Monday, November 29, 2010

Quadrillion=10^15. Derivatives?

Remove "millions" from your immediate vocabulary. It’s outdated and no longer has use in political language. “Billions" can also be kept at arm-reach as "trillions" has become the new appropriate, politically-correct and common terminology. And, is there a new 800 lb gorilla about to enter the room - his name is "Quadrillion!" Surprised? Here's how it looks: 1,000,000,000,000,000. And, I don't even want to think of how many times that sum would stretch to the moon and back - let's just say many times and save that brain energy for pouring more coffee.

The current see-saw debate Congress is having over Obama's spending plan pales in comparison and is simply "political cover" for what is forthcoming. They are merely "throwing us a bone" to make it appear that they are "doing something" to help with American job losses. However, in reality it's just part of a larger scheme to soften our palpability to another gargantuan bank-bailout and a cushion for the gorilla about to plop his big, ugly self down. Recently, it was noted that US banks are still dramatically under-capitalized, facing more than $3.6 trillion in additional credit losses as the financial crisis broadens. You may have already heard sound bites indicating that there will be another "bailout bill" coming soon - this time likely trillions in another attempt to re-capitalize the failing banks. Think that's bad news? Well, it gets worse, far worse - the 800 lb gorilla still lies ahead.

There are over $600 trillion (careful, that's trillion, not billion) in credit derivatives steadily tanking as we speak, effectively draining world liquidity. Stumped yet? Derivatives (though I've never seen one) are basically "insurance policies" that cover large loans in case of default. But, it wasn't just the homeowner as we’ve been led to believe that was hedged to fail, it was the paper itself - bundled repeatedly, replicated and sold that became gargantuan. The heavier and deeper these derivatives grew the more volatile they became. Ultimately, they all default because no one, no one fund is solvent enough to cover these large losses. And, now we know why the Fed's money-printing presses have been working 24/7 - they can't print enough money fast enough to fill these default holes.

Consider for a moment that the "combined" world stock exchanges represented only a mere $62.5 trillion in the fall of 2007 (though it fell to $36.6 trillion in the fall 2008); we're talking small potatoes compared to the dark derivatives market that is sucking the US and the world dry. Federal Reserve Chairman Ben Bernanke knows this – he sits on the board of the Bank for International Settlements, a consortium of the world's central banks. $600 trillion in derivatives is what the consortium has estimated and claim is now maturing, emptying depositories and keeping credit markets clogged. Amidst the secrecy shroud, it’s my guess that it’s much bigger and we'll soon hear the term “quadrillion.”

We've been hoodwinked by every conceivable excuse for the financial crisis - from poor folks that should never have been given mortgages, to corrupt politicians like Barney Frank who couldn't balance his own checkbook much less comprehend the scale and scope of what's happening or do anything about it, to shady Wall St traders who were just trying to pay for their yachts and beach homes. Sure, it's all complicit, but none hold a candle to the dark dealings in derivatives, unregulated and obscure with a life and death of their own making.

What can be done? Clearly, it's going to take larger minds than out-of-work lawyers in Congress, or Presidential soothsayers and Chairman Bernanke’s team. Personally, I give them two chances of resolving this mess: slim and none. Certainly, nothing will be done quickly to stave off children’s hunger pains caused by laid-off parents. The stimulus plans have been noble, but they miss the mark. Now, with a job lost every 13 seconds, it seems unlikely that more obtuse spending will dissuade the crisis. The financial elite are fighting a beast they can't beat - their gorilla has slipped and busted it on a banana peel of epic proportions in a quintessential, wrecking slide of greed and corruption. Unfortunately, he has bruised more than his pride, leaving millions jobless, perhaps homeless and certainly hungry for answers.


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