Thursday, January 17, 2008


Poulsbo (EB) - The Institute for Economic Reality has raised its CRASH-CON rating from CRASH-CON 2 to CRASH-CON 2 - LEVEL Bravo. The IER has been tracking the rapid and relentless deterioration of the financial network of the United States, and has concluded that the next level of awareness must be set.

The IER issued the upgrade from CC-2 to CC-2B, which is a heightened state of CC-2, but not quite a full-blown crash warning. Take the time to prepare. Get in cash. CC-1 will likely come before April.

Earlier today, AMBAC (ABK) was warned by Moody's that it's AAA rating might be in jeopardy.

Moody's Investors Service has placed the Aaa insurance financial strength ratings of Ambac Assurance Corporation and Ambac Assurance UK Limited on review for possible downgrade. Moody's also placed the ratings of the holding company, Ambac Financial Group, Inc. (senior debt at Aa2), and related financing trusts on review for possible downgrade. Moody's stated the rating action follows Ambac's announcement of record losses, a capital raising plan, and the retirement of its CEO.

The IER believes that once the monoline insurers of structured debt get downgraded, the financial instruments they insure will also be instantly downgraded. Given that these insurers are ridiculously undercapitalized, it will only take a default in one or two percent of these insured obligations to fully bankrupt the insurer.

At that point, we roll back to the 70s in terms of our finances - if we are lucky.

Big Bank A has $100B worth of structured debt on its balance sheet. It carries these assets at full value of $100B, and carries no reserve against their default.

Why no reserve?

They don't need reserves because they have insurance in the form of a CDS (credit default swap) that is issued by another large financial institution.

They have reserves, right? Nope. They have insurance.

The insurance company has reserves, right? Wrong. That's why the monoline insurerers have lost 90% of their value in 3 months. ABK lost 60% on this morning's opening trade, and it is still AAA rated!

So, what is backing up the debt? Bank reserves? Nope, they have insurance. Insurance reserves? Nope. They are undercapitalized. The insurer has a signature that says the debt is AAA.

Bank A's $100B is backed up by two signatures and the full faith and credit of the insurance company.

At least when the US government issues debt on "full faith and credit," it has 8,000 nuclear warheads, 12 carrier groups, and 110,000 IRS agents to carry through on that promise.

So, if the mortgage backed security defaults, because we actually come to find out that real estate, even Bainbridge Island real estate, can go down in value, and this causes people not to pay on a depreciating asset, and the bank eats all the depreciation due to lax lending, what happens?

CDO defaults.
Bank makes claim to issuer of CDS (credit default swap).
CDS writer can't pay.
CDS writer makes claim to insurer.
Insurer can't pay.

Original bank now has to dip into reserves to pay. This results in massive writedown of company assets. Now, BANK A is insolvent and suing BANK B (CDS writer) who is now insolvent, who sues insurer, who is out of business.

BOOM! Down goes Frasier! Down goes Frasier! Down goes Frasier!

The entire US banking system goes "poof" in a chain-reaction of bad, uncollateralized debt explosion.

This is not some freaky, tinfoil hat theory. This is Wall Street circa 2008. This is happening right now.

The entire expansion of credit (money) in the past 6 years has been driven by this kind of uncollateralized debt that is called "collateralized debt." The collateral is nothing more than a signature. The assumption was that, "real estate always goes up."

If that were true, none of this would be happening. Unfortunately, it isn't true and we are now going to pay dearly for believing a lie.

We now return you to your regularly scheduled financial immolation...already in progress.

-Ernst Stavro Bloviator,
Senior Fellow, IER.

Oh, and if it was not enough that the US financial system was resting on dumb, debt-laden "home owners" who believed their RE agent's line of BS...

If you really don't want to sleep for a week, read how safe your
"insured" deposits
are at your favorite deposit institution.

2008 will be the year nobody forgets.

1 comment:


I guess you can say wall streets a mess.