The South Sea Bubble of 1720

Michel Zimmer, a friend of mine, brought another financial crisis of the past to my attention, The South Sea Bubble of 1720. As I did my research anger swept through my brain. Could our Financial Crisis have been a reenactment of the South Seas Bubble of 1720 that almost brought the English Empire to its knees? Could this all have been as a result of our political leaders turning a blind eye because they were involved in this whole mess from the beginning? Could there be high ranking officials in our government who had a personal interest is seeing the Sub-Prime Mortgage leveraging expand to the levels that it reached?
You read what I read on Wickipedia and let me know what you think.
Click on the headline and it will take you to Wikipedia or paste this address in your brouser. http://en.wikipedia.org/wiki/South_Sea_Bubble

Financial Crisis ....Thud

Thud…. This feels like the bottom. Oh, we’ll see another Hedge Fund or two go down, and we’ll see some insurance companies and pensions funds tell their dirty secrets, but that news is nothing compared to: BREAKING NEWS…"THE GLOBAL ECONOMY IS FALLING". This was as bad as Chicken Little screaming…"THE SHY IS FALLING". We’ve survived both, and we will create a base and then grow from here. If you have cash, next week is the time to buy.
Now we need to focus on our next president and congress delivered to compliments of George W. Bush. Don’t blame John McCain for not giving it his best; Jesus Christ couldn’t have won as a Republican.
Let me restate: These are My Opinions.

Financial Crisis….. Proud Owner of Banks

Today the US Government committed $250 billion of our tax dollars to purchase preferred shares of nine banks plus any number of others who wish to play. I think this is a good thing in light of the situation that we find ourselves in. In fact we as tax payers should make money on the deal. The problem is that we have taken a large step towards Socialism, and I fear it will not stop here. The Swap and CDO problem is not fully unwound; there are more casualties to come. The banks are rescued; next we will see insurance companies, and pension funds that need propping up not to mention the auto industry. They will have to be rescued as well and that means more tax dollars and more Socialism. The money is allocated, $700 billion, last week. What have our leaders done to us, our children and our grandchildren, and all so the fat cats could have a bigger boat, house and airplane?

Financial Crisis ….Stabilization?

Monday morning the DOW open up 425 points based on the action of Great Britain’s support of its markets and banks over the weekend. This stimulated anticipation of the US government’s additional support of the US markets and banks. This all looks good but we must remember that we are in a market that is being driven by liquidation not fundamentals and technicals. I believe there are still a slew of hedge funds, mutual funds, pension funds and insurance companies who have to adjust their balance sheets to allow for the devaluation of their sub prime based investment holdings. As these assets are valued in the market place the mark to market rule requires them to write them down on their books. In order keep their asset to liability ratios in compliance with regulations and to fund growing redemptions they will need to raise cash, which will mean more liquidation. Monday ended up 938 on the DOW signaling that investors want back in feeling that we have set the bottom. I agree that we have hit the bottom but I don’t think that we are out of the woods yet, we still have bad news to come from some of our largest financial institutions. I feel this is the time to own hard assets and arga assets. I like coal, natural gas, oil, gold, and agricultural ETF’s. I also like oil companies, we have seen a 40% drop in the cost of oil and a 15% drop at the pump; someone is making the 25% difference.
Definition: LIBOR = London Inter-Bank Offer Rate. The interest rate that the banks charge each other for loans (usually in Eurodollars). This rate is applicable to the short-term international interbank market, and applies to very large loans borrowed for anywhere from one day to five years. This market allows banks with liquidity requirements to borrow quickly from other banks with surpluses, enabling banks to avoid holding excessively large amounts of their asset base as liquid assets. The LIBOR is officially fixed once a day by a small group of large London banks, but the rate changes throughout the day.

Financial Crisis - More to come

The Lehman Brothers Auction that I spoke of yesterday took place today and the strike price on their debt instrument investments (COD) sold for 9.75 cents on the dollar. That means those who wrote the Credit Swaps (Insurance) owes the investors 90.25 cents on the dollar. Some assets have been sold over the past months in preparation for this and more assets will have to be sold to cover these shortages (estimated to be $60 trillion) or the writers of the swaps will go under or the investors will be left holding the empty bag. In all cases some money will have to be raised, assets sold, which will put more selling pressure on the stock market. Thus look for the markets to go lower next week. The long and short is that the $10 million package of mortgages that we spoke of yesterday is now valued at $975,000. I believe that this will cause more banks and brokerage firms to fail in the next few weeks. It will take a month or two for the dust to settle, ie… banks to close doors, the government to implement their $700 billion rescue package, and global governments to initiate a coordinated effort (this weekends G7 meeting). From there the market will have to build confidence and as it builds the market will rally. I will be putting my money in commodities, oil, coal, agribusiness, natural gas: these are things that you and I will continue to be purchased at some level as the economy regains strength. I don’t have to buy cars, heavy equipment, computers, software, or houses so I’ll stay away from consumer discretionaries. I’ll also stay away from financials; a year from now the financial industry will look very different then it dose today. I don’t know how but I don’t want to get caught in the effects of heightened government regulation which usually translates to less risk and less profits thus lower value. The world is not coming to an end, the sun will rise tomorrow, and we will get through this and come out of this crisis on the other side better then we entered. I’ll keep posting until I don’t have an opinion.

Financial Crisis...What's Next?

Today we saw a 678 point drop in the DOW. The DOW has now lost 25% of its value over the past thirty days, 39% in the past year.

Why? The Global Economy has been on a credit binge for the past 40 years and this is the day of reckoning. The Sub-Prime Mortgage Crises brought our banking and investment markets into the binging thus geometrically multiplying the effects of the overall misuse of credit.

Banks lent money to unqualified borrowers to buy homes. Both buyer and lender knew that the borrower would not be able to make the payments when the favorable mortgage terms reset; but both also knew that the price of real estate was going to continue to go up and thus this would not be a problem. Waiting outside the bank were a hoard of investment bankers; CDs were paying 2.5% and this new mortgage was paying 7%, they snatched them up as fast as the bank could write them. These Investment Banks were not held to the same rules as Consumer banks; they could use borrowed money (leverage) to buy these mortgages. They could borrow short term money at 2.5% and turn it into an investment that was paying 7%. Granted there was a risk in these Sub Prime Mortgages, so the Investment Banks packaged maybe a 1000 of them together all with different degrees of risk thus diversifying the investment a CDO. Smart investors recognized this risk and asked for some assurance that if these mortgages should default they would still get their money. In rides AIG on a white horse and offers a Credit Swap, (Insurance to pay the investor if the mortgage should default) but not being called insurance it was not held to the rules of insurance (You must keep deposits on hand to pay any claims).

Over the past 60 days we have seen banks fail. Auditors came in and found that their assets on hand were out of line with their debt obligations and they were unable to raise enough capital to bring their debt to equity ratio back into line. The consumer was OK, the FDIC stepped in and made their deposits up to $100,000 good. But that other bank that lent the failed bank some short term money the week before lost its funds. This is why the global banking system has frozen-up. Banks are afraid to lend other banks any money, banks are afraid that the assets they have on their books will be devalued (The mark to market rule: and asset is worth whatever the market will pay for it today). If such a devaluation should accure they could be forced to close their doors.

Over the past 60 days we have seen Commercial Banks fail or be bought out. As the mortgages started to default investors stopped getting their 7% interest payments, they panicked and demanded their money from their broker. First the brokerage frim started liquidating their holdings to cover the demands for cash, thus putting selling pressure on the stock market and starting the slide down. Bear Sterns, Merrill Lynch and AIG were not able to keep up with the outflow of money and sought a governmental life preserver, Lehman Brother filed for bankrupsy.

That brings us to two weeks ago when AIGs Credit Swap business came out from under the rock it had been hiding under. This is when the banks, hedge funds, pension funds, insurance companies, and institutional investors learned that their Credit Swap (Insurance) had no capital to pay claims. Remember if you have a package of mortgages with a face value of $10 million on your books with insurance, its worth $10 million even with the defaults, but if there is no money to pay off the insurance…What are your mortgages worth? Last week it was announced that there would be an auction to auction off Lehman Brothers CDOs and Credit Swaps on Friday October 10, 2009…tomorrow. Remember the Mark to Market Rule. Tomorrow everyone will know what the assets they hold on their books and in their portfolios are worth. That is why the market has been in a freefall for the past eight days of trading. If hedge funds had anything of value it was being sold in fear that Monday October 13 could be too late. That $10 million package of mortgages could be worth $120,000.

Over the next 90 days our banking system and our investment markets will take a new form, as they should. It is my opinion that if you own banking and investment firm stocks you could be in for some real hurt. On the other hand if you own stock in well managed companies you will have more in your account next year at this time then you do today. When it’s all over the greedy bankers, hedge funds, brokerage firms, and speculators will be the big losers, as they should.