Autoimmune Finance: The System Attacks Itself


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    Gordon Parks Seafood City June 1943 "A scene at the Fulton Fish Market, New York" The only thing that has been achieved -if we can even use
    [See the full post at: Autoimmune Finance: The System Attacks Itself]

    steve from virginia

    The banks that are kept alive with the zombie money …

    No solvent counterparty so the scheme is bankrupt from the get-go. It’s not really a scheme but an ironic expression of institutionalized cynicism.

    I keep waiting for the establishment to acknowledge that the entire modern idea is bankrupt … as sooner or later it must. We are children unwilling to accept that our childish craftiness has exhausted itself. No more toys, no more living outside of means.

    We have ‘getting back to means’ confronting ‘betting back to means’.

    … The smart-money insiders have suspected all along what is/has been underway.


    Bailouts are just about hiding bank debt from view. I like that description. I think its dead on.

    I also agree that the bond market’s reaction to the latest bank bailout screams failure. Spanish bond yields have hit a new cycle high. Might a Blodget-style bank resolution solve the problem? From my look at Bankia’s balance sheet, the bill for just THAT bank would run perhaps 60 billion euros.

    If all the caja debt was made visible and Bankia accurately reflects the other caja’s conditions, my guess is the bill would be on the order of 300 billion euros. Likely less than half that could be borne by the bondholders, so that would leave a recapitalization bill to taxpayers of at least 150 billion euros.

    This assumes a retracement of about 50% on property values, along the lines of what happened in Ireland.

    Mass liquidation of the caja loans would likely crash the property market in Spain, increasing the losses. Spain would probably use a “bad bank” that would liquidate the bad bets in an orderly way – killing the property market there for years to come.

    My sense is, whenever the next intervention is announced, watch those Spanish bond yields. Ignore the news and happy talk and watch the numbers.


    Grexit, Spailout, Spanic, Quitaly… I’m getting sick of all these Euro portmanteaus, or rather, Euranteaus.

    Also a new blog post on the history of Spain’s problems:

    steve from virginia

    One thing to keep in mind about ‘proper’ bank restructuring (Blodget): it assumes that the impaired assets represent a small fraction of total ledger assets.

    Most finance assets in 2012 are loans to leverage other loans which themselves are loans leveraged against still more loans. When first-order loans go bad the failure leverages across all the lower order loans.

    The outcome is rapidly expanding impairment across the entire asset-side of top-tier finance businesses. Instead of a modest percentage of bad loans equal to bank equity-plus-some-bondholders, all loans are bad or (rapidly) becoming so. Asset collapse crushes all liabilities including depositors.

    When depositors recognize their risk they ‘run’ which amplifies the impairment on the asset side.

    This is why establishment hesitates to restructure. Once begun, the danger is of cascading failures as marginal effect of (accurately) repricing impaired assets reprices all of them. Damned if you do restructure (damned if you don’t).

    Finance businesses must continually make new loans in order to finance existing loans, when the lending process slows or stops the lower order loans cannot be retired or serviced. As people are discovering, once on the debt treadmill there is no stepping off.

    Plus, industry is entirely debt dependent: no debt, no industry.


    Blodget has his baggage. I wouldn’t trust his view at an time.

    In any case, as shareholders and bondholders of these banks get wiped out or take a haircut, among them will be the pension funds that are already in the crap.

    Those of us who have had the good fortune not to put too much of our money into such funds wont be a hell of a lot better off, but at least we’ll have a shorter fall from where we think we are to where we WILL all be.

    There will be NO managed processed by which this is sorted out. Governments will not make the decisions in the end, nor will banks.

    The decisions will be made by ordinary people refusing, or being unable, to pay their debts, buy stuff they don’t need or obey TPTB and when the prisons are full comes Bastille day.

    In some cases, as in Greece or Portugal, they will retreat to family farms, islands and other holdings. In other cases, where those options don’t exist, they will suicide and/or revolt. Revolt as in burn buildings and start killing people.

    At some point the police will stop enforcing the laws and join the people.

    But don’t bet on any kumbayah outcome, hungry, sick and poor people with starving and sick kids will not sit around making good collective decisions.

    Right now the ride is making us nauseous, some of us are throwing up. But out there in the storm there is a mountain that we are flying into.


