In other financial news, mattress companies report an uptick in orders for king size mattresses, with goodly amounts of the stuffing removed.
Customers say they have other stuff to put in there.

Posted by: Antifa | Sep 23 2008 17:41 utc | 3

Ute Lemper sings it

Posted by: catlady | Sep 23 2008 17:57 utc | 5

another certainty, the democrats will bend over, as is their custom & take it wherever the republicans shove it

Posted by: remembereringgiap | Sep 23 2008 18:49 utc | 7

@johnf – did you read my post before plugging that URL?

Posted by: b | Sep 23 2008 19:16 utc | 9

Enlightening post as usual B. You said, “It is too late to regulate it away.” in reference to this CDS bubble.
Here’s a question I have had for some time now, and I figured that the arrival of the crash was a good time to ask it (again). Everybody is naturally chattering about ways by which the economy, the money system, can be saved. It is evident to me that it can’t, and that assumption is based on things like Paulsen’s $700b plan, shown to be more govt b**lsheit, and negative reaction to it by a number of diverse parties who expect to further enrich themselves via the old model.
Point is, time has finally come to switch to another model, as this one has proven unworkable. No, I can’t suggest a better one but I haven’t yet seen anyone who can.
Granted, the above is somewhat cloudy and unfocused.

Posted by: rapt | Sep 23 2008 19:57 utc | 11

As one of your less astute but devoted readers, I rarely comment. But I have to ask. How does 250 billion (+ or – 100 billion) of subprime debt become inflated to over 65 trillion? Who was supposed to pay this 65 trillion? Who has been paying?
Did everyone who traded know that the Emperor had no clothes? Did they not know the value of what they were trading was an impossible amount of money? Or did no one compare their books?
I don’t understand the mindset behind this incredible fraud. From my limited understanding, it seems like a joke. Wall Street was playing for years with monopoly money? Were they laughing?

Posted by: christiana | Sep 23 2008 21:33 utc | 13

Christina@13
For a thorough explanation of how the over the counter swaps market has metastasized, check out Michael Hudson’s latest at Counterpunch –
http://www.counterpunch.org/hudson09202008.html
His summary –

America has entered into a new war – a War to Save Computerized Derivative Traders. Like the Iraq war, it is based largely on fictions and entered into under seeming emergency conditions – to which the solution has little relation to the underlying cause of the problems. On financial security grounds the government is to make good on the collateralized debt obligations packaged (CDOs) that Warren Buffett has called “weapons of mass financial destruction.”

Posted by: Bruce F | Sep 23 2008 23:13 utc | 15

Former German chancellor Schmidt recently suggested to let the IMF draft world-wide regulation for CDS’ and related ‘products’ as it is somewhat neutral and has a lot of international specialist, but currently rather little to do.

Oh, really? Is this the same IMF that has worked tirelessly to impoversh country after country and take away any possible safety nets from the poor of the world under the murderous market fundamentalism of “structural adjustment?” Just because this arm of the elite is international (Western) in scope, and is more interested in class warfare than nationalism, is hardly reason to term them “somewhat neutral.” Perhaps that neutrality of effect accounts for the fact that the nations of South America have — after painful experience — shunned the IMF, and they now have little to do — that is, until they impose structural adjustment on the U.S.
Ranks right up there with the idea of demolishing useful housing stock because it might only last 40 years instead of a hundred (as if the world had endless resources to trash) in order to prop up the cost of housing at unsustainable multiples of peoples’ take-home pay, thereby enslaving them to the most unsustainable and violent parts of the cash economy in order to put a roof over their head.
A large picture is best as the sustainability of the world is the true canvas.

