Wolf Richter: Hidden Leverage Threatens To Blow Up the Markets

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Yves here. Wolf is correct to focus on the danger of multiple layers of leverage. That sort of fragile financial edifice was a major driver of the crisis just past. One example was unrestricted rehypothecation, which is not permitted in the US per the Securities Exchange Act of 1934, but in London, no one cared about such niceties. Another leverage-on-leverage vehicle was CDOs. As the Financial Times’ Gillian Tett wrote in January 2007:

Last week I received an e-mail that made chilling reading. The author claimed to be a senior banker with strong feelings about a column I wrote last week, suggesting that the explosion in structured finance could be exacerbating the current exuberance of the credit markets, by creating additional leverage.

“Hi Gillian,” the message went. “I have been working in the leveraged credit and distressed debt sector for 20 years . . . and I have never seen anything quite like what is currently going on. Market participants have lost all memory of what risk is and are behaving as if the so-called wall of liquidity will last indefinitely and that volatility is a thing of the past.

“I don’t think there has ever been a time in history when such a large proportion of the riskiest credit assets have been owned by such financially weak institutions . . . with very limited capacity to withstand adverse credit events and market downturns.

“I am not sure what is worse, talking to market players who generally believe that ‘this time it’s different’, or to more seasoned players who . . . privately acknowledge that there is a bubble waiting to burst but . . . hope problems will not arise until after the next bonus round.”

He then relates the case of a typical hedge fund, two times levered. That looks modest until you realise it is partly backed by fund of funds’ money (which is three times levered) and investing in deeply subordinated tranches of collateralised debt obligations, which are nine times levered. “Thus every €1m of CDO bonds [acquired] is effectively supported by less than €20,000 of end investors’ capital – a 2% price decline in the CDO paper wipes out the capital supporting it.

“The degree of leverage at work . . . is quite frankly frightening,” he concludes. “Very few hedge funds I talk to have got a prayer in the next downturn. Even more worryingly, most of them don’t even expect one.”

So you can see why Wolf is more than a tad alarmed.

By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Testosterone Pit.

We don’t know what hedge fund manager Steven Cohen will do with the money he’s borrowing from Goldman Sachs’s GS Private Bank. We don’t even know how much he’s borrowing. But it’s a lot, given that the personal loan is backed by his collection of impressionist, modern, and contemporary art estimated to be worth $1 billion. The only reason we know about the loan at all is because Bloomberg dug up a notice Goldman filed with the Connecticut Secretary of the State, claiming he’d pledged “certain items of fine art” as part of a security agreement.

Goldman and Cohen go back a long ways. It provided prime brokerage services to his hedge fund, SAC Capital Advisors that pleaded guilty last year to insider trading charges and agreed to pay $1.8 billion in penalties and stop managing money for outsiders, which will reduce the fund to a family office managing $9 billion to $11 billion of Cohen’s personal fortune.

Cohen made $2.4 billion in 2013, according to Institutional Investor’s Alpha List of hedge fund managers, in second place, behind David Tepper ($3.5 billion) and ahead of John Paulson ($2.3 billion). Wouldn’t that be enough without having to borrow more? And what might he be doing with all this borrowed moolah? He won’t need that much to make ends meet when his electricity bill comes due.

In the rarefied air where these art loans take place, they have unique advantages: clients get to keep their art on the wall, and interest rates are about 2.5% – thanks to the Fed’s indefatigable efforts to come up with policies that enrich this very class of success stories. This is where the Fed’s otherwise illusory “wealth effect” is actually effective.

So why borrow money?

“A number of hedge fund guys who manage their money wisely, they look to put their art collections to work,” explained Michael Plummer, co-founder of New York-based consultant Artvest Partners and former COO at Christie’s Financial Services. “If you can get liquidity out of your collection and pay only 250 basis points,” he said, “it just makes sense.”

So Cohen will invest it. Cheap leverage, the holy grail these days. It’s the driver behind the asset bubbles all around. It’ll goose otherwise minuscule returns. He might invest this borrowed money in his fund, which might for example buy Collateralized Loan Obligations. Banks that carry them on their books have to dump them to satisfy new regulations. But prices have dropped, and so banks are lending hedge funds cheap money so that they buy these CLOs. Some banks are offering to lend as much as nine times the amount that the hedge fund itself would invest. More massive and cheap leverage.

