Stacy Summary: Swaps wiping out counties, countries and financial systems across the world . . .
“People want to kill somebody, but they don’t know who to shoot at”
Jefferson County’s debacle is a parable for billions of dollars lost by state and local governments from Florida to California in transactions done behind closed doors. Selling debt without requiring competition made public officials vulnerable to bankers’ sales pitches, leaving taxpayers to foot the bill for borrowing gone awry.
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@ Stacy,
Good story on ‘Interest rate swap Armageddon in Alabama’.
It’s corruption writ large and small. The small fry will go down, the corporate criminals – the banks, can negotiate their penalties.
It’s a good illustration of the properties of swaps, where the bank play bookie, and the punters make their bets, never anticipating the potential liabilities in such a small ‘tail risk’:
“Swaps Blew Up
Under Langford’s stewardship, the county bet on interest-rate swaps, agreements that a representative of New York-based JPMorgan Chase & Co. told commissioners could reduce their interest costs. Instead, the swaps — covering more than $5 billion in all — blew up during the credit crisis after ratings for the county’s bond insurers fell. …
Thousands of public borrowers across the U.S. chose a similar strategy, and many are now paying billions of dollars to escape the contracts, said Peter Shapiro, managing director at Swap Financial Group in South Orange, New Jersey. Even Harvard University, the world’s richest academic institution with an endowment of $26 billion, fell for Wall Street’s financing in the dark: It paid $497.6 million to investment banks during the fiscal year ended June 30 because it chose to cancel $1.1 billion of interest-rate swaps.
…The [Jefferson County] sewer financing debacle began in 1996, … The estimated $1.5 billion project grew into a $3.2 billion behemoth, and in 2002 — the year Langford was elected to the commission — county leaders began refinancing about $3 billion in tax-exempt bonds that had helped pay for the improvements.
Interest rates were at a 30-year low. While that made fixed rates attractive, a JPMorgan banker advised commissioners to issue variable-rate debt with swaps layered on top to create a “synthetic fixed rate.” The technique was “supposed to provide a lower rate than traditional fixed rate” bonds… .
Theory of the Deal
Under the deal, the county would pay JPMorgan a fixed rate in return for receiving floating-rate payments from the bank. In theory, the payments to the county would match its debt obligations, leaving its swap payments to the bank as the county’s only cost.
… Langford said in 2005 that the swaps would save $214 million — an assumption based on the county and its bond insurers maintaining their credit ratings.
‘Bunch of Rubes’
“You know, I get the impression that people think a bunch of rubes in Alabama shouldn’t be smart enough to utilize these swaps,” he told Bloomberg News that year.
The county later hired financial adviser James White … who estimated that the commission’s cost for the swaps, $120.2 million, was as much as $100 million too high, based on prevailing rates.
Then, in 2007-08, credit ratings for bond insurers that backed the variable-rate bonds plummeted to junk status because of unrelated losses in mortgage-backed securities. The reduction in credit quality killed demand for the bonds they insured.
Banks were forced to buy the securities, kicking in contract provisions that accelerated to four years from 40 the county’s payment schedule on more than $800 million of the debt. …
Some of the county’s variable rates more than tripled, to as high as 10 percent. Meanwhile, the bank payments it received were decreasing. In March 2009, when JPMorgan canceled its swap agreements, a county filing said they were worth more than $650 million to the bank, which has agreed to waive termination fees under negotiations on how to restructure the county’s debt.
Federal Investigations
JPMorgan disclosed in May that the SEC is investigating the bank’s role in selling the financing structure to the county. The … U.S. Justice Department, is also conducting a nationwide investigation into alleged bid-rigging or collusion in the sale of “municipal derivatives.”
As for Langford, he “sold out his public office to his friends Blount and LaPierre for about $235,000z in clothes, watches and cash to pay his growing personal debt,” said a Department of Justice press release that accompanied the unsealing of his indictment in December. Of more than $7 million in fees Blount allegedly received, he kicked back $371,932 to LaPierre, according to federal documents in the case…”
——————-
Petty personal corruption in the political administration opened the door to massive corporate crime.
Alabama got burned, and JP Morgan got richer on an instrument the banks have used to turn themselves into bookmakers on interest rates.
The punters have been fleeced so bad JPMorgan even waived their cancellation fees! That’s shocking.
Was it really a question of the Fed bailing out the whole world?
I’m not an economist. But at the time I really was surprised to find out that Norway, with a huge financial reserves of somewhat 150 billion dollars, had to extend its credit limit from the Fed significantly in order to make money transfers from the Norwegian central bank to national commercial banks.
The reason as I understood it, was that all payments between banks in the whole (western?) world are made i american dollars. If this is how it works, no wonder why the demand and value of the dollar went skyhigh at the time being, …
@d3do
Yawn DOT DOT DOT I knew you would say that DOT DOT DOT boring, Yawn!!!
God Bless us all! And Tiny Tim!
http://network.nationalpost.com/np/blogs/francis/bush,paulson,bernanke,cox.jpg
Christopher Cox, the chairman of the Securities and Exchange Commission, has said oversight of the municipal bond markets is inadequate, and has urged Congress to take steps to protect both investors and taxpayers. Congress has not taken up the initiative.
http://www.nytimes.com/2009/01/09/business/09insure.html?pagewanted=all
Dedo: yes, clarity!
Cox worked for Reagan. The flag-wavers shouldn’t be complaining now.
“During the second term of Ronald Reagan from 1986 to 1988, he served in the White House as Senior Associate Counsel to the President. His duties included advising on the nomination of three Supreme Court justices, the establishment of the Brady Commission following the 1987 market crash, and the drafting of legislative reform proposals for the federal budget process.[7]”
http://en.wikipedia.org/wiki/Christopher_Cox
@Super,…..no offense, but I think you ought to insert more comma’s, cause I don’t get how your comment meant anything in retort to mine. Not only was it not on the same page,…….it wasn’t in the same frikin’ library!!
Interesting comment though, in and of itself,.
@d3do
no offence…but everytime I read one of your posts lately they seem more about your hurt feelings… which kinda tells me that you haven’t been the victim of crimes against the person…also to include murder alonside theft seems weird… society is much more inclined to punish people for crimes against property than the person??? I may be confused about the kind of murder you refer to but we don’t get many assassinations in the uk… anyway all crime whatever the reason IMO is a result of short term thinking… as I have said before I prefer Max’s approach of boycott or using market forces against the market. Oh and if you dont understand comments, as my teenage daughter used to say before she grew up a bit – whatever!….insert smiley here!!!
@Frances,….laws against crime are there to perpetuate monopolistic establishment, nothing new, just that folk have the wrong end of the stick.
In other words, (because I’ve bin told I can seem ambiguous).
murder, theft, fraud, etc, etc are competing interests to the establishment, and must be stymied.
It’s not just America: Morgan-Chase ambition circled the globe!
http://www.bloomberg.com/apps/news?pid=20601109&sid=a2pGnLOBmPoY
The endowment fund lost more than $10 billion in value over the year, according to the school’s annual report. The Cambridge, Massachusetts-based university has frozen employee salaries, cut staff and offered other workers early retirement to cut costs.
http://groups.google.com/group/alt.gossip.celebrities/browse_thread/thread/3f4b2fd7e54c734b
How well the criminals are rewarded!
http://topics.wsj.com/person/e/mohamed-a-el-erian/451
Yes, Johnny. The more corrupt you are in America, the higher your ambitions may be! Why, you could even be president if you lie, cheat, and steal well enough!
@ Phil
Agree, the possibility of actually doing something/anything at a personal level may seem insurmountable. But if they were going to crash their car in a mountain wall, I kind of expected them to put their seatbelt on or at least brace for impact. Maybe they do, they just don´t want to see the mountain?
@ Dedo
True, but again I just want them to see the mountain. I´m not telling them it´s going to be the end of the world, because its not. Maybe the mountain still is to far away, it needs to get closer to home to the personal sphere?
Haha, yes the fairytale. Isn’t that what everyone wants? That all things bad ends in good?
@ Sideny
I usually use some numbers to explain. Like US debt actually 60 T$. World total annual GDP 55T$. Derivatives total low estimate to be 600T$ and so on. You are not a nutty if backed with documented fact. After these numbers no one usually wants to argue any more. A few wants to know more.
To make the currency story complete:
Australia’s central bank Signals Further Rate Increases, Tolerance of Currency Gains http://tinyurl.com/yha6o3r
European finance chiefs expressed “worries” about foreign-exchange movements.
From: Europe Finance Chiefs Back U.S. Strong-Dollar Stance http://tinyurl.com/yh8pt8x
Let me set someting very straight here. The idea that giving very large bonusses to just a vew people is good for the economy is utterly outmost bogus bollocks. One man can only spend so and so much to a limited chain. Many people spend much more in ratio thinking but also more diverse.
“While Wall Street bonuses are an important component of state revenue, they are not the only component,” Anderson said in an e-mail. “We continue to see substantial declines in tax collections across the entire budget. There is little prospect, if any, for a rebound in receipts by the end of the fiscal year that would remove the need for difficult deficit reduction actions.”
