the Treasury of a right-wing administration, certainly never imagined one day live the painful paradox of being treated "socialist" every time you are forced to provide public support for the bailout of private finance.
Undoubtedly, it was also to end this infamy that either decided, since the week of Sept. 8, at the same time exhausted by the mega-bailout of Fannie Freddy seemed necessary to follow that of Lehman, " thumb him down to it and tell the financial community that the next stage would be negotiated without them.
If you leave aside the personal humiliation, there is reason to understand the position of the tandem "Fed-Treasury" (Federal Reserve - Treasury Department). The authorities are concerned, not without reason, by the precedents created every one of his speeches, and the fact that the private bankers could comfortably let go into bankruptcy, knowing that at the last moment "is necessary" to save them, as it did with Bear Stearns and Fannie "Freddie." The mood is clouded with these facilities and the fact is that one hardly keep pleasure at the spectacle of the arrogant and enriched finances when things go well, but taking refuge in the bosom of the public, who usually treated as an aberration of Soviet to beg protection and exceptions.
Here's how often the mood is the surest way to lose the analysis, which in any case means that the outrage which must be unlawful or, still less, that we should not capitalize to accumulate political resources to enable swipe later. But only a little later, without waiting too-that is, after having made clear what it is analytically. However, it is clear that this is a systemic risk, ie the possibility for the density of commitments between banks, that the fall of a single actor triggers for successive shock waves, a cascade of bankruptcies side.
Reference to any liberal who hear bad, we need that the term "systemic risk" is the word "systemic", which means that it is the "system" ... that is, all the institutions of private finance, potentially involved in a global collapse. And, if you really need to be even more explicit, let's say once the "system" of finance, credit, therefore, is in ruins, there is no longer simply economic activity possible. Absolutely. Is it enough to make this a glimpse of the enormity of the consequences?
For more painful it may be, there is no alternative to finding that a Once the financial bubble has burst and systemic risk has been generated, the Central Bank lost almost all its room for maneuver, because the fact that private finance have the ability to link their fate for the worst to the rest of the economy, the collapse of finance will necessarily involve the collapse of the economy, forcing government intervention in the rescue, is a hostage situation with no possibility of avoiding the heart of the crisis. Therefore, a significant new financial regulation can only be done around the strategic objective of preventing bubbles from forming (1), because then it's too late. Can only be fought against systemic risk eradicated; as reconstituted, and especially when activated, the game is lost.
Federal Reserve, but has not shown any serious desire to eradicate them at least aware of the extent to which is strategically dominated in the game that the opposition to private finance in crisis, paradoxically in a position of strength for stronger by the fact that they are dying. And then submitted, with a heavy heart at successive injunctions ruined the various banks to come to his aid, with the risk of letting a disaster occurs irreparable.
In March 2008 Bear Stearns threatened to unpaid leave of $ 13.4 billion transactions credit derivatives (2) - that is ten times more than Long Term Capital Manager (LTCM) that had not been ready to cover its debt of 1.5 trillion dollars. Many high caliber financial institutions have invested in these securities: pension funds, retirement-savings accounts, mutual funds, public-, and even foreign central banks! Is out of the question for the survival of the U.S. financial system as a whole that such an event occurs.
Henry Paulson, Treasury secretary, has no need for you to make a plan: July 12 mobilized 25,000 million of public money in credit lines and early recapitalization. And on Sept. 6, it appears that need recapitalization rather ... 200,000 million! Perfect, taxpayers will these 200,000. "I did not want to Have to Do That," says Paulson, however, afraid of his own socialist future. "I did not have to do that" but, anyway, it has. And really had no choice.
As Lehman is much smaller than the "Fed-Treasury", it intended to find a chance to "have a choice." And I do not want to lose under any circumstances. In this bank you will pay for the other, and with all the anger that had to swallow the left arm twisting previous times. But, however, to achieve an excellent release of bile which offers the "opportunity" Lehman demanded to be carefully evaluated prior to "let it die." Given its size and exposure of other banks that are its partners, "a Lehman debt default or does not constitute a systemic risk?
is true that Lehman's exposure in derivatives was infinitely less than Bear Stearns -29,000 million dollars against 13.4 billion (3) ... but anyway, Worldcom Lehman moved to the top of the list , becoming the largest bankruptcy in history United States, with 613,000 million of debt. However, it is evident that from the technical point of view there is no equivalent default, since Lehman has assets and the liquidation procedure is precisely the aim of realizing them.
But how exactly these assets worth? That is the question. There is a minimum of 85.000 million shares many (including 50,000 million subprime derivatives) that the recovery plan, ultimately aborted, which was studied during the weekend of 12 to 14 September, expected to contain a bad bank (rescue society is responsible for the bad loans) ad hoc. Its value at this time is 85,000 million, but it is reasonable to ask what will be the end of a fire sale, though, aware of the risk of collapsing values \u200b\u200beven a little more, U.S. officials believe a settlement "orderly", so it must be understood settlement spread over several months.
But anyway, the breakdown is announced severe, and this is not just a problem for Lehman. Because the accounting rule of mark-to-market ", ie the recording of assets at market value instantaneous force all financial institutions to value, in turn, the settlement price special" Lehman " the same assets from which their balance sheets are still full, suffering further reductions in the end you can imagine.
Yet, if the risk of devaluation was the only side ... But we add to the counterparty risk related to the fact that multiple transactions in which Lehamn was involved will not be completed. And finally, the risk of activation of the CDS (Credit Dafault Swap), these products offer to those who buy insurance against loss of value of various assets in bonds. If insured, it is because the other side are insurers. However, the bankruptcy triggers the operation relentlessly CDS issued as debt protection Lehamn, and compensation payable is important announcement.
This is very annoying, because experience indicates that the securitization of the CDS mechanism, perfect on paper, has emerged as one of the most dubious, and the CDS market is extremely fragile, raising fears that large shock every time he uses a little brutally, by a bankruptcy. Unfortunately, when it occurs Lehman's bankruptcy, is just out of the nationalization of Fannie, Freddie, "which many fear itself already represents a significant risk to the CDS market ...
But surely la “Fed-Treasury” contaba con este conjunto de amenazas para desprenderse del salvataje de Lehman y “convencer” a los banqueros de la plaza que lo tomaran a su cargo, ya que era de su interés, en el mejor de los sentidos. Pero nada se hizo y ningún plan privado salió de ese fin de semana frenético. Es que “Wall Street” es una abstracción que abarca una colección de intereses particulares, a veces divergentes. El plan de recuperación cuyo fracaso llevó a Lehamn a presentarse en quiebra preveía la compra del “buen banco” por Barclays y el Bank of America (finalmente éste se dirigirá hacia Merrill Lynch) y la contención del “mal banco” se iba a do with a joint financing of the square.
But "the square", meaning that those who do not have the means to buy the good segments, not least that was requested to wipe the devaluation of the bad segments, and has had difficulty accepting the use of utilities, at great expense, to allow two lucky to leave with the crown jewels, leaving other repairs to the ruined castle.
Indeed, the entire weekend of 12 to 14 September was not just a huge liar poker game: between the "Fed-Treasury", showing their desire not to move, Wall Street, which in principle interpreted, but mistakenly voltage as a strategy to increase the commitment of private banks, the conflict between those private banks that are divided between buyers and financiers opportunistic forced-to grumble about having to be a flower for the first, but they also know their own interest is not indifferent to the survival of Lehamn-, conditions were more together to make the rescue coordination unlikely.
The "Fed-Treasury" did not lie. Left to do. Was no longer socialist. But - but still did not know at that time, only two days! And yet, is so eager to believe in it! Since almost a week se veía fuertemente alentada por todos sus admiradores, un poco desorientados por las sorprendentes vías que se vio obligada a tomar hasta ese momento. El editorialista del Financial Times comenta con satisfacción: “Es hora de que las autoridades se retiren (…) Lo que se hizo hasta ahora debería ser suficiente (4)”. Pero no es la “Fed-Treasury” quien decide si “lo que se hizo es suficiente” o no, sino la situación.
Ahora bien, no sólo la situación de Lehman no ha revelado todavía sus verdaderos riesgos, sino que la apuesta de la Fed está lejos de haber ganado en el momento en que creía repudiar su socialismo, porque, por detrás, maduran otras threatening situations and to make his bow at the parting of the Companions of the song (French vocal group from the beginning of the Second World War): reversible and repetition. The first gala
return not wait forty-eight hours to follow the presentation, and what a party! AIG is eligible as a textbook case. All aberrations of contemporary finance focus on it and offered as entertainment. As the simple job of ensuring it was so monotonous, AIG established a branch of "financial products" and jumped headlong into the market of the CDS rather special. And here
AIG, in a period of financial ruin compromised by 441,000 million shares at ensuring, of which 57,800 million were linked to the subprime (5). It is needless to say, their losses are colossal: 18,000 million in the past three quarters, and which is currently advertised bright because, between activation of CDS and collateral devaluations, the collapse of Lehman could push the cumulative loss AIG to 30,000 million dollars, among which 600 million are also linked to the complete devaluation of the shares "Fannie-Freddie" after the nationalization.
