From Webdiary

Until recently, whenever climate research organizations reported increases in Arctic Sea ice melt rates [6], advocates of global “cooling” have been making references to the Antarctic continent as supposed counter argument [7]. Referring to small stable or slightly cooling parts of east Anarctica (Fig 2), a plethora of bogus climate websites claim Antarctic warming is not a part of global warming [8].

Presumably regarding Antarctica as part of another planet?

Nor do “climate skeptics” shed too many tears about Emperor penguins, the magnificent birds which have to migrate from their inland colonies across ice shelves and sea ice (Figs 8), where the females lay just one egg that is tended by the male. The ice plays a major role in their overall breeding success. Further, the extent of sea ice cover influences the abundance of krill and the fish species that eat them – both food sources for the penguins.

Misreadings of climate science by “climate skeptics” have delayed efforts at climate mitigation by at least 20 years. In the words of Clive Hamilton [9]: “If scientific advances cause scientists to reject the conclusions of past IPCC reports … not much harm will be done. … but if … fellow skeptics were successful in stopping policies to cut emissions and the IPCC projections turn out to be correct, then environmental catastrophe will follow and millions of people will die. Do they lose sleep over this? Do they worry about how their grandchildren will see them? Or are they so consumed by the crusade that they know they will never be proven wrong?”

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From the New York Times

Job Losses Pose a Threat to Stability Worldwide

PARIS — From lawyers in Paris to factory workers in China and bodyguards in Colombia, the ranks of the jobless are swelling rapidly across the globe.

Worldwide job losses from the recession that started in the United States in December 2007 could hit a staggering 50 million by the end of 2009, according to the International Labor Organization, a United Nations agency. The slowdown has already claimed 3.6 million American jobs.

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From the Independent

The HBOS whistleblower whose revelations led to the resignation of one of the Government's top regulators is about to release a tranche of documents which he says point a direct and accusatory finger at Gordon Brown's responsibility for the banking crisis, and has called on the Prime Minister to resign. In a further blow to Labour, an Independent on Sunday poll showed voter support for the party evaporating, leaving it only a few points ahead of the Lib Dems.

Paul Moore, the former head of risk at HBOS, told the IoS that he has more than 30 potentially incendiary documents which he will send to MPs on the Treasury Select Committee. He says they disprove Mr Brown's claim about the reasons for HBOS's catastrophic losses – now estimated to be nearly £11bn – and show that it was the reckless lending culture, easy credit and failed regulation of the Brown years that led directly to the implosion of British banks.

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from the ABC

Personal borrowing at highest level in 6 months

Posted Mon Feb 16, 2009 4:41pm AEDT
Updated Mon Feb 16, 2009 4:40pm AEDT

Personal borrowing has posted its biggest rise in six months as consumers took advantage of lower interest rates to refinance existing loans.

Australian Bureau of Statistics (ABS) data shows personal borrowing rose 4.1 per cent in December compared to the month before.

It was the biggest monthly gain since June 2008, the first monthly increase in personal loans since September, and followed a 1.8 per cent fall in November.

CommSec's chief economist Craig James says it is a good sign households are still willing to spend.

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[2007]

The linear growth started turning exponential in 1965 for GDP, and a year later in 1966 for Housing Valuation.

Such a close relationship between the two is not just a coincidence. Rising home values have made Americans feel wealthy. And tapping into the Home Equity has been the source of purchasing power. Fuelling consumption and GDP growth.

Since 1980 the Housing Valuation has exceeded GDP.

Since 2000, it also appears that The Housing Bubble has not been pushing up  the GDP as much, and the Gap between the two has been rising.
May be the Housing Bubble is no longer effective in pushing up the GDP as much.
 
This may well be it's final sprint before busting after a 40 year expansion.

---------------------------------

Pakistan's president says his country is fighting for its survival against the Taleban, whose influence he said has spread deep into the country.

In an interview with US TV channel CBS, President Asif Zardari said the Taleban had established a presence across "huge parts" of Pakistan.

The country had failed to increase its forces in response, he said.

On Saturday, officials said at least 27 militants were killed in a suspected US missile strike on a Taleban hide-out.

The missile hit a house in north-west Pakistan, near the border with Afghanistan, where the US has carried out more than 20 air strikes from drones in recent months.