Posted by: Incredulous | Sep 23 2008 23:56 utc | 17

Word for the week: “It isn’t just optics and good politics.” WTF?
Word for the year: “There is a need for market-value housing.” WTF?
Word for the epoch: “The creation of a Section 8 Finance Tsar.” WTF?
With 3Q actuals closing in just 7 days, and only one more shopping weekend before El Blowout en Bushistan, wouldn’t now be a good time to go long on Costco and WalMart? They’re already out of silver and gold bullion and coins, and out of gas in two cities, “Oh, the lines, the lines!”
—
A Thousand Points of Light
Scranton Times Tribune
“They have no lights or air conditioning, nor do they have diesel for their pickup, but Larry “Colonel” Saunders says life is pretty good for him, his wife and their sixteen children, even with the national credit freeze and economic lockdown.
They live about a mile from their repossessed but still abandoned home on North Main Avenue here in Scranton, like the tens of thousands of unemployed industrial workers also locked out, now that businesses can’t secure credit and cash flow to pay for raw materials, or to ship finished goods out to their customers.
At night there’s no other sound but the crickets chirping in the cool fall air,
and an occasional giggle of one of their children, straying from their homework.
A next-door neighbor also is homeless, they say, as are a number of other Scranton residents who are making do, while the devastated city begins its long purgatory.
Although city officials have warned residents about the risks of living under freeway overpasses and in densely wooded areas of public parks — and especially the dangers of bringing children back to the tent camps after their school day — the Saunders insist that they have things “right nice”.
They cook meals in a bramble-thatched clearing on a homemade barbecue grill over a fire pit. They store food in coolers packed with ice. They take cold showers from a nearby creek. They boil water and wash dishes in it. Their children read, color and play, when they aren’t helping to scrounge for bottles and cans along the freeway.
“We’re making it. 11¢ a can! We’ve got everything, almost like home,” said Saunders, a former electrician who still works a couple of hours a week for the utility company, disconnecting utility customers who haven’t paid their electric bills, before he returns to his family’s tarp camp by the Interstate 81 freeway.”
—
(Kidding, kidding, kidding. There’s already 11,000,000 invisible homeless in the US, and another 5,000,000 on the way, but City of Seattle just announced a plan to build housing for 85 families after it destroys their hobo camp!!! Hoorah!!!)

Posted by: Emma Powers | Sep 24 2008 6:01 utc | 19

Always the same story. Ppl cannot understand, or dope out, if the US authorities are complete fools concentrated on their personal interests while blindly supporting some kind of group think, see. e.g. the Iraq invasion, or Afgh. for that matter – or if there are other forces behind the scenes at work. It is all opaque, mysterious, conspiracists mutter and rumble, nothing is known, wild speculations fly, the media reassures with soporific pablum, distractions galore.
The sub-prime mess was grasped long ago, 2006 or so, by many… And yet it went on – nobody said HALT. (But see b above, about merkel.) The PTB knew, without any doubt, what was coming on down the pike. Looking foolish and blaming events in the past is a national pastime in the US, be it for investments, wars, or personalia like marriage, careers, etc.
Post-hoc hand-wringing is the name of the game. Once the events are safely buried in the past, and regulation / retribution / compensation / fixing up / are no longer possible, it becomes, de facto, necessary to move forward in the new landscape, saying, get over it already – the present has to be dealt with.
The Paulson plan is a transparent buddy bail-out, presented as the Knight on the White Horse that will save the US banks and financial system. Why exactly this system needs to be saved – except insofar as disruption and strife might be negative, bothersome, etc. – is not spelled out.
Christina at 13 asks a good question. The US sub prime mess is but an excuse, the tip of the iceberg, good for public statements about poor homeowners, yada yada. Just dealing with such a bubble (housing etc.) is not too difficult. Many have done it before, thru semi-nationalizing schemes, etc.

Posted by: Tangerine | Sep 24 2008 13:44 utc | 21

The 65 trillion isn’t on bank debt but on a wide variety of bonds across dozens of industries; the figure refers to the total CDS market (not just the 6 percent devoted to banking issues.) It’s a completely deceptive statistic.
That is correct – and the 65 trillion (I assume it’s much more now as the FT said 62T in late 2007) is about double the value of the total underlying assets.
The price of these assets (bonds) is now driven more by CDS speculation than by the real value of the assets.
A municipal bond, which is an asset in the above sense, may therefore see much higher (or lower) interest payments than was assumed when it was launched even though the basic numbers and credit validity of said municipal did not change at all.
This inverted or perverse market will hurt a lot of taxpayers simply because some curves on a Bloomberg terminal will induce some anonymous dealer to adjust ‘a bet’ via a CDS sell or buy.
Somehow, I think, this is wrong.

Posted by: b | Sep 24 2008 18:54 utc | 23

This inverted or perverse market will hurt a lot of taxpayers simply because some curves on a Bloomberg terminal will induce some anonymous dealer to adjust ‘a bet’ via a CDS sell or buy.
Some curves on a Bloomberg terminal would also induce some ‘anonymous portfolio manager’ (need we know their names?) to buy the muni bonds, also a ‘bet’ on the credit quality of the issuer. A widely syndicated market for risk gives that dealer comfort that this credit quality has been vetted by the broadest public market, rather than a shadowy cabal of anonymous bond traders.
The existing CDS are a myriad of individual private contracts that are not standardized at all.
Completely false. By and large the CDS market uses highly standard term sheets from ISDA, which also publishes regular guidelines to credit derivatives definitions and settlement terms eg
http://www.isda.org/publications/isdacredit-deri-def-sup-comm.html

