Someone please explain this total collapse theory

[Rambis]

that if Bear were allowed to go bankrupt the whole system were to collapse

everyone says it but nobody seems to have any evidence of this being true.



What does it even mean.

[aiki14]

that if Bear were allowed to go bankrupt the whole system were to collapse

everyone says it but nobody seems to have any evidence of this being true.



What does it even mean.

It's a combination of the domino theory and the "mob" mentality effect. The hard evidence is murky at best since no one really knows what would happen, but the theory is that if a major money player collapses, due to the illiquidity of the CDO/CMO portfolios, that anyone holding this type of paper will be considered to have a valueless asset, and therefore the market cap of the holder will drop precipitously. The total leveraged "value" of this paper worldwide is $600 trillion. Considering the fact that the worlds GDP is $53 trillion, if the CDO/CMO paper is worthless, then the world as a whole holds much more debt, then it can write off or absorb. The next domino is that none of the players will accept any debt or promissory paper from anyone else, and financial interparty commerce comes to a halt. Then the end customer (businesses and individuals) would not be able to get any credit, so business would be cash or nothing. (As an aside this is why there is a flight to gold, and hard assets)
That doesn't sound too bad until you realize that means no credit cards, or FOB purchases, and the cash is all gone due to the leveraging of the paper I spoke of above.
That is when things get really crazy.
The FED and the central banks around the world are mandated to prevent this from happening, but they can only go so far, and have only so many arrows in their quiver.

I hope that helps. It is a very complicated group of interactions, and not easy to either understand, or get the straight info on.

[Rambis]

It seems to me that institutions of this size have gone out before.

"The total leveraged "value" of this paper worldwide is $600 trillion"

It seems to me that the cashflows are bought and sold many times over...I dont see how subprime lending can total that amount....the writedowns can't possibly get that bad. I am guessing the $600 trillion to mean the value of all CDO's in existence...as far as revaluing them below their book value- the people holding the most could step in and buy them from bear (like JP Morgan). Problem solved, afaik?

Institutions crash and burn all the time and I don't think I see how Bear is any different. Companies can be acquired for -$; someone can absorb the debt, its happened before.


People who work at these investment banks claim this defense daily; and I think It's BS.

[netwrangler]

It's a combination of the domino theory and the "mob" mentality effect. The hard evidence is murky at best since no one really knows what would happen, but the theory is that if a major money player collapses, due to the illiquidity of the CDO/CMO portfolios, that anyone holding this type of paper will be considered to have a valueless asset, and therefore the market cap of the holder will drop precipitously. The total leveraged "value" of this paper worldwide is $600 trillion. Considering the fact that the worlds GDP is $53 trillion, if the CDO/CMO paper is worthless, then the world as a whole holds much more debt, then it can write off or absorb. The next domino is that none of the players will accept any debt or promissory paper from anyone else, and financial interparty commerce comes to a halt. Then the end customer (businesses and individuals) would not be able to get any credit, so business would be cash or nothing. (As an aside this is why there is a flight to gold, and hard assets)
That doesn't sound too bad until you realize that means no credit cards, or FOB purchases, and the cash is all gone due to the leveraging of the paper I spoke of above.
That is when things get really crazy.
The FED and the central banks around the world are mandated to prevent this from happening, but they can only go so far, and have only so many arrows in their quiver.

I hope that helps. It is a very complicated group of interactions, and not easy to either understand, or get the straight info on.

That's an excellent summation, Aiki — concise and to the point, as is your style.

We are truly in uncharted waters.

[Rambis]

also "marking down" of the cdo paper should have to happen every quarter anyway so bear going down should have nothing to do with that. am I crazy ?

[aiki14]

also "marking down" of the cdo paper should have to happen every quarter anyway so bear going down should have nothing to do with that. am I crazy ?

The problem has been that with no market for the paper, the value is indeterminate, and the write downs have been haphazard and voluntary. If the paper was trading, the mark to market would have been done as it always has been. Bear going down would assign an actual value, or lack there of, forcing the industry wide write downs to occur simultaneously.
And having read many of your posts, yes, you're crazy. :)

[Rambis]

har har.

If the writedowns would occur as a result, IMO they should occur anyway. Auditors are brutal. If other companies would go down as a result, maybe they should anyway.