Islamabad has long argued that the strikes complicate its fight against insurgents, and violate its sovereignty.

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BACK IN 1969 the International Monetary Fund (IMF) created a new kind of money – the ultimate form of international money, it believed – called the Special Drawing Right.
 
You can't shop with an SDR, nor trade it or even touch it. Unless you crunch numbers for an international organization like the IMF, Andes Reserve Fund, the Arab Monetary Fund, or the Bank for International Settlements (BIS) in Basel, the only time you're likely to come anywhere near an SDR is if an airline loses your luggage.
 
The Montreal Convention states that if your bags have not reached you within 21 days of expected arrival, you can claim 1,000 Special Drawing Rights as compensation from the airline.
 
At today's valuation, that would mean you receive around $1,500...or £770...or €955...or ¥159,000. Because you can't be paid in SDRs. In reality they don't exist. Only a government-issued paper money can bring the SDR's value into existence.
 
"Monetary Gold and SDRs issued by the IMF are financial assets for which there are no corresponding financial liabilities," explains the Monetary Fund. But while Gold holds value for people earning all kinds of currency across the world, the SDR is simply an intangible monetary unit. It exists as an accounting tool only, used by the world's central banks and cross-border monetary organizations.

--------------------------

In recent years, the World Bank like other international financial
institutions have been using GNI more frequently as a measure of national
income in international economic comparisons. Why ?

In order to understand this, we need to know first of all what GNI is. Well,
basically it is just a new acronym for the good old Gross National Product
we used to know, which in the 1970s was largely abandoned in favour of GDP.
The rationale given for the change in wording is that GNI is considered more
a concept of "income" rather than a "product measure" (sic.).

Officially, GNI equals GDP (the sum of value added by all resident
producers in the sphere of production) PLUS any product taxes
(less subsidies) not already included in the valuation of net output, PLUS
 net receipts of primary income (compensation of employees and
profits) from abroad. (To smooth fluctuations in prices and exchange
rates, the "Atlas method of conversion" used by the World Bank then
applies a conversion factor, which averages the exchange rate for a
given year and the two preceding years, adjusted for differences in
rates of inflation between the country, and through 2000,
the G-5 countries (France, Germany, Japan, the United Kingdom,
and the United States). For 2001, these countries include the Euro Zone,
Japan, the United Kingdom, and the United States.)

The extra net income added to GDP thus refers specifically to the income
received from labour and capital owned overseas by residents of the domestic
economy, MINUS similar payments made from the domestic economy to
non-residents overseas. Conceptually, these incomes must be related to the
social accounting concept of "production". In other words, it has to be new
income generated by the application of factors of production overseas, which
are owned by domestic residents, income which represents a fraction of
new value added.

So far, so good, but now I want to know, just what difference does this
component make to the GNI and GDP totals ?

-------------------------------

[IMF 2000]

Prospects and Policy Challenges
How Much Longer Will the Expansion in North
   America Continue?
Reenergizing the Japanese Recovery
Recovery and Divergence in Europe
Recovery in Latin America: Emerging But Still Vulnerable
Recovery in Asia-Pacific: The Momentum Increases
Russia and the Commonwealth of Independent States (CIS): Growth, But Uncertain Prospects for Sustained Recovery
Countries on the European Union Accession Track
Middle East and Africa: Stronger But Narrowly-Based Growth
Poverty and Globalization

The Ongoing Recovery in Emerging Market Economies
Financial Conditions Facing Emerging Market Economies
Commodity Market Developments
Policy Responses and Vulnerabilities in Latin America
Improved Outlook in East Asia, But Policy Challenges Remain 

-----------------------

(Gus' note: some of the figure I quoted in the comment "greed on credit" were in the wrong year. By shifting back the values to the rightful year, the "economic trauma is thus emphasized [stressed] by an extra 13 per cent...")

28 January 2008

The total value of the world's financial assets grew faster in
2006 at 17 per cent to reach $167 trillion from $142 trillion in
2005, according to a McKinsey report titled, Mapping Global
Capital Markets, Fourth Annual Report, released this month.
At constant exchange rates, the growth in global financial
assets was 13 per cent.
The report, prepared by McKinsey Global Institute (MGI),
the economics research arm of McKinsey & Company, was
the latest year for which "comprehensive data was available".

