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Tactical Financial Nuclear Bombs – Dave Kranzler
Pigs are greedy – hogs get slaughtered (famous Wall St adage) – Our entire financial system is one giant hog farm – Dave Kranzler, 2015
TND Guest Contributor: Dave Kranzler |
“Hope and Change.” Remember that campaign slogan? Boy, we sure hope something like the 2008 financial collapse doesn’t happen again. But alas, Obama didn’t changeanything. In fact, the financial fraud and risky leverage embedded in the system is worse now than back then.
Among Wall Street’s improvised electronic devices, aka roadside financial bombs, that blew up our financial in 2008 were Collateralized Debt Obligations (CDOs) which had credit default swaps “wrapped” around them. This was the financial tactical nuke the blew AIG and Goldman. These securities were cesspools of subprime mortgages thrown into a security that was “sliced up” into various tranches with varying degrees of risk. Goldman would sell these primarily to hedge funds and insurance companies. Goldman would then underwrite credit default swaps which offered other hedge funds and insurance companies the ability to bet on the CDO blowing up and, conversely, allowing investors who bought into the CDO “insurance” against the CDO blowing up.
Goldman itself would retain a piece of the action. The rest is history, as Goldman found itself fatally exposed to AIG’s inability to fund the side of the credit swap in which it guaranteed that the CDO’s wouldn’t blow up. That’s how counterparty default risk operates. In this case, it blew up our financial system, cost the taxpayers directly about $1 trillion in direct funding to bail out Goldman, AIG, et al. The cost of the $4 trillion printed by the Fed has yet to be felt all of us, but rest assured it will be…
Well guess what? The CDO/credit default structure is re-born, only this time in the form of “Bespoke Tranche Opportunities:”
Goldman Sachs Group Inc. is joining other banks in peddling something they’re referring to as a “bespoke tranche opportunity.” That’s essentially a CDO backed by single-name credit-default swaps, customized based on investors’ wishes. The pools of derivatives are cut into varying slices of risk that are sold to investors such as hedge funds. (Bloomberg)
Rather than a securitized trust filled up with junk mortgages and junk corporate bonds, this ugly beast has greasy hair on it. It’s a securitized trust of derivatives in the form of credit default swaps, ostensibly with psuedo high grade and junk corporate debt issues used as the underlying reference securities. And of course this package will be wrapped up with a credit default swap on the entire cesspool of derivatives:
The derivatives are similar to a product that became popular during the last credit boom and exacerbated losses when markets seized up. Demand for this sort of exotica is returning now and there’s no real surprise why. Everyone is searching for yield after more than six years of near-zero interest rates from the Federal Reserve, not to mention stimulus efforts by central banks in Japan and Europe. (Bloomberg)
Whereas the CDO’s of 2008 vintage were portfolios of debt securities gift-wrapped in a credit default swap, the 2014 vintage gift from Wall Street is a portfolio of derivatives wrapped up with another derivative. Sheer. Financial. Insanity.
Our entire system is now significantly more leveraged than it was in 2008 – especially when you factor in the various forms of derivatives which are now – thanks to Dodd Frank/Obama/Eric Holder/etc – even more opaquely embedded into the financial system’s “balance sheet.” When this blows, the financial mushroom cloud will be a sight to behold.
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About Dave Kranzler:
I spent many years working in various analytic jobs and trading on Wall Street. For nine of those years, I traded junk bonds for Bankers Trust. I have an MBA from the University of Chicago, with a concentration in accounting and finance. My goal is to help people understand and analyze what is really going on in our financial system and economy. You can follow my work and contact me via my website Investment Research Dynamics. Occasionally, I publish on Seeking Alpha too. As a co-founder and principal of Golden Returns Capital, LLC Mr. Kranzler co-manages the Precious Metals Opportunity Fund, a metals and mining stock investment fund.
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The new digits that the FED creates are all being used to hold up the casino and none of it makes it way to main street but when these CDS go bang then so does your pension and any savings.
Laws will be past to allow bankers to take your property even if you have paid for most of it and the loan is with a bank thats gone bust and at this stage people need to stand up and fight or burn the properties and then ask the scum banker puppets who call themselves our leaders what is the propery worth now.
Yes we would all do good to have a very long bank holiday and also say goodbye to paying taxes when you have no control over how the money is spent and how much gets given to bent politicians to keep you supressed