Baseball91's Weblog

February 26, 2009

Balance Sheet

Filed under: Banking,Ben Benanke,Business,European Union,Ireland,Money,Nebraska,TARP — baseball91 @ 3:48 AM

Last October Kevin Giddis, head of fixed-income trading at Morgan Keegan, was quoted as saying, “I think we’re dealing with more confidence than substance.” With anywhere from $460 trillion to $560 trillion that was written by the 5 investment banking houses, confidence in people like Kevin Giddis, like Al Goldman, had been lost and would not be coming back.


It was no longer subprime mortgages, Mr. Giddis. What don’t you get, Mr. Goldman? It was not subprime mortgages. It is the entire derivative market, stupid.

And now there was Jim Lerher last Friday discussing almost record lows in the market indexes. The recent record low, Mr. Lehrer, in the Dow Industrial average had been reached on the 2nd Friday in August in 1981. That number was 798. How can you cover the news for a career and speak of “record low,” at this point in time?

Those earnings driven markets had a lot lower to sink in the coming weeks.


The Cliff Notes:  The  financial media has finally explained the goings-on on Wall Street and now in in Washington, since September 15th.  There were 5 investment banking houses not being regulated by the Securities Exchange Comminssion. The parties were Bear Stearns, Lehman Brothers, Merrill Lynch, Morgan Stanley, and Goldman Sachs.   The former Treasury Secretaries Robert Rubin and Henry Paulson were CEOs at Goldman Sachs.  Particularly during the reign of Paulson at Goldman Sachs, the derivative market exploded.  In 1970, Paulson entered the Nixon administration fresh from Harvard Business School Masters program, working first as staff assistant to the assistant secretary of defense and then as office assistant to John Erlichman in 1972-73.  There was something going on in the offices of Mr. Erlichman about that time called Watergate.  Paulson left the White House and went to work for Goldman Sachs in 1974, becoming a partner in 1982, co-head of investment banking in 1990, chief operating officer in 1994, and taking over the post of CEO of Goldman in 1998, forcing out his co-chairman Jon Corzine (who now is a U.S. Senator).  

Last September 2008, quarterly statements were due from the 5 investment banks.  The focus was on the balance sheets of banks who were loaning money, the value of properties which they had foreclosed on was dropping fast.  And their business had been selling off mortages, and selling 

Over the past 5 months there has been quite a rapid pace in positions taken in the derivative market markets.  Credit derivative get at least part of their value from the value of another security.  And these days there is a lot of insecurity in securities.  The underlying security can come in many forms including commodities, mortgages, stocks, bonds or currency.  Credit markets froze between September 15th and October 7th.  Congress at the time was voting on bailouts during this time.  The battle of ideology going on between the credit markets and the equity markets continued during this time as reflected in the LIBOR rate which one bank charged another bank.  The spread was about 3.0 percent higher than the Fed rate at the time, an unheard of differential.  Banks in the current envirnment, no matter the moves put on by the Treasury, were not buying in to the bailout.  When everything was overvalued, why lend money?

That was why credit markets froze.  Bankers have always been conservatives. They were not buying into the social engineering on capitalism.  There was a revolution in capitalism with this bailout.  No one wanted to purchase shares in these banks that were illiquid.  And it is said that the banks in Europe were in worse shape. 

Bankers neither trusted the balance sheet of another bank nor the government. It was not, as Mr. Giddis suggested, an issue “more confidence than substance.”

The Guardian reported Monday that British police are preparing for a “summer of rage” with victims of the downturn expected to take to the streets.  The news from Europe was a lot more bleak than in the United States.  The government in Latvia fell last Friday.  The crisis is the worst in Lithuania and Latvia.  Iceland was in the news last September.  Ireland was in slightly less straits.  Ukraine.  Lithuania.  Hungary. 

The reason investors may invest in a derivative security is to hedge a bet, by investing in something based on a more stable underlier.  Yet now nothing was stable.  Those $461 trillion in credit derivative implode.  And with it currencies. 

As an example, in Poland 60% of mortgages are in Swiss francs.  In good times, when currencies are stable, it is nice to have a low-interest Swiss mortgage.  As a requirement for joining the euro currency union, Poland has been required to keep its currency stable against the euro. This gave borrowers comfort that they could borrow at low interest in francs or euros, rather than at much higher local rates.  But along came the synchronized global recession and large Polish current-account trade deficits.  A lot like those subprimes in the US.  The Polish current-account trade deficits were 3 times those of the US in terms of GDP.  Goods coming from Asia will cost more in Europe unless Asian countries decide to devalue their currency.  That would bring some pressure to bear. And it has.  The Polish zloty has basically dropped in half compared to the Swiss franc.  If you are a mortgage holder, that means your house payment just doubled. And this has happened all over the Baltics(Latvia) and Eastern Europe.

There would be political repercussions in all of this.  As communism fell in 1987, so capitalism was threatened around the world.  But in the words of Kevin Giddis and Al Goldman, “I think we’re dealing with more confidence than substance.”

There would be a lot of turmoil in currencies in the coming month.

“The current economic and financial crisis has made it even more evident that not every aspect of human life can be subject to the laws of the market,” stated a declaration from representatives of the Protestant church in Germany, European Catholic bishops, and the Church of England. “In fact, consumerism is not a model either for a sustainable economy or for healthy human development.”

Governments are now trying to save a system that is leaking.  “It is going to take some time to work,” I heard the current Treasury secretary say tonight.


I never took that Logic class.  But if we have the financial institutions upholding the credit derivatives, and now government is now stepping in to prop up the bad institutions who partook in the credit derivatives, $460 trillion in derivatives, there is not enough money in the world to keep the system of capitalism going.

Confidence? It ain’t about confidence. It is all about the truth.  All of this was available if you read the Christian Science Monitor,, or on “The European Depression. “


Banks are going under.  In March.  And in a lot of countries, money is going to lose its value.


1 Comment »

  1. Comment by baseball91 — March 12, 2016 @ 11:40 PM | Reply

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