Post by hundredtoone on Jan 16, 2008 18:35:20 GMT -5
Derivatives are basically side bets that some investment (a stock, commodity, etc.) will go up or down in value. The simplest form is a "put" that pays the investor if an asset he owns goes down, neutralizing his risk. But most derivatives today are far more difficult to understand than that. Some critics say they are impossible to understand, because they were intentionally designed to mislead investors. By December 2006, according to the Bank for International Settlements, the derivatives trade had grown to $415 trillion. This is a Ponzi scheme on its face, since the sum is nearly nine times the size of the entire world economy. A thing is worth only what it will fetch in the market, and there is no market anywhere on the planet that can afford to pay up on these speculative bets.
The current market implosion began when investment bank Bear Stearns, which had been buying CDOs through its hedge funds, closed two of those funds in June 2007. When the creditors tried to get their money back, the CDOs were put up for sale, and there were no takers at anywhere near their stated valuations. Panic spread, as increasing numbers of investment banks had to prevent "runs" on their hedge funds by refusing withdrawals by investors concerned about fraudulent CDO valuations. When the problem became too big for the investment banks to handle, the central banks stepped in with their $300 billion lifeline.
Among those institutions rescued was Countrywide Financial, the largest U.S. mortgage lender. Countrywide has been called the next Enron, not only because it was facing bankruptcy but because it was guilty of some quite shady practices. It underwrote and sold hundreds of thousands of mortgages containing false and misleading information, which were then sold in the market as "securities." The lack of "liquidity" was blamed directly on these corrupt practices, which had frightened investors away from the markets. But that did not deter the Fed from sending in a lifeboat. Countrywide was saved when Bank of America bought $2 billion of its stock with a loan made available by the Fed at newly-reduced interest rates. Bank of America also got a nice windfall, since when investors learned that Countrywide was being rescued, the stock it just purchased shot up.
www.fourwinds10.com/siterun_data/government/banking_and_taxation_irs/news.php?q=1200514948
...Flying Moose(cmkxunofficial)
The current market implosion began when investment bank Bear Stearns, which had been buying CDOs through its hedge funds, closed two of those funds in June 2007. When the creditors tried to get their money back, the CDOs were put up for sale, and there were no takers at anywhere near their stated valuations. Panic spread, as increasing numbers of investment banks had to prevent "runs" on their hedge funds by refusing withdrawals by investors concerned about fraudulent CDO valuations. When the problem became too big for the investment banks to handle, the central banks stepped in with their $300 billion lifeline.
Among those institutions rescued was Countrywide Financial, the largest U.S. mortgage lender. Countrywide has been called the next Enron, not only because it was facing bankruptcy but because it was guilty of some quite shady practices. It underwrote and sold hundreds of thousands of mortgages containing false and misleading information, which were then sold in the market as "securities." The lack of "liquidity" was blamed directly on these corrupt practices, which had frightened investors away from the markets. But that did not deter the Fed from sending in a lifeboat. Countrywide was saved when Bank of America bought $2 billion of its stock with a loan made available by the Fed at newly-reduced interest rates. Bank of America also got a nice windfall, since when investors learned that Countrywide was being rescued, the stock it just purchased shot up.
www.fourwinds10.com/siterun_data/government/banking_and_taxation_irs/news.php?q=1200514948
...Flying Moose(cmkxunofficial)