A Napolean-like retreat out of the Middle East?

It is becoming obvious that the problem with the economic meltdown is the foreign investors who were told their investments in these instruments were safe because they were backed up by credit default swaps types of debt insurance ... which is now a huge "oops!"

If there is a run on that stuff ... by those people ...

Whew! Americans would have to start growing their own vegetables, darning their socks, walking to the store ...

We would not be able to drive to the mall and go shopping like before!

That might be seen as funny ... but a collapse of our economy might also leave our military forces stranded in the Middle East ... anybody remember reading about Napoleon's retreat out of Russia?

No wonder Secretary Paulson went on bended knee in front of House Speaker Pelosi ...

The $700 Billion bailout - Part II

I don't think we know yet whether this is a bailout or a blip on the slide into banana republicanism ... there is a lot more we should be finding out ... like ...

According to Time Magazine the world economy is annualized around $54 Trillion ...

According to Bloomberg News the credit default swap (CDS) industry is around $62 Trillion ...

And the way I am beginning to understand is that a CDS is what allows a financial institution to carry a questionable instrument of debt -- such as subprime mortgages and bundled credit card debt -- on its books at full asset value ... (even when that instrument of debt is about to go in the tank ... because the CDS is supposed to pay off on default)

So ... if CDS's start going south ... as in what happened to AIG ... then the world has to revalue the instruments of debt they carry on their books as assets ...

So ... the perfect example is Lehman Bros. ... as I understand it ... it was leveraged at 35 times its capital ... see, assets = liabilities + capital ... so say you have $36 Billion in assets then you have $35 Billion in liabilities (what you have borrowed -- from creditors -- to combine with you put in as capital to buy the assets) plus the $1 Billion in capital -- your own money -- (this is an example, of course, the amounts are representative)

So ... the value of the assets goes south by 5% or .5 X $36 Billion = $1.8 Billion ... this means you now owe your creditors $ 800 Million ... which is a manageable amount in terms of getting new capital ...

But what if the assets start going south by 10-20-25% ... or like what is happening now: 50-75-100%? and everybody's assets are going south at the same time?

And what if this then also triggers a collapse of the CDS industry?

Don't we have to have some idea of what the CDS industry is insuring if we are going to figure out whether the $700 Billion is a bailout or a blip?

These geniuses keep saying these are "derivatives" that are too complicated to understand ... I don't think so, IF they are forms of insurance for questionable instruments of debt.

I think the gurus don't want to explain them to us because it would scare the bejabbers out of the rest of us and they wouldn't have a snowball's chance in hell of getting the money they think they need to escape the collapse.

But I could be wrong ...

Upon reflection ...

Let me tell you when I realized the size of the $62 Trillion credit default swap industry relative to the $54 Trillion annualized world economy ... I took a deep breath.

I believe Secretary Paulson and Chairman Bernanke are playing Col. Jessup: "You can't handle the truth!"

We need a whole lot more honest information.

The $700 billion bailout ... are they kidding us?

With this proposal, Paulson has abandoned hope of holding financial-sector players responsible for their mortgage disaster and is instead intent on distributing those losses to taxpayers. The problem is, it's not clear what the government is buying or what the ultimate price tag will be. -JRacioppi, NJVoices

Right on target, Joe!

And not only that ... we have yet to find out what is hidden in the $62 Trillion credit default swaps (amount per Bloomberg news today) ... up from $900 Billion in 2001 (can you BELIEVE it?!)

Repeating myself, you have hit the nail on the head ... this is a scheme for taxpayers to bail out the global financial sector players who got us into this mess ... and I would add: apparently before the $62 Trillion credit default swaps debacle hits the skids ...

Listening to Paulson and Bernanke this morning ... I could feel a chill creep over me. These two are dissembling (the kindest thing I can say) ... and to me it seems obvious.

I sent the following email to the Senator Dodd's Senate Banking (...) Committee:

Two things:

1. It seems to me that Secretary Paulson and Chairman Bernanke are using people's fears over their retirement funds and mortgages to hide the problems in the $62 Trillion credit default swap industry (amount per Bloomberg news today).

2. I couldn't believe my ears when I heard Chairman Bernanke say we couldn't limit executive pay because they then might not participate in the bailout, letting their companies fail instead.

These two are the problem ... looking to them for a solution is leting the fox guard the hen house.

Let me see if I understand these credit default swaps (CDS) ...

They are a form of insurance ... highly profitable to the issuers up to now ... depending how the rate of default ... which was calculated as relatively manageable ... up to now ... when the sub-prime mortgages went in the tank ... meaning that sub-prime default's could bring down the whole $62 Trillion CDS thing ...

See ... the brilliant global financial sector mathematicians calculated the default risk as manageable with big payouts to the "insurance" salespersons ... so they took their fees upfront ...

oops!

So ... the REAL problem seems to be that if the mortgages go south ... they exceed the CDS inndustry rate of default and the $62 Trillion CDS industry goes south right behind it ... now THAT is going to be exciting!

Will the $700 Billion stem the southward flow? I don't think anyone knows for sure.

Anyhow that's how I would look at it ...

What's more ...

It seems obvious that the reason that Secretary Paulson and Chairman Bernanke want unrestricted flexibility in the use of the $700 Billion is that they do not KNOW where the money needs to go to stave off the collapse of the $62 Trillion CDS industry ...

Now THAT would explain their urgency and fear ...

The problem then becomes of their not being up front with us or Congress ... apparently because "they know what is best for us" and "we can't handle the truth."

And without transparency we don't know if this will work.

So what they are really telling us -- in my opinion -- is that if the plan is not approved, the $62 Trilllion CDS industry will in all likelihood fail ... and if it is approved, we don't know whether it will fail or not.

And Paulson and Bernanke want us to trust them?!

OK, that being said ... let's take another look at the credit default swaps (CDS) ... because from my pov, unless we get a handle on the risk involved in these things we don't know whether the the $700 Billion bailout will work or not ...

See, apparently CDS's were sold as insurance without the "experience" analyses of rates of disability, morbidity, mortality, fertility and other contingencies as in the forms of insurance with which we are more familiar. The actuaries (specialized mathematicians) used SOMETHING to calculate the rates for selling CDS's. The Senate banking committee looking into this mess should be asking for the THAT information ... to determine just how big a scam has been perped by the global financial sector gurus.

I would suggest that they based the rates on a guess with an eye toward how much they could generate in fees and bonuses, and NOT on anything real ... and if that can be proved, isn't it fraud? or shouldn't it be?

I mean, if you paid life insurance to an insurance company only to find out the company was going bankrupt because it had not set aside enough to pay off your policy ... but had paid its salespersons and executives high salaries, fees, and bonuses ... and then asked your heirs to take out a loan to pay off your policy?

And somebody actually thought this was a good idea? ANY kind of idea except bad?!