Nuclear Containment by The Fed

Any military planner would tell you to expect the best but plan for the worst.

The comments below consider the worst-case analysis for the world’s economies and populations as I see it.

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PART 1.
The Fed's Immediate Plan of Action: Nuclear Containment.


When the Soviet Union disintegrated, the West took actions to try and control the spread of the Soviet nukes.

With the same thinking, The Fed, BOE and RBA have implemented a similar plan to prevent the spread of “Derivative Fallout” throughout the world’s economies.

The Fed and others have started new programs to collect up defective paper (mortgage-backed bonds and securities) held by members of the financial community. The reason is The Fed wants to prevent the derivative bomb from igniting financial Armageddon… The defective paper must be isolated and quarantined to guarantee the world’s safety.

If the defective paper were allowed to be priced to market or forced sold, it would begin a chain of counterparty defaults throughout the world.

The combination of FRAUDULENT COLLATERAL (mortgage-backed bonds and securities), DERIVATIVES (counterparty contracts that commit parties to mutually-assured destruction) and GLOBALIZATION have perfected the Ultimate Doomsday Machine.


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PART 2.
Recap and Explanation of Fed and Government Intervention.

From everything I have read The Fed arranged the Bear Stearns rescue to prevent claims from being made against counterparties which could have quickly precipitated a downward spiral toward global financial meltdown... a downward spiral that could not be recovered from.

Had Bear Stearns not been rescued, it’s demise may have exposed the derivatives game for what it is… a house of cards constructed by companies writing IOUs to each other who may actually be insolvent or quickly become insolvent.

The derivative players have made and accepted promises to each other as if their contracts were backed by “Monopoly” money rather than solid assets and financial statements.

Companies that were required to pay out claims on their counterparty obligations might have found that their other counterparty contracts for such events--their “insurance” contracts--might have proved worthless.

-- Think of claims being made against insurance companies that have become insolvent. --

The companies trying to make good on their counterparty obligations might then be forced to liquidate assets in order to pay out on their contractual obligations. The selling of these illiquid assets (MBS for example) would depress the value of similar remaining assets.

-- Think of bank foreclosures driving down the price of houses in a neighborhood. --

With the value of company assets dropping these companies are required to put up more collateral for their mortgage-backed bonds and securities or face downgrades by the rating agencies to "subprime."

This in turn forces the companies to unload more illiquid assets or to horde more cash… Needed cash to meet collateral requirements on existing or new loans.

This is like asking a homeowner to, now, put up a 20% down payment instead of the original request for 5% down payment to qualify for a mortgage.

These actions all become self-reinforcing, of course.

In addition these actions would depress housing prices further... because real estate lending would be further restricted due to a lack of available funds.

-- Each derivative player thought they were reducing their risks… but what happened is these “heroin addicts” were all sharing from the same needle. --

What the FED and the politicians are trying to do in the last few months is to prevent the game from stopping. When financing/lending shuts down… everything will shut down.

So in addition to the containment of toxic derivative implosions, the Fed is trying to ensure the availability of money for financing activities, especially, mortgages to home buyers with the hopes it will halt the slide in home prices. And, finally, the Fed hopes to hold the impaired (trash) collateral long enough until these companies can redeem their assets and sell them at previous bubble prices. The politicians are, also, aiding and abetting the Fed actions to firm up housing prices with the expansion of lending programs by Fannie, Freddie and FHA.

-- The Fed has in effect just turned itself into the world’s biggest pawn shop for troubled debtors (bankers and investors) --

-- While it is understandable that folks would speculate on real estate given the circumstances provided by lax, incompetent and complicit officials and CEOs, it is amazing how many people actually believed that real estate could only go higher, so disconnected from historical trend or affordability… but then you stop and recall the tulip bubble.--

-- At any rate the rest of us will have to suffer for the unchecked and unmitigated greed of people throughout real estate--from home owners to investors.--

Of course all these policies are primarily done to protect “The Bankers.” … And, of course, if and when the financial meltdown comes, the taxpayers will be stuck with the worthless collateral while at the same time they try to deal with accelerating unemployment, homelessness, and the inflation of essential commodities.


Part 3.
Conclusion.

The Fed and the politicians are hoping they can keep things juggling long enough till housing is in the clear, again,...by lowering interest rates and giving out easy loans, yet again, on overpriced collateral. But even the best jugglers can only juggle so many knives at one time… and for only a finite length of time.

As I see it, the Fed will end up juggling too many knives for a lot longer than they hope… but then again, that is why they are setting up the taxpayer, now, for the grand finale : )

Just my opinion, CY.

Use it or ignore it as you deem appropriate for yourself.


See next posts under this thread for related articles if interested.

RECAP OF PUBLISHED REPORTS:

http://en.wikipedia.org/wiki/Bear_Stearns

Bear Stearns
From Wikipedia, the free encyclopedia


On March 16, 2008, under the supervision of the Federal Reserve, the company signed a merger agreement with JP Morgan Chase under which JPMorgan Chase would assume the counterparty risk and exercise management control over Bear Stearns pending shareholder approval. The Federal Reserve issued a non-recourse loan of $30 billion which would cover any losses in Bear Stearns' investments in mortgage-backed securities and exotic investment paper,[2] with collateral to be managed by BlackRock.[3]One week later, JP Morgan Chase increased the value of its purchase stock swap from $2.00/share to $10.00/share and reduced the loan from the Fed by $1 billion.


http://www.kansascity.com/438/story/580248.html

Investment firms pull back on borrowing
By JEANNINE AVERSA
AP Economics Writer
Thu, Apr. 17, 2008 04:54 PM

The program, which began March 17, is one of several extraordinary actions the Fed has taken recently to limit damage from a trio of crises - housing, credit and financial.

After the sudden crash of Bear Stearns, the nation's fifth-largest investment bank, fears grew that others might be in jeopardy, given major stresses in credit and financial markets.

The Fed's No. 2 official, Donald Kohn, said in a speech Thursday that Wall Street investment firms should be subject to greater regulatory oversight because any severe problems they might encounter can endanger the entire financial system.

Investment houses have key roles in the financial system. If one fails or is having difficulty, it could put the whole financial system in jeopardy. That's because they have complex relationships with many players in the system, including hedge funds, commercial banks and others.

In exchange for the 28-day loan of Treasury securities, bidding firms can put up more risky investments, including certain shunned mortgage-backed securities, as collateral.

The 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.

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.



http://money.cnn.com/news/newsfeeds/articles/newstex/AFX-001...

Fed's Kohn hints at need for permanent liquidity backstop for primary dealers
April 17, 2008: 10:11 AM EST

In remarks delivered in North Carolina today, Kohn said the Fed in March decided that it made sense to allow primary dealers to borrow from the discount window in order to ensure they had the funds they need to continue operating. Extending discount window borrowing to non-depository banks was aimed at avoiding 'substantial damage to the financial markets and the economy,' he said.

SUPPLEMENTAL READING

ARTICLES ON THE DERIVATIVE MARKET

http://www.prudentbear.com/index.php/CreditBubbleBulletinHom...


Global Credit Market Dislocation Watch:

April 15 – Bloomberg (Neil Unmack and Sarah Mulholland): “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… ‘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…Swiss Reinsurance Co., said…”

April 17 – Bloomberg (Abigail Moses): “Banks worldwide are demanding 60% more in collateral from investors such as hedge funds to cut the risk of derivative trades going bad, the International Swaps and Derivatives Association said.”


MBS/ABS/CDO/CP/Money Funds and Derivatives Watch:

April 16 – Bloomberg (Shannon D. Harrington and Abigail Moses): “Credit-default swaps worldwide expanded to cover $62.2 trillion of debt in 2007 as investors rushed to protect against losses triggered by the collapse of the U.S. subprime mortgage market.

April 16 – Bloomberg (Abigail Moses): “The $62 trillion market for credit derivatives needs regulating to prevent a ‘calamitous chain’ of market failures, Credit Suisse Group’s head of investment banking, Paul Calello, said at the industry’s biggest gathering. ‘All sectors of the financial system need to act -- both regulators and industry,’ Calello told the International Swaps and Derivatives Association conference… ‘There will be new regulation, and there should be; voluntary efforts are not enough.’”


GSE Watch:

April 15 – Financial Times (Saskia Scholtes): “Fannie Mae and Freddie Mac…came under regulatory pressure to improve counterparty risk management of mortgage servicers, insurers and derivative trading partners they rely on to collect and guarantee mortgage payments or to hedge interest rate exposure. The Office of Federal Housing Enterprise Oversight’s annual report to Congress on Tuesday said that both the government-sponsored mortgage financiers ‘remain a significant supervisory concern’ because of still-needed progress on internal controls, corporate governance and risk management… ‘Counterparties, which represent a significant exposure to Fannie Mae, may be unable or unwilling to honour obligations should their financial strength continue to decline,’ the report said.”


http://www.prudentbear.com/index.php/archive_menu?art_id=502...

Global Credit Market Dislocation Watch:

March 19 – Dow Jones (Matthew Cowley): “JPMorgan Chase may have stepped in to save Bear Stearns, but that hasn’t stopped investors from worrying about counterparty risks. The weekend maneuver by JPMorgan and the Federal Reserve seems to be more about preserving Bear Stearn’s trades, rather than its business. That’s why the firm’s shareholders are being wiped out, but its mechanics will continue to operate under the auspices of its acquirer, JPMorgan Chase. Default by a counterparty is one of the major threats pervading crucial parts of the international financial system today; it's helped spread fear far beyond the origins of this crisis in the U.S. subprime market. The extent to which the Fed wants to avoid even testing a possible default by a major counterparty is indicative in the speed with which Bear's rescue plan was put together.”

March 20 – Bloomberg (John Glover): “The cost of protecting the bonds of Kaupthing Bank hf, Landsbanki Islands hf and Glitnir Banki hf against default soared to records this week amid concern Iceland’s three largest banks may be unable to fund themselves. Credit-default swaps on Kaupthing, Iceland’s biggest bank, rose 22 bps to 855… The cost of the contracts is about seven times more than the average for banks in Europe…

Recommendations: 0
Follow Up to my Previous Post on Fed and Government Policies


Inflation, Deflation and Other Trends:

Consumer inflation will accelerate for, now, as long as the fed stays with their current plan or until financial meltdown occurs. The Fed will attempt anything it deems necessary to avoid the Japanese deflation scenario. Inflation is increasing, in part, because the Fed is pursuing inflationary policies to avoid a deflationary economy. When meltdown occurs, the world economies will basically shut down creating consumer deflation in nonessential goods and services--and in some commodities like oil for a time--in addition to the current asset deflation we are seeing, now.

Governments of various countries will then turn to inflationary policies at various points to try and pay off debts and purchase goods… this will result in the worst of hyperinflation as governments try to remain in power and keep their populations from riots and insurrections--of course, the hyperinflation activities will eventually result in the same behavior by their citizens. Some countries will have more success than others. Which ones will be the winners and the losers?

There will eventually be wars over the essential resources of water, arable land, timber, oil and precious metals.

Security and defense-related companies will surely prosper in this environment. Outsourcing firms… and pharmaceuticals manufacturing both drugs to fight infectious diseases, as well as, nutritional-related products should prosper, too. More profits will generated by companies in alternative energies, recycling and pollution controls. Unless there is a new discovery in the production of energy, I should think that the American Railroads will see a renaissance of their previous Golden Years and finally be comparable to the existing rail lines in Europe and Japan.

Always remember that what you think and what the sheeple think can be completely different. But that’s a good thing. Every seller needs a buyer… and vice versa.

Bull and Bear Traps... they're all good : )

nice information
thxs for you information
any way i m new user
of this forums
so suggestion me any typs of information.