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#272331 - 03/14/08 08:33 PM IMF warns: "think the unthinkable"
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IMF Is Urging Members to Set Stimulus Plans
By BOB DAVIS
March 13, 2008; Page A16


WASHINGTON -- The International Monetary Fund urged members to make plans to increase spending to stimulate economic growth and to rescue troubled financial institutions if the global housing-and-credit crunch worsens further.

Policy makers world-wide need to "think the unthinkable," said the IMF's deputy managing director, John Lipsky, because of the possibility of what he called a "global financial decelerator." Under that scenario, "a downward credit spiral, driven by rising defaults or margin calls" might prompt banks to stop making loans and sell the existing loans and securities on their books at distressed prices. That, in turn, could reduce lending further and strangle the economy.

Mr. Lipsky said he wasn't predicting such an outcome. He said the IMF still thinks the global economy will muddle through with slower growth but no outright global recession. He said governments need to prepare to deal with the "low probability" of a financial meltdown.

The IMF's warning contrasts sharply with its usual advice of balancing budgets, restraining government spending and counting on markets to lift growth. Since the credit crunch worsened last year, the IMF has generally stayed on the sidelines, applauding individual country actions to increase economic growth, such as the U.S. stimulus package. The IMF rarely steps far ahead of its largest members as Mr. Lipsky did yesterday.

The IMF staff has calculated that "major" advanced and developing nations accounting for half the world's economic output "have fiscal room to implement a discretionary stimulus, if needed," Mr. Lipsky said in a speech at the Peterson Institute for International Economics in Washington, D.C. In other words, the budget situations in those countries would let them increase spending without fear of igniting steep inflation.

A larger number of nations, accounting for two-thirds of global gross domestic product, are in adequately sound fiscal condition to let automatic stabilizers kick in if the economy turns down, he said. In many nations, welfare and social-security payments routinely increase when the economy worsens and people lose their jobs. During past economic crises, the IMF has sometimes urged countries against using the full panoply of automatic stabilizers, for fear of deepening inflation or creating a run on the local currency.

Mr. Lipsky specifically named China as a country that could raise government spending to spur growth, while tightening monetary policy to keep inflation under control. Oil exporters in the Middle East also are increasing spending, he said, but added those countries must make sure the spending doesn't worsen inflation. He didn't mention other countries.

Additionally, Mr. Lipsky said that nations should consider using government funds to "safeguard the financial system," although he said he wasn't advocating using taxpayer funds "for individual banks." He didn't lay any specific plan, but in the past the IMF has urged governments to rescue banks that are critical to the economy, while insisting that a bank's shareholders take a hit, too. By the IMF line of reasoning, such a plan wouldn't amount to a bailout, a term Mr. Lipsky called politically loaded.

http://online.wsj.com/article/SB120534814030831027.html
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#272339 - 03/14/08 09:05 PM Re: IMF warns: "think the unthinkable" [Re: Short]
Sir Isaac Newton Offline
Note to self: Advertise in China and the Middle East.
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#272849 - 03/18/08 12:46 AM Greenspan: worst U.S. crisis since World War II [Re: Sir Isaac Newton]
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Greenspan sees many casualties from crisis: report

LONDON (Reuters) - There will be many casualties from the unfolding financial market crisis, which will lead to a large-scale overhaul of international banking regulations, codes and risk management, former Federal Reserve Chairman Alan Greenspan said.

Writing in the Financial Times, the former Fed chief said much of the financial system's risk-valuation models failed, not because they were too complex but because they were "too simple to capture the full array of variables governing that drive global economic reality".

"The crisis will leave many casualties. Particularly hard hit will be much of today's financial risk-valuation system," he wrote.

While insisting that current risk management models and econometric forecasting methods remain "soundly rooted in the real world," he said risk management can never be perfect.

"It will eventually fail and a disturbing reality will be laid bare, prompting an unexpected and sharp discontinuous response," Greenspan said.

He added, however, that he hoped one of the casualties from the worst U.S. financial crisis since World War Two would not be the spirit of broad self-regulation within financial markets.

Although he said the Basel II international banking regulatory framework would almost definitely be revamped and financial institutions' financial models would need to be re-drafted, Greenspan warned against over-regulation.

"It is important, indeed crucial, that any reforms in, and adjustments to, the structure of markets and regulation not inhibit our most reliable and effective safeguards against cumulative economic failure: market flexibility and open competition," he said.

http://www.reuters.com/article/governmentFilingsNews/idUSL1762683520080317
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#272985 - 03/18/08 07:39 PM Re: Greenspan: worst U.S. crisis since World War II [Re: Short]
Danny2 Offline


Whatever Greenspan wants I don't want. He and his China friends got us where we are now and going. Like my Dad would say " going to hell in a hand basket". Gold over 1000. Oil 112. What's the us dollar worth? Hyper inflation is on the way. The train is off the track but it hasn't stopped sliding in the dirt yet. Waite till the first car stops and the rest pile up against one another.

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#273145 - 03/19/08 05:15 PM Re: Greenspan: worst U.S. crisis since World War II [Re: Danny2]
Diane Campbell Offline
How about that article that said the mortgage crunch will be particularly difficult for people with no job history, bad credit and no down payment.
I'm not sure if that was intended to be funny or what. And no, it was not an article from the Onion. It was CNN or something.

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#273247 - 03/20/08 12:08 AM Re: Greenspan: worst U.S. crisis since World War II [Re: Diane Campbell]
Danny2 Offline
I think this is a good read.

Imagine now that between the two Caribbean nations of St. Bart’s and St. Maarten’s there is a small island nation, St. Smallcap. It may be poor in comparison with the United States, but it has a working, even vibrant, economy. Its currency trades at parity with the US dollar (that is, one of the first converts to one of the other, and vice-versa). No one knows what the future holds for St. Smallcap. Perhaps it will stay as it is for generations. Perhaps it will develop into a prosperous island nation like Bermuda. Maybe it will become a destitute, impoverished nation like many other small island nations. Perhaps it will become an economic powerhouse, like Hong Kong or Singapore. There is no way to tell.

One day, as if on cue, a dozen hedge fund managers and Wall Street bankers show up in St. Smallcap. No one thinks much of it as these fellows start driving around Smallcap with their special machines. They print off the local currency with great abandon, using that currency to buy drinks and dinners on the town, pay for taxis, and gamble at the casino. In time, they begin buying the island’s houses, cars, yachts, and cargo ships. They even buy Smallcap National Airline’s sole 727 jet. They buy anything that is not nailed down, paying for it all along with the local currency, which they print off their special currency machines as they need it.

After a few weeks something funny begins to happen. There is so much extra currency floating around, it begins to affect the economy. As everyone realizes that there is a lot of extra currency sloshing around the island, prices for goods rise in anticipation that Smallcap’s currency will become less valuable. It may even happen that prices soar, as they did in Weimar Republic Germany after WWI, in a bout of hyper-inflation. Of course, as this happens, the rate at which Smallcap’s currency can be exchanged against other currencies, including the dollar, collapses.

There is an even more insidious effect, however, that one can understand by thinking about the nature of prices. There are many ways to think about prices. Often we see them simply as obstacles preventing us from getting what we want (”Jim wants a new Mercedes but on his teacher’s salary he cannot pay the price.”) Another way to think of prices, however (a way many economists think of them), is to see prices as little bits of information passing back-and-forth around the economy, permitting millions of strangers to coordinate their economic activities. Prices for corn are going up and prices for wheat are dropping? That is a signal to farmers that they should cut back on wheat production and plant corn instead. Rents soar in a city while prices for office space stagnate? That is a signal that someone should convert some office space to apartments and condominiums. A city is washed out because of a hurricane, and prices for flashlights are soaring? That is a signal to surivivors within the city to share the scarce resource of flashlights, and a signal to outsiders to start trucking in flashlights for resale (i.e., “profiteering,” which to economists means, “responding quickly to price signals without regard for ethical concerns such as loyalty”).

Like any other normal economy, in order to function St. Smallcap’s economy relies on prices to pass information around the economy. The hedge fund managers and their special currency machines, however, print out so much of their “temporary” currency that Smallcap’s economy becomes awash in it. Imagine listening to a radio playing across the room while someone plays white noise in speakers set up next to your ears: you would not be able to hear what was being said. Similarly, this flood of “temporary” currency washes out the signals that prices normally carry within St. Smallcap’s economy. No one knows whether to grow wheat or corn, and since seed prices are rising but no one knows what income can be generated from any crop, fewer farmers plant anything. Savings drop: it makes less and less sense to save, because what is the point of delaying consumption today in return for a future benefit that cannot be estimated? Since less money is being saved, banks have less capital to loan to businesses to expand, or even maintain, current production. As a result, manufacturing on the island also collapses.

One can imagine a situation where, if Smallcap’s economy were small enough, and the Wall Street bankers and hedge funds swept down on Smallcap with enough currency-printing machines, that they could flood Smallcap with so much of its own currency that the price signals of the local economy would be mostly lost. The white noise of massive amounts of this “temporary” currency would disrupt real economic activity, like farming and manufacturing, until the economy of Smallcap cracked. Hyper-inflation, starvation, and mass unemployment might set in. People would begin trading anything they have in return for a ticket to flee the island.

Throughout it all, the Wall Street bankers and hedge fund managers continue using their machines to print local currency with which they can buy, buy, buy.

After six months, when nothing of value is left on the island that they do not already own, the bankers and hedge fund managers take everything they bought and load it onto their new cargo ships and yachts. They gather at the airport to board their new jet.

A government official arrives and sets about to find out how much of the local currency they printed while visiting the island. The official reads the print-out from each of their machines, sums it up and exclaims, “100 million!”

One hedge fund managers speaks for the rest: “Yes, but that is not 100 million US dollars. It is 100 million in your local currency. And while we have been visiting your country your local currency seems to have collapsed. That is hardly surprising, given that your farms are vacant and your factories are boarded up. It seems that on the international markets your currency is worth 1/10,000th of what it was worth when we arrived six months ago. Thus, in US currency, we owe you precisely… $10,000.” He flashes his thick wallet and counts out the sum. Laughing, his hedge fund colleagues and banker friends board their jet and take off, banking to watch their new cargo ships sail out of the harbor loaded with the wealth of the country, for which, in the end, they paid $10,000.

Imagine also that surprisingly few reporters seem interested in these events, or notice the pattern of it happening to one small island nation after another. Those who do notice it take it for granted that small island nations are supposed to be the way they are: destitute and impoverished. Only rarely does a reporter challenge the bankers and fund managers on their actions, but the financiers respond in unison so perfect it appears rehearsed, “Are you kidding? Don’t you know what a dump that island is? The last time I saw St. Smallcap its farms were barren, its businesses were boarded up, and everyone was fleeing. I tell you, the place is just a disaster.”

If you can understand the story above, then you can understand the crime that is occurring in our financial markets (the metaphor is a sound one, if I say so myself). The point of subsequent posts in this category will be to convert the story you just read into Wall Street lingo, one step at a time. You will see how the preceding story precisely expresses behavior that is occurring on Wall Street, routinely, today.

In reality, of course, the “special machines” that bankers and hedge fund managers are using are not actual physical machines, and what they are destroying are not “small island nations,” and what they are printing is not “currency.” In reality, the “special machines” are loopholes in our legal system, what the bankers and hedge funds are destroying are small companies, and the “currency” they are printing off to do so are shares of stock in those small companies.

Posted in 2) Unsettled Trades (e.g., Naked Short Selling) | 23 Comments »
The Simple, Literal Explanation
February 11th, 2008 by Patrick Byrne

The “St. Smallcap” example conveyed the dynamics of the manipulation, but it was only a metaphor. This blog will provide an explanation whose truth is more literal.

You and I enter a stock trade. You buy a share of stock from me. You hand over your money, and I hand over the share of stock. That is called, “settlement.”

It may surprise you to learn that there are loopholes in our nation’s regulations that permit some people, when it comes time to settle, to hand over nothing but an IOU. By using one of these loopholes, when the time comes for settlement I can take your money but say, “I’m not delivering you any stock. I’m just giving you an IOU for a share of stock that I will deliver later.”

There are reasons these loopholes came into existence. If someone made a mistake by signing the wrong line on a form, for example, or mistakenly sold more shares than he really had, one would not want the entire system to vapor-lock as the mistake was rectified. So the system has been designed so that the gears do not get hung up on minor mistakes. The general idea is that, if someone sells shares it turns out he cannot deliver, he can create these IOU’s and send them on as though they were real shares, giving himself time to clean up whatever error he is experiencing, and sending the real shares a couple days later.

There is no system in place to alert you to the fact that you sent me your money and received nothing but an IOU. The system treats these IOU’s just as though they were real shares. Your brokerage statement will say that you got shares, even though I never sent anything but an IOU. You can sell them, and that IOU will pass on through the system into someone else’s account.

The problem is, suppose I (having mastered these loopholes) start using the system’s “forgiveness” strategically? Suppose I find a company that is likely to need capital to expand, or simply survive, in the near future? They plan on raising that capital by issuing shares of stock to the public (there is no crime in that: for example, lots of young pharmaceutical companies sip at the capital markets for years as they get going). Imagine that I target one of them, and deliberately go out selling that company’s shares into the marketplace, yet instead of delivering stock, I deliver nothing but IOU’s. I flood the market with them, always standing ready to sell more than anyone wants to buy. My IOU’s are anything but temporary: they drift around in the market for weeks, months, and eventually years. If anyone gets mad and tells me that I have to deliver real shares against one of the IOU’s I sold, I say, “Sure, I’ll deliver shares against that IOU,” but what I deliver is … just another IOU. Eventually I flood the market with so many IOU’s that people end up reselling them, and they go and on until there are more share-IOU’s bouncing around than there are actual shares.

What will the effect be on the price of those shares? If I have chosen a company like, for example, IBM, the effect will be negligible (just as in the example of the preceding blog, if the hedge funds brought their money machines to Paris and printed off 100 million “temporary” Euros to spend around France and Germany, it would not cause any real harm before they bought them all back as they departed).

But remember how the hedge fund managers destroyed the economy of St. Smallcap, so that the “temporary” currency they had issued could be paid off in the end for next-to-nothing? Similarly, if instead of choosing IBM I choose a tiny company, and I generate more IOU’s than there are shares of stock in the company, then the market in those shares will crack just as surely as $100 million of fake currency would crack the tiny island economy of St. Smallcap. Once cracked, the stock becomes next-to-worthless. And if I manage to issue enough IOU’s in my target company’s stock that it cracks and becomes near-worthless, they become barely an obligation at all. Who cares about millions of IOU’s, if those IOU’s are for something with infinitesimal value?

I walk away with my winnings. The company, however, is in a fix: they planned on issuing stock to raise capital, but now their stock price has been destroyed through my manipulations, and they cannot raise capital. Maybe they run out of funds and disappear, or maybe they go into hibernation mode in order to nurse what capital they have. In either case, society is deprived of the output and the jobs that would have existed were it not for my villainy.

It may be hard to believe, but such loopholes really do exist (I will be explaining several of them in subsequent blogs). In reality, however, neither you (if you are like most Americans) nor I can actually use them. Only large hedge funds and broker-dealers can access these loopholes to create IOU’s (just as, in the story of St. Smallcap, only hedge funds were allowed to own the currency machines with which to print off that “temporary” currency). As we will see in more detail, these hedge funds and broker-dealers have learned how to manipulate these loopholes in the stock settlement system so as to flood the market with over a billion IOU’s (maybe many billion) in hundreds of companies. In doing so, they have disrupted the market for shares of companies that are researching cures for cancer and other illnesses, figuring out how to make blood substitutes to treat cases of acute blood loss, and building mine-resistant vehicles for troops in Iraq. Hundreds of such corporate “St. Smallcaps” have been damaged or destroyed. Thus, cancer patients are being deprived of treatments, accident victims are dying of acute blood loss, and soldiers in Iraq are dying from IED’s, so that some hedge fund ass-clowns can drive new Ferraris.

It really is that simple.

I have explained the issue through metaphor (”St. Smallcap”), and now, provided this literal explanation. I will continue with more detailed explanations and citations for further reading for those who wish to gain a more thorough understanding of the workings of the US stock settlement system and precisely how loopholes permeate it. The general reader, however, may feel satisfied with the account thus far and, feeling no need to learn intricacies of stock settlement, may wish to move on to subsequent chapters, where I discuss in greater detail the harms being done to society, who is doing it, and who has taken part in the cover-up.

Posted in 2) Unsettled Trades (e.g., Naked Short Selling) | 13 Comments »

Table of Contents

* Introduction: An Overview of Deep Capture
* 1) Capture & The SEC
* 2) Unsettled Trades (e.g., Naked Short Selling)
* 3) Corporate Governance Has Become a Hoax
* 4) Ruined Firms, Looted Pensions
* 5) The Risk of Systemic Collapse
* 6) "Cronies Gone Wild": NY Financial Journalism
* 7) Reporters Concealing the Crimes of Cronies
* 8) Social Media - Hijacking the Discourse
* 9) The Players
* 10) Journalists Tried to Be Players But Became Pawns
* The Deep Capture Campaign
* Take 5 With Patrick
* ————————————

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* Michael Steinhardt - "When the Bad Guys Came to Town"
* Come on Folks, You're Better Than That
* Tim Mullaney and Patrick Byrne Discuss 2.0 (BusinessWeek)
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* Gary Weiss, Psychopath & Scaramouch
* Umbrellas, Casinos, and the End of the World as We Know It
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#273254 - 03/20/08 12:51 AM Re: Greenspan: worst U.S. crisis since World War II [Re: Danny2]
pedro2
Good explanation Danny.

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#273358 - 03/20/08 03:36 PM Re: Greenspan: worst U.S. crisis since World War II [Re: ]
Danny2 Offline
Thanks pedro2 I'm glad you liked it. I'll post another snippet about explaining derivatives later. People betting and making money one weather other people win or loose. Crazy!

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#273361 - 03/20/08 03:46 PM Re: Greenspan: worst U.S. crisis since World War II [Re: Danny2]
Danny2 Offline


Ok, here it is,


n, that third point is key: recognize that the mortgage crisis, while real, is a trigger but not the underlying situation. The dancer is different than the dance.

I would like to switch metaphors now, to discuss derivatives.

I ask you to imagine a special casino. On the ground floor, it looks like a normal casino. There are 100 people standing around playing craps, roulette, and blackjack. They each brought $10,000 so there is $1 million of betting on the first floor.

On the second floor, however, there is another casino. In that casino, people are watching television screens showing people gambling on the first floor. In the second floor casino, people bet each other on who they think is going to win and lose on the first floor. All the really big players are in that second floor casino, and they are betting hundreds of millions of dollars of action on various people in that first floor casino. Their outcomes are “derivative” of the outcomes on the first floor. A roll of the dice on the first floor that loses someone $100 may create tens of thousands of dollars of losses on the second floor (and if there is a third floor where people are placing even bigger bets on the outcomes on the second floor….)

I will argue that unsettled trades in the financial system bear the characteristics of such derivatives. However, they present a special kind of derivative. If you and I walk into the first floor casino and bet on whether the next roll of the dice is a 7 or not, no amount of betting on our part can affect the underlying event. Similarly, the underlying event will not be affect by any amount of betting by the people above us on the second floor (or by betting on them by people on the third floor).

Unsettled stock trades, however, can affect the underlying events upon which they are a bet. In fact, unsettled trades resulting from “the option market maker exception” are often the by-product of deliberate efforts to affect those underlying events. When an underlying event that someone deliberately affects is a stock price movement, it used to be called, “manipulation” (and was also called “illegal” until Wall Street captured the SEC, at which time it became known as, “a hedge fund business model”).

Because unsettled trades have this property of affecting the underlying events upon which they are a bet, they are derivative contracts with an especially nasty twist.

I tell you, that guy Buffett will go places.

PS Again, because I wish neither to imply support for or endorsement of my views, I am going to give one additional quote, without comment. In May, 2007 Messieurs Buffett and Munger were asked to comment on the issues I am raising here in Deep Capture. Mr. Munger’s response was as follows (page 6): “Those delays in delivering sometimes reflect tremendous slop in the clearance process. It is not good for a civilization to have huge slop. Sort of like how it isn’t good to have a lot of slop in nuclear power plants.”


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