Best of the Week
Most Popular
1.The Greatest Stock Market Crash Of Your Life Is Just Ahead… – Warns Harry Dent - GoldCore
2.Budget 2016: Borrowing, Lifetime ISA, House Prices, Economy, Syria, Brexit and Stocks - Nadeem_Walayat
3.Gold Price Intermediate Top - Clive_Maund
4.Brussels Terror Attacks, Death of the European Union, BrExit Wake up Call - Nadeem_Walayat
5.Stock Market Maybe This Time is Different? - Tony_Caldaro
6.UK House Asking Prices Break Above £300k! Housing Market Paralysis - Nadeem_Walayat
7.A Big Reason Why Silver Price Is Set To Soar - Hubert_Moolman
8.The Financial Crisis Has Just Begun; Is The American Dream Is Over? - Chris_Vermeulen
9.Gold Stocks Spring Rally - Zeal_LLC
10.GLX, GLDX, Baby Gold Bull Market Stillborn? - Rambus_Chartology
Last 7 days
Stock Market Strong Elliott Wave Relationship is Developing - 29th Apr 16
Fed's Kaplan: Brexit to Factor in US June Interest Rate Decision - 29th Apr 16
Silver Miners Strong in Grim Q4 - 29th Apr 16
Is Silver a better bet than Gold in the Near Future? - 29th Apr 16
How to Use the CoT Report in Gold Investing? - 29th Apr 16
Sri Lanka is Intriguing: Areas to Consider for Value Investing - 29th Apr 16
Gold “Chart of The Decade” – Maths Suggest $10,000 Per Ounce Says Rickards - 29th Apr 16
Are We or Are We Not in a New Gold Bull Market? - 29th Apr 16
Silver: The “Five Year Plan” and the Great Leap Forward - 28th Apr 16
Michael Hudson: The Wall Street Economy Has Taken Over The Economy and Is Draining It! - 28th Apr 16
AUD/USD - Trend Reversal or Just a Bigger Pullback? - 28th Apr 16
A Gold Revaluation Could Transform Your Financial Status - Overnight - 28th Apr 16
Monetary Policies Misunderstood - 28th Apr 16
Gold Bullion vs Gold Miners - 28th Apr 16
OECD Suggests BrExit Would Cut Net Migration by 1.2 Million by 2030 - 28th Apr 16
MP Naz Shah Punished for Tweets Made During Israel's Genocide of Gaza Palestinian People - 28th Apr 16
Global Recession in 2016 and Beyond - The Obvious Evidence - 27th Apr 16
Why Gold Bugs Need to Stop Listening to The Fear Mongers and Start Thinking for a Change - 27th Apr 16
BlackRock’s Fink: Fed to Raise Interest Rates by Quarter Point ‘at Best’ - 27th Apr 16
Gold More Productive Than Cash?! - 27th Apr 16
Donald Trump Will Fire Janet Yellen and Be Trapped - 27th Apr 16
Money Saving Gardening by Propagating Roses From Cuttings - Propagating Rose Plants Over 2.5 Years - 27th Apr 16
Facebook Censors Pro Trump and Negative Hillary News - 27th Apr 16
This is the Era of the Democrats and Your Taxes are Going Up - 27th Apr 16
Long Awaited Gold Price Breakout - 26th Apr 16
Crude Oil Price Double Top or Further Rally? - 26th Apr 16
Madness in the Crimex Gold and Silver Trading Pits - 26th Apr 16
Britain's Prospects: GBP and BREXIT - MAP Wave Analysis - 26th Apr 16
CRB, Gold, Oil, Cotton, Coffee - 7 Must See Commodities Charts - 26th Apr 16
Gold Price Target is $3,000 and Silver is $75 per Ounce - 25th Apr 16
Parameters for a Stock Market Sell Signal-in-the-making - 25th Apr 16
Stock Market Dangerous Divergence - 25th Apr 16
Gold Miners Nub is the Sweat of the Sun - 24th Apr 16
US Dollar Price Forecast - 24th Apr 16
Stock Market Upside Objective Reached - 24th Apr 16
Why Leftist Greeks have more reasons than Liberals to favour Entrepreneurship and Support Entrepreneurs - 24th Apr 16
The Dow Jones is a Catalyst for Misplaced Stock Market Optimism - 24th Apr 16
Why Russia Harasses U.S. Aircraft and Ships - 24th Apr 16
Stocks Bull or Bear Market Rally? - 23rd Apr 16
A Bright Future for Solar Power in the Middle East - 23rd Apr 16
Silver Commitments of Traders – Halloween is Arriving Early This Year - 23rd Apr 16
Good News, Bad News, Both Favor Gold And Silver - 23rd Apr 16
Mish's Sure Fire Proposal to End Japanese Deflation - 23rd Apr 16
Mish Shedlock: “EXCUSE ME MR. PRESIDENT, IS THAT A JOKE?” - 23rd Apr 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Catching a Falling Financial Knife

Bailout Secret- To Prevent $68 Trillion Derivatives Collapse Chain Reaction

Stock-Markets / Credit Crisis 2008 Sep 27, 2008 - 12:00 PM GMT

By: Andrew_Butter

Stock-Markets Best Financial Markets Analysis ArticlePaulson doesn't give a toss about the balance sheets. It's what's OFF them that's frightening him to death. When I read Shah Gilani's excellent analysis How to End the Credit Crisis at No Cost to US Taxpayers which was much better than the analysis that I wrote a few days previously How to save the US Taxpayer $700 Billion and the Failure of "Mark to Market" the penny finally dropped.


I'm just a simple moderately dumb real estate analyst, I had always assumed this was all about house prices and RMBS's. Now I realize I was duped, that's just a side-show. But I don't think I'm the only one.

Why did Paulson jump in to save some, and not others? Now I got it, it's all about how much CDS's they were exposed to.

I believed Mr. Paulson when he said that the $700 billion was to clean up balance sheets. Why shouldn't I? That's what he said clear as crystal, I wrote it down.

What's on the balance sheets is the RMBS's, but why now and why $700 billion? I couldn't understand it.

But it's nothing to do with the balance sheets.

I wouldn't be surprised if on average those RMBS are worth 80 to 90 cents on the dollar if they are valued properly (i.e. not Market to Market). I mean OK that's lot of money, but we all lost 20% on deals in our time, you just dust yourself off and get on trucking.

But this crisis is not about accounting rules, I couldn't understand how they were all being so dumb saying “Oh woe is me…Mark to Market all these banks are insolvent, and it's all because the market is stalled”. No I was stupid, I under-estimated the intelligence of those guys, they know exactly that they can value those assets using income capitalization, and nothing much has changed for the past three months. How could I have been so stupid to think they were SOoo stupid?

So why now?

It's what's not on the balance sheets that matters. Because as Shah Gilani explained, chances are the bets that were placed via CDS's dramatically geared the potential losses, in just the same way they dramatically geared profits when house prices were rising.

I always thought that it was illegal to take out insurance on your next-door neighbor's house in case it burnt down. What CDS's allowed the banks to do was to write a hundred policies, and now one house in fifty is in danger of burning down, and the guys that wrote a hundred policies on each house are in danger of defaulting. And the way the system is structured that could set of a domino meltdown of CDS's,

The reason it's $700 billion is that Mr. Paulson knows that he can't afford any more RMBS's to fail.

Not because some poor people might lose their homes, and oh wasn't Georgie such a sweetie-pie, “you won't be able to send your kids to college and the “farmers” (why the farmers they are only 2% of the population), “won't be able to plant their crops – could this be the end of the American Dream, just agree $700 billion, it's not much, I spent that much on my faith inspired crusade to protect all the Americans in Iraq, and find those weapons which we are still looking for and I PROMISE we will find them, and protect our oil supplies (pity about the price of oil but my saviour works in mysterious ways)”.

That's just "collateral damage".

It's because if they do, the $68 Trillion chain reaction could start.

What does this mean?

•  The $700 billion WILL be approved, there is no question about that.

•  The Fed will keep interest rates far below the rate of inflation, to stimulate an increase in house prices.

•  House prices will rise.

•  The US Government will effectively guarantee all RBMS's against default.

•  So, no more defaults on RMBS's.

•  The dollar will fall

•  Disaster will have been avoided.

What you do with your money depends on if you think he will pull it off or not.

And Bye Bye Miss American Pie.

By Andrew Butter

Andrew Butter is managing partner of ABMC, an investment advisory firm, based in Dubai ( hbutter@eim.ae ), that he setup in 1999, and is has been involved advising on large scale real estate investments, mainly in Dubai.

Andrew Butter Archive

© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Robert Brown
27 Sep 08, 16:20
Derivatives, $68 Trillion+.

Please consider UNIFIEDMARKETS.


joe six pack
28 Sep 08, 19:55
houses prices will rise LOL in 4-5 years? fine not this year or next

good points made

house prices will rise , ya but when not in the next couple year's mate!


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife