The derivative beast is eating them alive.

This is an unescapable financial minefield with hundreds of trillions, not billions, in hidden losses ready to blow the system up.

http://www.reuters.com/article/rbssFinanci...03?rpc=401&
Three-month Euribor rate hits new three-month high

FRANKFURT, April 3 (Reuters) - The Euribor rate for
three-month unsecured lending in euros between European banks
hit a fresh three-month high for the second day in a row on
Thursday, rising to 4.741 percent from Wednesday's 4.736.

The three-month rate is now at its highest level since Dec.
27, despite efforts by the ECB to reduce money market tensions
when it held its first ever auction of six-month funds on
Wednesday.

----------------------------------

http://www.bloomberg.com/apps/news?pid=206...&refer=bond
Money-Market Rates Rise as Banks Keep Hoarding Cash
By Gavin Finch

April 3 (Bloomberg) -- The cost of borrowing in dollars and euros for three months rose, as widening credit-market losses encourage banks to keep hoarding cash.

....

Banks are refusing to lend to all but the safest borrowers after at least $232 billion in losses and writedowns since the start of 2007. Bayerische Landesbank reported 4.3 billion euros ($6.7 billion) in writedowns from the subprime-market collapse today, double its previous estimate and the biggest of any German state bank. Financial institution losses may rise to $600 billion, according to German financial regulator BaFin.

With manure being a real investment... Quite. Have you insured against the possibility that the price of Gold may plummet (along with fiat denominated investments) and for a simultaneous spectacular rise in the price of fertilizer? I find this more likely than your pension failing - but gold doing well. The biggest hint to me about gold is that because our national gold reserves have been sold, we have burned our bridges... our currency will never be gold-backed... so, in the case of economic collapse, gold would be devalued to zip just like your other financial investments.

Rather than insure you against economic collapse, investment in gold makes it more likely... since gold is an inert investment. When your wealth is stashed in physical form, it doesn't enrich anyone else. Wealth invested in a productive business creates jobs and, when carefully selected, the kind of economy in which you wish to be supported.

One has to stop insuring at some point... and while I respect that the risks you face are different to the risks I face... I definitely see it as more likely that you'd want to grow food organically than that fiat would collapse and having gold would be important to you. Each to their own... One of my quirks is that, once I've bought a house, I want it to have a big garage - into which I'll construct a workshop... having space to make/repair things is far better insurance for me than buying an arbitrary quantity of a metal that I'd have to exchange for something I actually want at a later date. I quite like the idea of being self-sufficient... which is a form of insurance, I guess, but I don't consider financial investments to be insurance.

This is the mark of the derivative beast.

Nothing can save the world from hyperinflation.

http://www.ft.com/cms/s/0/508fcb8e-01d6-11...?nclick_check=1
Surge in US bank borrowing from Fed

By Krishna Guha in Washington

Published: April 4 2008 00:48 | Last updated: April 4 2008 00:48

Bank borrowing from the Federal Reserve’s discount window surged in recent days, as primary dealers continued to draw still larger amounts of cash from their new emergency finance facility, figures released by the US central bank showed on Thursday.

The Fed said bank borrowing from the discount window averaged $7bn in the week to April 2 – a $6.5bn jump from the previous week. The total amount outstanding on April 2 was $10.3bn.

Meanwhile borrowing from the new emergency finance facility for primary dealers - including investment banks that do not have access to the discount window - rose $5.2bn to average $38.1bn over the week, though the amount outstanding dipped to $34.4bn on April 2.

That doesn't sound hyper inflationary to me. Repaid debts.

the issue is not our currency it is the worlds reserve currency (unbacked by gold since 71) and the collapse or otherwise of markets and price fixing mechanisms associated with and demoninated in it, not least because of the flight from dollar denominated investments due to the whole subprime MBS CDO debacle etc etc also the impact of the rate cuts and the now obvious downturn in the USA.

any gold standard would involve nations with little gold backing there currencies actually producing goods and services and then trade will do the rest.

With 2255 posts, this thread is in real danger of becoming too popular. It should be moved to the "Credit Derivative Meltdown In Progress" sub forum.

What on earth has global finance got to do with house prices?

Well said

http://www.telegraph.co.uk/news/main.jhtml.../ncredit104.xml
Half of lenders to ration mortgages, says Bank

By Robert Winnett, Deputy Political Editor
Last Updated: 2:14am BST 04/04/2008

The Bank of England has warned that almost half of all lenders are preparing to ration mortgage deals over the next three months as the credit crisis worsens.

Nothing new about this.. HBOS finance director declared yesterday they see house prices flatlining or even falling in 08 as well as a drop in unsecured borrowing but an increase in secured, this he says should provide room for growth...

On top of that.. thier main strategy is to get savings... banks want your money and are stopping people from buying.. could the market just freeze for a year with no one having the means to fund over priced houses until banks "manage" down house prices? in a last stand attempt at fighting of a crash?

Eric Dinallo on FGIC. Doesn't look like they can get capital. Probably a run-off situation...where they may not be able to pay out as claims come in.

Click on Eric Dinallo's face on the FGIC item on the rhs.

http://www.ft.com/cms/8a38c684-2a26-11dc-9...mp;fromSearch=n

Edit: Interesting little game at the end called 'long/short'.

Starts "London as a financial centre: ' short' "...

FT article:

http://www.ft.com/cms/s/0/d05490a6-019b-11...0077b07658.html


Can Wall Street, in other words, deliver a wave of “Goldilocks deleveraging” that is neither too hot, nor too cold – but somehow “just right” – or, at least not too wrong?

It seems a fiendishly difficult task. The credit crunch has demonstrated with painful clarity in recent months that the financial sector has become dangerously over-levered this decade, to a degree that almost nobody realised before – partly because the normal metrics to measure leverage are pretty useless.

And..

But while deleveraging has got under way in the hedge fund world in recent weeks, one dirty secret of today’s financial sector is that most banks have not yet followed suit; on the contrary, many are still seeing their leverage levels rise because assets are rolling back on to their balance sheets on a large scale.

Another FT piece: on hedge funds this time

http://www.ft.com/cms/s/0/ee9153a0-01bf-11...0077b07658.html


"Hedge funds are still reeling after banks unexpectedly pulled credit lines and demanded more security against loans, forcing firesales and heavy losses.

Now they face a new threat: investors are abandoning them, raising the risk that the funds will have to sell assets at any price to raise the cash to meet withdrawals."

With borrowed Yen.

This is surely the beginning of the end of this mess...

"MBIA Insurance Corp, the insurance arm of the world's biggest bond insurer, saw its ratings fall to "AA," the third highest, from a top rating of "AAA." Fitch also cut the parent company by three notches to "A," the sixth highest, from "AA.""

http://www.reuters.com/article/hotStocksNe...432017820080404

everything

Can you provide any evidence for that? I strongly expect that with Yen appreciation, net borrowing of the Yen is negative.

http://www.bloomberg.com/apps/news?pid=new...id=alFmHmDC.a20
Quite right .... everything.

Posed this on another thread but it seems it should probably go here as well:

http://www.tickerforum.org/cgi-ticker/akcs-www?post=38551

Facinating... especially as a date is given for the prediction. I'd have liked to review the original material - but not enough to subscribe.

I'd like to know what a "Waterfall bond crash" actually is - perhaps a description in terms of the 1930s crash.

Ageed, house prices are a function of the availability of credit, which has everything to do with the global financial situation.

We have simply had a credit bubble.

Its happened before - but this one is just the biggest in history - the first global credit bubble and only Germany and Japan of the advanced countries havent taken part.

The South Sea Bubble was the UK's former biggest - this is bigger than that - for this is the first time in history credit has been available to everyone.

It took the UK 50 years to recover from the South Sea Bubble but this could be worse - that is the measure of the catastophy cgnao is talking about.

The banks are suffering now they should be broke, they are not because the central bankers are injecting money - fiat money.

What happens next beit deflation/inflation I am not sure under a gold standard it would be deflation now it depends on the central bankers.

Cgnao thinks they will inflate and so hyperinflation is coming - I suspect he knows what he is talking about.