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"The world's financial system is overflowing with stocks, bonds and other financial assets -- $140 trillion worth, to be precise.

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Overflowing? Where did the overflow go and what created the overflow?

see toon above and others as indicated....

"Raise you by another 2 bils*..."

or playing poker with the world economy... and the planet...

or a honest day's work for bugger-all slave-wage pay...

 or two billions bet the house will burn down...
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A lot has been said about many part of our financial system, but few parts of this wonky three-wheeler take the cake like CDS — or Credit Default Swaps for the initiated...

Few financial whizzes understand how derivatives really work and I don't blame them... Derivatives are hard yakka... And these CDS babies are derivatives of the smarter kind... Mathematically, they are a gem of simplicity, once past the fog of moralisationing and once we have mastered the ability to keep a straight face. I may be contested on my explanation here... go for it.

Some people dare describe CDS as "insurance" but it's actually a very cleverly disguised extortion — like a "protection racket" with a bet attached.

The Mafia would be proud!!

The scheme is ingenious. THE MAFIA GIVES YOU MONEY!!!

It gives you (the bank or busIness) money for someone else's (or your own, should you choose to as a business) windows NOT GETTING BROKEN... It seems like a win-win deal, doesn't it? But if the windows you have insured by BEING PAID MONEY FOR are broken, you pay the Mafia heaps (as an agreed amount) in return... Brilliant!!!!

And the broken windows are now irrelevantly kaput. That's only an aside to the transaction. Betting is the name of the game.
-------------

In other words:

in CDS, the banks will place a bet with "investors/insurers" that a business won't go up in flame. Meanwhile, the "investors/insurers" have to fork out regular payments to the banks should your business stay afloat for example. Of course your business relies substantially on the bank's largesse for loans to trade efficiently (or not).
You get your loans by waging your own assets as collateral. So far so good.

The banks hope they will beat the "investors/insurers"'s bet because it's in the bank's interest your business stay solvent, at least till the expiry date of the CDS contract, at which time the bank would have made heaps of cash for investing nothing.

Whether you business works well or not is not part of the deal. The deal is not an "investment". It's a bet on whether you stay afloat during the "contract" terms.

And this massive raining CDS cash meanwhile is accounted in the Banks annual returns and used for investing in other schemes, including supplying you with more loans so your business can "grow", faster and faster... The faster the better for the banks. They can't give you enough money... You want a million, here's two... The banks are laughing their heads off. They could and sometimes they do bet twice as much as before, against the "insurers/investors". The economy is booming... The "investors/insurers" fork out dough for nothing really — but for only betting your business is going to sink no matter what.

It does not take Einstein to work out what's going to happen next...

Our clever financial system relies on "boom and bust" cycles to create "greater" flow of money.

See, some universities (French UK and US) around the world put their brains together to snoop around this conundrum and have devised a strange but solid mathematical theory that says, in the long run, "economies" are gaining far more with boom and bust cycles that in a steady growth system. Weird but the figures don't lie... The maths do add up. In short with boon and bust practice — say slash, burn and rebuild — the economic advantages are about 300 to 500 per cent up per decade on just steady as she goes growth. And let's not talk of sustainability here... or any other planetary concerns either...  And please do not mention that there are a few provisos...  a small print clause in the equation so to speak, that bust the theory in specific cases — say advanced economies?.

Place your bets!

Thus in CDS the bets are placed on "when a bust is going to happen". The banks work their butt off to make sure there is always a boom or one at least till the contracts have expired...

One wonders if their brains are in their fundamental bums...

Imagine that there is a room on the backside of the banks where there is a big roller-poker circus going on. The bank know there will be a crash but they bet against the "investors/insurers" that the crash will come after the "investors/insurers" paid far more than the value of the windows that have been "insured".

As mentioned, these windows could be your own, but generally as a cautious "investor/insurer" they are someone else's that as an "investor/insurer" you keep a close eye upon. If they are your own, there is a chance you know your business is going arse-up, but the bank does not know that, despite all its effort to know the health of you trade...

Meanwhile, the "investor/insurer", is entitled to advertise to the whole wide world that the windows that are "insured" are very exposed and fragile, but they are "prepared to take the risk"...

What risk you may ask???...

the "insurers/investors" don't have to pay thugs to throw stones.

There are always some silly twits and graffiti artist ready to spray paint on the abode (say you're in business and your competition make deals with your customers, deals you can hardly match — i.e. manufactures in China, or so like) and, soon after, a few loose canons stop buying your products or make life difficult for your business. Meanwhile your windows are "insured" and, so far, on average, the odds are that they will be broken before they are "fully paid off" to the bank by the "investors/insurers". Thus the Bank has to give the "investors/insurers/Mafia") the full value of the windows or whatever sum "they were insured for" (which could be far more than your windows themselves)...

Easy pickings.

This amazing system was devised by a team of smart bankers working for JPMorgan/Chase... They wrote the rules of the games in 1997... And I believe they're still laughing their heads off... Sure the scheme has been publicly sold as an insurance against breakage but on that scale, breakage is inevitable and the scheme works... IN REVERSE!!!.

And since the premiums for this insurance are roughly based on a 15 year cycle, when the true boom and bust cycle is on average 7 years... or similar, and the contract are often written on a couple of years' basis, there is plenty of room for clever punters (not on the side of the banks of course) to make a killing. The presidential mug who signed off on the scheme was Bill Clinton — may be in a moment of libido weakness (possibly enamoured with Greenspan who was whispering sweet nothings of the financial markets in his ear).

Meanwhile the banks call the unfortunate payola to the "investors/insurers": bad debts... Same name as with other defaulting loans, such as in the sub-prime debacle. Extinction in species is that more than one bad factor is often necessary to become effective. In the case of banks, they had two major factors pushing their bum up. Sub-prime and I'd say CDS. These two factors would make the banks tighten their butts and credit would stop flowing to businesses, which in turn would go under, compounding the CDS bet debts at a rate of knots. Chugging along with me, folks?

Too many of these bad debts and the banks go under.

Despite their huge size, the banks may not have enough cash or borrowing power with other banks to pay the debt, because the bets are not done with potato chips — they are done with millions of dollars, adding to billions, bordering on trillion, etc.

Sometimes to save the furniture, the banks might do new deals with the "investors/insurers in broken windows" but it's a bit like double or nothing and the banks are likely to loose their pants and ours (we — the piddly-savers who are counting three bux fifty cents by candlelight) at the same time.

The banks become insolvent.

Some banks thus did crash, others got bought out with their massive bad debts, while GOVERNMENTS WORLDWIDE had to fork out rescue packages to salvage the bigger "banking system" including protecting savings by "garantee", otherwise, the entire house would go on fire.

And dry-cakes to the peasants would not be enough to stop a revolution. Thus governments have buttered the cakes as well... while making sacrifices to the god of money, Mercury, and by begging Pandora to open her box again, to let loose the last monster: hope...

I would guess there are some (many) nervous politicians in governments, in opposition and some (many) bankers with browning pants — although the latter's  dry-cleaning bill is taken care of by their lavish bonuses...

So, no-one is prepared to put a figure on the bank and government losses yet.

The black hole is huge and still swallowing moneys. Unless one is prepared to rewrite the CDS contracts with a gun in hand (i.e. burn the paper they've been written on), nothing will save the system.

Meanwhile, businesses are begging for more cash but the banks having been cleaned up by the first CDS on the frontline are bare and only Governments can now print the maintenance money... Considering say for example the total value of financial assets worldwide being 140 trillions, the value of the Credit Default Swap is about two fifth of that — or 60 trillion bux. In my book, that is a mega lot of bet!!!.

Not that all assets will go on fire, but the "insurers/investors" are hoping so or at least wishing for a mega deconstruction (bust), so they can cash in. Sure the "Investors/investors" are also part of the system and smartly would have covered their tracks by having some other regular "investments" — investments that would burn in the collapse but, on balance the "insurers/investors" make mega bux on the difference. But did they expect such a large melt down? Growth was so spruiked up... I bet they did and did not... the market is bipolar (boom and bust) to progress...

Good luck to you anyway. As me mum used to say, "one does not take it away, once we've carked..."

And the fun of this scheme is that one does not have to be a bank to play this hot game. You and me, mere stingy mortals, could place a bet with an investor for example that the Euro won't be down against the dollar at the end of a fixed period. The investor will pay you regular cash against your bet (CDS) and you can enjoy the life of Midas — until you have to pay twice what you have in reserve (because you're a "spend-drift"), should the Euro take a nosedive at five minutes to midnight of the "contract". You sink. You're dead meat.

