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• Friday, August 17, 2007 03:57 AM

  Not so easy guides to understanding the freakout

  FINANCIAL SYSTEM IN JEOPARDY!

  by Martin D. Weiss, Ph.D.

  http://www.financialsense.com/editorials/weiss/2007/0813.html

  The Gigantic, Poorly-Known, Highly Inflammable Market For DERIVATIVES …

  [snip]

  "In its latest survey, the Bank of International Settlements (BIS) calculates that the total "notional" value of all derivatives outstanding in the world is a mind-boggling $415 trillion.

  That's over eight times the GDP of the entire world economy … twenty times the total value of all U.S. stocks … and fifty times all the Treasury debts of the United States Government."

  [snip]

  http://www.bitsofnews.com/content/view/5955/

  The Insolvency Crisis: How we got here, and what to expect

  Saturday, 11 August 2007 Written by Garrett Johnson

  And Nouriel Roubini, naturally:

  '[T]oday any wealthy individual can take $1 million and go to a prime broker and leverage this amount three times; then the resulting $4 million ($1 equity and $3 debt) can be invested in a fund of funds that will in turn leverage these $4 millions three or four times and invest them in a hedge fund; then the hedge fund will take these funds and leverage them three or four times and buy some very junior tranche of a CDO that is itself levered nine or ten times. At the end of this credit chain, the initial $1 million of equity becomes a $100 million investment out of which $99 million is debt (leverage) and only $1 million is equity. So we got an overall leverage ratio of 100 to 1. Then, even a small 1% fall in the price of the final investment (CDO) wipes out the initial capital and creates a chain of margin calls that unravel this debt house of cards. This unraveling of a Minskian Ponzi credit scheme is exactly what is happening right now in financial markets.

  http://www.rgemonitor.com/blog/roubini/

  And finally:

  "Debt securitization is guerrilla warfare against a sound credit system. Unlike a credit-driven economy, a debt-propelled economy will inevitably reach a point where its ability to service the growing debt is exceeded, unless inflation stays ahead of interest charges, in which case the banking system will fail." - Henry C K Liu

  (Emphasis added - cfs)

  —cynshep Read cynshep's other letters
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