CLOs are similar to subprime-mortgage-backed Collateralized Debt Obligations that turned into toxic waste during the financial crisis. But they’re backed by junk-rated corporate loans, some of them malodorous “leveraged loans” that private equity firms use to strip-mine their portfolio companies. These already overleveraged companies borrow money from banks and pay it out as a special dividend to the PE firms. It pushes the company deeper into the hole, loads up the PE firm with cash, and saddles the bank with a dubious asset, the “leveraged loan.” The bank can then package it with other low-rated corporate debt into an enticing CLO [read…. Banks And Hedge Funds Make Curious Deal On New Structured Toxic-Waste Securities].

So Cohen, using these multiple layers of leverage, might earn a return of 8% a year on his art loan that costs him 2.5% a year. Multiply that out to a billion, and it’s a money machine. That would be on top of the art itself that has seen phenomenal increases in value under the Fed’s money-printing binge.

Absurd? Sure, but this sort of absurdity, an outgrowth of the biggest credit bubble in history, has become the lifeblood of the US economy and its lopsided income distribution.

It’s not just a few people at the top that can benefit from multiple layers of leverage. After the run-up in home prices over the past two years, many homeowners have equity. So it didn’t take the financial media long to encourage them to leverage that equity – through home-equity lines of credit or “cash-out refinancing” – and buy stocks with the proceeds (always buy, buy, buy!).

A homeowner might cash out $100,000 and put it into a brokerage account. To goose his returns like Cohen, he might buy $150,000 worth of securities, with the remainder coming from margin debt. And the security might be IBM, a highly leveraged outfit with $123 billion in debt and tangible stockholder equity of minus $18.3 billion [read…. Stockholders Got Plundered In IBM’s Hocus-Pocus Machine].

Absurd? Heloc originations soared 42% in the fourth quarter. The average credit line for “super-prime” borrowers was $120,000. Even “deep subprime” borrowers got an average credit line of $60,000. And “cash-out refinancing” is hot again, making up about 25% of all new refis in the first quarter, according to Quicken Loans.

Strung-out consumers might blow this money on a car and food and other things and some might consolidate debt and pay off their maxed-out credit cards so that they can charge more in their heroic effort to keep consumer spending from collapsing altogether. But the gorgeously mediatized stock market gains over the last few years, and especially last year, seduced many people to step back into the this craziness, all guns blazing, after having missed the entire run-up. And they’re doing it at precisely the worst possible moment.

This kind of hidden leverage pervades the investment scene at all levels. When multiple layers of debt are used to finance a chain of speculation, with very little equity involved, returns on equity can be eye-popping, as long as everything soars without ever as much as hesitating. But once progression beings to totter, and many feverishly hyped stocks, like Twitter, lose more than half their value in a matter of months, the bloodletting starts and margin calls go out, and banks are suddenly worried about their collateral, and some of the art gets dumped into a market with no buyers, and junk bonds plunge, and “leveraged loans” default, and it kicks off another bout of forced selling into an illiquid market, and the cross-connections and tie-ins and the whole counterparty spaghetti of these layers of leverage get knotted up, and all heck breaks lose. And as the whole construct tumbles down, Cohen and his ilk will once again press their cronies at the Fed and the Treasury to bail out their investments just one more time.

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  1. Podargus

    When this insane situation meets the brick wall of reality (again) let’s just hope that the federal government has the cojones to allow the perpetrators to pay the full price of their insanity. No more rescues except for the innocent.

    What amuses me is that these same lunatics scream blue murder about the federal governments so called “debt”. It should be obvious that there is no such animal as “debt” for the sovereign issuer of a fiat currency.

    1. PaulW

      Define “innocent” please. Seems to me the majority are either trying to exploit the situation to make money or are willfully ignorant and quite happy to enjoy the trickle down debt bonanza, no questions asked. Realistically we all know that if anyone gets bailed out it will be those who crashed the system. That’s what happened in 2008. Same people still in charge. Why would it be any different? Which makes the “innocent” debate irrelevant. Will the insiders be bailed out again or will no one be bailed out? That is the question.

      1. cnchal

        The insiders will get bailed out. That is why they are insiders. Everyone else can eat dirt for food.

        1. ambrit

          When all is said and done, dirt is food. (Just add water, trace minerals, sunlight and lots of labour.)

      2. NotTimothyGeithner

        It won’t happen again. The politics of 2008 were quite different than today. The GOP had lost every seat it was going to lose except maybe Minnesota (Franken and Coleman). Palin like Geraldine Ferraro was meant to stem bleeding.

        Dubya did heavy lifting and could serve as the target of bipartisan blame for the long term effects of Alan Greenspan, deregulation, a military neo keyensian economy, and wealth inequality which led people to racking up debt.

        Two there was a relatively popular President coming in who was perceived as an outsider, and even McCain wound up with 5 million more votes than Cheney stole despite McCain being seen as an outsider.

        This time both parties are unpopular and blaming Obama and the other side won’t fly. This time there won’t be an echo chamber and given Obama’s behavior no voter will trust a promise of fix it later. Anyone voting for a bailout will lose, and once we combine the proto-teabaggers* and Democrats who aren’t hideous to the mix, there won’t be a working majority.

        *The teabaggers always existed, but the GOP blue bloods knew they would never vote for a Taxachusetts Mormon unless they were pulled from their Christianist or libertarian organizations. The next thing we know dollars were flowing in to a re branding exercise focused on Boston, a hotbed of liberal caricatures, stuffy wasp types, and Mittens non corporate raiding claim to fame.

        1. readerOfTeaLeaves

          Agree wholeheartedly that – at least psychologically – the US is a very different nation than it was in 2008, when at least we had some hopey-changey optimism. Now, government is more delegitimized than I ever thought possible; it’s dwindling into farce.

          1. NotTimothyGeithner

            I think government by the current clowns in Versailles, but it may be anecdotal, my city council races were yesterday. Team R should have done better, but their voters didn’t show up when the biggest issue was the recent approval by the Team D aligned council to have a major expansion and renovation of the high school in the more conservative area of town, which they had considered shutting down in favor of one mega high school.

            When the issues were about good government, not yuppie/hipsters/so forth exhortations about voters not understanding how much smarter Obama and company are than idiot voters, Democrats will win. This time voters won’t tolerate messages of blind trust which means will have to be accompanied by taxes, regulation, and drug testing for employees of financial institutions.

        2. jon fudd

          Anyone voting for a bailout will lose

          You give a lot of credit to average voter. I think everything will be repeated again. People never learn.

      3. Berial

        Would you consider people who’s retirement(thinking state workers but people with general retirement funds too) will be wiped out to be innocent?

        1. PaulW

          These retired people are the ones most supportive of the status quo politically for decades. They’ve benefited the most over the years and been in the best position to oppose the changes that have undermined the current economy but have chosen to simply accept them. It’s no surprise that in Canada Harper and his “call me Conservative” Reform Party gets much of its support from these retirees. Thus we are talking about people so programmed to vote the status quo that a right wing revolutionary party can simply hijack the Conservative label and be guaranteed their votes. Is there innocence in willful ignorance?

          I’m not sure later Baby Boomers and post-Boomers track records are any better. It’s a bit like allowing the fox in the hen house, pretending he isn’t there but then getting upset when you later go to get some eggs for breakfast and there’s none to be found. Are there any innocents in our society or is everyone a part of that society therefore we are all responsible? Of course what we might view as innocents, the 1% view as willing victims to be preyed upon.

          Unfortunately if things turn out as bad as they could it really won’t matter who was innocent or not. I spent – emphasis on past tense – a quarter century trying to vote out every establishment party in federal and provincial elections. Will it matter if that makes me an innocent victim or not?

          1. Jerry

            The innocent are people like my son who have developmental disabilities and are not able to care for themselves ….and an old lady I met today who was walking home from the store with a grocery clerk pulling the ladies’ grocery cart. They had walked about 4 miles when I saw them and gave her a ride home. She looked like she couldn’t take another step. Yes there are people suffering and their lives are not getting better, their lives are getting worse and there is nothing they can do about it.

      4. Podargus

        Define the innocent? – I think that depositors in a failed bank would qualify as would retirement fund members as Berial mentions.
        I also think that it is just too easy to take a catastrophist viewpoint in economic matters. Sort of like a cop out to avoid having to come up with solutions.
        The economy is a human construct therefore it is subject to change by humans.

  2. allcoppedout

    Not exactly news we may be back to ‘margin call’ or that finance is merely repeating its Ponzis and bets on credit. Tett was about with her anthropology after 2007 – sure she’s right. How is anyone, anywhere, convinced any of this can be remotely the right way to do anything? We need a plan to stop the economy so we can fix it, while people get fed. Even Keiser has been preaching for years on this. My own guess is various hybrids like CoCos will bring things down, as when they convert to bank equity the writing is on the wall in neon. Key for me is that the banksters were in trouble when they were allowed to rip us off right, left and centre. Given a lot of this trap has been cut off, how can they be doing any better now? Because if they can do better now, why did they need the crooked crap before? Everytime a bank takes another bank over it seems they buy a sack that once had dead donkeys in it, and couldn’t tell anything was wrong with the accounts (and neither could the consultants) despite alleged due process. Yet there is the black hole, just where those assets or that loan book you didn’t visit in due process (weird) are.

    How about some moral hazard from government?
    1. plan to keep population safe, fed and housed
    2. plan to reduce banks to utility via new form of audit done by men and women in blue uniforms carrying big sticks unless they can convince Bill Black they aren’t broke and bent
    3. plan to revalue and redistribute assets and give housing to people as homes
    4. guarantee livings to pensioners not reliant on stock market values
    5. bar anyone who has been in any kind of political office in the last 20 years and elect some new people by sortition and lot while we reconstitute the world in a way that makes sense

    Off to walk the dog and get my money out of the Coop before it collapses.

    1. F. Beard

      2. plan to reduce banks to utility … allcoppedout

      I like everything else but this is poison. The publics’ credit should be for the general welfare ONLY and that can include GRANTS to the poor, a universal debt bailout, a gauranteed living income, scholarships, etc., and it should simply be SPENT into existence with no debt issued other than the fiat itself, which, as a GRANT, requires no repayment.

      But LENDING by the monetary sovereign to the private sector just because the borrowers are likely to be able to repay the debt violates Equal Protection Under the Law in favor of the so-called creditworthy, which always includes the rich. In effect, the purchasing power of those who can’t or won’t borrow or who qualify only for smaller loans or who must pay more interest to cover the risk is stolen via dilution.

      “Creditworthiness” for loans is a concept that is only legitimate wrt to lending by 100% private banks with 100% voluntary depositors. OTOH, the monetary sovereign might deem some worthy of GRANTS such as to promising med students, scientists, the poor, and for universal restitution but not simply to someone because he is relatively rich which a loan of new purchasing power is, a disguised form of government grant – not based on need or merit but on a probable ability to repay the loan.

      So here’s the challenge to Progressives: Do you insist that LENDING by or subsidized by the monetary sovereign is NECESSARY when what you claim to want can legitimately be done via GRANTS from the monetary sovereign based on need, justice and merit? Are you willing to cutoff the government-subsidized ability of the rich to loot the poor? Or are you part of their problem?

    2. gepay

      My problem is what to do that could possibly make this happen – your 5 points. There is the Catch 22 of – this can’t happen before the power of creating money is taken back by the government but the US government is broken. The Supreme Court has made corporations have all the rights of people and said money is speech. So the Congress that we have is totally compromised by the need to get money to be elected and re- elected. To get a government we could trust to do the right thing for the overall populace we need campaign finance reform – but that would need to be done by the same compromised Congress we have now.
      We have seen how the power of money has stopped GMO labeling in Washington state and California. I have less and less faith in the validity of electronic voting results although Ohio 2004 proved that you can steal elections with the old voting machines still being used. Then again the record of John Kerry as Secretary of State means it really wouldn’t have made any difference if he had been elected. Women’s right are the only difference I see as being the major difference between the two parties in practice. Like if McCain had been elected we might still have prisoners still at Guantonamo or troops in Afghanistan or bombing countries like Libya or spending billions to knock out a democratically elected President in the Ukraine or…

  3. financial matters

    One of the big questions seems to be how much of a hit will money market funds take. They have no guarantee and play a big role in providing liquidity for the repo market.


    After a Financial Flood, Pipes Are Still Broken
    Published: September 14, 2013

    IT’S been five years since the bankruptcy filing of Lehman set off the worst economic crisis in the United States since the Great Depression. With the perspective that distance provides, it’s worth asking: Is our financial system safer and sounder today than it was back then?

    Many of the nation’s bankers, lawmakers and regulators might well say yes, arguing that safeguards have been put in place to protect against another cataclysm. The voluminous Dodd-Frank law, with its hundreds of rules and new regulatory regimes, was the centerpiece of these efforts.

    And yet, for all the new regulations governing derivatives, mortgages and bank holding companies,a crucial vulnerability remains. It’s found in our vast and opaque securities financing system, known as the repurchase obligation or repo market. Now $4.6 trillion in size, it is where almost every financial crisis since the 1980s has begun. Little has been done, however, to reduce its risks.

    The repo market, also known as the wholesale funding market, is the plumbing of the financial system. Without it, money could not flow freely, and banks, brokerage firms and asset managers would not be able to conduct their trades and open for business each day.

    When institutions sell securities in this market, they do so with the promise that they can be repurchased the next day — hence the “repo market” name. By using this market, banks can finance their securities holdings relatively cheaply, money market funds can invest cash productively and institutions can borrow securities so they can sell them short or deliver them in other types of trades.