    Greek banks are bankrupt.
    Spanish banks are bankrupt.

    Let me say it another way
    they do not have any money.

    Let me say it another way.

    Who is supplying the money to the bankrupt banks to give to the depositors.
    HOW WILL THE the greek banks and Spanish banks that do not have any money, repay who ever is supplying the money for those deposits.

    Following the money trail means you are following the bankruptcy trail.

    Its a dark path.

    Golden Oxen

    Your seven step plan is a bulls eye sir. The only proper way to deal with that sewer of toxic debt and the imbeciles that created it. Might I add that the newly recapitalized banks be forbidden from all speculative activities in the bond, stock, and currency markets, as well as engaging in any derivative schemes whatsoever. Auditors should also be liable for accurate audits with clear prison and financial penalties for failure to live up to their fiduciary responsibilities. I realize it is hard to legislate integrity, but something has to be done to restore sanity and transparency.


    Let us review the 7-Step Program for Banksters Anonymous:

    • Seize the bank
    Good start, but like seizing a rotten tomato, you don’t get anything but dirty hands.

    • Fire management
    Another Good Start, problem being that going down nearly to the level of Janitor, everybody in these organizations is corrupt. Loan Officers, Mortgage Brokers, Risk Analysts, Traders, the WORKS! Whose left to run an “honest” banking system here?

    • Write down the value of the bad loans to the amount they are actually worth

    • Zero out the bank’s equity (shareholders lose everything)
    OK, now you have left of this Rotten Tomato a Bank with a loan book worth Zero, Equity of Zero, and nobody above the level of Janitor to staff it. You want to RECAPITALIZE this dogshit? What?!?!?

    • Apportion the losses to the bank’s subordinated debtholders (they lose something)
    Correction. They lose EVERYTHING. The Bank is rehypothecated up the wazoo. If they are lucky, the debtholders get a penny on the dollar here.

    • Inject new capital in the form of senior debt and new equity
    Whose New Debt are we “injecting” here? The Taxpayers? They should take on more Debt to “recapitalize” this dogshit? Who is going to buy the Equity? Wiped out Pension funds?

    • Refloat the bank (by selling all or part of it).
    WTF is going to BUY it? Another Bank? They ALL are broke! Da Goobermint? Broke ALSO! The Ferengi? Still Light Years away with the Freighters of Gold Pressed Latinum.

    Why do I think this process has about as much chance working at Rehabbing Banks as Rehabbing Lindsay Lohan?


    Golden Oxen

    @RE There are always folks ready to invest in an enterprise that has come clean. With losses accounted for, scoundrels punished, and a fresh eager new management team eager to instill confidence and show their worth investors will flock to it. Faith in the future is what investing is all about.


    love the title – its the right perspective. Its the autoimmune disease stage.

    Good so everything is going as planned. Wondering what happens next though.

    When it becomes evident that bailouts lose credibility how will the system try next to force people to continue with the system? What is the next stage of fix one does when even reissuing a new currency loses credibility?

    Alexander Ac

    Ok, now we have this: Oil price could plunge to $50, says Credit Suisse

    what will happen to Bob Hirsch’s tar sands investment? 🙂



    no ashvin, you are too generous. inject capital? ha! refloat the bank? ha! the banks need to go under. period. protect the depositers. have the govt protect ONLY the depositers and NOT A DROP MORE. let the wildfire clear the underbrush. set an example that NEVER AGAIN will any portion of any bank be saved. let the bankruptcy courts deal with their mess. let the private, FREE MARKET, bid for scraps. its not the governments job to fire management. the market will take care of management. LET THE SYSTEM WORK THE WAY IT WAS INTENDED.


    Here is a point of view that should be added to the pot of soup.

    Highrev @ M.T.

    Since I’m a nice guy, and since I like you all, I’m going to try things from another angle by dumbing this down.

    What would you be saying about Spain if there had been no real estate bubble? Does it get any clearer with that?

    Well, when you look at the base population homeowner statistics, it looks like there was no bubble, doesn’t it? DON’T PROJECT!!! The Spanish real estate bubble was nothing like the U.S. real estate bubble. It wasn’t broad based! There was no Home ATM mentality! The liabilities, or toxic assets if you like, were in, and stayed in, the hands of a relatively few speculators (percentage wise). Do you dare take off the blinders and look more closely at how many of those speculators aren’t even Spanish?