Under these conditions, rating agencies, dazed by the need to rebuild a virginity to forget so many past mistakes, do not hesitate to severely degrade the status of AIG, which had the initial effect immediately required to meet the provisions referred to "appeal to the margins" to offset the deterioration of quality insurance in contracts (CDS) in which it is involved. But how can AIG immediately remove 10,000 to 13,000 million dollars of "appeal to the margins" when it is already in the process of sinking?
During a journey, the "Fed-Treasury" still in the intoxication of his most recent "de-socialization," but in every way a bit shaken by the extent of the damages were announced, imagine coordinating a private relief in which Goldman Sachs and JP Morgan would be at the head of a syndicated loan of 75,000 million dollars for AIG.
If you still remember just the day before, had asked the top ten banks in the plaza be a pool of 70,000 million dollars to support the settlement "orderly" Lehman ... The failure of private relief was predictable and the need for government intervention inevitable. One never ceases to be amazed by how far it would take. Through a bridging loan of 85,000 million Central Bank, the State acquires 79.9% stake in AIG.
Even in its brevity, the Federal Reserve's statement of September 16 continues to be rapid. Is there any history of the extraordinary fact that the "Fed" lends money to a "no bank"? Can be measured here the extent of the concessions it will have started the crisis. In March it had decided, for the first time since 1929, to allow investment banks in refinancing (which, to date, only were banks deposits): behold, now an insurance company in the window ...
But what follows is even more surprising. Because on the one hand, the Federal Reserve and the Treasury appear to act as an organic unit close to an outright merger. And, secondly, the federal share of 79.9% in AIG appears as the "counterpart" of the loan of the "Fed." But since when a loan is granted in exchange for an equity stake? The loan is intended to be returned, is secured by all assets of AIG and penalizing rate was set on purpose to encourage their return as quickly as possible. But after exhaustion of credit, the Federal State will remain a shareholder of 79.9%. Then it happens that you have made a takeover without trigger for the moment, the package: an expropriation! In the case of relapse in socialism, this is a strong and well.
The New York Times reports that Henry Paulson and Ben Bernanke, appearing on September 16 evening, to announce his plan, had "a gloomy air." It is easy to understand, because beside Venezuelan President Hugo Chavez seems a liberal puppet sold to big business: when he nationalized, pay! But the stunts ultra socialists of our two buddies just beginning. Because now we are far beyond the liquidity to deal with which the Fed is pretty well armed.
Now that the extraordinary losses have eroded at its core the foundations of equity, this is a widespread solvency crisis that has gripped the financial sector. A frantic imperative to recapitalize declared in March and Lehman Bear Stearns, to Fannie-Freddie, all the critical moments as the source had a doubt about the ability of the banks involved to raise capital (6).
However, for there recapitalizations, there needs to be recapitalized! But most can not afford for that kind of effort: colleagues banks struggle to keep the little money they have left, the sovereign funds (7), which has waited a long, perhaps too, have meditated on your recent setbacks since his sensational arrival on the scene in March, was based on the assumption that prices of real estate assets and stocks had hit bottom, but we know what happened afterwards, and the devaluations that were it convinced them to look twice before doing things from that time. Remains, then, the state alone can do "homework" when no one wants or can.
This is how Karl Vladimir Illich Bernanke and Paulson have not yet reached the end of their sentences. The cap with the red star as the shooters are going to pork, but they have understood, at least, to be kept tight in the head all the time, at the inverse of the crazy liberals angry that appeal to "let the bankruptcies occur" or morality of punishment. There is only one reading this imperative of clothing, and makes a delicious paradox that a former president of Goldman Sachs should make it their own, are structurally liberalized finance an explosive instability, not only is sure to trigger repetitive disasters, but are unable avoid them by themselves, ah, the famous "market solutions" which appealed to the European release of 29 January (see box below)!
State alone, with a gesture of pure sovereignty, quite beyond the common law, by allowing the unthinkable, such as nationalizing no limit to pay later, unilaterally capture all dividends, including shares that have no ( ) - can stop the landslide that increasing returns mechanisms divine feed market. So will the cap or the Apocalypse. Rather
cap, because it is about radiant dawn rising before our eyes: the procession of the subprime has not fully completed when it announces the Alt-A mortgages. Intermediate between the first (standard) and the subprime, Alt-A loans pretend have requested some information on the status of borrowers, but they put up have been answered incompletely or with some "mistakes": a study by the Mortgage Asset Research Institute, almost all of the files Alt-A (made by brokers for the banks) overstate the income of borrowers by at least 5% ... and more than half the overvalued by over 50%! The category
Alt-A loans differ-called Option ARM (Adjustable Rate Mortgages Option), with features to provide credit to the borrower several options regarding the initiation of payments. One of them, particularly tempting offers not only did not begin repaying the capital during the early years, but partly also begin paying interest, so you can be reached tentative start with rates of 1%, which is difficult to resist.
Obviously all these facilities result in extensions for the following years, and reset (reset rate) is therefore more painful. The average policyholder is as option-ARM payments suddenly increase by 63%. The Bloomberg financial agency evaluated in 16% of payment arrears for more than two months in the Alt-A issued in January 2006. These late payments will accelerate next year and may last until 2011, having into account the duration of the reset, which is three to five years. And something else had 855,000 billion of subprime, but there are 1 trillion of Alt-A.
"Fannie" owns or holds as collateral 340,000 million. Wachovia has 122,000 million option-ARM. Countrywide, drawn from bankruptcy by Bank of America (El Salvador of Merrill Lynch), 27,000 million. WaMu (Washington Mutual), 53,000 million, of which 13% will reset next year. And behold, Standard & Poor's downgraded WaMu to junk bond level, the lowest level (scrap or junk bonds).
is not innocent finish this list, very incomplete, with WaMu, because it is a savings-the savings from the public, beginning to feel the wind of the bullets: the money market funds (SICAV monetary) (8), hitherto regarded as safe and liquid as deposit accounts, Were not overwhelmed by demands for withdrawal after its customers were collapsing as their holdings as a result of complete loss of value of securities of Lehman, in which those investment companies had invested cleverly? A run of depositors, this is what would complete the picture ... absolutely
Without wishing to continue this disaster scenario, but more so if you take into consideration the needs bank recapitalization are so important, so widespread, occurring in a context of rejection commits itself by those who are still afloat, the State, and not only lending, but shareholders and recapitalized ultimately faces a financial task becoming less soluble with standard resources. While it is likely that the federal state will end at some time, pay warrants (9), and then the actions that give ownership of AIG, after the 200,000 million dollars from a similar operation with "Fannie-Freddie "not be renewed too often such largesse, because their resources are limited.
Standard & Poor's estimated at ten points of gross domestic product (GDP) what all this might cost in full. Whether in the form of recapitalizations in different directions or over a giant containment structure could reassure private finance for all damaged assets, the problem is the same. These ten points of GDP are they going to leave the American taxpayer's pocket, torpedoing the remainder of growth? Or, conversely, will allow further inflating the deficit of public debt, with the risk that Treasuries and the dollar will become unmanageable, transforming the private financial crisis a crisis of public finances with an aggregate monetary crisis? Just
bad solutions, at least according to the conventions of orthodoxy. So our friends will cap the extent necessary to make what should be done, it is also the reason why so many converts dogmas have loved stupid, they will quickly go to the trash. Recapitalizations monetary emission, pure and simple embargoes, exchange controls ... if things go wrong, perhaps we have not seen anything yet. The story progresses through strange paths. Let us open your eyes, because we are entering uncharted territory.
------------------- (1) is the first number a text "Quatre principes et neuf propositions pour finir avec les crises in financières (Four principles and nine proposals to end the financial crisis)," La nouvelle pompe à phynance, Le Monde diplomatique Blog: www.monde-diplomatique.fr / 2007/09/LORDON/15165
(2) There is a net exposure since commitments to buy / pay compensated commitments to sell / receive.
(3) Office of the Comptroller of the Currency, New York, 09.30.2007.
(4) "Decisive inaction", Financial Times, 11-92008.
(5) Type of home loans granted to borrowers of dubious creditworthiness, and unknown even in the banking system.
(6) Lehman's episode was triggered after the announcement of the failure of negotiations with a view to making participation in the Korean Development Bank KDC.
(7) See Ibrahim Warde, "Des 'fonds souverains' au multinationale des chevet (The" sovereign funds "occupy a privileged place among the multinationals)," Le Monde diplomatique, May 2008.
(8) N. of T.: The SICAV (Mutual Funds Variable Capital) are corporations whose sole object the acquisition, possession, enjoyment and general administration and disposition of securities and other assets financial resources to compensate for an appropriate composition of assets, risks and types of income without economic or political stake in other companies.
(9) Warrants are options, ie, rights to buy shares.
(*) Economist, author of Jusqu'à quand? L'éternel retour de la crise financière (How long? The eternal return of the financial crisis), Raisons d'agir, Paris, November 2008.
is true that current events are elements to confuse and the succession increasingly quick critical situations, each real-time perceived as a "summit" of the crisis, to be immediately erased by another even more serious and even more spectacular, it's like to sink into the abyss regulators of distress and disorientation.
the weekend of extreme urgency continues at a pace that is accelerating - March 16, Bear Stearns, on 12 July, the first act of Fannie Mae and Freddie Mac September 6, the second act of the latter (see article by Ibrahim Warde, and vocabulary), Sept. 13, Lehman Brothers and Merrill Lynch, Sept. 16 (did not wait even a week), American International Group (AIG) - and the binomial Federal Reserve and Treasury Department, which is increasingly believed to have been overcome, he discovers that it was not and that we must return all over again.
