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    I don't know barbaro's Avatar
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    World Banking Situation

    Wasn't sure where to put this article, so it's here: The article notes 3 trends. One of these has been noted on this forum a couple of time. Many dollars/money looking for places to invest. And then the 2 others.

    Any comments on where the world banks are headed from NA, to Europe, to Asia in the next year?

    Economic View
    Three Trends and a Train Wreck

    Published: October 17, 2008
    The crisis is global in nature and its causes are more general and less country-specific than is commonly reflected in the political discourse of any single nation. Many countries — not just the United States — came to have fundamentally unsound banking systems. If Japan remains an exception, it is only because it already suffered through similar problems in the 1990s.
    The current financial crisis comes from a conjunction of three major trends, common to many countries and to a wide variety of financial institutions.

    The first trend was a positive one: an enormous growth in wealth that needed to be moved into investments. Before he became chairman of the Federal Reserve, Ben S. Bernanke wrote of a “global savings glut,” particularly from Asia. Furthermore, over the last 20 years, many countries have modernized their financial systems and created new channels that linked savings and investment. In Spain, Iceland, Ireland and Britain, the real estate boom was without recent precedent.

    Of course, more wealth is a good thing over all, but the question is whether that wealth has been invested in an effective and prudent way.

    This leads us to the second trend, the greater willingness of both individuals and financial institutions to take on risk. This trend has shown up in many areas, including real estate, derivatives markets, loans to companies like the American International Group, and overpriced equities. Heavy debt, particularly in financial institutions, created a low margin of error for many of these calculations.
    Greater risk-taking was driven by investor hubris and collective delusion. Banks and other financial institutions bet against the possibility of bad times and in the short run those bets paid off handsomely. But in the long run they were disastrous.

    For a simple analogy, imagine betting against a sports underdog every year. You may win consistently for a while but eventually you will lose all your money when the odds turn against you. In essence, banks were betting against extreme volatility, which sooner or later does arrive.

    In the United States, loose monetary policy in the previous decade encouraged this misplaced optimism, while in Europe there was giddiness from the benefits of economic integration. People pursued profits rather than prudence because their minds and emotions were geared to expect further rewards.

    The third component has been weak governance and oversight. That includes inadequate control and monitoring by shareholders, regulators, creditors, accounting systems and ratings agencies, among others. Most people, including informed insiders, simply did not understand the systematic risk that financial institutions were accepting.

    A common view was that a real estate bubble had popped before — in the late 1980s — and that the United States had survived that event with a mild recession but not much calamity. Yet, in the meantime, the world had created more fragile interconnections through debt, while most people’s expectations about risk had stood still.

    The end result was that both markets and governments failed miserably — at the same time and on the same issues. With hindsight, it is easy to argue that regulation should have done more, but in most countries, governments were happy about rising real estate and asset prices and didn’t seek to slow down those basic trends. (You’ll note that greed doesn’t play an independent role in this explanation because greed, like gravity, is pretty much always there.)
    Subprime loans collapsed first because those were the investments most dependent on relatively poor borrowers who were the most likely to fail. Since then, we’ve seen asset values fall throughout the economy. Subprime borrowing was the canary in the coal mine, but it was hardly the only problem. It now seems that a wide range of asset prices were artificially inflated. The market for contemporary art, which depends almost exclusively on very wealthy buyers, will probably be the last market to plummet but that development is almost certainly on its way.

    Over all, then, the three fundamental factors behind the crisis have been new wealth, an added willingness to take risk and a blindness to new forms of systematic risk. All three were needed to bring about the scope of the current mess — so that means we’ve had some very bad luck on top of everything else.
    One prophet of today’s crisis was Fischer Black, the late financial economist who developed the Black-Scholes formula for options pricing with the Nobel economics laureate Myron S. Scholes. Mr. Black died more than a decade ago and his work on macroeconomics has not received much attention recently. But in his 1991 book, “Business Cycles and Equilibrium,” and his 1995 work, “Exploring General Equilibrium,” he argued that major business downturns could be caused by a combination of excess risk-taking and simple bad luck.

    Most business-cycle analysts have very detailed scenarios for how things go wrong, but Mr. Black’s revolutionary idea was simply that we are not as shielded from a sudden dose of bad luck as we might like to think.