Posted by: CDS Trader | Sep 24 2008 20:55 utc | 25

@sloth – I saw this one recommended on several sites: Credit Derivatives: Application, Pricing, and Risk Management (Hardcover) by Gunter Meissner (Author)
For starters this NYT piece: Arcane Market Is Next to Face Big Credit Test may help.
@CDS Trader – “The price of these assets (bonds) is now driven more by CDS speculation than by the real value of the assets.”
Sorry, but do you have any data to back this assertion up?
No – just a Bloomberg interview with a CDS guy from Wachovia which I am currently unable to find. But it is typical for derivative markets – see the recent oil spike at $150/bl – those were derivatives driving the real price at the pump as real oil was available.
@CDSTrader – By and large the CDS market uses highly standard term sheets from ISDA, which also publishes regular guidelines to credit derivatives definitions and settlement terms eg
By and large there are several types and subtypes of CDS that will be hard to evaluate if one wants to try to chancel them out against each other.
“[There are] binary, basket, cancelable, contingent, and leveraged [CDS]. This is not a total list of default swaps nor does it detail variations (e.g., the typical CDS spread is fixed but under a constant maturity CDS, the premium is variable over the life of the contract).” here.

Posted by: b | Sep 25 2008 5:24 utc | 27

Not sure is this the right thread, but …
the big investment banks used to be Morgan Stanley, Merill Lynch, Bear Stearns, Lehman Brothers, and who else?
Oh yeah, JP Morgan. I think they now go by JP Morgan Chase, which seems to be a Morgan and Rockefeller merger.
Why no mention of this giant? Morgan Stanley is not JP Morgan, and Goldman Sachs is neither. Recent stories quoted and written online seem to mistake JP Morgan, a very serious firm, for Morgan Stanley, another firm. I used to make the same mistake.
But where does JP Morgan stand in the arena. Is it that their hyphenation has pre-emptively transformed them from a cornerstone Wall Street firm into what Goldman has undertaken to become, a commercial bank or commercial bank holding company.
Inquiring minds would like to know, thanks in advance.

Posted by: jonku | Sep 25 2008 8:16 utc | 29

That NYT Morgensen piece is off. See here: http://seekingalpha.com/article/65104-a-misleading-chart-on-credit-default-swaps
By and large there are several types and subtypes of CDS that will be hard to evaluate if one wants to try to chancel them out against each other.
Yes there exist dozens of CDS contracts.. there’s also a good precedent of exchange listed bespoke derivatives in unrelated markets that work very well. Exchanges like ICE, NYMEX, CBOT some time ago expanded their clearance services to take in these custom contracts. The payment streams may be unique but the general settlement conditions are similar enough to allow for efficient netting of collateral, based on a multilateral mark to market process, or a mark to model whose parameters have also been vetted.
those were derivatives driving the real price at the pump as real oil was available
I rather doubt it. the thinner the paper market in any traded product, the more volatility it has seen. for example, oil prices with smaller or no paper markets have moved more and higher than WTI, and so has coal. All of them are functions of rocketing freight rates that no fund trades (look at the volatility of the dirty tanker rates to see how a market with no speculators has behaved.)
Add to this that global inventories are low and I’d say the evidence that oil derivatives are ‘ manipulated’ is extremely weak. In markets where data is available (ie equities) studies have shown that derivatives markets lower volatility. Might your wachovia trader be overestimating his own importance? traders always think they can move the tides, and financial reporters are only too happy to hype this image for a gullible public.
Can someone suggest a definitive read on cds and other investment banking insurance schemes?
I wouldn’t call them ‘schemes’, but if you’re really interested the Wiley series is the industry reference. Unfortunately most people won’t have the patience to learn the dry mechanics of derivatives. superficial hype makes for easier reading (and writing)

Posted by: CDS Trader | Sep 25 2008 13:13 utc | 31

slothrop,
If C goes bankrupt, B *doesn’t* have to unwind his position, and you’ve given me no reason why A would default on the initial underlying loan. B’s losing his insurer doesn’t impact the full notional principal at risk, only the credit protection (some small number denominated in basis points representing the very low probability of default). To believe that CDS markets steer underlying value, you’d have to believe that bonds are mostly made up of insurance value, which may be true of some very narrow category of structured product but is totally inapplicable to most CDS-insured debt.
A better example: if your home insurer went broke, would you feel compelled to sell your house? No, but even if you were unable to find any other source of insurance the intrinsic value in the house hasn’t gone anywhere.

Posted by: CDS Trader | Sep 26 2008 5:59 utc | 33