Investment firms tap Fed for billions

Wall Street banks take advantage of Fed's emergency loan program, borrowing an average of $38.1 billion a day last week.
Last Updated: April 3, 2008: 6:26 PM EDT

Bernanke: recession possible



WASHINGTON (AP) -- Big Wall Street investment companies are stepping up their borrowing a bit from the Federal Reserve's unprecedented emergency lending program.

The Federal Reserve reported Thursday that those firms averaged $38.1 billion in daily borrowing over the past week from the new lending program. That compared with $32.9 billion in the previous week and $13.4 billion in the first week the lending facility opened.

The program, which began on March 17, is part of the Fed's effort to aid the financial system.

The Fed, for the first time, agreed to let big investment houses temporarily get emergency loans directly from the central bank. This mechanism, similar to one available for commercial banks for years, will continue for at least six months. It was the broadest use of the Fed's lending authority since the 1930s.

Fed Chairman Ben Bernanke and his colleagues opened the facility as it raced to deal with the sudden crash of the venerable Wall Street firm Bear Stearns (BSC, Fortune 500), which was on the brink of bankruptcy. Fearful that other investment firms could be in jeopardy given the intense fear that gripped the markets at that time, the Fed moved to give investment firms a place to go for overnight cash loans.

Doing this was "a very substantial step," Bernanke told lawmakers at a Senate Banking Committee hearing on Thursday. "We didn't take it lightly."

The lending facility is seen as similar to the Fed's "discount window" for commercial banks, where the Fed acts as a lender of last resort. Commercial banks and investment companies pay 2.5 percent in interest for overnight loans from the Fed.

Banks also stepped up their borrowing from the Fed's discount window. Banks averaged $7 billion in daily borrowing for the week ending April 2. That compared with $550 million in average daily borrowing for the previous week.

The identities of commercial banks and investment houses borrowing from the Fed's emergency lending facilities are not released.

The Fed's decision to extend emergency lending to investment houses -- along with another controversial move -- backing a multibillion lifeline as part of JP Morgan's (JPM, Fortune 500) deal to take over the troubled Bear Stearns -- were under scrutiny by the Senate Banking Committee on Thursday. Some Democrats and others worry that the moves could put billions of taxpayer dollars at potential risk.

Bernanke, however, defended the actions, saying they were necessary to avert a meltdown of the entire financial system, which would have dire consequences for the economy and for millions of Americans.

"Our ultimate concern is the health of the American economy and the average person," he said.

Also Thursday, the Fed, in the second operation of its kind, auctioned another $25 billion of much-in-demand Treasury securities to investment firms. Bidders paid an interest rate of 0.160 percent. The Fed received bids of $46.9 billion worth of the securities. Bidders, who are not identified, can put up risky home loan packages as collateral.

That program is intended to help financial institutions and the troubled mortgage market. The Fed said it would make as much as $200 billion worth of Treasuries available through weekly auctions that started last Thursday.

The goal is to make investment houses more inclined to lend to each other. It also is aimed at providing relief to the distressed market for mortgage-linked securities. Questions about their value and dumping of these securities have driven up mortgage rates, aggravating the housing crisis.

Please review:

Look how the Yen has fallen back from its recent highs against Sterling and USD.

Fooooooooooook Me!

THE DOLLAR IS BEING DEVALUED

Monetary cancer has just spread from credit to interest rate derivatives, which are at least one order of magnitude larger.

When the county goes bankrupt, notional value will become real value and the counterparties (banks) will take horrendous losses. This will accelerate the chain reaction further, regardless of central bank interventions.

Protect yourselves NOW.

http://www.bloomberg.com/apps/news?pid=206...mM&refer=us

Jefferson County Advisers Meet With U.S. Officials

By William Selway and Martin Z. Braun

April 10 (Bloomberg) -- Financial advisers for Jefferson County, Alabama, met yesterday with Bush administration and Federal Reserve officials as the county contends with rising borrowing costs that have pushed it close to bankruptcy.

The advisers for Alabama's most-populous county were in Washington to keep federal officials informed of its negotiations with creditors, U.S. Representative Spencer Bachus said. He said the meetings weren't an attempt to arrange a federal bailout.

``It appears Jefferson County is working diligently to negotiate a settlement and avoid bankruptcy,'' Bachus said in a statement. ``Activities in these markets can move very rapidly, so it is prudent that appropriate federal officials be informed of the Jefferson County situation.''