    Is than understandable?

    Don’t bring out the unemployment rate on me now. What’s the REAL unemployment rate in the States? Compare apples with apples. The unemployment rate reported in Spain is the real unemployment rate. Benefits keep getting extended and people don’t roll off. And then if I asked another “if there were” question like if there were no illegal migrants on the dole? How many illegal migrants were allowed invited to enter Spain during the past 7 years of Socialist idiocy? If they weren’t here? If they were deported? (Don’t worry, they’re not going to be deported. They’re what is going to constitute a huge, cheap labor pool that’s not only going to be one of the pillars of Spain’s competitive advantage, but also what’s going to ultimately kill the unions. Once again, the Socialist hand backfires.)

    On top of that, on top of reality (that I hope has been made a little clearer anyway with that mental exercise), I’ve said it before, but I’m not sure if I’ve said it here: the current government is implementing Reaganomics. Yep, you heard me right. Study what they’re doing, then google Reaganomics, and then try to tell me they’re not.

    From his point of view, a few rich money managers/bankers made bad club med investments and want to make Spain pay the price.


    The main problem with “seizeing” the banks – “Derivatives”

    There are hundreds of Trillions of dollars in derivatives floating
    around. No one knows who the “counter parties” are, what
    type they are, or the terms. The one thing that most have in common
    is the counter parties have “first claim” on any and all assets!

    This would included deposits!! Talk about an international
    legal nightmare!! (MF Global comes to mind!)

    steve from virginia

    RE, if a bank’s assets are worthless, there is no bank, a restructuring cannot be done.

    At issue are (remaining) depositors, what to do with them?

    Since the insolvent banks tend to be ‘sinks’ or higher-order lenders which have large amounts of (derivative) bad loans on their books (and massive structured liabilities including those of depositors at other banks) it is very difficult to restructure them. See John Hussman’s “Freight Trains and Steep Curves”.

    At issue are local banks’ corresponding relationships with the giant money center banks. The funds in your bank account are re-deposited — swept overnight — into your bank’s account at the giant bank. This means your ‘real’ bank is effectively the giant bank not the local bank you actually use. Your account is a derivative liability of the giant bank.

    First of all, most commercial banks (except under extraordinary periods) are not insolvent. They are actually weakened by special treatment given to defunct corresponding banks.

    What must be done is separate smaller banks’ deposits from giant bank’s balance sheet.

    You have to start with the smaller banks if for no other reason than to find out how much the entire restructuring process is going to cost.

    Begin with partially solvent smaller banks that can be restructured by conventional means: Blodget’s approach is very basic ‘Restructuring 101’: converting debt-to-equity and recapitalization. As this is done the derived liabilities at the larger banks can be identified and dealt with. Liabilities can be ‘separated out’ from the giant banks (with an eye to either breaking up the giants or simply closing them down).

    The situation is the same in the Eurozone. The banks’ customers are other banks, which are in turn customers of still other banks in a gigantic circle jerk.

    Jumping in and busting banks down is no different from letting them simply crash … or bailing them out.

    As Margaret Hamilton so famously said, “These things must be done … delicately!”


    kito post=3586 wrote: no ashvin, you are too generous.

    Nope, not me.

    I think large-scale banking systems should be eliminated, and, more than that, they WILL be. No amount of debt restructurings and/or “capital” injections will retain confidence in them – they will be crushed by the ensuing spiral of debt deflation. The only question is how the populations and the central authorities of the rapidly growing police states will respond to all of this. No doubt the globalists will try to use it all to their advantage, but the complex dynamics and speed of collapse could overwhelm them.



    I am not sure if we are talking about the same thing.

    By derivatives I am talking about items like credit swaps,
    currency swaps, interest rate derivatives, commodities
    derivatives, plus combinations and other forms. The point
    I am trying to make is banks use deposits as collateral
    for various derivative “plays” (Jamie Diamond called it the
    Synthetic Market while testifying before the US Senate today).

    AFAIK the face value of the derivative “plays” for J. P. Morgan
    Chase was somewhere north of 90 trillion dollars, for Bank of
    America it was north of 50 trillion dollars, for CitiGroup it was
    north of 40 trillion dollars. It has been estimated the combined
    face value of derivative “plays” ( includes finance companies,
    brokerage houses, insurance companies, as well as banks) in
    America is around 300 trillion dollars!

    There will be no “Volker” rule, no “Dodd Frank” rules or any
    form of removing commercial accounts from the investment
    side of banks. The loss of that “collateral” would create the
    “mother” of all margin calls against banks and destroy trillions
    of dollars!!!


    Wouldn’t it be better if all the world’s major countries just did an etch-a-sketch? None of the sovereign debt is ever going to be repaid. We already did the 7 point plan back in the 1980’s with the savings and loan bust, but the system wasn’t overloaded, like it is now.

    We’re gonna get a depression anyway, from all the misallocated capital. Might as well lay the foundation for a decent recovery, eventually. that can’t happen in the USA with $15 trillion in debt and $100 trillion in unfunded liabilities, not to mention trillions more in individual and corporate debt, and hundreds of trillions in derivatives.

    Eventually, it is all going ‘poof’. Might as well be now.


    doubled said, “It has been estimated the combined
    face value of derivative “plays” ( includes finance companies,
    brokerage houses, insurance companies, as well as banks) in
    America is around 300 trillion dollars!”

    The world’s GDP is about $65 Trillion, much of which is not for sale. I don’t know how much of that $65 trillion is collateral and callable, but I assume it is a small percentage of the total. So what does that $300 trillion represent?

    I can bet you a trillion, or 500 trillion that the Yankees will win the world series. The banks can bet $300 trillion that interest rates will fall. It’s all pretend money either way.


    The only solution for insolvent worthless banks is to zero them out and guarantee the deposits by direct money printing.



    “The banks can bet $300 trillion that interest rates will fall. It’s all pretend money either way.”

    Almost, but as Jamie Diamond knows, not quite. If you “bet”
    150 trillion dollars that interest rates will go up and 150 trillion dollars that interest rates will go down you have 300 trillion dollars of f
    “face” value in derivatives but they are “covered”. The bettors try to make money on the differences in the premiums and by “tweaking” the contact terms. J. P. Morgan Chase had apparently some “uncovered” derivatives and lost 2 billion dollars of real money (so far) because they were on the “wrong” side of the bet.

    If the world total face value of derivatives is a quadrillion dollars and at any given moment 1% to 2% are “uncovered” that means between 10 and 20 trillion dollars of derivatives
    are “exposed” at any given time. The main problem is exactly which ones are “uncovered” at any given time is always changing. Know one knows who is “twisting in the wind”. Not even the CEO, as Jamie Diamond found out.

    “So what does that $300 trillion represent?”
    Leveraged bets! It has been estimated that MF Global leveraged the futures accounts under its control at a 100 to 1 ratio and used them as collateral to make CDS bets on sovereign debt bonds in Europe. Apparently they were not covered and the resulting “margin call” wiped them out. That was real money
    (ask the owners of the futures accounts that had them “scooped up” and liquidated by the counter parties in a matter of minutes!).


    If JPM lost $2 billion (or $20 billion) then someone else ‘won’ the same amount. But you never hear of any big winners. 1% $300 trillion is $3 trillion. 1/10 of that is $300 billion.

    What are you saying? There aren’t ever any big winners? If there were, surely we would have heard about it by now.

    What if you ‘won’ $300 billion? Where would you spend it? Anything other than US treasuries, and you would be pushing the price up dramatically against yourself just trying to buy.

    Perhaps I don’t fully understand this, but if you can’t spend it, is it really money?



    Don’t confuse money with currency. They are two different things. Money, also known as “tier two assets” is made up of mainly electronic digits that represent deposits, stock, bonds, contracts, pension accounts, ect… As long as the margin calls and bets do not envolve your personal accounts it makes no difference what the details are. But all of everyones accounts appear to be “in play” and can be wiped out
    if the wrong bet is made or a series of bad events occur (Black Swan!!). There is no safe place for money except in currency or “hard assets”. That is the main point TAE is making!!!


    “…will one day forcibly be forced out into the daylight anyway, and kill the banks that hold it. “

    If it’s not being forced into the daylight now, why will it be in the future and who will be doing the ‘forcing’ if it does? Can’t we just continue kicking the can until we can’t anymore at which point noone will have the luxury, due to massive system collapse, of caring about debt and who holds it.

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