    WE’VE already been through a savings and loan crisis, a junk bond crisis and a dot-com bubble, but today’s crisis is by far the worst of the lot — and will probably prove to be more than just a bump in the road. We can do better the next time around, but we have to start by seeing that the current failure is far-reaching and that we can blame many different things and many different people.
    The real problem is not some particular villain but rather the very fact that we cannot help but put the evaluation of risk into all-too-human hands.

    Tyler Cowen is a professor of economics at George Mason University.
    Link & Entire: http://www.nytimes.com/2008/10/19/bu...19view.html?em
    ............

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    One aspect I would the article misses is a lack of confidence in the economy.

    As the saying goes, "if it looks too good to be true, then it usually is." I believe a small number of investors have had this feeling for about 3 years (especially in regard to real estate prices) and this has had a ripple effect.

    As to regulation, when the 1997 financial crash happened in Asia, there was general talk about who rates the rating agencies? To a degree, I believe the S&P, Moody, et. al do have to answer to some investors for giving credit ratings to investment vehicles that were, at best, unwarranted - thus reassuring investors who later found out what they were holding was not what they thought they were holding; QED, a beak-down in confidence.

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    ^ I disagree about the ratings agency, they are not the guilty ones. For CMOs and CDOs, it was just a question to increase their quality ratings through financial mechanism. Ratings agency credit rating model is already very complex, and that complexity made it possible to "exploit" tiny holes in the model.

    At the end, the investor and the selling agents were responsible. The investors for not understanding what kind of vehicle they were investing into, and the agent for pushing complex instruments to clueless investors.

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    ^I don't disagree with your argument that investors and selling agents were not partly to blame. However, giving tripple A credit to secrutisations was a little rich

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    ^ well technically they are bonds, so their AAA was "warranted", it's all part of the complexity of the instruments, the model can only rate what it knows, and as the instruments become more complex, the model falls apart. Unfortunately, there are no other models, so as a proxy to valuation, it's better to have something doing things approximately than nothing at all. Maybe a weak argument, but the market pressure at the time took care of the rest.

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    ^true - selling agents went out and told investors they had a product that had a tripple A credit rating from S&P/Moody's/or whoever. You can blame a number of people in that equation - not least the investor for not doing their homework - but I do think it helped to create a 'bubble' of over confidence. And in my opinion, that was the worst bubble of the lot

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    I don't know barbaro's Avatar
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    ^ and ^^

    The false AAA ratings for securitized mortgage bundles that were not AAA, but many ratings lower was:

    Fraud.

    Period.

    This is Fraud.

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    ^ a bit too far, maybe fundamentally mispriced, but I seriously think that they were all drinking Kool-Aid and really thought those securities were fairly priced,

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    Thailand Expat lom's Avatar
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    Quote Originally Posted by Butterfly
    I seriously think that they were all drinking Kool-Aid and really thought those securities were fairly priced,
    While even a child understands that blowing to much air into a balloon will make it burst.
    The childs only need that experience once to understand it.

    Can I have one of those balloons with strong rubber please. With AAA plus rated rubber...

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    meanwhile , everyone who owned a house was buying a house thought they were rich.

    and the politicians encouraged it all as the voters attributed their good fortune to the incumbents.

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    Crisis may wipe 20 million jobs


    THE financial crisis could lead to a 20 million rise in the number of unemployed worldwide by the end of 2009, International Labour Organisation chief Juan Somavia warned today.
    Estimates from the ILO indicate that the "number of unemployed could rise from 190 million in 2007 to 210 million in late 2009,'' said Mr Somavia, marking the "first time in history that we pass 210 million.''
    The population of working poor living on less than a dollar a day could rise by 40 million, and those on two dollars a day by over 100 million, added the ILO.
    But Mr Somavia said these projections "could prove to be underestimates if the effects of the current economic contraction and looming recession are not quickly confronted.''
    Thousands of jobs have already been slashed on Wall Street and other financial centres as banks collapse or are forced to merge due to the credit crunch.
    But the ILO said that the axe was likely to reach ordinary working people, with sectors including construction, the automotive industry, tourism, services and real estate bearing the brunt of the financial storm.
    "This is not simply a crisis on Wall Street, this is a crisis on all streets. We need an economic rescue plan for working families and the real economy, with rules and policies that deliver decent jobs,'' he said.
    Unemployment rates have been rising throughout the world.
    Hong Kong earlier today said its jobless rate rose to 3.4 per cent for the three months to September, compared to 3.2 per cent in the three months to August.
    Meanwhile, the United States reported earlier this month that it had lost 159,000 jobs in September.
    Somavia called for "prompt and coordinated government actions to avert a social crisis'', and said he welcomed calls for "better financial regulation and a global surveillance system of checks and balances.''
    The crisis gave an "opportunity'' to re-balance globalisation which had grown "unfair, unsustainable and unbalanced,'' he said.
    all this monetary injection which has not created any more efficiency or produced more arable land - a fcukin fiasco

    the only people who are cheering it are the ones who hold shares and property and are seeing their ( supposed ) wealth dissipate by the day, which is the only reason for the share rallies of the past few months - reality will set in then it will be every rat for himself
    If you torture data for enough time , you can get it to say what you want.

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    Quote Originally Posted by baldrick
    all this monetary injection which has not created any more efficiency or produced more arable land - a fcukin fiasco
    A fiasco from the beginning. All based on perpetuating an irrational economic system whose sole purpose is to measure success on growth though mass consumption via easy credit. Capitalism gone mad.

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    And the funniest thing is that we'll be going through another one in another 20 years or so as all the lessons from this one are forgotten.

  14. #14
    bkkandrew
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    ^No, these ones happen every 100 years. The last comparable crisis (IMO) was 1907, which was solved by the creation of the FED.

    The current crisis may be solved an International version of the FED, as the BIS (Bank for International Settlement, based in Basel) seems to be AWOL from the current debacle.

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    Excommunicated baldrick's Avatar
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    today will be the day the wall street teddy bears start their picnic - uzis or icecreams ?

    October 21 sees the settlement of the credit default swaps (CDS) issued on Lehman Brothers debt.

    First the facts. A CDS, or credit default swap, is essentially an insurance against losses if an issuer of debt goes bankrupt and cannot honor its obligations. Those who have sold the protection will then compensate the loss to those who have bought the protection. Estimates say that Lehman debt amounts to some US$150 billion. Other estimates say that Tuesday will see settlement of about $360 billion worth of nominal CDS contracts
    Asia Times Online :: Asian news and current affairs

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    ^ The key prob is that Lehman and others used that collateral several times over to bankroll new derivatives. That's why nobody knows who has what nor where it is. JP Morgan apparently has its hands on several bil.

    Quote Originally Posted by Butterfly View Post
    ^ well technically they are bonds, so their AAA was "warranted", it's all part of the complexity of the instruments, the model can only rate what it knows, and as the instruments become more complex, the model falls apart. Unfortunately, there are no other models, so as a proxy to valuation, it's better to have something doing things approximately than nothing at all. Maybe a weak argument, but the market pressure at the time took care of the rest.
    Disagree. CDSs and other structured instruments should have been monitored more closely. The ratings agencies are there to measure credit worthiness first; then that "rating" is slapped onto a company's debt; all crap, IMO. S&P, Moody's and especially Fitch & AM Best should have seen some sh*t happening. They did not and thus deserve a whalloping for not doing their jobs. Our analysts do their own credit ratings on firms.
    Last edited by Jet Gorgon; 22-10-2008 at 05:43 AM.

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    Can someone explain why the $ is stronger than the Euro and Sterling when it appears that the Americans are worse state that Europe?

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    Quote Originally Posted by Jet Gorgon
    Disagree. CDSs and other structured instruments should have been monitored more closely.
    Jet darling, pay attention, we are talking about CDOs and CMOs, not CDS


    Quote Originally Posted by baldrick
    today will be the day the wall street teddy bears start their picnic - uzis or icecreams ?
    CDS are "unregulated" private insurance contracts, they just fucks up the investors and trades OTC, don't see how they can create a bigger panic as they are swaps, not priced instruments or securities (unless they are terminated before expiration and settled in cash). If they default, it fucks the investors, end of story. No need for bailout etc... all parties knew the risk when they entered that contract, and the default usually damages the credibility of the party more than it does financially as those contracts are usually carried at terms by both parties. Default could be partial for a few interests payments until the underlying bond recovers, or they could be terminated with a cash settlement.

    For Lehman, well big fucking deal.
    Last edited by Butterfly; 22-10-2008 at 08:56 AM.

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    Quote Originally Posted by binnsy
    Can someone explain why the $ is stronger than the Euro and Sterling when it appears that the Americans are worse state that Europe?
    because it seems that the US bottom out and should be logically on the way to recovery,

    Europe and UK is just starting to feel the pain and might not be as flexible as the US for fixing this mess,

    of course the crisis is not really over yet, and new development could fuck up the US, the UK and the rest of Europe a little bit further,

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    Quote Originally Posted by Butterfly View Post
    Quote Originally Posted by Jet Gorgon
    Disagree. CDSs and other structured instruments should have been monitored more closely.
    Jet darling, pay attention, we are talking about CDOs and CMOs, not CDS


    Quote Originally Posted by baldrick
    today will be the day the wall street teddy bears start their picnic - uzis or icecreams ?
    CDS are "unregulated" private insurance contracts, they just fucks up the investors and trades OTC, don't see how they can create a bigger panic as they are swaps, not priced instruments or securities (unless they are terminated before expiration and settled in cash). If they default, it fucks the investors, end of story. No need for bailout etc... all parties knew the risk when they entered that contract, and the default usually damages the credibility of the party more than it does financially as those contracts are usually carried at terms by both parties. Default could be partial for a few interests payments until the underlying bond recovers, or they could be terminated with a cash settlement.

    For Lehman, well big fucking deal.
    Hello! CDSs shoulda been part of the rating agencies' responsibilities, Bfly. Oh, it's OK, those are not in our realm of credit checks. FO. Shoulda been.
    Lehman? Ya, big fekin deal except alot of banks and brokers had money with Lehman and where is it? Oh, part of this deal that was recollateralised with this deal and so on.

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    I don't know barbaro's Avatar
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    Quote Originally Posted by Jet Gorgon View Post
    CDSs shoulda been part of the rating agencies' responsibilities
    I agree. And these Credit Default Swaps were allowed to increase rapidly since 2001. These derivatives basically exploded in number and value. You can look at the bar graph since 2001 and see the massive growth.

  22. #22
    bkkandrew
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    Quote Originally Posted by binnsy View Post
    Can someone explain why the $ is stronger than the Euro and Sterling when it appears that the Americans are worse state that Europe?
    Risk of Euro break up is being factored in on top of deep problems in many member states.

    Sterling being hammered (as I warned about 4-months ago here: https://teakdoor.com/business-finance...tml#post651735 (Thailand's Baht, Peso --- Decline) ) although I was incorrect about how soon the Baht would commence its decline. The net result for us interested in THB-GBP price is that we have some months of pain prior to the inevitable and steep decline of the Baht.

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    I don't know barbaro's Avatar
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    Quote Originally Posted by bkkandrew View Post
    Quote Originally Posted by binnsy View Post
    Can someone explain why the $ is stronger than the Euro and Sterling when it appears that the Americans are worse state that Europe?
    Risk of Euro break up is being factored in on top of deep problems in many member states.
    I've read this a couple of times. I'm a neophyte. Can you tell us why the Euro may decline?

    If the Euro does decline will it be temporary or long-term?

    Or, does anybody really know?

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    Quote Originally Posted by bkkandrew
    we have some months of pain prior to the inevitable and steep decline of the Baht
    Isn't the Baht (unofficially) linked to the Dollar?

  25. #25
    bkkandrew
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    Quote Originally Posted by Milkman View Post
    Quote Originally Posted by bkkandrew View Post
    Quote Originally Posted by binnsy View Post
    Can someone explain why the $ is stronger than the Euro and Sterling when it appears that the Americans are worse state that Europe?
    Risk of Euro break up is being factored in on top of deep problems in many member states.
    I've read this a couple of times. I'm a neophyte. Can you tell us why the Euro may decline?

    If the Euro does decline will it be temporary or long-term?

    Or, does anybody really know?
    Much of the Euro strength was attributed to the risk being spread over diverse economies. After break up, the aggrigate value of any Euro holdings would likely be much lower than the current (and previous) value of the Euro. The risk spread is simply being removed and may be completely reversed if divergence between the economies of say, Germany and Ireland, grow.

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