Jefferson County, home to Birmingham, is reeling from interest rates on variable-rate bonds that jumped as high as 10 percent when the auction-rate securities market collapsed and the county's bonds, backed by ailing insurers FGIC Corp. and XL Capital Assurance, were shunned by investors. Without restructuring its bonds, interest costs on its sewer debt may reach $250 million, nearly twice the $138 million the system produces in revenue, according to county Commissioner Bettye Fine Collins.

The county's financial problems have been compounded by $5.4 billion of interest-rate swaps with JPMorgan Chase & Co., Bank of America Corp., Bear Stearns Cos. and Lehman Brothers Holdings Inc. that were intended to shield it from higher borrowing costs.


Swap Collateral

The floating rates it pays have climbed while the variable rate banks pay the county under the agreements has declined, pushing costs higher. A series of credit-rating cuts require the county to post some $180 million in collateral it doesn't have.

Jefferson County has proposed using some of the sales tax it collects for its school bonds to make up for some of the sewer system's shortfall, though it has yet to reach an agreement with creditors. County officials say they can't burden residents with higher sewer rates, which have risen more than fourfold since 1997.

The county last month reached an agreement with eight banks to delay until April 15 the repurchase of $53 million of its $847 million variable-rate sewer debt from banks. The banks had agreed to act as buyers of last resort for county bonds that weren't wanted by investors.

Extension Sought

The county is negotiating with creditors to extend that agreement.

``We're talking about extending the forbearance term, which we can do under the documents, but we don't have any specific agreement on that,'' said Patrick Darby, a lawyer representing Jefferson County.

Jefferson County's advisers met in Washington with officials from the U.S. central bank, the Treasury Department and the president's Council of Economic Advisers, Darby said.

County commissioners have said bankruptcy may be an option if it can't reach an agreement with creditors. It would be the largest municipal bankruptcy by the amount of outstanding debt, eclipsing Orange County, California.

Its going to happen m8

I know it (thnx to you among others) and you do too.

I think you are looking for teh trigger too hard.

I will happen when you aint expecting it - there is just too much inertia in the minds of the financial class.

The gradually increasing eventually to be overwhelming force of a credit bubble generated debt will do its worst in the end.

ps if we are both wrong I will be very happy and I guess you will be too.

The realization of crisis will be slow.

I am reminded of a conversation I had with my great aunt probably 35 years ago, in her eyes the Titanic felt at the time like a greater disaster than WW1 she was no idiot and knew the what the real tradegy was but why? because the Titanic was sudden unexpected and shattered a complacent world. WW1 the pain came slowly step by step.

Diana is a Titanic so sudden and unexpected it becomes more imortant in peoples minds than it really is.

This crisis so far has been like a WW1, stuff going on in other countries - we will have to tighten our belts a bit etc.

The big breakdown has not happened yet, but cgnoa is right; get some protection - get wealth in real stuff (esp precious metal) not promises in a bankrupt banking system.

Not sure if this is the thread to hang this one, but apparently several US airlines went pop last week, apparently down to the rising cost of fuel and problems in the credit markets.
http://www.ft.com/cms/s/0/9382312e-079f-11...00779fd2ac.html

American Airlines meanwhile have suspended more than 3,300 flights in five days.
http://www.bloomberg.com/apps/news?pid=206...&refer=home
does anyone buy that?

From jsmineset.com, a site I rate very highly:


Dear Comrades In Golden Arms (CIGAs),

1. The OTC derivative disaster is far, far, far from over.
2. The Fed will participate in public debt offerings as well as the buying of crap paper at mark to model prices.
3. Today's GE earnings disappointment has more to do with their key position as a dealer in credit derivatives.
4. GE's smooth earning gains over the past years may well have to do with earnings smoothing OTC derivatives.
5. The company just retained by the Fed to value their growing portfolio of OTC derivatives was yesterday, themselves, chastised for overvaluation of their own OTC derivative holdings.

This is the derivative beast eating them alive.

The amounts are growing exponentially and will soon exceed central bank assets. Then the printing presses will shift into the highest gear. I don't need to tell you what will happen to the purchasing power of all currencies.

http://business.timesonline.co.uk/tol/busi...icle3671568.ece
April 13, 2008
US banks Citigroup and Merrill Lynch reveal fresh $15bn loss

CITIGROUP and Merrill Lynch will heap further pain on Wall Street this week as they reveal additional sub-prime write-downs totalling $15 billion (£7.6 billion) or more.

In another sign of the intense pressure on leading banks, Deutsche Bank is attempting to offload some of its €35 billion (£28 billion) of toxic debt to a consortium of private-equity firms.

Huge exposure to American mortgages is expected to result in Citi taking a $10 billion hit to its accounts, dragging the bank to a first-quarter loss of almost $3 billion. Some analysts believe Citi’s write-downs could stretch to as much as $12 billion.

Merrill will suffer $5 billion of write-downs, analysts say, which would push the bank $2.7 billion into the red.

The purchasing power of all currencies except gold, that is.

aren't you a bit disapointed/surprised by gold's failiure to break the $1000 barrier for a sustained period?

i read on here yesterday that an ounce of gold could have bought you an entire block of commercial real estate in the weimar republic back in the day- if thats the case then we dont need much gold do we?
why would someone accept gold when it isnt accepted currency? even if your local currency was worthless why would a shop accept gold as payment?

Oh theres some life in violence backed paper yet Errol.

http://www.financialsense.com/editorials/c.../2006/0223.html

When are you going to explain to the readers on this site that you don't know the foggiest thing about derivatives?
Or do you just prefer to mislead people?

(If anyone wasnts to know what I'm talking about, just read the first couple of pages of this thread)

So who actually does?

The core problem with derivs is that firstly no one can compute the true downside and they are also (worst of all!) an unregulated product.

Most recent (past 30 + years) of fiscal and financial crises have emerged on the back of "new" financial engineering and unregulated markets.

And then the outcome effect/s spill over into the holistic economic platform and cause devastastation.

At present Western economies are in the main experiencing the wholly negative affects of the Sub Prime idiocy (from e.g. ABSs, and Securitisation generally).

The Federal Reserve backing major US financial institutions, is simply a replay of the collapse of Continental Illinois Bank in the 80s and the further collapse of Meriweather's Long Term Capital Management in the 90s.

If the Fed and the NDIC had failed to bail out the resultant positions of both, then the long feared Domino Effect would have resulted, bringing financial and currency collapse to the USA and many other Western states, too.

And reactive action in such circumstances by central banks simply dilutes the ripple effect and lumps the true cost on the little guy.

How unusual!

Wachovia Loss

European stocks extended losses after Charlotte, North Carolina-based Wachovia, the fourth-largest U.S. bank, posted a first-quarter loss of $393 million and cut its dividend. The Dow Jones Stoxx 600 index, a benchmark for European equities, fell for a fifth day.

http://www.bloomberg.com/apps/news?pid=206...amp;refer=japan

State Street: looking bad!
down BIG on volume. even after "Net Income Climbs 69% On Record Revenue"

"The core problem with derivs is that firstly no one can compute the true downside"

Even for vanilla credit derivatives?

Since they are unregulated, it is impossible to compute outstanding liabilities.

Worse, they are used as a mixture of financial structured engineering to set-off risk, or increase a range of products and their tradability; expand "Off Balance Sheet" obligations and so on.

The whole key point about any market has to be liquidity: and thus prime obligations rapidly become secondary, as they are traded and again traded.

It was easy with Bill of Exchange: each acceptor signed the back! Same with Avals used in forfaiting. There was an audit trail.

In these days, Company Registrars don't even know who owns their issued shares!

The core problem is that the global financial village has now become so massively intertwined and cross-obligations so very complex, that it is truly impossible to adequately regulate.

Worse, different jurisdictions employ different accounting rules and banking regulations, thus there is no level playing field.

Add to that the mind-numbing welter of financially engineered products and the different modalities used to secure them, plus hedging, futures and cross-collaterallizations and one starts to comprehend the financial minefield waiting to sympathetically explode.

At the moment, the global capital markets are running on optimism and blind confidence.

We shall see...................................

Meet the derivative beast.

http://www.bloomberg.com/apps/news?pid=206...&refer=home
Swaps Tied to Losses Became `Frankenstein's Monster'

By Neil Unmack and Sarah Mulholland

April 15 (Bloomberg) -- The credit-default swap market has become a lesson in being careful what you wish for now that Wall Street has taken $245 billion of losses partly tied to such exotica.

Rather than dispersing risk and lowering borrowing costs as former Federal Reserve Chairman Alan Greenspan predicted, the contracts have exacerbated the debt crisis. What was intended as a way for lenders to protect against defaults spawned a market covering $45 trillion of bonds and loans where no one knows how much is traded and speculators who bet on deteriorating credit quality end up forcing that reality.

Some credit-default indexes have morphed into what Wachovia Corp. analysts led by Glenn Schultz call ``Frankenstein's monster'' because they now often drive prices in the so-called cash bond market, rather than the other way around. Fearing a repeat of losses, banks are refusing to support new indexes that would allow investors to wager on everything from auto loans to European mortgages, reining in a market that's about doubled in size every year for the past decade.

``The indices are just trading on their own account with no relationship whatsoever to an underlying cash market that's ceased to exist,'' Jacques Aigrain, chief executive officer of Zurich-based Swiss Reinsurance Co., said at a March 18 insurance conference in Dubai.

...

`Vicious Cycle'

Accounting rules require companies to estimate a value for some assets that are seldom traded and to record any change as an unrealized gain or loss. Where quoted prices aren't available, companies are required to use other measures, such as indexes of credit-default swaps.

The most telling reality is this:



Capital markets of any type were intended to be subservient activities, wholly dependant on the primary wealth and job creational process of real economic activity.

Back to Adam Smith.

You take raw materials; add skill, knowledge, inspiration and sweat: the total is more than the sum of the parts: ergo, you have created profit.

Once capital markets usurp the primary role of wealth creation and start to believe they are the wealth creators, rather than the servants of the core process, it all goes sadly wrong.

During the past 30 years, an increasing range of financial products and activities have created increasing opportunuties for traders to "Bet": indices such as Cantor are nothing other than gambling, as they focus on the performance of a capital market, not the underlying primary process which that market ought to be tracking.

As the complexity of cross- relationships and obligations and insane bets of derivs unwind ever more rapidly, as increasingly, worst case position applies, the gross negative downside will become larger and larger and larger.

If Central Banks try and support all the failures, then their currencies will equally quickly become worthless.

A good equity bet will be an options Call on De La Rue!

I assume you are saying it is impossible to calculate outstanding liabilities for all banks from an external regulator's point of view , rather than a risk team calculate liabilies for their own bank?

Is this talking about asset backed, corporate backed, or both?

Both.

Totally impossible to know what the true collective downside risk is, if the absolute worst case pertains.

Despite pretty smart risk management systems today, many banks find their reporting lag creates black spots: plus the markets move too fast.

In any case, Risk Management Software is far from perfect as yet.

Interesting that my wife did a six months contract as EA/PA to the CEO and founder of the leading UK offering a few years back.

Which blights my perspective quite a bit!

To the negative...........................................

This was posted on another forum, but deserves to be put here as well. Does this mean the UK will feel the pain more than the US?



http://www.ifsl.org.uk/uploads/CBS_Derivatives_2007.pdf

Not necessarily.

The CDOs may have been traded in London/UK.

The assets (errmm... so called) may not be held within the UK.

The insanity continues unabated ...

Activity robust in credit derivatives
By Gillian Tett and Paul J Davies in London
Published: April 15 2008 22:25 | Last updated: April 15 2008 22:25

Activity in credit derivatives has continued to explode in spite of investors’ and regulators’ growing concern that recent events such as the Bear Stearns’ implosion have highlighted potential weaknesses in the infrastructure of this market.

The total volume of outstanding credit derivatives contracts stood at $62,200bn at the end of last year, up from $34,500bn a year earlier, the International Swaps and Derivatives Association will announce at its annual conference in Vienna today. This is 10 times the level of four years ago.

The heady expansion of these instruments – which in effect let investors protect themselves against the chance of corporate default – will delight many investment bankers, since it suggests that derivatives activity remained robust last year, even after the start of the credit crunch.

Link