Behind much of the apparent debacle lie derivatives and structured assets so, as Tuesday October 21st saw the settlement of many of these instruments effected by the Lehman bankruptcy, we take a look at Credit Default Swaps and some of the myths behind them.
Fundamental changes are being affected to the way banks are required to account for their assets with the hasty dropping or limiting of "mark-to-market" or fair value accounting - what is behind these changes and who benefits?
"I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs." Thomas Jefferson 3rd president of the US (1743-1826), Letter to the Secretary of the Treasury Albert Gallatin (1802)
Thomas Jefferson was right; he was right when in 1863/64 US agricultural loans were called in at the behest of the Rothschild bankers in London, he was right in the panic of 1906, he was right in the agricultural crisis of 1920/21, he was right in the Crash of 1929 and the Great Depression of the early 1930's and he's right today. However, not even he could foresee that it is not just the people of the US that are slaves to private banking interests but all the peoples of the world.
Last week we titled our weekly Signs Economic Commentary, Wonderland Economics, due to the apparent disconnect between the official price of gold and the collapsing markets and also in acknowledgment that all is not what it seems. Over the next weeks we plan to take a trip down the Economic Rabbit Hole to explore what is really going on but before we start that journey let's see what is being presented on the surface.
Gold and oil dropped sharply last week, while U.S. stocks rose while the US dollar/Euro rated remained almost unchanged . Most of the rise in the stock market happened on Monday. Wild market swings are becoming commonplace as is the seeming disconnect with reality that marks the decline in price of gold in the face of ever increasing government intervention and the ballooning of liquidity.
Gold closed at 787.00 dollars an ounce Friday, down 9.1% from $859.00 for the week. The dollar closed at 0.7456 euros Friday, virtually unchanged from 0.7458 at the close of the previous week. That put the euro at 1.3412 dollars compared to 1.3408 at the end of the week before. Gold in euros would be 586.79 euros an ounce, down 9.2% from 640.66 at the close of the previous week. Oil closed at 72.03 dollars a barrel Friday, down 7.9% from $77.70 at the close of the week before. Oil in euros would be 53.71 euros a barrel, down 7.9% from 57.95 for the week. The gold/oil ratio closed at 10.93 Friday, down 11.9% from 11.06 at the close of the previous week. In U.S. stocks, the Dow closed at 8,852.22 Friday, up 4.7% from 8,451.19 at the close of the previous Friday. The NASDAQ closed at 1,711.29 Friday, up 3.7% from 1,649.51 for the week. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 3.92%, up 5 basis points from 3.87 at the close of the week before.
Bank bailouts continue apace
Liquidity was no longer the issue, at least this week, the ECB and Fed, together with coordinated action from other central banks, are providing unlimited liquidity in the markets in both US dollars and Euro. The issue is restructuring bank balance sheets and political positioning for the new economic world order.
The Fed, seemingly following the British lead, injected capital into the largest US banks and will be providing substantial loan guarantees and commercial paper facilities having previously been pushing for the simpler approach of buying defaulted and otherwise devalued assets. A sign perhaps of the speed with which positions are being adopted in the battle for global economic hegemony. Kenichi Ohmae's comments that the US may be left with just '3 mega banks' are interesting in this respect.
In contrast small US banks have not been given any details on what they can get, how to get it and the strings that will be attached. Their situation should become clearer at an 11:30 briefing on the Capital Purchase Program at the US Treasury on Monday 20th October.
Henry Paulson, US Treasury Secretary, played to the public; "The needs of our economy require that our financial institutions not take this new capital to hoard it, but to deploy it," he said, having earlier said, "These are healthy institutions, and they have taken this step for the good of the U.S. economy. These institutions, along with thousands of others to come, will have enhanced capacity to perform their vital function of lending". To reiterate the point, David Nason, the Treasury's assistant secretary for financial institutions, in an interview with Bloomberg Television said, "It's in their economic interest, when you give them a stronger capital position and you also provide a certain amount of government backstop to their funding sources, it's incumbent upon them to go out and continue to lend.''
Needless to say, we're not falling for any of that clap-trap. The US banks, just like many of the European ones, are not being heavily capitalised due to their present health but as a precursor to even more dramatic developments in the near future. That is not to say that they are healthy, far from it, it's just that we don't see that as being the key issue nor a valid explanation for the volumes of capital being injected.
In Europe, the mid-week EU summit statement said the 27 EU leaders unanimously endorsed a concerted 2.2-trillion euro ($3 trillion) euro zone rescue plan for banks agreed in Paris on Sunday. The UK now effectively has a two-tier banking system: those controlled by the state and the independents. RBS, which is on course to be 57 per cent-owned by the Government, and the merged Lloyds TSB and HBOS, in which the state will have a 43.5 per cent stake, fall into the first category; Barclays, HSBC and Standard Chartered keep their independence - for now. As do Abbey and Alliance & Leicester, both owned by the Spanish banking giant Santander.
The Dutch government announced on Sunday October 19th that it would inject €10 billion, or about $13.4 billion, into ING after the company became the latest victim of the global financial crisis. Strangely, given the UK precedent, the injection will be in the form of non-voting preference shares which give the bank the same benefits as if the government had taken voting shares but gives the government no votes and a fixed 8.5% coupon. The Shares of ING fell more than 27 percent the previous Friday in Amsterdam after the company said it expected to post a third-quarter loss of €500 million as a result of €1.6 billion in write-downs. Thus ING joins Fortis Bank and Dexia. In addition the Dutch government said it would provide loan guarantees up to €200 billion in support of banks.
Germany has pledged €500billion and Sweden €117 billion to meet all manner of 'crisis' needs. While, at the EU summit, the chairman of euro group finance ministers, Luxembourg Prime Minister Jean-Claude Juncker, said there was no question of any pan-European economic support programme or fiscal stimulus, which would breach EU budget rules. Diplomats said Britain insisted on removing references to the need to react to a slowdown in demand and the contraction in investment.
In fact European Ministers, while being overwhelmingly generous to their banking friends and paymasters on the carousel of "private profit, public bailout", were unusually frank about what they planned to give to the ordinary citizens of Europe.
Chris Floyd hammered the point home:-
Let's say it again: The money was there all along.In Asia, Singapore and Malaysia stepped in to guarantee bank deposits while India cut the cash reserve requirements for all Indian banks to release cash into the banking system, a move that the Philippines looks likely to emulate. The Philippine central bank has also started lending to banks in US dollar in contrast the previous strictly Peso only facilities. Asians stocks rose for the first time in seven weeks..
Money to build and generously equip thousands and thousands of new schools, with well-paid, exquisitely trained teachers, small teacher-pupil ratios, a full range of enriching and inspiring programs.
Money to revitalize the nation's crumbling inner cities, making them safe and vibrant places for businesses and families and communities to grow.
Money to provide decent, affordable and accessible health care to every citizen, to provide dignity and comfort to the elderly, and protection and humane treatment for the mentally ill.
Money to provide affordable higher education to everyone who wanted it and could qualify for it. Money to help establish and sustain local businesses and family farms, centered in and on the local community, driven by the needs and knowledge of the people in the area, and not by the dictates of distant corporations.
Money to strengthen crumbling infrastructure, to repair bridges, shore up levies, maintain roads and electric grids and sewage systems.
Money for affordable, workable public transport systems, for the pursuit of alternative sources of energy, for sustainable, sensible development, for environmental restoration.
Money to support free inquiry in science, technology, health and other areas -- research unfettered from the war machine and the drive for corporate profit, and instead devoted to the betterment of human life.
Money to support culture, learning, continuing education, libraries, theater, music and the endless manifestations of the human quest to gain more meaning, more understanding, more enlightenment, a deeper, spiritually richer life.
The money for all of this -- and much, much more -- was there, all along. When they said we couldn't have these things, they were lying -- or else allowing themselves to be profitably duped by the high priests of the market cult. When they wanted a trillion dollars -- or three trillion dollars -- to wage a war of aggression in Iraq, they found it. Now, when they want trillions of dollars to save the speculators, fraudsters and profiteers of greed in the global market, they suddenly have it.
With all the national bailouts taking front page space, few seem to have noticed the participation in this crisis of the International Monetary Fund (IMF), with Ukraine looking to borrow up to $14 billion to stabilize its economy, Pakistan as much as $10 billion over the next 2 years (although they only want up to $4 billion the IMF insists they will need more), and Iceland is said to be very close to doing a deal for $6 billion.
Distraction of litigation
The US wouldn't be the US if there wasn't some litigation, a fine distraction and a crowd pleaser rolled into one. This weeks offerings for those seeking some blood focused on Lehman litigation which is spreading ever wider and confirming it's illusory and distracting nature when one considers that it's not like Lehman did anything the others didn't.
Meanwhile, a Congressional committee lead by Henry Waxman is investigating AIG. Waxman has sought "a detailed description" of uses of the government funds, and identities of counterparties to which funds were provided for collateral, among other details are those relating to a conference AIG held days following the original government loan, with bills of about $230,000 for hotel, spas and other services.
It's about the entire system.
Did you ever wonder how from the 1980's to last year the financial world was able to generate such explosive profits and asset growth? Did it ever occur to you that the monumental growth might not be based on reality, on sound business principles, on good ethics, on honesty? Did you even know that Iceland had a banking industry that was in excess of 10 times greater than it's entire economy?
By now it should be clear that the entire modern banking system is corrupted. Sure there are some banks that remained true to their roots but they are precious few as most were bought up and bought out by the ever expanding global monoliths. With this in mind, consider just three of the people in control of the bank bailouts and for whose benefit they are likely to be working, whose culture and philosophy they follow and who will be employing them in the future and therefore where their loyalties lie.
Three key players
In the US, Kevin Warsh is credited with being an architect of the terms the Treasury dictated to the nine banks in return for its $125 billion injection of new capital. A 37 year old former Morgan Stanley banker and White House aide, son-in-law of cosmetics billionaire Ronald Lauder, a funder of the Republican party and ambassador under Reagan, Warsh was nominated for his Board role at the Fed by Bush and happens to be the only board member with any capital markets experience.
Neel Kashkari, 35-year-old former Goldman Sachs banker who, as head of the new Office of Financial Stability, is responsible for overseeing the selection of private contractors for Treasury's Troubled Asset Relief Program, hiring permanent government employees for the effort and setting standards that will govern how conflicts of interest are managed.
Michael Greenberger, a former official at the Commodity Futures Trading Commission and now a professor at University of Maryland School of Law, reflected the sentiment of many when he said "It was unfortunate that it was yet another Goldman Sachs person taking the helm; essentially it appears that he is turning to the very financial institutions that led to the problems to fix the problems.''
In the UK the 45 year old lady at the helm is Baroness Shriti Vadera, a controversial former investment banker who was a close advisor to the South African government, a link that will ring bells for those familiar with Naomi Klein's 'Shock Doctrine' in which she details the application of severe austerity measures ('Shocks') to the South African economy and the resulting capitalist 'free for all'. Shriti Vadera, like the returning Peter Mandelson (aka 'The Prince of Darkness') had to be ennobled (made a Baroness) to enable her to take ministerial status in 2007. She appointed her former bank, UBS, along with JP Morgan and Citibank to advise on the restructuring of the British banking industry. Credit Suisse was appointed to carry out the plan hatched by Vadera, UBS, JP Morgan and Citibank and purported to be the brainchild of Peter Sands and Richard Meddings, chairman and CFO/finance director of Standard Chartered Bank.
While talking about people, in a strange coincidence, it emerged this week that the IMF is investigating whether its chief Dominique Strauss-Kahn abused his power in an affair with a subordinate who has since left the institution. The fact that this subordinate was Piroska Nagy, wife of former Argentine central bank President Mario Blejer doesn't seem to be raising any more eyebrows than the extraordinary timing coincidence is.
Perception Managers and the web they weave
In his work on the Bobby Kennedy assassination, A Branson referred to conspirators being perception managers. All the evidence shows that the world financial crisis, like those before it, has been deliberately induced and that the vast majority of what is happening, both action and reaction, is in the hands of perception managers.
"The perception managers are the spiders, the spinners of the web. Like any web, its usefulness is not dependent on any particular part holding up. Areas of the web can fall away and still the spider will catch its prey. This is how it works. A central lie is spun and anchored in several locations. Threads connect the various anchors until a web has been woven of lies and misdirection that can remain useful and maintain its overall integrity even when various individual parts have broken down.To understand the web that is being built around the "global financial crisis" a little better we need to explore derivatives, Credit Default Swaps in particular, and "mark-to-market" accounting.
It is the nature of a web that you will never break it down by attacking the individual pieces. As you work to break the web in one spot, the perception managers work to build it back up where it had been damaged before. They run you around in circles until at last, exhausted, you give up and give in. Eventually, even some of the most ardent seekers of the truth either just stop looking or, in some cases, join the spiders and help them spin their webs. If you can't beat 'em, join 'em, as they say."
Credit Default Swaps and other Derivatives
The subject of derivatives has been causing much consternation. Of particular concern have been Credit Default Swaps as they are transactions that take place in an unregulated market and to which vast sums of risk have been attributed. In an attempt to assist the understanding of readers not familiar with these instruments and deal with some of the myths please bear with us.
A Credit Default Swap (CDS) is a contract between a Buyer and a Seller. In a standard CDS, the Seller, in exchange for a regular premium from the Buyer, agrees that should a third party borrower, called the Reference Entity, default (ie. not pay all or part of its debts) then the Seller will reimburse the Buyer an amount equal to the amount not paid by the borrower (Reference Entity) on those debts. In simple terms therefore the Seller is insuring the Buyer against losses due to another person, the borrower or Reference Entity, no being able to pay their debts.