From: Wall Street 40% Bonus Rise Feeds Spending on $43 Steak, Co-ops http://tinyurl.com/ylyjwrj
@Dedo:
Classic.
@y’All
Yep, It’s lonely at the top.
“How the Federal Reserve Bailed out the World” From what I understand about it it’s a delicate balancing act which is sustainable in a steady economy were day to day changes can be balanced out in time. But if somebody pulls a leg out of the system like what happened with Lehman things get much more complicated and somebody has to fill the gap which was the FED in this case.
The problem with the carry trade is that like water, money always will flow from a higher point which is the country with the lowest interest rates to a lower point, the country with the highest interest rates.
This could counter act other monetary policies with unintended concequences as far as I can understand it. So ir coulkd be that money volumes which first poored out of the country come back as an huge inflationairy tsunami when interest rates are increased. Also will the dollar carry trade be destroyed and once again you could have an other Iceland situation.
But one could think that a warned man counts for two man. The other parallel problem of the dollar is the depreciation caused by the los in confidence which forces country out of the dollar. if the wave of dollar carry trade goes in par with unwinding positions what will happen?
All together it isn’t a easy puzzle and not every movement is always obvious in the beginning which makes it very hard to predict. But I am a leyman and don’t have the over sight. One could sometimes make some questimations based on the diffirent ongoing happenings.
Now, for instance we know that the foreclosure debts are still hidden for a certain part which can bring us an other surprise down the line.How much debts will come to the surface later? And we are not even talking about all the toxic assets hidden in the shadow banking system or are thgey gonna hide these foreclosure debt also in that system?
This will ultimaly all together not benefit the confidense in the system and the dollar could take an other confidence hit.
Hope it make some sense this line of thought of mine?
Ah.. still reminded of the ZH quote…
On a long enought timeline, the survival rate for everything drops to zero
Sometimes I regret being born to live these times.. and sometimes I am excited that I can experience this on front row. Can’t really make up my mind which is the best… For the first one it’s mainly because I have kids and I really don’t want them to grow up in a “fallout”-world. For the second one it’s when I forget that I have kids…
@Cash and Mongo,..BTW, that clip I posted for Frances is a prime example of how our perceptions are manipulated from a young age,…go figure : )
mongo “The most tragic thing is that nobody believes me.. ”
I have similar experience, which is terrible! People think you
are a nute-case! But I suppose that´s how it is all designed
already for many years. Thinks are so crazy that “normal” people
do not believe it… so everything flips over the normal become the
a-normal etc.
@Cash and Mongo,…..It’s difficult to take away someone’s identity unless they become aware it’s false.
Try it, have an argument with someone, and keep an eye on how many times you react!
Identity= world view/core values.
Persistent criminals could escape trial under new CPS guidelines
… Persistent criminals could escape punishment even when there is overwhelming evidence against them under new plans allowing prosecutors to overlook minor offences, senior lawyers have warned. …
http://www.telegraph.co.uk/news/newstopics/politics/lawandorder/6378452/Persistent-criminals-could-escape-trial-under-new-CPS-guidelines.html
Well, if the BigBoys cheat, why shouldn’t the small guys get off the hook !
Crazy !
@Mongo/Cash Tango .. nobody believing
Yes … everyone considers themselves too small to be able to do anything anyway … which is why most of them just they turn off. As if to say … ” Let it be ” !
I often wonder why they even bother to vote !
@ Mongo “The most tragic thing is that nobody believes me.. ”
That´s my experiance with people aswell. Few listen, but so many more don´t and push it away.
@Mother
I explained it on another thread :
@Mongo … cross currency swaps
.. is basically an interest rate swap in different currencies. The currencies are normally exchanged at the maturity date at the market price at that date. The go-between bank has to manage the Xrate and Interest rate risk and hedge accordingly.
Here’s a paper from BoA
http://www.classiccmp.org/transputer/finengineer/%5BBank%20of%20America%5D%20Introduction%20to%20Cross%20Currency%20Swaps.pdf
@phil
Thanks, most graciously..Its a ‘standing on the shoulders of giants..’ kinda thing..
I’d like to understand the difference between a currency trade and a currency swap. Aren’t they the same thing? It seems swaps allow banks to continue their charade while they already handed over the local currency to the US to spend. In other words, The only one that benefits is the US, everyone else remains at risk, and the detrimental process (of wealth extraction by the US) continues.
