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-- Posted Sunday, 28 September 2008 | Digg This Article | Source: GoldSeek.com
Rick’s Picks “Phenomenally accurate forecasts” There’s a neighborhood in Baltimore where quaint old row-homes were recently offered for sale at $1,000 apiece. At that price they needed some fixing up, to be sure, but there were still no takers. The homes have since been boarded up and sit vacant. What turned buyers off was that the homes contained asbestos and lead paint, and anyone who wanted to move in would have to deal with a laundry list of EPA hazmat requirements. As a recent Wall Street Journal story documented, Baltimore isn’t the only place where fixer-uppers have been offered for next to nothing, only to go begging on the market. We mention this because it parallels the situation faced by the few large, nominally solvent banks that have been called upon to imbibe the toxic effluvia of other banks too weak to stand on their own. On Friday, J.P. Morgan Chase became the designated bag holder for the assets of newly bankrupt Washington Mutual, paying $1.9 billion to take over the giant mortgage lender’s $307 billion portfolio. The deal includes 2,200 WaMu branches and, by someone’s estimate, $31 billion in bad debts. We suspect that if J.P. Morgan had its druthers, it would not have touched WaMu with a ten-foot pole. Of course, it was not a business decision that drove the deal, but rather government arm-twisting -- plus a little sweetener on the back end that presumably would leave taxpayers on the hook for any WaMu balance-sheet problems that cannot ultimately be cured. The Swiss Paradox While this bank failure, the largest in history, was hastily being absorbed, another troubled bank, Wachovia was looking for a buyer as well. The firm’s choices will necessarily be very limited, however, since there are at most only a half-dozen or so banks left that could be perceived as big enough, and superficially stable enough, to swallow Wachovia. UBS was mentioned as a possibility, but who’s to say the Swiss banking giant won’t itself be exuding the smell of death in a week or two? We usually think of Switzerland as an impregnable fortress of wealth, but in truth, there is not enough real wealth left in this world to save the banking system. No, it is only U.S. banks that can be “saved” at this point, since they have access to the ethereal kind of capital that the Swiss are congenitally incapable of manufacturing. We mentioned here yesterday that the $700 billion bailout package working its way through Congress’ small intestine is dwarfed by the actual problem. How big is the problem? Some readers would say as much as $500 trillion dollars, citing the Bank for International Settlements as their source. We’ve used this number ourselves but must confess to have learned since that it greatly exaggerates the size of the derivatives market, double- triple- and quadruple-counting many ledger entries. It were as though a worker deposited a $1,000 paycheck, blew $500 of it at a night club, $500 of which got dispensed as change to other boozers, who spent it on prostitutes, who shot it into their veins. If the BIS were tallying up this string of transactions, it might reckon the original $1,000 as having grown to, say $4,000. Knowing this, it behooves us to try and re-calculate the value of global derivatives more honestly. The trouble is, if we were to whittle down the $500 trillion BIS figure to something reasonable, it would still tally more than $100 trillion – at least twice global GDP. No Walking Away And so, even using very conservative numbers, we must reckon the implosionary force of the derivatives markets as being at least a 15-digit sum (i.e., $100,000,000,000,000). Stack that up against Congress’ $700 billion bailout plan and you begin to see why the mega-rescue cannot work. For make no mistake, each and every dollar of that conservatively estimated $100,000,000,000,000 is owed by someone to someone else; and in the end, every penny of it will have to be paid, if not by the borrower, then by the lender. For that reason, we cannot in fact collectively walk away from it. We’ve hypothesized here before that the U.S. Government could conceivably hyperinflate by mailing out checks to each and every homeowner for the full amount of the homeowners’ mortgages. But again, that would amount to only a piddling $11 trillion or so – hardly enough to counter the implosion of 15-digit debt. Ditto for bailing out the money markets with funny money. That would amount to only about $3.3 trillion. Whatever the size of the bailout, it cannot begin to counter the destruction of all those derivative zeros. *** Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers’ initials will be used unless express written permission has been granted to the contrary. All Contents © 2008, Rick Ackerman. All Rights Reserved. www.rickackerman.com
-- Posted Sunday, 28 September 2008 | Digg This Article | Source: GoldSeek.com
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