    Among the biggest participants that provide funding in this market are the money market mutual funds; they lend their cash to banks and other institutions, accepting collateral like mortgage securities in exchange. The money market funds accept a small amount of interest on these overnight loans in exchange for being able to unwind the transactions daily, if need be.

    When markets are operating smoothly, most wholesale funding trades are not unwound the next day. Instead, they are rolled over, with both parties agreeing to renew the transaction. But if a participant decides not to renew because of concerns about a trading partner’s potential failure, trouble can arise.

    In other words, this is a $4.6 trillion arena operating on trust, which can disappear in an instant.

    Both Bear Stearns and Lehman Brothers collapsed after their trading partners in the repo market became nervous and stopped lending them money. For decades, the firms had financed their holdings of illiquid and long-term assets — like mortgage securities and real estate — in the overnight repo markets. Not only was the repo borrowing low-cost, it also allowed them to leverage their operations. Best of all, accounting rules let repo participants set aside little in the way of capital against the trades.

    “It was a very unstable form of funding during the crisis and it is still a problem,” said Sheila Bair, former head of the Federal Deposit Insurance Corporation, andchairwoman of the Systemic Risk Council, a nonpartisan group that advocates financial reforms, in an interview. “The repo market is also highly interconnected because the trades are done between financial institutions.”


    This also provides liquidity for brokerage houses. Similar to pension funds if the Fed steps in to bail out money market funds I think they should restructure this money into fed back stopped public investments rather than back into the repo market. It could even set higher interest rates for these projects as well as provide employment. I think other brokerage losses should be true losses.


    “The Fed has been testing the repo program with 139 different counterparties in the past few months, including 94 money-market funds, and setting an interest rate of 0.05%”

  4. PaulW

    Given that it is all going to fall apart, because the global economy is too far down the rabbit hole to ever come back, the only question that matters is deflation or hyper inflation and how individuals can protect themselves? Actually the initial question has to be: when will it fall apart? Yet we can’t know that and have no way of controlling when it happens so the only thing to do is prepare for the inevitable.

    As much as I like the online media, there has been very little in the way of advising people how they can protect themselves. Predicting an economic crash is coming by itself really does one little good. People with a stake in precious metals telling people to buy gold and silver might be the right advice but it’s rather convenient advice. Sounds better than Keynesians demanding more money creation but give it to the average person. Really wushful thinking when we all know that is the last place the money will ever go to.

    Thus, no matter how much research I do, I’m still left ignorant(more than usual) as to what to expect. Inflation or deflation, and what factors will determine which one? Perhaps NC readers can enlighten me, as usual.

    1. NotTimothyGeithner

      In many ways, it’s already happening. Policies have protected certain enclaves, communities are in decline across the country. Savings are being ripped open to make ends meet. Now we are talking about when the problem will reach NY, and the top 15%. At some point, a major company will have a cash flow problem which can’t be solved by layoffs. This will set off the depression for enclaves.

      Oct. 29 was the date of the market crash, but the depression had already started worldwide 2 years earlier.

    2. cnchal

      In my reckoning it already has fallen apart. There are millions and millions and millions of people who’s lives have been destroyed. Plutocrat insiders have become insanely rich for doing nothing of real value and even destroying value.

      Inflation or deflation, and what factors will determine which one?

      Most likely, whatever the plutocrats want, will be what happens. I wish it weren’t so, but they have a stranglehold on the direction of society.

      If they want deflation because they sold their paper and are sitting in cash, we get deflation. If they want inflation because they have yet to sell their paper, we get inflation.

      1. PaulW

        I’d lean that way in my conclusions too. The only catch being hyperinflation. That would be a case of the plutocrats losing control and getting something they don’t want. In their arrogance they likely think they can see it coming and slam on the brakes. My understanding is that when you see hyperinflation coming it’s already too late. Who is to say when all this money creation passes the event horizon, if it hasn’t already?

        I’ll concede they could lose control only to regain it later. But what chaos might be unleashed during the time they lose control? Some plutocrats in history have lost control and never recovered it.

        1. backwardsevolution

          You will not see hyperinflation, but you will see deflation. The smart money will get out once enough suckers are lured in, and the deflation will be ugly, ugly.

          The plutocrats losing control? Yes, but they run the country, make the laws, so they will not lose. Their banks might go down, but they’ve already got enough cash hidden away in tax havens that they don’t give a sh*t.