Otorguémosles to have, until now, chained spectacular performances, but perfectly futile if it was to put a definitive end to the collapse of American finance, and doing so at a cost that is not just financially, because neither the president Federal Reserve Ben Bernanke, or even less Henry Paulson, former chairman of Goldman Sachs, escutcheon absolute absolute capitalism, then become Secretary of the Treasury of a right-wing administration, certainly never imagined one day live the painful paradox of being treated "socialist" every time you are forced to provide public support for the bailout of private finance.
Undoubtedly, it was also to end this infamy that either decided, since the week of Sept. 8, at the same time exhausted by the mega-bailout of Fannie Freddy seemed necessary to follow that of Lehman, " thumb him down to it and tell the financial community that the next stage would be negotiated without them.
If you leave aside the personal humiliation, there is reason to understand the position of the tandem "Fed-Treasury" (Federal Reserve - Treasury Department). The authorities are concerned, not without reason, by the precedents created every one of his speeches, and the fact that the private bankers could comfortably let go into bankruptcy, knowing that at the last moment "is necessary" to save them, as it did with Bear Stearns and Fannie "Freddie." The mood is clouded with these facilities and the fact is that one hardly keep pleasure at the spectacle of the arrogant and enriched finances when things go well, but taking refuge in the bosom of the public, who usually treated as an aberration of Soviet to beg protection and exceptions.
Here's how often the mood is the surest way to lose the analysis, which in any case means that the outrage which must be unlawful or, still less, that we should not capitalize to accumulate political resources to enable swipe later. But only a little later, without waiting too-that is, after having made clear what it is analytically. However, it is clear that this is a systemic risk, ie the possibility for the density of commitments between banks, that the fall of a single actor triggers for successive shock waves, a cascade of bankruptcies side.
Reference to any liberal who hear bad, we need that the term "systemic risk" is the word "systemic", which means that it is the "system" ... that is, all the institutions of private finance, potentially involved in a global collapse. And, if you really need to be even more explicit, let's say once the "system" of finance, credit, therefore, is in ruins, there is no longer simply economic activity possible. Absolutely. Is it enough to make this a glimpse of the enormity of the consequences?
For more painful it may be, there is no alternative to finding that a Once the financial bubble has burst and systemic risk has been generated, the Central Bank lost almost all its room for maneuver, because the fact that private finance have the ability to link their fate for the worst to the rest of the economy, the collapse of finance will necessarily involve the collapse of the economy, forcing government intervention in the rescue, is a hostage situation with no possibility of avoiding the heart of the crisis. Therefore, a significant new financial regulation can only be done around the strategic objective of preventing bubbles from forming (1), because then it's too late. Can only be fought against systemic risk eradicated; as reconstituted, and especially when activated, the game is lost.
Federal Reserve, but has not shown any serious desire to eradicate them at least aware of the extent to which is strategically dominated in the game that the opposition to private finance in crisis, paradoxically in a position of strength for stronger by the fact that they are dying. And then submitted, with a heavy heart at successive injunctions ruined the various banks to come to his aid, with the risk of letting a disaster occurs irreparable.
In March 2008 Bear Stearns threatened to unpaid leave of $ 13.4 billion transactions credit derivatives (2) - that is ten times more than Long Term Capital Manager (LTCM) that had not been ready to cover its debt of 1.5 trillion dollars. Many high caliber financial institutions have invested in these securities: pension funds, retirement-savings accounts, mutual funds, public-, and even foreign central banks! Is out of the question for the survival of the U.S. financial system as a whole that such an event occurs.
Henry Paulson, Treasury secretary, has no need for you to make a plan: July 12 mobilized 25,000 million of public money in credit lines and early recapitalization. And on Sept. 6, it appears that need recapitalization rather ... 200,000 million! Perfect, taxpayers will these 200,000. "I did not want to Have to Do That," says Paulson, however, afraid of his own socialist future. "I did not have to do that" but, anyway, it has. And really had no choice.
As Lehman is much smaller than the "Fed-Treasury", it intended to find a chance to "have a choice." And I do not want to lose under any circumstances. In this bank you will pay for the other, and with all the anger that had to swallow the left arm twisting previous times. But, however, to achieve an excellent release of bile which offers the "opportunity" Lehman demanded to be carefully evaluated prior to "let it die." Given its size and exposure of other banks that are its partners, "a Lehman debt default or does not constitute a systemic risk?
is true that Lehman's exposure in derivatives was infinitely less than Bear Stearns -29,000 million dollars against 13.4 billion (3) ... but anyway, Worldcom Lehman moved to the top of the list , becoming the largest bankruptcy in history United States, with 613,000 million of debt. However, it is evident that from the technical point of view there is no equivalent default, since Lehman has assets and the liquidation procedure is precisely the aim of realizing them.
But how exactly these assets worth? That is the question. There is a minimum of 85.000 million shares many (including 50,000 million subprime derivatives) that the recovery plan, ultimately aborted, which was studied during the weekend of 12 to 14 September, expected to contain a bad bank (rescue society is responsible for the bad loans) ad hoc. Its value at this time is 85,000 million, but it is reasonable to ask what will be the end of a fire sale, though, aware of the risk of collapsing values \u200b\u200beven a little more, U.S. officials believe a settlement "orderly", so it must be understood settlement spread over several months.
But anyway, the breakdown is announced severe, and this is not just a problem for Lehman. Because the accounting rule of mark-to-market ", ie the recording of assets at market value instantaneous force all financial institutions to value, in turn, the settlement price special" Lehman " the same assets from which their balance sheets are still full, suffering further reductions in the end you can imagine.
Yet, if the risk of devaluation was the only side ... But we add to the counterparty risk related to the fact that multiple transactions in which Lehamn was involved will not be completed. And finally, the risk of activation of the CDS (Credit Dafault Swap), these products offer to those who buy insurance against loss of value of various assets in bonds. If insured, it is because the other side are insurers. However, the bankruptcy triggers the operation relentlessly CDS issued as debt protection Lehamn, and compensation payable is important announcement.
This is very annoying, because experience indicates that the securitization of the CDS mechanism, perfect on paper, has emerged as one of the most dubious, and the CDS market is extremely fragile, raising fears that large shock every time he uses a little brutally, by a bankruptcy. Unfortunately, when it occurs Lehman's bankruptcy, is just out of the nationalization of Fannie, Freddie, "which many fear itself already represents a significant risk to the CDS market ...
But surely la “Fed-Treasury” contaba con este conjunto de amenazas para desprenderse del salvataje de Lehman y “convencer” a los banqueros de la plaza que lo tomaran a su cargo, ya que era de su interés, en el mejor de los sentidos. Pero nada se hizo y ningún plan privado salió de ese fin de semana frenético. Es que “Wall Street” es una abstracción que abarca una colección de intereses particulares, a veces divergentes. El plan de recuperación cuyo fracaso llevó a Lehamn a presentarse en quiebra preveía la compra del “buen banco” por Barclays y el Bank of America (finalmente éste se dirigirá hacia Merrill Lynch) y la contención del “mal banco” se iba a do with a joint financing of the square.
But "the square", meaning that those who do not have the means to buy the good segments, not least that was requested to wipe the devaluation of the bad segments, and has had difficulty accepting the use of utilities, at great expense, to allow two lucky to leave with the crown jewels, leaving other repairs to the ruined castle.
Indeed, the entire weekend of 12 to 14 September was not just a huge liar poker game: between the "Fed-Treasury", showing their desire not to move, Wall Street, which in principle interpreted, but mistakenly voltage as a strategy to increase the commitment of private banks, the conflict between those private banks that are divided between buyers and financiers opportunistic forced-to grumble about having to be a flower for the first, but they also know their own interest is not indifferent to the survival of Lehamn-, conditions were more together to make the rescue coordination unlikely.
The "Fed-Treasury" did not lie. Left to do. Was no longer socialist. But - but still did not know at that time, only two days! And yet, is so eager to believe in it! Since almost a week se veía fuertemente alentada por todos sus admiradores, un poco desorientados por las sorprendentes vías que se vio obligada a tomar hasta ese momento. El editorialista del Financial Times comenta con satisfacción: “Es hora de que las autoridades se retiren (…) Lo que se hizo hasta ahora debería ser suficiente (4)”. Pero no es la “Fed-Treasury” quien decide si “lo que se hizo es suficiente” o no, sino la situación.
Ahora bien, no sólo la situación de Lehman no ha revelado todavía sus verdaderos riesgos, sino que la apuesta de la Fed está lejos de haber ganado en el momento en que creía repudiar su socialismo, porque, por detrás, maduran otras threatening situations and to make his bow at the parting of the Companions of the song (French vocal group from the beginning of the Second World War): reversible and repetition. The first gala
return not wait forty-eight hours to follow the presentation, and what a party! AIG is eligible as a textbook case. All aberrations of contemporary finance focus on it and offered as entertainment. As the simple job of ensuring it was so monotonous, AIG established a branch of "financial products" and jumped headlong into the market of the CDS rather special. And here
AIG, in a period of financial ruin compromised by 441,000 million shares at ensuring, of which 57,800 million were linked to the subprime (5). It is needless to say, their losses are colossal: 18,000 million in the past three quarters, and which is currently advertised bright because, between activation of CDS and collateral devaluations, the collapse of Lehman could push the cumulative loss AIG to 30,000 million dollars, among which 600 million are also linked to the complete devaluation of the shares "Fannie-Freddie" after the nationalization.
Under these conditions, rating agencies, dazed by the need to rebuild a virginity to forget so many past mistakes, do not hesitate to severely degrade the status of AIG, which had the initial effect immediately required to meet the provisions referred to "appeal to the margins" to offset the deterioration of quality insurance in contracts (CDS) in which it is involved. But how can AIG immediately remove 10,000 to 13,000 million dollars of "appeal to the margins" when it is already in the process of sinking?
During a journey, the "Fed-Treasury" still in the intoxication of his most recent "de-socialization," but in every way a bit shaken by the extent of the damages were announced, imagine coordinating a private relief in which Goldman Sachs and JP Morgan would be at the head of a syndicated loan of 75,000 million dollars for AIG.
If you still remember just the day before, had asked the top ten banks in the plaza be a pool of 70,000 million dollars to support the settlement "orderly" Lehman ... The failure of private relief was predictable and the need for government intervention inevitable. One never ceases to be amazed by how far it would take. Through a bridging loan of 85,000 million Central Bank, the State acquires 79.9% stake in AIG.
Even in its brevity, the Federal Reserve's statement of September 16 continues to be rapid. Is there any history of the extraordinary fact that the "Fed" lends money to a "no bank"? Can be measured here the extent of the concessions it will have started the crisis. In March it had decided, for the first time since 1929, to allow investment banks in refinancing (which, to date, only were banks deposits): behold, now an insurance company in the window ...
But what follows is even more surprising. Because on the one hand, the Federal Reserve and the Treasury appear to act as an organic unit close to an outright merger. And, secondly, the federal share of 79.9% in AIG appears as the "counterpart" of the loan of the "Fed." But since when a loan is granted in exchange for an equity stake? The loan is intended to be returned, is secured by all assets of AIG and penalizing rate was set on purpose to encourage their return as quickly as possible. But after exhaustion of credit, the Federal State will remain a shareholder of 79.9%. Then it happens that you have made a takeover without trigger for the moment, the package: an expropriation! In the case of relapse in socialism, this is a strong and well.
The New York Times reports that Henry Paulson and Ben Bernanke, appearing on September 16 evening, to announce his plan, had "a gloomy air." It is easy to understand, because beside Venezuelan President Hugo Chavez seems a liberal puppet sold to big business: when he nationalized, pay! But the stunts ultra socialists of our two buddies just beginning. Because now we are far beyond the liquidity to deal with which the Fed is pretty well armed.
Now that the extraordinary losses have eroded at its core the foundations of equity, this is a widespread solvency crisis that has gripped the financial sector. A frantic imperative to recapitalize declared in March and Lehman Bear Stearns, to Fannie-Freddie, all the critical moments as the source had a doubt about the ability of the banks involved to raise capital (6).
However, for there recapitalizations, there needs to be recapitalized! But most can not afford for that kind of effort: colleagues banks struggle to keep the little money they have left, the sovereign funds (7), which has waited a long, perhaps too, have meditated on your recent setbacks since his sensational arrival on the scene in March, was based on the assumption that prices of real estate assets and stocks had hit bottom, but we know what happened afterwards, and the devaluations that were it convinced them to look twice before doing things from that time. Remains, then, the state alone can do "homework" when no one wants or can.
This is how Karl Vladimir Illich Bernanke and Paulson have not yet reached the end of their sentences. The cap with the red star as the shooters are going to pork, but they have understood, at least, to be kept tight in the head all the time, at the inverse of the crazy liberals angry that appeal to "let the bankruptcies occur" or morality of punishment. There is only one reading this imperative of clothing, and makes a delicious paradox that a former president of Goldman Sachs should make it their own, are structurally liberalized finance an explosive instability, not only is sure to trigger repetitive disasters, but are unable avoid them by themselves, ah, the famous "market solutions" which appealed to the European release of 29 January (see box below)!
