RISMEDIA, May 11, 2010—Oh, it’s big alright. It is simply the greatest mystery of our time.
If it were the heavens, it would have been pondered and imagined, studied and charted, and ultimately explored to the limits of our ability.
Or, consider the wonder of the oceans blue; from Jules Verne to Jack Cousteau to Dr. Robert Ballard, we have romanticized about what lies beneath in the briny deep.
The more we probe these vast realities of the natural world, the more we learn about the details and, ultimately, there is an answer for every question.
But, this is a mystery so big and scary that, apparently, if anyone does know the answer, they probably have good reason not to talk.
After watching the Goldman Sachs testimony about how they created imploding loans to fill the pools to bet against and then took the worst of the worst to reference in synthetic CDOs they sold as Triple A to their clients, mostly pension funds, it does raise some curiosity about other firms’ involvement in similar schemes.
Goldman Sachs wasn’t the only institution doing this. Illegally pushing designed- to-fail loans to anyone for any purpose and betting against their performance or creating “synthetic” CDOs.
CDOs are a type of derivative. A derivative is defined as something whose value is not it’s own, but based on something else.
World Bank of Settlements monitors derivatives, and according to their report, there are $1,000 trillion in derivatives. The numbers may change, but the result is the same.
Scattered all over the world, investors, governments, retirement funds, and individuals all hold paper whose value is based on something else—but, what?
Not gold or silver, not gem stones or stocks, not bonds or real estate and certainly not cash, because the value of everything on the planet is only about $165 trillion. There’s a new definition of short for you, as in we are short about $835 trillion. Wait, let that sink in for a moment then consider this.
The world’s annual Gross Domestic Product, the value of all goods and services, is less than $60 trillion and the US share is about $14 trillion. The U.S. National Debt is fast approaching $13 trillion, and that number will soon be $14 trillion so we will soon owe more than we make.
How is it possible that one category of “investment” could be over-sold by six times the value of everything? What does it mean? Is it fractional reserve banking? Is it counterfeiting? Is it accounting trickery? Yes, yes, and yes; but wait, there’s more! It’s all “synthesized” for your deception.
That’s right. They made up, out of thin air, imaginary debt to bet against. In the absence of enough real debt to feed the machine, Wall Street created investments that were nothing more than bets that existing pools of mortgages could be cherry picked for default potential and resold to investors who thought they were buying a safe revenue stream. There are no assets backing these pools so there is nothing for investors to recover.
Thank you for playing; here’s a home version of our game. Next!
Based on what we have learned thus far about the conduct of Wall Street and their “what are ya gonna do about it?” attitude, it should surprise no one to discover that the cookie jar has been cleaned out. As I predicted long ago, governments are now collapsing, people are rioting in the streets and in our own country, states like California as well has many counties and cities are teetering on the brink.
For those expecting the other shoe to fall, look to pension funds.
If you are part of a pension fund that invested in derivatives, you might need to rethink your retirement plans.
Many pension funds were already underfunded. And, the Pension Benefit Guarantee Corporation is now $12.9 billion upside down.
Consider that much of the principle value of funds has been lost as real estate values declined and their derivatives prove to be worthless.
And then, last Thursday came an inkling of what could happen as the stock market recorded its largest decline in history, falling nearly a thousand points.
Explanations for the phenomenon have been mixed. First came the “fat finger” theory suggesting that a non-dexterous trader wanted to sell a million shares and hit some extra zeros, turning it into a billion. But, that takes several “fat fingers’ to add all of those zeros.
Others say it was programmed trading, and that once the free fall started, those programs began dumping stock.
So far, no one has suggested that it might have been deliberate. However, the run on Bear Stearns was engineered; why not a run on the entire market?
If we knew who may have made a lot of money shorting the market that day, we might be able to get some answers. But, we still don’t know who shorted and destroyed Bear Stearns.
Taken in the context of an $835 trillion shortfall in derivatives, Thursday’s sell off may be but a glimpse of things to come.
If anyone knows the answer to the question, I can’t wait to hear it. But, in the meantime, I can’t shake the uneasy feeling that it’s all air.
George W. Mantor is known as “The Real Estate Professor” for his consumer education efforts including a long-running radio program, monthly workshop series, public appearances, and frequent articles.
During a career dating back to 1978, he has amassed experience in new home and resale residential real estate, resort marketing and commercial and investment property.
Prior to starting his own real estate and mortgage brokerage in 1992, he had been Director of Training and Customer Service for Great Western Real Estate. In addition, he has served on virtually every real estate committee, including a term as a Director of the California Association of REALTORS.
George is a nationally respected authority on all areas of real estate and is frequently quoted in a wide range of publications. He is an oft invited guest of Fox Business Network and for many years, he was the host of “Keepin’ It Real…Real talk about the real thing, real estate” on KCEO radio.
The Real Estate Professional includes him in “a directory of the Nation’s outstanding authors, columnists, and speakers. His articles have also recently appeared in Real Estate Finance, The Real Estate Professional, National Real Estate Investor, Broker Agent News, and Realty Times. His blog is http://www.realtown.com/gwmantor/blog.