Friday, October 05, 2007

Financial Meltdown

I just read an article by Ellen Hodgson Brown, titled-Financial Meltdown: The End of a 300 Year Ponzi Scheme. I suggest everyone read it here.

Here is an excerpt-

"Before 1933, when the dollar went off the gold standard, the tether of gold served to limit the expansion of the money supply; but since then, the Fed's solution to collapsed bubbles has been to pump more newly-created money into the system. When the savings and loan associations collapsed, precipitating a recession in the 1980s, the Fed lowered interest rates and fanned the 1990s stock market bubble. When that bubble collapsed in 2000, the Fed dropped interest rates even further, creating the housing bubble of the current decade. When lenders ran out of "prime" borrowers, they turned to "subprime" borrowers - those who would not have qualified under the older, tougher standards. It was all part of the structural imperative of all Ponzi schemes, that the inflow of cash must continually expand to pay the people at the top. This expansion, however, has mathematical limits. In 2004, the Fed had to begin raising rates to tame inflation and to support the burgeoning federal debt by making government bonds more attractive to investors. The housing bubble was then punctured, and many subprime borrowers went into default.

The Subprime Mess and the Derivatives Scam

In the ever-growing need to find new borrowers, lending standards were relaxed. Adjustable rate mortgages, interest-only loans, no- or low-down-payment loans, and no-documentation loans made "home ownership" available to nearly anyone willing to take the bait. The risks of these loans were minimized by off-loading them onto unsuspecting investors. The loans were sliced up, bundled with less risky mortgages, and sold as mortgage-backed securities called "collateralized debt obligations" (CDOs). To induce rating agencies to give CDOs triple-A ratings, "derivatives" were thrown into the mix, ostensibly protecting investors from loss.

Derivatives are basically side bets that some investment (a stock, commodity, etc.) will go up or down in value. The simplest form is a "put" that pays the investor if an asset he owns goes down, neutralizing his risk. But most derivatives today are far more difficult to understand than that. Some critics say they are impossible to understand, because they were intentionally designed to mislead investors. By December 2006, according to the Bank for International Settlements, the derivatives trade had grown to $415 trillion. This is a Ponzi scheme on its face, since the sum is nearly nine times the size of the entire world economy. A thing is worth only what it will fetch in the market, and there is no market anywhere on the planet that can afford to pay up on these speculative bets.

The current market implosion began when investment bank Bear Stearns, which had been buying CDOs through its hedge funds, closed two of those funds in June 2007. When the creditors tried to get their money back, the CDOs were put up for sale, and there were no takers at anywhere near their stated valuations. Panic spread, as increasing numbers of investment banks had to prevent "runs" on their hedge funds by refusing withdrawals by investors concerned about fraudulent CDO valuations. When the problem became too big for the investment banks to handle, the central banks stepped in with their $300 billion lifeline.

Among those institutions rescued was Countrywide Financial, the largest U.S. mortgage lender. Countrywide has been called the next Enron, not only because it was facing bankruptcy but because it was guilty of some quite shady practices. It underwrote and sold hundreds of thousands of mortgages containing false and misleading information, which were then sold in the market as "securities." The lack of "liquidity" was blamed directly on these corrupt practices, which had frightened investors away from the markets. But that did not deter the Fed from sending in a lifeboat. Countrywide was saved when Bank of America bought $2 billion of its stock with a loan made available by the Fed at newly-reduced interest rates. Bank of America also got a nice windfall, since when investors learned that Countrywide was being rescued, the stock it just purchased shot up.

What else ----get this, Brokers are telling there clients to buy Bank of America,,RIGHT NOW!

Today, the SP500 hits new highs,,,,are you bullish!??

Apparently betweenthehedges is,,,and his fund must be making money.

So, if the financial markets do meltdown,,,,,we are all screwed pretty much,,,
so I guess the only option is to go long and be a bull.

To get my shorts trades in, I guess I can still short BSC and CFC, because they will be the first to go if this market is going down.

As of right now, my trades are-

Global warming

US Dollar
US housing
US middle class

Hey AMEX---you got an ETF for going global warming yet???


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