Unless you refuse to cough up.

Like the "investors/insurers" have protection, you have "thugs" working for you that will protect your assets against the "investors/insurers" you don't want to pay. They're called "lawyers" and private beefy blokes or "bodyguards", but their palms need to be well-oiled, so you need heaps of cash to afford this snubbing privilege.

It could turn ugly though, and the war in Iraq would be a side-show to your biffo with the "investors/insurers" demanding their cash...

They may have machine guns in their violin cases...

To avoid a massive bloodshed, the governments of the world had to basically pay the first part of the debt using FUTURE taxpayers money. And the poker-circus game is still on in the smoke-filled back rooms. No-one knows where the bluff will stop and more bets are waged.

The kitty is now more than 60 trillion bux, growing fast and on the table.

Do not sneeze.

*See toon above... I was going to do a toon with rotund bankers betting "bils" (billions) against the mafia with guns on the table while behind the scene, government leaders like Brown, Sarkozy, Obama, Rudd, etc would be sweating like pigs... But I got lazy and have work to do...

from Crikey …..

Glenn Dyer writes:

Two reports last week on Anglo Irish reveal it suffered a multi-billion euro run late last September to the point where it would have been insolvent but for the bodgied up deposits from Irish Life -- the bank financed the purchase of 10% of its shares from a group of rich Dublin business it refuses to name. Even though it has lost 300 million euros on the transactions, it lent a quarter of a billion euros to directors in 2008 and paid them over 5 million euros more.

...the extent to which the directors and executives of the bank were also big customers is truly shocking. It confirms the picture that has emerged over the last few months of an organisation that was fundamentally flawed and morally bankrupt.

In the case of Anglo, it was guaranteeing a crock of rubbish: it was propped up by billion of euros of 'deposits' from Irish Life, which were reversed after balance date, while the board and management still got paid under false pretences, and the mates of the chairman and others had their share purchase loans written off.

The PwC report reveals that in the week before the government's bank guarantee scheme last September, there was a run on Anglo Irish Bank with 5.4 billion euros in corporate and retail deposits withdrawn.

At the end of September, Anglo's balance sheet included 7.3 billion euros of deposits from Irish Life Assurance and 7.5 billion of short-term interbank placements from Irish Life and Permanent.

The report found the bank had 15 banking relationships in excess of €500 million. It concluded that the size of the exposures significantly increases the bank's risk profile. Most of these were property and housing developers. These loans could cost the bank 5 billion euros in losses over the next two years.

The amount loaned was 50% more than previously thought. They purchased up to 10% of the bank owned by businessman Sean Quinn. He had accumulated a 25% stake, more than revealed.

The bank also showed that 9.535 million euros was paid to the bank’s directors. Five executive directors, who managed the bank during the year, received a combined 8.13 million.

Some 255 million euros was advanced to 13 directors of the bank during its 2008 financial year to 30 September last, while 115 euros million was repaid. Including their board fees, that's 20 million euros in total for each of the 13 directors in 2008.

The outstanding amount owed by the directors at 30 September amounted to 179 million euros, of which 83.3 million was owed to the bank by the former chairman, Sean FitzPatrick. His loans were hidden by them being transferred to another Dublin bank at audit time with the connivance of Anglo's then CEO and other senior executives.

As scapegoats go, Sir Fred Goodwin is straight out of Central Casting. He's a banker; he's mucked up big time, cost the taxpayer sums still too large to calculate properly, and he's walked away from the mess with riches beyond the avarice of a Premiership footballer. All he lacks, as a media villain, is a pair of staring eyes and record of cruelty to animals.

If Alastair Campbell were still around, Sir Fred might have been saddled with even that. But this week, as loomed the handing to banks of further barrels of public cash on what the furniture stores used to call easy terms, the Government had no need for nudge-nudge rumours of scuttlebutt to create a diversion. It had information even more incriminating and instantly unpopular: the size of Sir Fred's pension pot.

It was huge; it was blood-pressure raisingly indefensible; and, above all, it seemed politically useful. Ministers had known the scale of it for months; something pretty close to its size had been reported on City pages as far back as 14 October last year.

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Gus: When one tallies all the rescue packages from Europe, the US and the rest of the world (including Russia and China), I would not be surprised if my "guesstimate" (actually a sharp calculation of bad debts differentials) of 15 trillions is accurate so far...  see toon at top and read the blogs below it...

As Italy's Banks Tighten Lending, Desperate Firms Call on the Mafia

By Mary Jordan
Washington Post Foreign Service
Sunday, March 1, 2009; A01

ROME -- When the bills started piling up and the banks wouldn't lend, the white-haired art dealer in the elegant tweed jacket said he drove to the outskirts of Rome and knocked on the rusty steel door of a shipping container.

A beefy man named Mauro answered. He wore blue overalls with two big pockets, one stuffed with checks and the other with cash. The wad of bills he handed over, the art dealer recalled, reeked of the man's cologne and came at 120 percent annual interest.

As banks stop lending amid the global financial crisis, the likes of Mauro are increasingly becoming the face of Italian finance. The Mafia and its loan sharks, nearly everyone agrees, smell blood in the troubled waters.

"It's a fantastic time for the Mafia. They have the cash," said Antonio Roccuzzo, the author of several books on organized crime. "The Mafia has enormous liquidity. It may be the only Italian 'company' without any cash problem."

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in one of the comments above didn't I call "mafia/investor/insurer" those indulging in CDS (credit default swaps). Didn't I say the mafia would be proud? see toon at top...

From Chris floyd...

Following the example of Arthur Silber, today we look to the work of Professor Michael Hudson to cut through the bewildering thicket of cant, con and deliberate deceit that surrounds the various "solutions" to the economic crisis. In his latest Counterpunch piece, Hudson addresses the seemingly counterintuitive spectacle of watching Alan Greenspan, the Arch-Druid of the "free market" cult, calling for nationalization of the nation's banks:

How is it that Alan Greenspan, free-market lobbyist for Wall Street, recently announced that he favored nationalization of America’s banks – and indeed, mainly the biggest and most powerful? Has the old disciple of Ayn Rand gone Red in the night? Surely not.

The answer is that the rhetoric of “free markets,” “nationalization” and even “socialism” (as in “socializing the losses”) has been turned into the language of deception to help the financial sector mobilize government power to support its own special privileges. Having undermined the economy at large, Wall Street’s public relations think tanks are now dismantling the language itself.

Exactly what does “a free market” mean? Is it what the classical economists advocated – a market free from monopoly power, business fraud, political insider dealing and special privileges for vested interests – a market protected by the rise in public regulation from the Sherman Anti-Trust law of 1890 to the Glass-Steagall Act and other New Deal legislation? Or is it a market free for predators to exploit victims without public regulation or economic policemen – the kind of free-for-all market that the Federal Reserve and Security and Exchange Commission (SEC) have created over the past decade or so? It seems incredible that people should accept today’s neoliberal idea of “market freedom” in the sense of neutering government watchdogs, Alan Greenspan-style, letting Angelo Mozilo at Countrywide, Hank Greenberg at AIG, Bernie Madoff, Citibank, Bear Stearns and Lehman Brothers loot without hindrance or sanction, plunge the economy into crisis and then use Treasury bailout money to pay the highest salaries and bonuses in U.S. history.

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In his speech on Iraq redeployment today, President Obama pledged to have all troops, including "residual forces," by the end of 2011. This is the pledge I have been waiting for:

Through this period of transition, we will carry out further redeployments. And under the Status of Forces Agreement with the Iraqi government, I intend to remove all U.S. troops from Iraq by the end of 2011.

The US Treasury wants more regulation of derivatives - the complex financial instruments that brought down some of Wall Street's biggest names.

Proposals to be set out by Treasury Secretary Timothy Geithner will call for an electronic system to monitor buying and selling in the market.

Firms trading in derivatives will need enough capital in case they default and will face tough reporting requirements.

AIG and Lehman Brothers were among the firms ruined by dealing in derivatives.

Perhaps the most notorious form of derivative is the credit-default swap.

Insurance giant AIG sold these to investors as a form of insurance to protect against defaults on mortgage-backed securities.

But the firm had to accept a hefty federal bailout after it was unable to support the contracts.

