Wall Street's Unraveling

Wall Street's Unraveling
Robert J. Samuelson
Sep 17, 2008

http://www.washingtonpost.com/wp-dyn/content/article/
2008/09/16/AR2008091602877.html

Wall Street as we know it is kaput. It is not just that Merrill Lynch agreed to be purchased by Bank of America or that the legendary investment bank Lehman Brothers filed for bankruptcy or that the insurance giant AIG is floundering. It is not even that these events followed the failure of the investment bank Bear Stearns or the government's takeover of Fannie Mae and Freddie Mac, the largest mortgage lenders. What's really happened is that Wall Street's business model has collapsed.

Greed and fear, which routinely govern financial markets, have seeded this global crisis. Just when it will end isn't clear. What is clear is that its origins lie in the ways that Wall Street -- the giant investment houses, brokerage firms, hedge funds and "private equity" firms -- has changed since 1980. Its present business model has three basic components.

First, financial firms have moved beyond their traditional roles as advisers and intermediaries. Now, most financial firms also invest for themselves. They use partners' or shareholders' money to place bets on stocks, bonds and other securities -- so-called "principal transactions."

Second, Wall Street's compensation is heavily skewed toward annual bonuses, reflecting the profits traders and managers earned in the year.

Finally, investment banks rely heavily on borrowed money, called "leverage" in financial lingo. Lehman was typical. In late 2007, it held almost $700 billion in stocks, bonds and other securities. Meanwhile, its shareholders' investment (equity) was about $23 billion. All the rest was supported by borrowings. The "leverage ratio" was 30 to 1.

Once assembled, these components created a manic machine for gambling.

The Greatest Transfer of Wealth in History

The Greatest Transfer of Wealth in History
Bob Moriarty
321energy
August 10, 2008

http://321energy.com/editorials/moriarty/moriarty081008.html

I’ve made it clear for a year that I believe we have entered what will be the most serious depression in history. It also will involve the greatest transfer of wealth in history.

There are two basic classes of assets. There are paper assets and real assets. An ounce of gold is a real asset. A copper mine is a real asset. A house is a real asset. An oil field is a real asset.

Over the counter derivatives now total over $596 trillion dollars, (click here [pdf]) ten times the size of the world economy. Those are paper assets, their value is derived from some other asset. That derivative size is what is going to destroy the world’s financial system, it’s all fraud.

A mortgage is a paper asset. A T-Bill or T-Bond is a paper asset. A $100 bill is a paper asset. It’s pretty easy to see that a $500,000 mortgage on a house now worth $250,000 isn’t worth very much. Latest figures show 9.6 million homes in the US have negative equity. How many of those loans are going to be paid back?

According to an ex-Fed Director, both Fannie Mae and Freddie Mac are bankrupt. They were leveraged 65-1. For those comforted by the thought of the FDIC bailing you out should the banking system fail entirely, you need to realize the FDIC is leveraged at 130-1. We are told that the collapse of Washington Mutual alone could bankrupt the FDIC.

In a depression, no real assets appear or disappear. Paper assets, on the other hand, turn to vapor. But the ownership of real assets will change as the real assets move from weak hands into strong hands.