    3. F. Beard

      Given that it is all going to fall apart, because the global economy is too far down the rabbit hole to ever come back, PaulW

      That’s a rash and unjust assumption.

      Question: Is the DESIRE for goods and services in a slump or just the means to pay for them?
      Question: Is new fiat a means to pay for goods and services?
      Question: Is it not the banking cartel that is the likely driver of hyperinflation as speculators attempt to front-run and indeed CREATE price inflation?
      Question: Do the factories still stand, do farms still produce, are workers not abundant?
      Question: Are there not new technologies very near to commercial application such as solar power, meta-materials, nano-technology, and new biotechnology?

      Question: Is it not the height of stupidity verging on wickedness then to think this problem can’t be solved with neither deflation nor hyperinflation nor much if any misery at all?

      If this generation is too stupid to solve this problem then shame, shame on us!

      1. backwardsevolution

        Fat Beard – CO2 just passed 400 ppm, the world population is set to reach 10 billion soon, there are water shortages, etc., and you’re talking about new fiat, new technology?

        Yeah, let’s keep this party going. Talk about stupidity!!!!!

        1. F. Beard

          Party? The people I see are tired from two or three low wage jobs!

          What do you consider a party? Anything more than a soup kitchen? And a homeless shelter?

          If there’s no Creator who Cares then we are doomed anyway so we best assume He exists and act accordingly. That’s just plain logic.

          1. backwardsevolution

            By “party,” I was referring to more and more growth. Some people think that if we can just crank everything back up again, things will get back to normal. Well, “they might be fine”, but this will all happen again, and the next batch coming up behind them will then be in trouble. The burden just keeps getting shifted and pushed back onto someone else.

            But besides that, this is a FINITE planet. We cannot continue to have more and more growth. Again, in our narcissism, we push problems onto our grandchildren.

            We really are stupid!

            1. gepay

              I am of two minds. Having made my living playing music I know one can live on much less than most people spend. There is just so much senseless spending that an economic downturn used to be good for weeding out all this useless spending and accumulation – one of the few things I agree with with the Austrians (austerians) but it isn’t happening in this ?greater recession?). The silly stupid spending is ongoing but many people lack necessities – homeless hungry children – workers who need jobs but there aren’t any for them – small businesses folding – rents going higher – college grads in debt slavery type of positions – the banks getting money at .5% but college graduates paying 7% – public school teachers and teaching assistants being let go while the administrative bureaucracy grows – the US military-industrial national security state complex growing and growing ….
              We all know we could have a better more fulfilling life on less money (smaller GDP). We all know whether there is man made global warming or not there needs to be a change in the suburban-mall-auto lifestyle of America. It is a good thing that this “greater recession” is making many drive less. The world’s resources are finite.
              At the same time those wealthy beyond greed grow wealthier at the expense of the rest of us. It doesn’t bother me that some have much more than me. What bothers me is that they are getting it at the expense of the world’s poor getting poorer – the destruction of the US and European middle class – the continued ripping off of Africa’s resources – …

              1. backwardsevolution

                gepay – totally agree with everything you said. Was just reading The Great Gatsby, set in the Roaring Twenties. That time reminds me very much of now – consumerism, greed, moral and social decay, speculators. We all know how the 20’s ended. I hate to say it, but, to me, we need a good downfall. We actually need it.

                Good post!

  5. worker-owner

    A couple of comments. It was reassuring to read Testosterone Pit’s assessment of the shell that used to be IBM. As one who was too close to the strategic shifts back in the day, it is sad to see the damage the financiers did to the old girl. Not that she was a proper Victorian Maiden at any stage, but it was a shame to start dismantling her at the height of her success in the late 1970s and early 1980s.

    So many good writers with excellent views on this situation (Yves, Wolf, Michael Hudson and Bill Black, etc.) here at NC make the compelling point that the rehypothecating and over-leveraging is counterbalanced by the wall of liquidity (QE). One wonders how we maintain the myth that the dollar bill I hand to my Korean bagle-store owner is actually worth anything in reality. Of course, we all need the myth to keep everyday life going but …

    1. NotSoSure

      Because Ben B says so!!! He’s 100% sure (not 99.99, not 95, nothing less than 100) that there won’t be hyperinflation.

    2. susan the other

      No not Bernanke. The beauty of it is, the trump card, is that you say it is. Screw Bernanke.

  6. Jim Haygood

    “If you can get liquidity out of your collection and pay only 250 basis points,” he said, “it just makes sense.”

    It sure as hell does. Ever checked margin loan rates? At most retail brokers, they still hover in the 8 to 10 percent range, with the brokers’ cost of funding near zero. And this is for over-collateralized loans on highly liquid securities in the broker’s own custody.

    So f*** yeah. If plutocrats can borrow at Libor plus 250 bips on illiquid art, while retail schmoes pay 800 bips on highly-liquid security collateral, I’d say that’s a hell of a deal.

    1. craazyman

      ffaaaak I’ve got an inkjet photo of 18 yellow chicken legs cooking on a grill in Queens in the sun through a window. It’s aaaaatt. Can I get a loan for 2%? I’d only need $500,000.

      If I can’t pay it back, they can have the print. hahahahahaha

      I can’t believe reality sometimes. Did somebody make it up without telling us?

      This year is the year to get rich quick. I’m just not sure how.

  7. rich


    Caesars Sells Minority Stake Stripping Guarantee From Debt

    Caesars Entertainment Corp. (CZR) is selling a minority interest in its largest unit, a move that removes guarantees by the parent company on much of its $23 billion of debt and sets the stage for a wider restructuring.

    The Las Vegas-based casino company will sell a 5 percent stake in Caesars Entertainment Operating Co. to undisclosed investors, according to a statement today. Caesars has agreed to pursue a stock exchange listing for the unit.

    The sale means some bond investors will no longer hold a claim to the parent company’s assets and will have less bargaining power in debt restructuring negotiations. The company was purchased in 2008 in a $30.7 billion leveraged buyout led by Apollo Global Management LLC and TPG Capital.

    Lawyers representing certain debt holders have sent letters to Caesars challenging the company’s transfer of assets. Some creditors may be wiped out in a restructuring, Moody’s Investors Service analyst Peggy Holloway wrote in a report yesterday.


  8. digi_owl

    Slap enough zeros on the leverage and even 1% profit becomes a massive number out the other end…

  9. The Dork of Cork

    if we look at a extreme example of leverage as a result of its absurdly open economic nature………Irelande

    M3 and private sector credit continue to decline yet M1 is increasing
    private sector credit peak Y2008M11 : 403.945 billion euros
    Y2014M : 271.465 billion euros
    Yet where is this M1 coming from ???????
    Is it a result of time deposits becoming checking accounts……..or more likely a increase of exports and tourists revenue from credit explosions elsewhere……..

    No local organic money power results in the people doing jobs which have no other purpose then to get access to scarce money via exports and courting tourists.
    This non productive use of time and energy eventually results in the collapse of the real economy i.e. the production distribution and consumption chain.

    For example dependence on tourist income results in a decline of the local organic primary industry as real work gets priced out of the equation.

  10. Kobiashi

    The article link below “Public Banking Institute Calls Largest Wall Street Banks Unsafe” describes the massive derivative exposure of the TBTF investment banks. If these banks become insolvent, the derivative counterparties have super-priority status over the banks assets (get ready for a U.S. “bail-in”).


    From the article:

    The Public Banking Institute has released a new video making serious claims, backed by graphs and government documents, that the largest Wall Street banks are an unsafe choice for the savings of moms, pops and public payrolls. Citing a December 10, 2012 jointly approved plan between the U.S. Federal Deposit Insurance Corporation (FDIC) and the Bank of England, which resides on the FDIC’s federal web site, the organization says depositors in the U.S. could see portions of their deposits confiscated, similar to what happened in Cyprus, should there be another Wall Street collapse as occurred in 2008.

    Mike Krauss, a founding director of the Public Banking Institute, goes even further in the video. Krauss says: “We’re making the argument that the biggest banks on Wall Street really aren’t safe; that they’ve got so much exposure in derivatives and who knows what else – they’re in danger of going down and taking depositors with them. We think money is much safer closer to home. It’s also more productively used,” says Krauss.

    If you thought Congress or the regulators has reined in the reckless derivatives activities on Wall Street after the 2008 to 2010 economic collapse, you will be shocked to learn that what they did instead was to concentrate the risk among four Wall Street banks.

    According to the OCC, as of March 31, 2013, banks held $231.6 trillion (with a “t”) in derivative notional (face) amounts. Just four banks are responsible for 93 percent of that amount: JPMorgan Chase with $70.2 trillion; Citibank (part of Citigroup) with $58.4 trillion; Bank of America with $44.5 trillion; and Goldman Sachs Bank USA with $42.2 trillion.

    1. financial matters

      Yes, and it would be better to address this sooner rather than later..


      “Super-priority Status for Derivatives Increases Rather than Decreases Risk

      Harvard Law Professor Mark Row maintains that the super-priority status of derivatives needs to be repealed. He writes:

      … [D]erivatives counterparties, … unlike most other secured creditors, can seize and immediately liquidate collateral, readily net out gains and losses in their dealings with the bankrupt, terminate their contracts with the bankrupt, and keep both preferential eve-of-bankruptcy payments and fraudulent conveyances they obtained from the debtor, all in ways that favor them over the bankrupt’s other creditors.

      … [W]hen we subsidize derivatives and similar financial activity via bankruptcy benefits unavailable to other creditors, we get more of the activity than we otherwise would. Repeal would induce these burgeoning financial markets to better recognize the risks of counterparty financial failure, which in turn should dampen the possibility of another AIG-, Bear Stearns-, or Lehman Brothers-style financial meltdown, thereby helping to maintain systemic financial stability.

      In The New Financial Deal: Understanding the Dodd-Frank Act and Its (Unintended) Consequences, David Skeel agrees. He calls the Dodd-Frank policy approach “corporatism” — a partnership between government and corporations. Congress has made no attempt in the legislation to reduce the size of the big banks or to undermine the implicit subsidy provided by the knowledge that they will be bailed out in the event of trouble.

      Undergirding this approach is what Skeel calls “the Lehman myth,” which blames the 2008 banking collapse on the decision to allow Lehman Brothers to fail. Skeel counters that the Lehman bankruptcy was actually orderly, and the derivatives were unwound relatively quickly. Rather than preventing the Lehman collapse, the bankruptcy exemption for derivatives may have helped precipitate it. When the bank appeared to be on shaky ground, the derivatives players all rushed to put in their claims, in a run on the collateral before it ran out. Skeel says the problem could be resolved by eliminating the derivatives exemption from the stay of proceedings that a bankruptcy court applies to other contracts to prevent this sort of run.

      Putting the Brakes on the Wall Street End Game

      Besides eliminating the super-priority of derivatives, here are some other ways to block the Wall Street asset grab:

      (1) Restore the Glass-Steagall Act separating depository banking from investment banking. Support Marcy Kaptur’s H.R. 129.

      (2) Break up the giant derivatives banks. Support Bernie Sanders’ “too big to jail” legislation.

      (3) Alternatively, nationalize the TBTFs, as advised in the New York Times by Gar Alperovitz. If taxpayer bailouts to save the TBTFs are unacceptable, depositor bailouts are even more unacceptable.

      (4) Make derivatives illegal, as they were between 1936 and 1982 (http://tarpley.net/2010/04/25/fight-the-derivatives-cancer-with-a-wall-street-sales-tax-plus-bans-on-hedge-funds-credit-default-swaps-and-synthetic-cdos/) under the Commodities Exchange Act. They can be unwound by simply netting them out, declaring them null and void. As noted by Paul Craig Roberts, “the only major effect of closing out or netting all the swaps (mostly over-the-counter contracts between counter-parties) would be to take $230 trillion of leveraged risk out of the financial system.”

  11. The Dork of Cork

    Irish economic recovery depends on credit explosions elsewhere…….such as the UK.

    irish M1 is now at a all time high
    Y2008M11 : 78,686
    Y2014M3 : 116,711

    Irish Austerity has made the country more vulnerable to economic shocks by further reducing internal redundancy (which was its purpose I guess given the now obvious overall objectives of the Masonic / Talmudic elite) although a collpase of mid and eastern europe would not be a bad outcome for the present neo liberal conduit economy of Ireland

  12. MyLessThanPrimeBeef

    Some are born to do leveraging.

    Some are not born to handle leveraging.

    And the Fed knows that by lowering rates, more people will be forced to take more risks. For these people, there is no financial/economy free will, or no freedom from financial persecution.

    When what people will do is completely predictable, there is no free will. There is no freedom from being manipulated.

    1. craazyman

      that’s why you need to get rich quick and lay around and waste time. because why do you want to participate in being manipulated? I read again today that silver is gonna fly. I’m thinking maybe 30 by year-end. If you get the 25 January calls and put several hundred thousand dollars into them, you can get rich in just a few months! You need a few hundred grand though, if you have an art collection you can borrow it for 2% and never pay it back. They just keep the art. Why worry? It’ll end up in a museum anyway so you still can see it usually 6 days a week and have lunch in the cafeteria. It’s not quite like having it at home, but if you’re home, you can Google it and sit back and look at it on the screen. What difference does it really make? Both are pictures, just one is a picture of a picture. If it’s the same size, it’s almost like nothing happened.

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