The Biggest Rip Off Ever?

[Crewleader]

Weekend Edition
June 5 -7, 2009

The Perils of Securitization
The Biggest Rip Off Ever?

By MIKE WHITNEY

Is it possible to make hundreds of billions of dollars in profits on securities that are backed by nothing more than cyber-entries into a loan book?

It's not only possible; it's been done. And now the scoundrels who cashed in on the swindle have lined up outside the Federal Reserve building to trade their garbage paper for billions of dollars of taxpayer-funded loans. Meanwhile, the credit bust has left the financial system in a shambles and driven the economy into the ground like a tent stake. The unemployment lines are growing longer and consumers are cutting back on everything from nights-on-the-town to trips to the grocery store. And it's all due to a Ponzi-finance scam that was concocted on Wall Street and spread through the global system like an aggressive strain of flu. This isn't a normal recession; the financial system was blown up by greedy bankers who used "financial innovation" game the system and inflate the biggest speculative bubble of all time. And they did it all legally, using a little-known process called securitization.

Securitization--which is the conversion of pools of loans into securities that are sold in the secondary market--provides a means for massive debt-leveraging. The banks use off-balance sheet operations to create securities so they can avoid normal reserve requirements and bothersome regulatory oversight. Oddly enough, the quality of the loan makes no difference at all, since the banks make their money on loan originations and other related fees. What matters is quantity, quantity, quantity; an industrial-scale assembly line of fetid loans dumped on unsuspecting investors to fatten the bottom line. And, boy, can Wall Street grind out the rotten paper when there's no cop on the beat and the Fed is cheering from the bleachers. In an analysis written by economist Gary Gorton for the Federal Reserve Bank of Atlanta’s 2009 Financial Markets Conference titled, "Slapped in the Face by the Invisible Hand; Banking and the Panic of 2007", the author shows that mortgage-related securities ballooned from $492.6 billion in 1996 to $3,071.1 in 2003, while asset backed securities (ABS) jumped from $168.4 billion in 1996 to $1,253.1 in 2006. All told, more than $20 trillion in securitized debt was sold between 1997 to 2007. How much of that debt will turn out to be worthless as foreclosures skyrocket and the banks balance sheets come under greater and greater pressure?

http://www.counterpunch.org/whitney06052009.html

[ThomCat]

1. Wasn't it anounced that the cost of all those securities

was larger than the actual value of all the real output (productivity) on earth?

Perhaps one of the people with a real economic background remembers for sure and can post? I seem to recall this but I'm not positive.

If the cost of these manufactured securities from the banks is greater than the total real productive output of the entire world, that in itself shows how totally out of hand it is when banks can create money one their books from absolutely nothing, with no security behind it at all anymore. :(

[notesdev]

5. Well...

Yes, technically, the notational value of derivatives exceeds not only the total real output of the entire planet, but in fact the accumulated total wealth of the entire human race from the beginning of history.

However, in actual practice it doesn't work out to be quite as ridiculous as it sounds. Most of that notational value is the same exact contract being sold and resold until it finds the person willing to take the fewest dollars to cover the bet. So you could rack up a billion dollars of notational value on a much smaller contract if it's resold enough times.

It's the actual net exposure to risk which is a concern; the numbers for that are also huge but are nowhere in the ballpark of the notational sum.

[truedelphi]

8. The higher of the figures mentioned was something like 550 Trillion

Bucks. I don't know how you could even print up that much money.

And in his video, Gary Fielder speculates taht it could be in the quadrillions.

But hey, it is only money.

[aquart]

2. Any move to outlaw it? A finger lifted? Anything?

[NYC_SKP]

3. A YouTube Primer: "Money As Debt".

A comprehensible explanation for at least how what is described in the OP is even possible.

http://www.youtube.com/watch?v=vVkFb26u9g8

:patriot:

[Mythsaje]

4. Long before I really understood any of this

I remember saying that eventually this credit shit was going to get us all in deep shit because it would have us trading money that didn't really exist except as electronic blips. I was about seventeen or eighteen at the time, which puts it around 1984. I KNEW the credit economy was a BAD idea even back then, but, hell, what did a high-school dropout know?

[DemReadingDU]

6. Securitization, Derivatives, CDSs, etc.

This credit bubble is so huge, when it bursts it will be heard around the world. We will all be shaking in our shoes.


:nuke:

[Wednesdays]

7. K&R

:kick: