People Never Learn...

People never learn, do they? Not in the stock market at least.

EVERY SINGLE major crash of the past, every has always ALWAYS quoted the previous crashes, looked at their current situation, and said "this time will be different"

Well, admittedly, of course the JE and birdflu outbreak really did turn out to be a very minor crash compared to say, the Great Depression, but, duh, that much was OBVIOUS from the start. A minor problem will create a minor crash. A major problem will create a major crash. Simple.

This current crisis... why is everyone calling it a financial crisis anyway? It has turned into an ECONOMIC crisis... which has far deeper implications, IMHO. Anyhow, a lot of people have been calling it the biggest crisis since the Great Depression. Some people are saying it is WORSE than the great depression. Personally, it looks impossible to tell for sure. But what is certain is that this crisis is pretty freaking serious. Much more serious than say, the Internet Bubble.

Yes, this is much more serious than the internet bubble. Anyone who thinks otherwise is just dreaming. Frankly, the internet bubble was small change compared to this. If the entire IT industry had been wiped out entirely and restarted from a clean slate, the world would recover in under a year. When all the "false value" built up was wiped out, it was a lot of wealth destruction, but in reality, people generally survived.

This Derivatives Bubble? If the entire derivatives industry is wiped clean and restarted from a clean slate, the world would be crippled for at least a decade. If all of this "false value" from derivatives is wiped out at once, everyone admits that the entire world will not just grind to a halt, but crash and BURN.

However... here is the bad news. That false value HAS to be written off. It is FALSE VALUE. The banking industry, quite frankly, has been growing it's asset sheets under false assumptions and false intentions. From what I hear, it's possible under the current system for $100 of mortages to have something like 5 separate CDOs on it for $80 each. That is... just stupid. From a different perspective, when an American family took out a loan on his house, 3 other people/banks across the globe took out a loan of equal value on his house too. And the global cash available jumped up by $500 based on a house worth $100.

Basically, what I am trying to say is, if everyone pays off all their debts today, this very day... it will show that the planet earth is NOT as rich as the balance sheet totalling up all the assets on every country would have us think.

http://www.larouchepac.com/news/2008/10/09/derivatives-hyperinflationary-bomb-crushing-international-fi.html

http://www.bestcyrano.org/THOMASPAINE/?p=1071

http://www.informationclearinghouse.info/article21071.htm




... basically. The networth of the entire planet Earth put together is estimated to be around 100,000,000,000,000 = 10^14 = 100 trillion.

The estimated value of derivatives flying around is 1,000,000,000,000,000,000 = 10615 = 1 quadrillion.

FALSE WEALTH??? No WONDER the banking and financial industry has been reporting huge earnings this decade! (and their board of directors have been receiving ungodly bonuses in their paychecks) Remember, these guys get a portion of the sales of derivatives as profit!

Why is this an ESTIMATED figure? Because, unbelievable as it sounds, this amount of ten times the value of the entire planet is UNREGULATED.

... Are they insane???

Of course, everyone is claiming that this number is not as bad as it sounds, because most of the positions offset each other. They THINK. Of course, they aren't quite certain, but they certainly assume that this is a logical conclusion... but they aren't really sure, since after all, this is UNREGULATED.
By the way, someone estimated that only 10% of total derivatives do not offset each other. Oh well... so that's only 100 trillion then. Erm, ok, so that's only the networth of the entire planet earth then instead of 10 times Earth!!!

AARGH!!!! The... the stupidity of it all! I... my head hurts...

The excuse? "If we don't do it, someone else will". Yes. It is true. If Citi hadn't packaged and sold derivatives, Wachovia or BofA would have.


Btw, a warning for everyone currently looking to buy bank stocks.
To those who are valuing banks based on projected amount of losses and future income... the losses will probably be greater than you think. Perhaps more importantly, these derivatives have PROVEN themselves to be dangerous. It would be totally irresponsible for the governments to not regulate and limit them to a greater extent.
So... my question is... guess how much that Citibank's earnings will be if it's derivatives sales are cut by 95%?
Yeah, you heard me correctly, 95%. It has become VERY apparent that CDOS and derivatives in general are being oversold to a ridiculous degree. I mean, Lehman Brothers was worth, what, 47billion in market cap? On October 21, 2008, creditors of Lehman Brothers who had acquired CDS in order to hedge them against the risk of a Lehman bankruptcy were scheduled to settle those accounts. This event appears significantly to have affected AIG which issued many of the Lehman CDSs. The amount of the settlement was estimated to be between $100 billion and $400 billion. The amount of global losses involving derivatives involving Lehmans was many MANY other billions.
In a regulated market, I would assume that you would not allow people to sell more than, say, 25% of the face value of Lehmans?

There is a REASON why companies with only $1million capital are not allowed to borrow $5billion! It is only sensible to not attach a huge amount of risk to a very small enterprise!

Similiarly, it is stupid to take a VERY large enterprise, and attach VERYVERYVERYx1000 large risks to these entities! Even if the entity is huge, that doesn't mean it should be allowed to take INFINITE risk, it should still be given a limit which is balanced with it's size!

Unfortunatly, even back then, people considered AIG and Lehman and such "too large to fail". So they just let them do whatever they liked. They were safe after all, weren't they? They were, after all, too large to fail...



Summary: Some idiots made some huge mistakes. And there WILL be a reckoning day, the only question is who is going to receive the pain of the eventual punishment?
This crash is like every other in history... people will keep saying that it won't be that bad, the governments will step in and solve the problem... the trouble is, these guys have not realised something very very critical. In fact, fiscal policy and such can NOT solve problems. They can't make REAL assets appear out of thin air. It's like conservation of mass and energy in physics. They can only change one kind of problem to another type of problem. Which they are hoping will be less severe. They're also hoping to spread it out over the next 10 years instead of dealing with it quickly and letting recovery begin.

Idiots.