The idea is a good one on the face of it as if the Buyer has lent a lot of money to the Reference Entity then having some insurance against possible losses would seem sensible. However, that's not what has been happening, and it hasn't been happening because some very intellectually smart people decided that they could trade in these insurance contracts and do a whole bunch of other complex messing around with them and make a fortune in the meantime.
Imagine that a bank 'A' lends money or does other business that means it has a $100 risk on bank 'Z'. A is happy with this risk as it makes good money and doesn't think Z will default (not pay its debts). However, A and Z like doing business and A soon finds that it now has $500 of risk on Z. In order to get back to where it feels comfortable, A (as Buyer) enters into a Credit Default Swap with bank 'B' (as Seller) for $400. B (as Buyer) then enters into a Credit Default Swap with bank 'C' (as Seller) for $300. C (as Buyer) then enters into a Credit Default Swap with bank 'D' (as Seller) for $200. D (as Buyer) then enters into a Credit Default Swap with bank 'E' (as Seller) for $100.
Thus at the end of this chain we have five banks each with a $100 risk on Z, totaling the original $500 of risk that A had. However, the total value of Credit Default Swaps entered into ('written') with Z as Reference Entity is $400 + $300 + $200 + $100 = $1,000. These CDS contracts "derive" their value from the underlying borrowing of Z and are therefore referred to as "derivatives".
Now let's imagine that a Hedge Fund comes along and would like to take some risk on Z because it thinks that it will pay its debts and it likes the interest margin (the amount over the Hedge Fund's own costs of debt) that can be earned by lending to Z. But there's a problem, the Hedge Fund can make 1% by lending directly to Z but has promised it's investors it can make 25% annual returns. If the Hedge Fund lends a $1,000 to Z it makes $10 (1% return) and uses $1,000 of its investors money. But if it acts as a Seller in a CDS written with Z as the Reference Entity and with $1,000 being the value of the debt insured it will receive a premium of $10 from the Buyer and still have $1,000 to use elsewhere.
How the Hedge Fund uses the $1,000 can be extremely complex so let us leave that to one side for this illustration and just assume it invested the $1,000 in stock/shares.
Now the situation is that Z has still borrowed $500 from A and there a total value of $2,000 of CDS have written with Z as Reference Entity.
Multiply this activity by ten or a hundred fold and you can see how things could easily get out of control, and out of control they have been. A vast market in credit insurance, colloquially known as the Credit Default Swap market developed. There is an array of instruments included on this "market" the simplest of which is as described. The market mushroomed into the structured asset market, Collateralised Debt Obligations (CDO's) being just one example, because of its fundamental nature, being the ability to create risk which can be traded for profit by banks, hedge funds and others without there being any underlying lending to the Z's of this world.
The explosive growth in private equity has been attributed to the similarly explosive growth in the derivatives market of which credit default swaps are but one part. Seeking Alpha put it very succinctly back in January 2007.
The web site www.dailyreckoning.com describes the current situation succinctly: "Private equity is not just an accident waiting to happen. Its more like financial joyriding. The enthusiastic drivers are new to the game, but have turbocharged their returns with high-octane debt. They don't know whether an economic downturn is around the corner, but it wont take much of one to send them skidding into disaster..."Everybody in the financial world knows that derivatives, key among them credit derivatives, drove much of the seemingly miraculous growth in commercial bank, investment bank, hedge fund and, in some cases, insurance returns over the last 5 years or more. Cutting a long and detailed story short, it was never about IF and always about WHEN and HOW BADLY. The WHEN has now arrived, the music has faltered and on some days seems to have stopped entirely, as, while everybody knows what that the problem is, we are told, that none of them know WHO is effected and by HOW MUCH!
The high octane additive driving the debt and equity markets higher, of course, is the OTC [over the counter] derivative. In the age of derivatives-enabled structured finance, the term "private equity" has become passé. Nearly every financial buyer deal we see coming to market involves a large degree of debt finance, regardless of the type of sponsor. Looking at the staggering numbers for public and private bond issuance in 2006, measured in the trillions of dollars, it seems clear to us, at least, that OTC derivatives and kindred structures like collateralized debt obligations [CDO] are driving a process whereby assets are being packaged and sold at prices that understate the true economic risk.
One very shrewd investor, Nassim Talib, summed it up well when he said, "We refused to touch credit default swaps, it would be like buying insurance on the Titanic from someone on the Titanic.''
From this has grown a great deal of misconception so let's clear up a few details.
There is a central registry for Credit Default Swaps run by The Depository Trust and Clearing Corporation (DTCC) and the majority of transactions are registered. According to DTCC.
Size of MarketThis information stands in stark contrast with much of the hype that the size of the market is unknown, that much of it is related to mortgages and that the Lehman bankruptcy will involve $400 billion of cash changing hands. Sure, there may be $400 billion of Lehman related CDS but, if DTCC are correct, that nets down to a much more manageable $6 billion.
When examining the outstanding amount of actual contracts registered in the Warehouse .... as of October 9, 2008, credit default swap contracts registered in the Warehouse totaled approximately $34.8 trillion (in US Dollar equivalents). This is down significantly from the approximately $44 trillion that were registered in the Warehouse at the end of April this year.
Less than 1% of credit default swap contracts currently registered in the Warehouse relate to particular residential mortgage-backed securities. Mortgage-related index products also have some components relating to residential mortgages and, as a whole, also constitute a relatively small fraction of total credit default swaps registered in the Warehouse.
Payment Obligations Related to the Lehman Bankruptcy
The payment calculations so far performed by the DTCC Trade Information Warehouse relating to the Lehman Brothers bankruptcy indicate that the net funds transfers from net sellers of protection to net buyers of protection are expected to be in the $6 billion range (in U.S. dollar equivalents).
The settlement (payment) day for Lehman related swaps is this coming Tuesday 21st October. Arrangements have been made for this settlement to take place smoothly but we do have a concern that Lehman will be used, once again, to trigger more fear and panic so while all should go well in the real world there is no knowing what spanners might be thrown into the works.
One of the principle reasons for the collapse in global markets is related to hedge funds and, to a less extent, mutual funds and their relationships with the banks that allowed them to borrow (known as leverage) so heavily and their investors who benefited from such heavy borrowing.
Bloomberg summarises elements of the debt market:-
- sub-investment grade corporate loans are trading at 66.1 cents on the dollar while across the whole corporate bond market trading is at 79.9 cents (trading was at 94 cents at end August and 99 cents end 2007)Thus we have the perfect financial storm. Debt that was used to finance speculative investments is being called in thereby causing the funds who incurred that debt to sell assets (bonds and stocks) to raise cash. This causes massive selling pressure in the bond and stock markets and prices collapse under the weigh of 'for sale' assets. As the asset sales are below what the assets cost then there has to come a point where there are no more assets to sell and the funds go bust. Everybody knows this so investors start redeeming their fund investments, banks start asking for more collateral (often cash) to back the remaining loans and derivatives, which are now looking very unhealthy indeed as the markets they are 'derived' from are dropping, which adds to the selling pressure and so the death spiral continues.
- the market is pricing in a 5.6% default rate on corporate bonds (the default rate in 1933 was 8.4%)
- bank lending is continuing to contract, forcing hedge funds and other leveraged investors to sell leveraged assets
- mutual and hedge funds are dumping assets to meet redemptions and de-leverage
That this storm has been a long time coming as was entirely predictable and is therefore the result of deliberate plans put into place many years ago should be obvious to those with perspicacity.
Banks and many funds are required to account for their assets using fair value or "mark to market" accounting. Accounting is normally a boring subject never discussed in public but 'mark-to-market" accounting has become a political hot potato these last 3 weeks.
Essentially, before "mark-to-market", banks valued their assets on their historic cost and took the profits from the assets as they accrued - ie. as time passed and the cash came in. In moving to "mark to market" banks became required to revalue their assets in accordance with the movement in price of those assets on the market, or as determined by market variables, for those instruments that were too complex to have a single identifiable market price. The aim of "mark-to-market" being to show the fair value of a banks assets, regardless of whether that had risen or fallen.
In a rising market, this meant that the future, as well as the current, profit would appear on the books of the bank immediately. This also meant that many highly structured, high risk assets were accounted for at low or no value on the basis of theoretically low probabilities of default combined with new consolidation rules brought in at the end of the 1990's. This suited the structured financiers and traders who were paid on their book profit and the senior management who were paid on the profit and on the share price (which reflects the profit and is then multiplied many times in the belief that rising profits will continue).
All fine and dandy while things were on the up and the bonuses kept rolling in. Now however, just as with the entire banking bailout, the bankers and their buddies want to change the rules now the market has fallen away beneath their feet. It is just amazing to see the calls from around the world for "mark-to-market" accounting to be abandoned. While reading this list bear in mind the following statement from Beth Brooke, global vice chair, at Ernst & Young and one of the world's most senior accountants:-
"Suspending mark-to-market accounting, in essence, suspends reality."Also bear in mind that in the absence of abandoning "mark-to-market" accounting the losses will continue to pile up as vast pools of assets that banks hold on their books are having to be revalued downwards, often to 80% or less of their previous value. Every dollar of value that these assets lose eats directly into bank capital.
In the US
The Securities and Exchange Commission and the Financial Accounting Standards Board, or FASB, on [October 2nd] issued "clarifications" regarding the rule, known as mark-to-market. The new directive allows companies to value their assets according to their estimated future cash flow, rather than current market prices.Did you catch that last comment from the former president of the Federal Reserve Bank of Dallas that "Mark-to-market was never intended for use in a declining market,"? Straight from the horse's mouth.
The Senate bill calls for the SEC to issue a report to Congress on the effect of mark-to-market accounting on the financial industry within 90 days of the legislation becoming law. It also gives the SEC authority to suspend the mark-to-market rule.
[John] McCain first called for repeal of the accounting rule in March.
The American Bankers Assn. also praised the SEC's action, saying "This guidance will help auditors more accurately price assets that are difficult to value under current market conditions."
Critics, however, contend that allowing companies to base the value of their assets on unknown future cash flows will only cloud their true financial condition.
William Black, former deputy director of the Federal Home Loan Bank Board, said Tuesday that the SEC's decision to relax the rule is an attempt to "cover up" the extent of the financial problems facing lenders. Black blames a similar accounting change for worsening the savings and loan blowup in the 1980s.
The SEC, McCain and others "want to use the same phony accounting to try and cover up losses, which will only make the losses much greater in the future," said Black, now an assistant professor of law and economics at the University of Missouri at Kansas City.
Bob McTeer, former president of the Federal Reserve Bank of Dallas and now at the National Center for Policy Analysis in Texas, said on NYTimes.com on [October 3rd] that suspending the mark-to-market rule "would make a big difference" in easing the financial turmoil. "Mark-to-market was never intended for use in a declining market," he said.
In a ruling to be circulated [October 17th], Canada's accounting watchdog, the Accounting Standards Board, will loosen the so- called mark-to-market valuations that require banks and financial institutions to price assets at current market values, the Post said, citing people familiar with the process.In Japan
The new ruling will give the banks some relief as they prepare for end-of-year results, which may show a broad decline in profits, the Post said. The banks' fiscal year ends Oct. 31.
The revaluations may result in significant gains for the banks, resulting in a ''substantial income boost,'' Roger Siefert, a managing director of forensic accounting at LECG Corp. in New York told the Post.
Japan should change its mark-to- market accounting regulations if current rules are found to cause ''systemic risk'' in the markets, the nation's finance minister said, urging regulators to move quickly in reviewing the matter.In Europe
Nakagawa's statement comes after regional Japanese lenders urged a suspension of mark-to-market rules, also called fair- value accounting, which require companies to review holdings regularly and report losses when values decline.
"The halt of a fair-value accounting system can create a 'black box' and hide possible losses from investors, which can make them even more nervous,'' said Nana Otsuki, a banking analyst at UBS Securities Japan Ltd. ''It can be useful as an emergency step. Yet it wouldn't have a long-term effect, as it can't improve Japanese companies' balance sheets, though it can improve investors' sentiment.''
European Union regulators have backed proposals to reform the "mark-to-market" accounting rules that many banks blame for forcing them to declare far larger writedowns than have been necessary during the credit crisis.With all this pressure, is it any wonder that the world's two accounting standards setters, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) are going along with the need for a change of rules:-
The European Commission's regulators committee said it would adopt the reforms unveiled earlier this week by the International Accounting Standards Board. It said that banks should be allowed to value certain assets on the basis that they will be held to maturity rather than being forced to estimate their current fair value.
October 13th - IASB amendments permit reclassification of financial instrumentsYou don't need to be a genius to know when you're seeing a whitewash in operation.
October 14th - IASB provides update on applying fair value in inactive markets
October 15th - IASB proposes improvements to financial instruments disclosures
October 16th - IASB and FASB launch consultation on proposed enhancements to the presentation of financial statements
October 16th - IASB and FASB create advisory group to review reporting issues related to credit crisis
October 20th - IASB and FASB commit to a global approach to enhance market confidence
Many will seek to ridicule the idea that a crisis such as this is engineered, why, by whom, for what benefit they will ask? That is like a fly with no knowledge of spiders arguing about the existence of a spider while held in the grip of its web. The first thing the fly needs to acknowledge is that it is stuck in a web. Once this is acknowledged then the existence of the spider is proven by default as 'spiders build webs'.
So stuck in a web we are, a web built on an historical explosion of money supply (see Thomas Jefferson quote at the beginning of this article), the creation of unregulated markets in complex high risk instruments and supported by accounting standards that fueled the greed machine. That vast national wealth is being funneled to the banks is beyond question, that panic is being deliberately induced is also beyond question. So now lets us try to see where we are headed and how we are to be taken there by the perception managers.
Crisis as means to the New Economic World Order
Naomi Klein's seminal work 'Shock Doctrine' illustrates the use of deliberately induced shocks on a society and economy to establish conditions that will allow changes to be implemented that would have been unthinkable just months previous to the shock or shocks.
As Stephen Martin says, it about Full Spectrum Global Domination.
Full-Spectrum Global Financial Domination: Shock and Awe in Economic WarfareMartin goes on to illustrate the use of the IMF as the antidote for the targeted economy. We think that while the IMF will undoubtedly be used (see list of new borrowers above) on the smaller economies of the world, the New Bretton Woods will be the key to the future of the global economy.
October 10 / 12, 2008
Naturally the common people don't want war; neither in Russia, nor in England, nor in America, nor in Germany. That is understood. But after all, it is the leaders of the country who determine policy, and it is always a simple matter to drag the people along, whether it is a democracy, or a fascist dictatorship, or a parliament, or a communist dictatorship. Voice or no voice, the people can always be brought to the bidding of the leaders. That is easy. All you have to do is to tell them they are being attacked, and denounce the pacifists for lack of patriotism and exposing the country to danger. It works the same in any country.
-- Hermann Goering
In the Economic War currently being waged, the first phase of the telling of such tale of attack, illustrated vividly by image, and with the objective of further building war chest, is over. We have seen the collapse of Lehman Brothers as sacrificial wolf, heard further sabres being rattled in form of AIG, Freddie Mac and Fannie Mae, and bailout, or rescue gone through on the basis of fear and plunging markets. The public coffers have been prised opened further as to plan.
Now the second phase of Economic Blitzkrieg is to begin, and the bad news is that as in total war, the citizen is no more than mere fodder to bomb. [ ] In Economic War, collateral damage; whether through default on mortgage, wipe out of pension or life savings, loss of livelihood, homelessness - all just battlefield casualty.
Economic Warfare Shock and Awe works like this:
First of all you create a shocking financial poison. Then you create the environment necessary for that poison to circulate in the enemy economy, ideally in a situation where they do not know they've even swallowed it in quantity - until it is too late. Iceland for example. Many other Economies are also on the brink of being such 'suckers going down'. Iceland just the first - but hey, every little economy helps when the target is Global Financial Domination.
[ ]The strategy: first create and administer the shocking financial poison -and then have antidote conveniently to hand, offered with strings attached.
[ ]Known by many names, but let's stick with the most popular. The collateralised debt obligation, or CDO. [ ] Get enough of this toxic crap circulating and dumped, and you can bring down whole economies.
There are other financial poisons in the market, including the original 'fiat currency', but as these are of lesser toxicity, more gradual in action, also with different antidote, equally shocking in the administration.
Last week we wrote that, "It is well documented, and thoroughly understood by those who have a complete grasp on the grand illusion that is global finance, that financial booms and the subsequent crashes are engineered by the financial elite via their control of both the banking system, including central banks, and the political elite whose careers they finance. Each crash is engineered through panic, triggered by the collapse of a major financial institution, whose flames are fanned by the press and through the careful placing of statements and information into the public sphere."
So for the past eight years the media and the financial policymakers have been telling us that we were living in the best of all possible economic worlds. Now, all of a sudden they are telling us to panic. The fear and panic are triggers.
We believe that the current 'crisis' is just one group of shocks in a series that will occur over the days, weeks, months and even years to come. There is a discernible direction in which we are being led. Gordon Brown, Nicholas Sarkozy and George Bush have been busy promoting the need for a "New Bretton Woods". The original "Bretton Woods" agreed in 1944, in secret and after two and a half years of planning, established the framework for the post war economic order that we see today; an order that was fundamentally inequitable in conception, has concentrated vast wealth in the hands of a very few and has resulted in untold suffering, starvation and death for those outside the privileged economies of the west. The essential tenets of this order were dictated by the US as ultimate victor in the Second World War, Europe having been utterly devastated physically and economically. Free trade and free markets were the order of the day as was a 'pegged' currency system with the US dollar as de facto global reserve currency.
The results of this system were promoted to all as the benefits of free market capitalism in which the US was the benign parent. The reality was of course quite different; the US exerted it's dominance over Europe and much of the developing world, used it's military might to suppress and destroy all who stood in it's way, used it's economic power and far ranging intelligence apparatus to maintain this new imperialism at the cost of slavery and slaughter for millions. Beyond the CIA's jackboot falling across Latin America and much of Asia, the IMF, tasked with the alleviation of poverty was in fact used as a poverty creator and raper of nations, as was the World Bank.
The realities of the Bretton Woods order have been carefully hidden from the mass of people in the west and so it will be this time also. Grand schemes will be wrapped in grander words, all of them hollow and behind them the rolling juggernaut of free market capitalist hell, a slavery for the entire globe and all who live upon it with a tiny elite sitting on the top of the heap.
However these things are always dynamic, always morphing and changing to meet the tides and currents of the time, nothing is set on stone. So it is that while building this New Economic World Order the positions of the players is by no means certain. The goal is Global Economic Hegemony within the New Economic World Order - on the one hand we should expect to see the world's leaders making fine speeches on the need for global cooperation while on the other seeking to strengthen their own positions.
We believe that the race to recapitalise banks far beyond what is needed today, the hype and panic that is being spread, the time bomb that is the derivatives market that seems to being toyed with and the rush to change accounting standards are all part of a hurried positioning of the players.
In our next article we will be exploring in detail the positioning of the players, what we expect from the New Bretton Woods and speculating how the new order will develop. We think that the next weeks and months will be like being dragged down stairs by our ankles, our head hitting every step as we are dragged lower and lower until we are finally so tired, so bruised and so desperate we will clamour for and embrace anything that can provide certainty. Certainty of food, clothing, shelter and of course security, for none of this is happening in isolation, it all falls under the umbrella of the 'war of terror' being waged against us.
So, while we apply ourselves to our keyboards,we urge you to take President Bush's sound advice to heart.
Bush Calls For Panic
The Onion [UK satirical magazine]
October 15, 2008
WASHINGTON - In a nationally televised address to the American people Wednesday night, President Bush called upon every man, woman, and child to spiral uncontrollably downward into complete and utter panic.
Speaking from the Oval Office, Bush assured citizens that in these times of great uncertainty, the best and only course of action is to come under the throes of a sudden, overwhelming fear marked by hysterical or irrational behavior.
"My fellow Americans, the time for running aimlessly through streets while shrieking and waving our arms above our heads is now," Bush said. "I understand that many of you are worried about your economic future and our situation overseas, and you have every right to be. Yet there is only one thing we as a nation can do in times like these: give up all hope and devolve into a lawless, post-apocalyptic, every-man-for-himself society."
"For those of you who have remained resolute in your belief that things will turn around eventually, I urge you to close your eyes, take shallow rapid breaths, and begin freaking out immediately," Bush added. "At this point, anyone who isn't scared to death needs to wake the f*** up - because we're screwed here."
The president then picked up the telephone from his desk and hurled it through the Oval Office window.
During the address, Bush laid out a historic five-point plan for panic that he hopes will help the American people fall apart as quickly as possible. The plan - which many are calling Bush's most well-thought-out proposal to date - calls for citizens to abandon their daily routines entirely, and engage in a weeklong period of bloodcurdling screaming, arm flailing, dry heaving, and gnawing on one's fingers while rocking back and forth in alternating bouts of maniacal laughter and gentle sobbing.
Under the new bill, Americans are also advised to withdraw all their money from U.S. banks and the stock market, place it in a Maxwell House coffee tin, and bury it in a safe place in their backyard. In addition, Bush has urged the legalization of Americans trampling one another in a mad rush to compete for the nation's dwindling resources, and proposed allocating $3 billion toward a program that would give every citizen a gun and a bottle of 140-proof whiskey.
The final part of the plan calls for the immediate release of all convicted felons and death-row inmates from the nation's prisons.
Immediately after Congress approves his plan, the president said he will order multiple B-2 stealth bombers to fly over America's cities at low altitude. The resulting sonic boom, Bush said, will set off all car alarms and cause all babies to cry uncontrollably, which he believes will promote a real sense of chaos throughout the nation. In addition, Bush intends to release 50 live cobras into the Senate chamber.
"I realize this is a difficult vote for members of Congress, but at this critical time in our nation's history, it is imperative that we not sit back and pretend like everything is fine, because everything's not fine, it's just not," Bush said. "Even if Congress fails to act, I still intend to do what is right and lead this country into mass hysteria by acting outside the framework of the U.S. Constitution, overriding the entire democratic process, and setting the Lincoln Memorial on fire."
Early reactions on Capitol Hill to Bush's call for panic have thus far been positive. Leading House Republicans and Democrats said they appreciate the president's candor, and will encourage their constituents to comply with Bush's request to "find something and smash it with all of their strength."
"For most of the day tomorrow, I intend to do my part by remaining in my boarded-up home and getting worked up about our standing in the world," Pacoima, CA resident Harold Miller said. "And then at night, I plan to lie awake in my bed and be scared to death about the loss of my job, pension, and retirement fund. Then I plan to run out into the streets in my bathrobe and shout that the End of Days is coming."
Bush told Americans that if at any point they catch themselves feeling even slightly at ease, they should remind themselves that, in the end, everything is going to be completely f*****.