Monday, March 23, 2009

Geithner throws another trillion dollars at the banks.

Well according to Geithner. Okay so the first billion TARP allocated fund didn't make the banks solvent. So they're demanding more money. Meanwhile, AIG blew $400,000 taxpayer dollars on a lavish party for themselves, lost $61 billion last quarter and oh... acted like jerks after Chris Dodd intentionally wrote loopholes in the bailouts allowing AIG to get these hefty bonuses for losing money. So the banks are demanding more money. Who's in control here? The government or the banks? Here's the logic. When a CEO bankrupts a company, either the shareholders or the Board of Directors have enough influence to change management, or have an executive removed. This is what business students are taught on the first day of Finance 101. This is also tested on other business/finance affiliated exams, such as the Series 7. There's a rumour going around that many politicians are vested with AIG. Or that AIG made some of the biggest contributions to our politicians. Maybe they're not in bed together, but they're sucking AIG's toes. But what the government is doing is preventing the natural course of events with these banks. AIG isn't even a bank, they're an insurance company with bank like duties (thanks deregulation!). Instead of allowing the shareholders and BOD to pursue these banks, the government is using our taxdollars to buy toxic assets from these banks, some like myself are kicking and screaming the entire way through. This should cost 300 million taxpayers around $5000. If my math is correct. I have better things to do with $5000 that I don't have in my back pocket. Sorry Bernanke. These toxic assets will not provide 100% returns. Just trust me on this one, I'll explain why. (for speed readers, go directly to the bottom of the screen) TOXIC ASSETS ARE UNSECURED DERIVATIVES These toxic assets are derivatives that are again not secured by a bond like they should be. If anyone is even reading this and they don't understand the concept of being "secured", a mortgage loan is secured with a house. An autoloan is secured with that vehicle. A stock is secured with ownership of a company. A future's contract (a type of derivative) is secured with ownership of a particular commodity. Or an option's contract (another type of derivative) is secured by 100 shares of stocks in either a long or short position. Derivatives are financial instruments that are secured by other financial instruments. The toxic assets in question are Credit Defaults. Credit Defaults supposed to be secured by bonds. CREDIT DEFAULT DERIVATIVES WERE SOLD TO FINANCE ARM LOAN INVENTORY When people are not able to pay off their ARM loans, the institutions would default on the agreed Credit default payments to the investor (often Hedge Funds). When the credit defaults were not secured by bonds, the derivatives were illiquid. They were merely an arbitrary agreement of money transfer between two parties making a risky gamble that the ARM borrower would pay their mortgages. When the borrower defaulted on their payments (due to increase in interest rates/payments, financial hardship, job loss), the lender had no payments to make to the hedge fund borrower. Because these things were not backed by bonds, they had nothing to give to the hedge fund traders. Hedge fund traders dumped these CD's. This is why the banks are illiquid. With that being said, a few questions come to mind that the Board of Directors or the shareholders should be asking the CEO's (but can't because the government interferred). 1. Who did the economic forecasting? What methods/models did they use? (btw, the Case Schilling Indes proved to be a JOKE!) 2. What business model was used to establish inventory? in other words, why is there too much inventory? What information were these decisions made from? 3. Who allowed the toxic assets to be sold in the first place? Sorry, if the share holders don't want these things, why are taxpayers forced to secure them? (see TARP) THE SEC IS NOT RESPONSIBLE FOR REGULATING DERIVATIVES. Most established derivatives are regulated by the Securities and Exchange Commission. Credit Defaults are not. Somehow the SEC got out of it after deregulation; when non-banks became mortgage lenders. Lastly, the quantity of derivatives traded were in the quadrillions. THE ENTIRE PLANET EARTH IS NOT YET VALUED AT A QUADRILLION DOLLARS!!! There was a lot of fraudulent derivatives sold world wide. It's going to cost a lot of money to secure these toxic assets. Who are they kidding?
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