State alone, with a gesture of pure sovereignty, quite beyond the common law, by allowing the unthinkable, such as nationalizing no limit to pay later, unilaterally capture all dividends, including shares that have no ( ) - can stop the landslide that increasing returns mechanisms divine feed market. So will the cap or the Apocalypse. Rather
cap, because it is about radiant dawn rising before our eyes: the procession of the subprime has not fully completed when it announces the Alt-A mortgages. Intermediate between the first (standard) and the subprime, Alt-A loans pretend have requested some information on the status of borrowers, but they put up have been answered incompletely or with some "mistakes": a study by the Mortgage Asset Research Institute, almost all of the files Alt-A (made by brokers for the banks) overstate the income of borrowers by at least 5% ... and more than half the overvalued by over 50%! The category
Alt-A loans differ-called Option ARM (Adjustable Rate Mortgages Option), with features to provide credit to the borrower several options regarding the initiation of payments. One of them, particularly tempting offers not only did not begin repaying the capital during the early years, but partly also begin paying interest, so you can be reached tentative start with rates of 1%, which is difficult to resist.
Obviously all these facilities result in extensions for the following years, and reset (reset rate) is therefore more painful. The average policyholder is as option-ARM payments suddenly increase by 63%. The Bloomberg financial agency evaluated in 16% of payment arrears for more than two months in the Alt-A issued in January 2006. These late payments will accelerate next year and may last until 2011, having into account the duration of the reset, which is three to five years. And something else had 855,000 billion of subprime, but there are 1 trillion of Alt-A.
"Fannie" owns or holds as collateral 340,000 million. Wachovia has 122,000 million option-ARM. Countrywide, drawn from bankruptcy by Bank of America (El Salvador of Merrill Lynch), 27,000 million. WaMu (Washington Mutual), 53,000 million, of which 13% will reset next year. And behold, Standard & Poor's downgraded WaMu to junk bond level, the lowest level (scrap or junk bonds).
is not innocent finish this list, very incomplete, with WaMu, because it is a savings-the savings from the public, beginning to feel the wind of the bullets: the money market funds (SICAV monetary) (8), hitherto regarded as safe and liquid as deposit accounts, Were not overwhelmed by demands for withdrawal after its customers were collapsing as their holdings as a result of complete loss of value of securities of Lehman, in which those investment companies had invested cleverly? A run of depositors, this is what would complete the picture ... absolutely
Without wishing to continue this disaster scenario, but more so if you take into consideration the needs bank recapitalization are so important, so widespread, occurring in a context of rejection commits itself by those who are still afloat, the State, and not only lending, but shareholders and recapitalized ultimately faces a financial task becoming less soluble with standard resources. While it is likely that the federal state will end at some time, pay warrants (9), and then the actions that give ownership of AIG, after the 200,000 million dollars from a similar operation with "Fannie-Freddie "not be renewed too often such largesse, because their resources are limited.
Standard & Poor's estimated at ten points of gross domestic product (GDP) what all this might cost in full. Whether in the form of recapitalizations in different directions or over a giant containment structure could reassure private finance for all damaged assets, the problem is the same. These ten points of GDP are they going to leave the American taxpayer's pocket, torpedoing the remainder of growth? Or, conversely, will allow further inflating the deficit of public debt, with the risk that Treasuries and the dollar will become unmanageable, transforming the private financial crisis a crisis of public finances with an aggregate monetary crisis? Just
bad solutions, at least according to the conventions of orthodoxy. So our friends will cap the extent necessary to make what should be done, it is also the reason why so many converts dogmas have loved stupid, they will quickly go to the trash. Recapitalizations monetary emission, pure and simple embargoes, exchange controls ... if things go wrong, perhaps we have not seen anything yet. The story progresses through strange paths. Let us open your eyes, because we are entering uncharted territory.
------------------- (1) is the first number a text "Quatre principes et neuf propositions pour finir avec les crises in financières (Four principles and nine proposals to end the financial crisis)," La nouvelle pompe à phynance, Le Monde diplomatique Blog: www.monde-diplomatique.fr / 2007/09/LORDON/15165
(2) There is a net exposure since commitments to buy / pay compensated commitments to sell / receive.
(3) Office of the Comptroller of the Currency, New York, 09.30.2007.
(4) "Decisive inaction", Financial Times, 11-92008.
(5) Type of home loans granted to borrowers of dubious creditworthiness, and unknown even in the banking system.
(6) Lehman's episode was triggered after the announcement of the failure of negotiations with a view to making participation in the Korean Development Bank KDC.
(7) See Ibrahim Warde, "Des 'fonds souverains' au multinationale des chevet (The" sovereign funds "occupy a privileged place among the multinationals)," Le Monde diplomatique, May 2008.
(8) N. of T.: The SICAV (Mutual Funds Variable Capital) are corporations whose sole object the acquisition, possession, enjoyment and general administration and disposition of securities and other assets financial resources to compensate for an appropriate composition of assets, risks and types of income without economic or political stake in other companies.
(9) Warrants are options, ie, rights to buy shares.
(*) Economist, author of Jusqu'à quand? L'éternel retour de la crise financière (How long? The eternal return of the financial crisis), Raisons d'agir, Paris, November 2008.
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