Included in the main article was this graphic which I have had to scan as it does not seem to appear anywhere on the digital version of the articles...
To fully understand, and to make it clear -
75% of global liquidity is made up of "Derivatives". The value of this portion of the pyramid is over 8 times the global GDP. The importance of this "top of the pyramid" will become apparent when we look at what it is made from.
13% is "Securitised Debt". The value of these "securitised debts" is just under 1.5 times the global GDP.
11% is made up of "Broad Money". The value of this part is just short of 1.25 times global GDP.
1% is in the form of "Power Money" - what you and I carry in our pockets.
So we can say, with a little simple addition, that the total global liquidity is somewhere in the vicinity of 10.8 times the total world income. How much of a worry should that be? At this stage I am far more worried about the top end of the pyramid.
What is that "top end"? The Herald graphic defines it was "Futures, options, swaps etc". Putting into my own words, this is the world of "financial products"; of units and risk and literally gambling with other people's (read thine and mine) money. I quoted Liam Dann at some length a whiles back here and concluded (my words) -
we are seeing what happens when the economy is run by snake-oil medicine men and itinerant side-show freaks.
So, 8 times the global income has been sunk into what is little more than betting slips that are owned and traded between the snake-oil medicine men. They end up back in the open market in forms such as the "Unit Share" of a superannuation fund. They are funded (as far as it is deemed neccessary) from the term deposits and savings accounts of the simple minded people who believe (in their naivete) that bank money is secure.
Read through Brian Gaynor's analysis in full. I want to quote just this piece -
Forty years ago there were almost no investment banks, securitised debt or derivatives. The huge increase in global liquidity and credit since the early 1980s has been almost exclusively driven by investment banks through the creation of securitised debt and derivatives, which now represent nearly 90 per cent of total liquidity.
At the beginning of the year there were five major US investment banks - Goldman Sachs, with assets of US$1061 billion (or US$1.06 trillion), Morgan Stanley US$1045 billion, Merrill Lynch US$1020 billion, Lehman Brothers US$689 billion and Bear Stearns US$424 billion.
Bear Stearns and Lehman Brothers have disappeared and Merrill Lynch is being taken over by Bank of America. These companies created a huge amount of toxic securitised debt and derivatives that have plunged in value.
The conversion of the two remaining investment banks, Goldman Sachs and Morgan Stanley, into bank holding companies is significant for a number of reasons:
* As commercial banks they will be subject to regulation whereas they were almost totally unregulated as investment banks
* Their lending capabilities will be severely restricted because commercial banks have strict capital adequacy requirements. Morgan Stanley's debt to equity ratio is 30:1 and Goldman Sachs 22:1 whereas banks are generally restricted to no more than 15:1.
Now that kind of difference is the stuff that makes my blood run cold. Morgan Stanley (to take that example) has borrowed 30 times its owner equity to fund financial market operations that are no more than betting slips that they hope to validate by winning the battle to influence the value of currencies, the value of future contracts.
This is not Capitalism 101, nor is it Capitalism 201.
This is Master Degree stuff; the kind of Capitalism that was never dreamed of by the likes of Friedman, or the early designers of the principles. It is Capitalism as was never dreamed of by the politicians of the US, or any other country.
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In another article, the Herald records the demise of WaMu - Washigton Mutual - in "the largest failure ever of an American bank".
The Government measures bank failures by an institution's assets; Seattle-based WaMu has roughly US$310 billion in assets.
The previous record was the failure of Continental Illinois National Bank in 1984, with US$40 billion in assets when it closed. IndyMac, seized in July, had US$32 billion.
WaMu was searching for a lifeline after piling up billions of dollars in losses because of failed mortgages. WaMu has seen its stock price plummet by 87 per cent this year, and it suffered a ratings downgrade by Standard & Poor's earlier this week that put it in danger of collapse.
The Bush Administration's proposal for a US$700 billion bailout for distressed financial institutions was believed to have given fresh impetus to a buyout and new allure to Washington Mutual. Besides JPMorgan Chase, Wells Fargo, Citigroup, HSBC, Spain's Banco Santander and Toronto-Dominion Bank of Canada were all mentioned as possible suitors. WaMu was also believed to be talking to private equity firms.
The FDIC was seeking a buyer willing to bear a large burden of WaMu's losses, to lessen the impact on the insurance fund.
In a statement, JPMorgan Chase said it was not acquiring any senior unsecured debt, subordinated debt, and preferred stock of Washington Mutual's banks, or any assets or liabilities of the holding company, Washington Mutual Inc.
JPMorgan Chase's chief executive, Jamie Dimon said in a conference call, the "only negative" related to the deal was "how to handle some of these bad assets". He did not elaborate.
WaMu had "$310 billion in assets". Right. What kind of "assets"? The article says "billions of dollars in losses because of failed mortgages". Well there goes some of the assets. How much was "owned" and recorded as "assets" in derivatives? My guess somewhat more than the thus far "failed mortgages". If I were a betting man, I would accept even odds that WaMu has 6 times the value of its total mortgage portfolio in the form of derivatives. If 50% of the mortgages failed, that means that likely 16 times that value is held in derivatives.
Little wonder that JP Morgan Chase is quoted as saying -
In a statement, JPMorgan Chase said it was not acquiring any senior unsecured debt, subordinated debt, and preferred stock of Washington Mutual's banks, or any assets or liabilities of the holding company, Washington Mutual Inc.
JPMorgan Chase's chief executive, Jamie Dimon said in a conference call, the "only negative" related to the deal was "how to handle some of these bad assets". He did not elaborate.
1 comment:
Gold is the answer.
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