"The days when a major insurance company could bet the house on credit default swaps with no one watching and no credible backing to protect the company or taxpayers from losses must end."
Timothy Geithner - Treasury Secretary

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See toon at top and read comments below it especially do not sneeze and see toon overthere...

By GRETCHEN MORGENSON and LOUISE STORY

In late October 2007, as the financial markets were starting to come unglued, a Goldman Sachs trader, Jonathan M. Egol, received very good news. At 37, he was named a managing director at the firm.

Mr. Egol, a Princeton graduate, had risen to prominence inside the bank by creating mortgage-related securities, named Abacus, that were at first intended to protect Goldman from investment losses if the housing market collapsed. As the market soured, Goldman created even more of these securities, enabling it to pocket huge profits.

Goldman’s own clients who bought them, however, were less fortunate.

Pension funds and insurance companies lost billions of dollars on securities that they believed were solid investments, according to former Goldman employees with direct knowledge of the deals who asked not to be identified because they have confidentiality agreements with the firm.

Goldman was not the only firm that peddled these complex securities — known as synthetic collateralized debt obligations, or C.D.O.’s — and then made financial bets against them, called selling short in Wall Street parlance. Others that created similar securities and then bet they would fail, according to Wall Street traders, include Deutsche Bank and Morgan Stanley, as well as smaller firms like Tricadia Inc., an investment company whose parent firm was overseen by Lewis A. Sachs, who this year became a special counselor to Treasury Secretary Timothy F. Geithner.

How these disastrously performing securities were devised is now the subject of scrutiny by investigators in Congress, at the Securities and Exchange Commission and at the Financial Industry Regulatory Authority, Wall Street’s self-regulatory organization, according to people briefed on the investigations. Those involved with the inquiries declined to comment.

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Here we can only move on to my explanation of CDS... see above "do not sneeze". See other financial comments above it as well (greed on credit) and other stuff on this site including yo yo yo hope...

I knew that...

From the NYT

Bets by some of the same banks that helped Greece shroud its mounting debts may actually now be pushing the nation closer to the brink of financial ruin.

Echoing the kind of trades that nearly toppled the American International Group, the increasingly popular insurance against the risk of a Greek default is making it harder for Athens to raise the money it needs to pay its bills, according to traders and money managers.

These contracts, known as credit-default swaps, effectively let banks and hedge funds wager on the financial equivalent of a four-alarm fire: a default by a company or, in the case of Greece, an entire country. If Greece reneges on its debts, traders who own these swaps stand to profit.

“It’s like buying fire insurance on your neighbor’s house — you create an incentive to burn down the house,” said Philip Gisdakis, head of credit strategy at UniCredit in Munich.

As Greece’s financial condition has worsened, undermining the euro, the role of Goldman Sachs and other major banks in masking the true extent of the country’s problems has drawn criticism from European leaders. But even before that issue became apparent, a little-known company backed by Goldman, JP Morgan Chase and about a dozen other banks had created an index that enabled market players to bet on whether Greece and other European nations would go bust.

Last September, the company, the Markit Group of London, introduced the iTraxx SovX Western Europe index, which is based on such swaps and let traders gamble on Greece shortly before the crisis. Such derivatives have assumed an outsize role in Europe’s debt crisis, as traders focus on their daily gyrations.

A result, some traders say, is a vicious circle. As banks and others rush into these swaps, the cost of insuring Greece’s debt rises. Alarmed by that bearish signal, bond investors then shun Greek bonds, making it harder for the country to borrow. That, in turn, adds to the anxiety — and the whole thing starts over again.

On trading desks, there is fierce debate over what exactly is behind Greece’s recent troubles. Some traders say swaps have made the problem worse, while others say Greece’s deteriorating finances are to blame.

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If one reads the do nott sneeze article above and the bet against one's own product above as well, one can see that this activity should be illegal and prosecuted forthwith retrospectively. Although it is hard to prove there is or was intent to precipitate the ruin of an "insured" in order to cash in, the simple fact of betting against one's own actions is too pervese for words... see also toon at top.

In another comment on this site, I exposed the hidden value of derivatives:

the world GDP is about 60 trillion US dollars.

The amount of money floating around worlswide is about 130 trillion US dollars.

The amount of derivatives (bets on the house), at last computation, is about 700 trillion US dollars...

Make the sums....