What if all foreign banks got their armies together to capture the US and make every dollar a share in the territories total net output? Would that be a beneficial exercise?
Am in my third day of serious flu…still no impulses to roll around in the mud..
@Frances,…Here ya go, I just thought it was analogous to your attitude, no offense!! : )
http://www.youtube.com/watch?v=kC5hlGqCt0Q
Gordon Brown = Flash Gordon
He is not a over weight Christian socialist Scott, well meaning but stupid lost in the chaos ooo no no he really is fulfiling his child hood fantasies as FLASH GORDON !!! take him seriously now !!!
http://www.dailymotion.com/video/xzhu4_queen-flash-gordon_music
http://video.baamboo.com/watch/2/video/46516
Mother at work !
Creditors To Slice Up The US?
http://www.youtube.com/watch?v=BcNd5jonURU&feature=sub
http://www.kingworldnews.com/kingworldnews/Broadcast_Gold+/Entries/2009/9/25_Jim_Willie.html?36be07a8
@BlackDouglas sounds like a finance fix to me or am I cynical what a joke.
I know iv seen this before 50 days to save the world what hysteria, iv seen this episode before, ha ha ha ha ha
Flash Gordon has warned there are fewer than 50 days left for world leaders to set a course of action to save the planet from devastating climate change.
FLASH GORDON Brown
http://video.google.co.uk/videosearch?hl=en&resnum=0&q=flash%20gordon&um=1&ie=UTF-8&sa=N&tab=wv#
The Prime Minister said there would be a global “catastrophe” if action to tackle climate change was not agreed at United Nations talks in Copenhagen in December. He also insisted “there is no plan B”.
http://thescotsman.scotsman.com/latestnews/Brown-Fifty-days–to.5747301.jp
@fib
seems like lots of people are getting pleasure out of trying to playing puppet master these days… and if or when the shit hits the fan… you won’t see any of these media types… getting their hands dirty, also watch how quickly they will distance themselves from the violence… same old same old!!!
@Fibon11235 … dangerous
I’m surprised hat the States haven’t yet rescinded their contract with the FED Govt. ( = USA ) … and issued their own money based on hard assets.
i.e. no longer “United” States .
From what I hear, nearly all the states are fed up with the interference from the Federal Govt. … on all levels, not even to mention the Money Printing Machine !
FWIW
@ Max what poetry lol this one had me in stitches
“American underclass of US dollar holders armed with guns and gluttonous appetites.”
What a dangerous situation that is emerging in the USA. I feel sorry for them, all of them.
Dont encourage anyone or anything to throw rocks, I fear they may be no stopping the madness when it starts, it hardly needs pushing now does it. Peace and love to all !
Brown: Fifty days to save the world
http://thescotsman.scotsman.com/latestnews/Brown-Fifty-days–to.5747301.jp
You know that propaganda picture with the polar bear on the little piece of ice? Can anyone do a photoshop and superimpose Gordon Brown on the piece of ice.
This is about self-preservation not global preservation!
@y’all
alabama story came back up good… I wanted to go back and reread the story from a couple of days ago but couldn’t find it!!!
http://www.youtube.com/watch?v=8j_TDoOPnIA
Your math here is non-existent.
http://www.huffingtonpost.com/max-keiser/why-no-save-our-happy-mea_b_114682.html
If and only if you assume [as I have heard] that each American owes some 500,000 per a cumulative debt accountancy … then yes.
Set theory issues:
0. Must not have any debt save residual (1% or less) per assets.
1. Must have 500k in bank or equivant fluid assets (cash, valuable metals, …)
2. Must own house or condo etc…
The outcome of this set theory filtering is that only the top 10% (a reasonable guesstimate) could afford to eat at McDs.
Jefferson County meltdown? JP Morgan? Hmmmmm….
Doesn’t President Obama bank there? No conflict of interest, innit? Hey, who handles his account? JD? Nuff said.
Has the US reached the tipping point?
http://seekingalpha.com/article/166596-has-the-u-s-reached-the-hyperinflation-tipping-point
A new record set in Britan!
http://news.bbc.co.uk/1/hi/business/8315907.stm
And to think they didn’t inclund the off the balance sheet debt!
Mike
JFYI …IIRC from yesterday, over 80% of the S&P500 are currently “above” their 50-day moving averages.
You’d think someone would cry “overbought” by now !
I am getting tired of the charade.. almost looking forward to that 40% dive of the Dow and currencies getting whacked (more brutally than today..).. can’t wait because I am so tired of the lies and deceit.
The most tragic thing is that nobody believes me.. except some very close friends who actually take time to READ what is going on.