[Rambis]

Like I said, if the value of the paper isn't zero, the other banks would step in and buy it. I'm calling BS

[aiki14]

Like I said, if the value of the paper isn't zero, the other banks would step in and buy it. I'm calling BS

Nobody has been buying it for months, even though it's been for sale. Nobody has been willing to take on the risk this paper holds for any price, or lend against it. The BSC folks were of the opinion that the paper would eventually be worth something, but couldn't stay afloat long enough to survive.


If the writedowns would occur as a result, IMO they should occur anyway. Auditors are brutal. If other companies would go down as a result, maybe they should anyway.

This is the tough choice, let them collapse and risk a broad market catastrophe (potentially even a worldwide catastrophe), or allow the market to cleanse itself. Many are in your camp, and feel we should allow the chips to fall where they may, others (the FOMC etc) are of the belief the fallout would be so horrific that to not act would be far worse.
Frankly, I am in the Fed's camp on this, the effect on the world market of letting the big banks go down and the depression that would likely ensue, is too much to risk. I wouldn't want to see my neighbors on 1930's style bread lines because we didn't use the tools at hand to prevent disaster. And I don't think it is over dramatic or unrealistic to say the scenario could play out.

[Rambis]

Many are in your camp, and feel we should allow the chips to fall where they may, others (the FOMC etc) are of the belief the fallout would be so horrific that to not act would be far worse.


I'm not trying to be in a camp, I was just hoping to get a solid reason why we would end up in 1930's bread lines. That didn't happen when Enron went down, or Amerynth. Bear Stearns isn't a real bank. It's not like Enron didn't have "counterparty risk"...In fact they were counterparty on every Single trade in their industry due to their "Enron Online" application.

[aiki14]

I'm not trying to be in a camp, I was just hoping to get a solid reason why we would end up in 1930's bread lines. That didn't happen when Enron went down, or Amerynth. Bear Stearns isn't a real bank. It's not like Enron didn't have "counterparty risk"...In fact they were counterparty on every Single trade in their industry due to their "Enron Online" application.

I guess since it didn't happen, it won't be possible to get a hard factual reason for why it would happen, but the fear of the FOMC, the Treasury, and the market as a whole was severe enough that they acted to prevent the eventuality.

[bigzip]

This is the tough choice, let them collapse and risk a broad market catastrophe (potentially even a worldwide catastrophe), or allow the market to cleanse itself. Many are in your camp, and feel we should allow the chips to fall where they may, others (the FOMC etc) are of the belief the fallout would be so horrific that to not act would be far worse.
Frankly, I am in the Fed's camp on this, the effect on the world market of letting the big banks go down and the depression that would likely ensue, is too much to risk. I wouldn't want to see my neighbors on 1930's style bread lines because we didn't use the tools at hand to prevent disaster. And I don't think it is over dramatic or unrealistic to say the scenario could play out.

I agree that letting a huge investment bank like BSC fail may have many drastic consequences, I am just failing to understand how the rate cuts help fix the economy. This may serve to prop up the markets temporarily, but it seems to do more damage as a whole (gas, food prices, etc) - and to greater numbers of people - than letting the markets correct freely. The artificially low rates are what got us here in the first place right?

The gains I may see in my 401k or trades will not outweigh the destruction of my purchasing power, and my salary increases are nowhere near the real inflation rate. I've also heard the 'exports will explode' argument and don't buy that when a large part of our trade deficit is related to oil imports, no?

I can't tell ya how many times I mumble "WTF?" to myself each day. The people were doomed when the government gave up control of our money supply to a private bank. Its ironic Andrew Jackson ended up on a Fed note isn't it?

[aiki14]

I agree that letting a huge investment bank like BSC fail may have many drastic consequences, I am just failing to understand how the rate cuts help fix the economy. This may serve to prop up the markets temporarily, but it seems to do more damage as a whole (gas, food prices, etc) - and to greater numbers of people - than letting the markets correct freely. The artificially low rates are what got us here in the first place right?

The gains I may see in my 401k or trades will not outweigh the destruction of my purchasing power, and my salary increases are nowhere near the real inflation rate. I've also heard the 'exports will explode' argument and don't buy that when a large part of our trade deficit is related to oil imports, no?

I can't tell ya how many times I mumble "WTF?" to myself each day. The people were doomed when the government gave up control of our money supply to a private bank. Its ironic Andrew Jackson ended up on a Fed note isn't it?

Actually I feel the FED's decisions last week to accept the CDO/CMO paper as collateral and opening the discount window to the primaries is a bigger factor to really helping the situation. The rate cuts are a palliative for the market, but the added liquidity the actions of last week provide will go down in history as the acts that saved the economy.

[Rambis]

the actions of last week provide will go down in history as the acts that saved the economy.

whether or not there is any evidence to support this!!! (though I am not saying you are wrong)


It just seems to me to share a lot in common with other arguments I have heard from these people.

It is not the first time they have attempted to write history and wouldn't be the first time they've Failed.

"Mission Accomplished"

[Horsefish]

One part of this I find difficult to accept. Why not change generally accepted accounting practices, and allow auditors to value performing mortgages at their hold to maturity value while only writing down defaults?

Wouldn't that clear up 80% of the problem?

[bigzip]

Actually I feel the FED's decisions last week to accept the CDO/CMO paper as collateral and opening the discount window to the primaries is a bigger factor to really helping the situation. The rate cuts are a palliative for the market, but the added liquidity the actions of last week provide will go down in history as the acts that saved the economy.

I hope you are right about the economy being saved.

I still have a problem with the Fed bailing out the banks with taxpayer money. That's certainly not a free market and survival of the fittest. Jim Rogers even suggested on CNBC that Bernanke was helping the BSC execs retain their bonuses that would have been lost under bankruptcy. Whats your take on the dollar Aiki?

[aiki14]

I hope you are right about the economy being saved.

I still have a problem with the Fed bailing out the banks with taxpayer money. That's certainly not a free market and survival of the fittest. Jim Rogers even suggested on CNBC that Bernanke was helping the BSC execs retain their bonuses that would have been lost under bankruptcy. Whats your take on the dollar Aiki?

No doubt the dollar has taken a beating for some time, but the FED is mandated to do certain things and the growth problem trumps the inflation problem at the moment in the FOMC's eyes. I am not an economist, and the intricacies of these machinations are outside my purview, I am a stock investor so I am also biased towards the growth problem. Give me 10% a year on the S&P and I will give back a few percent on the dollar.

Survival of the fittest is fine if the weak stragglers get culled, but when the population is allowed to be decimated it is failed policy in an economy. If it was just Bear or Thornberg or Newmarket it would be ok, but if they are the first domino in a chain that includes all the dominoes, it is prudent to prop up the fifth or sixth to save the six hundred in the chain. The FOMC and eventually the Treasury and the Congress have to determine at what point the whole chain is in jeopardy, and then act. It will always appear they have saved an individual entity because they will be propping up one particular domino, but they are mandated to save the chain.

Jim Rogers is known for his bombastic style, and stating Dr. Bernanke was acting in such a fashion, is no doubt going to get noticed, but I think it is a rude assertion. I have stated that I believe the FOMC and Dr. Bernanke have been behind the curve, but to state he has acted in an untoward manner is unwarranted.

[netwrangler]

The FOMC and eventually the Treasury and the Congress have to determine at what point the whole chain is in jeopardy, and then act. This is what scares me.

If the problem goes beyond what the FOMC is able to handle [and I think the problem does, the FMOC's tools have limits], the folks next in line — Hank, representing the current Administration at Treasury, and Congress — have more power than they have skill and knowledge. Even if they can discern the point at which 'the whole chain is in jeopardy', I'm just not confident that what they will do will help.

The ultimate danger in a run on the bank — not a financial firm or a collection thereof — a run on the central bank of the USA itself. Our economy exists today because the dollar is the reserve currency of choice for most of the world. Because of that, we can sustain trade imbalances and budget deficits.

But our dollar is declining in value. If the world decides that the dollar is no longer worthy of being the reserve currency of choice, interest rates will go up big time, and growth will go down.

That's a description of stagflation.

The good news is, under those conditions, traders can still make money.
The bad news is, under those conditions, investors are in deep yogurt.

[bigzip]

No doubt the dollar has taken a beating for some time, but the FED is mandated to do certain things and the growth problem trumps the inflation problem at the moment in the FOMC's eyes. I am not an economist, and the intricacies of these machinations are outside my purview, I am a stock investor so I am also biased towards the growth problem. Give me 10% a year on the S&P and I will give back a few percent on the dollar.


I'm obviously not an economist either, but it seems that the dollar is losing so much more than a few percent a year. If the dollar goes down and the commodities we all have to buy go up as fast as they seem to, the cash available for driving our consumer based economy goes down quickly and the house of cards must fall upon itself. So for investing in this market - commodities, consumer staples, etc.

I know I'm oversimplifying, but thats how it appears... At any rate, its all very interesting and I have some reading to do. :confused2: