What's a Trillion?

A one, with twelve noughts after it.

1,000,000,000,000.

According to Wikipedia humans have been around for about 40,000 years. Not long really. The last neanderthal man was still grunting around 30,000 years ago, so 40,000 years seems generous.

Some simple maths. 40,000 years * 365 days * 24 hours * 60 minutes = 210,240,000,000.

Thats about one fifth of one trillion.

To get this in perspective, if Adam (Eve's bloke) had opened a non interest paying account at the beginning of humanity and saved a pound a minute, he'd have a fifth of a trillion quid now. But he'd have to keep saving saving for another twenty thousand years to able to buy the toxic debt we all just insured for "Sir" Freds RBS.

If Adam had been particularly thrifty, and saved a fiver a minute, he'd have a whole trillion now. About two thirds of current debt in the UK.

Lets have another perspective on a trillion

It would take a jet plane flying at the speed of sound, reeling out a roll of dollar bills behind it, 14 years before it reeled out one trillion dollar bills.

One more (further contributions gratefully received).

According to geologists the planet we live on, Earth, (Bankers and politicians live on another planet) formed about 4.54 billion years ago. If God him/herself had started saving a dollar a day on the first day of the planet, that would be $1.66 trillion now. So not really enough to pay off UK indebtedness. And a bit less than the projected difference between US government spending and revenues, for the next fiscal year.

Happy Days :-)

Dates for your diary: Arse kicking in the Church.

In the future you may well be asking, "What were you doing on 8th March, 16 April, 26 December 2009?".

I won't say why exactly here, now, on 24 February 2009, but here is what I predict.

On or about those dates something which the US "perceives" as external (so it could be external and also be part of itself is does not acknowledge) will fundamentally undermine the US belief in its value system (i.e. money, "success"; there will be a great sense of having invested in something which turns out to let it down (false gods, articles of faith - money, free market); it could also be that the ideology of winner takes all is best for all is severely shown for what it is in a societal context - the hidden unloved and uncared for people of the US will be undeniably (to sane people) visible and their pain and distress becomes part of the national psyche. And these are not just down and outs, but middle class people whose regular savings and pensions have been so slaughtered that they have lost financial stability and security.

One way or another, there will be an almost shocking realisation around money and values in the US.

These are things which are already going on underneath the surface, like depth charges....but some event or speech around the dates mentioned should pin point a sea change. Its the moment when even money falls away and the problem becomes so fundamental a society questions its entire value structures, the validity of those values, and where they came from.

I know these are not specific predictions and this might sound like more of the same but these dates (plus or minus a day or two) will deal once and for death blows; not recoverable from without transformation and without the prop of what was the former foundation.

By the end of the year the US and Western belief system in capitalism, and free market fundamentalism, will know its been truly Tango'd.

A few years ago there was a glorious comedy TV series in the UK called "Father Ted" about the life of some priests on an Irish island. In one episode a priest loses a bet and his forfeit was to "Kick Bishop Brennen up the Arse". Afraid to do so, he was counselled by the other priests that the Bishop would be so taken aback and in shock that he wouldn't even believe it had happened. Well, it was partly true, the Bishop was sent into a catatonic stupor for days. But eventually the (accidental) disclosure of of a ten meter high photo of the arse kicking event brought the Bishop around to the reality of what had happened.

We are collectively having a Bishop Brennen moment right now. The politicians and bankers are trying to lull us into disbelief. But the ten meter high photo is developing, fast. And we are waking up to the fact that our arses have indeed been kicked by the bankers. Indeed the whole church of capitalism has been kicked up the arse by its priests.

And perhaps its time. Avarice, the love of money, is the root of much evil. In the absence of the love of much else (and I mean devoting time and money to that), it has made us the slave of money, rather than money the servant.

As a good friend of mine once said, what's a value 'til it costs you something?

Lets all ask what our values are worth, and just what the terrible hardship is we fear that we aren't joyfully able say "yes" to that for a more sane world.

The Safety Systems Were Deliberately Dismantled

We have learned from communism that government without business is tyranny. It seems we are learning that business without government is piracy.

Here’s something to consider.

PHASE 1

After the Great Depression two major lessons were learned about money, markets and banking. Legislation was introduced accordingly.

1. The Glass Steagall Act 1933 separated investment banking (taking risks with your money for bankers gain) from traditional banking (looking after your money, processing payments and conservative Mr Mainwaring type lending). This division meant that any losses taken by bankers taking risks would not affect the basic banking that you and I and everyone else depend on.

2. The “uptick rule” was introduced in 1938 after a review of the effects of short selling and effectively stopped it.

Sensible stuff.

PHASE 2

Following intense lobbying by the banking sector, the Glass Steagall Act was actually repealed in 1999 by the Gramm-Leach-Bliley Act.

As a direct result of this major banks became legitimised in their involvement in, amongst other things:

Mortgage Backed Securities (viz sub-prime);
Special Investment Vehicles (SIVs) (off balance sheet stuff); and our friends,
Collateralised Debt Obligations (CDOs) (See Synthetic Money post below).

In addition, the uptick rule was eliminated by the SEC in July 2007.

Hmm.

PHASE 3

The US Commodity Futures Modernization Act 2000 (nice sounding title) was hurriedly tacked on at the last minute to a must-pass 11,000 page budget bill on December 15, 2000 (the last day before the Christmas holiday when the politicians went home). Its sponsor was one Senator Gramm (same Gramm as above).

Of note also was that this was in the short period following George W Bush's election while then President Clinton was sill serving out his final days as President and as outgoing president was in no position to veto anything. Like the period we have just had between Bush and Obama.

The timing and procedure adopted by Gramm meant the bill by-passed the substantive policy committees in both the House and the Senate so that there were neither hearings nor opportunities for recorded committee votes.

As no-one had time read the 250 page bill (11,000 were in the budget bill) they just went on what Gramm said it was.

Gramm characterised the Act as follows: to ensure that neither the SEC nor the Commodity Futures Trading Commission got into the business of regulating newfangled financial products called swaps—and would thus:

"protect financial institutions from overregulation" and "position our financial services industries to be world leaders into the new century."

Splendid, they said. Now can we all go home for Christmas? And they did.

What they had signed up to was extraordinary. The “protection for financial institutions” (poor lambs) was provided by actually barring, yes barring, regulators from regulating, amongst other things, the credit default swaps (CDS) market and banking involvement in derivatives generally.

The regulation of banks' involvement in CDSs and derivatives was actually made illegal.

Pause for breath needed?

As a result, what became a $62 Trillion market (four times the size of the US stock market) was unregulated. No one was allowed to make sure hedge funds and banks had the assets to cover the losses they guaranteed.

Well, reeling as I am sure you are, there’s just a wee bit more. It's a side show now, but it seemed important at the time.

The same Act exempted most over-the-counter energy trades and trading on electronic energy commodity markets from government regulation. This was at the behest of lobbyists working with Gramm from a company which no-one had really heard of then, Enron.

Gramm's wife, coincidentally, was on the board of directors of Enron when it collapsed.

The “Enron loophole” which deregulated energy trading was sought to be closed in Senate Bill S.2058 in 2008, in large part because unregulated speculation had led to rocketing oil prices (remember $148 a barrel last year?).

President Bush vetoed it. Thankfully he was overridden by the House and Senate.

And finally.

In 2004, at the request of the major Wall Street investment banks, including Goldman Sachs, then headed by Hank Paulson , the SEC agreed unanimously to release the major investment houses from the net capital rule.

This was the end of the requirement that the US investment banks’ brokerages hold reserve capital.

The effect of this was to take the limit off leverage.

The SEC decision came following on from the complete dilution of restrictions regulating the capital requirements of the foreign operations of US investment banks in the European Union.

EU regulators said they would accede to US pressure and not scrutinize foreign firms' reserve holdings if, and only if, the SEC agreed to do so instead. The problem, however, was that the 1999 Gramm-Leach-Bliley Act (yes) had put the parent holding company of each of the big American investment houses beyond SEC oversight.

In order for the agreement between the EU and the US to go ahead, the investment banks lobbied for a decision that would allow "voluntary" inspection of their parent and subsidiary holdings by the SEC. This was accepted. (I am weeping)

As part of the deal repealing the net capital rule, the SEC agreed to the establishment of a risk management office that would monitor signs of future problems.

This office was later dismantled after discussions with Hank Paulson.

It took until late September 2008 for the SEC to agree to end the 2004 program of voluntary regulation.

My sincere hope is that these events will rekindle the debate about the roles of capital and labour (money and people), about individual freedom (personal and corporate) and the inevitable social contract with the communities those individuals and corporations live in, and about law making and ideals. There never has been such a thing as a "free" market. That was a quite conscious rebranding of capitalism that took place in the late seventies, and it was a polarised and lop sided reaction to the then opposing philosphy of communism.

In the name of the free market, and indeed ironically of democracy, our society effectively killed off debate about what was individual and social good. Since then the prevailing philosophy has been that all society needs is individuals pursuing their economic goals, regardless of moral, ethic or conscience, and that everything will take care of itself.

This is the time for hope for something new to be able to collectively flower.



(With thanks to research on Wikipedia)

Myth - Shares prices beat gilts over very long term

The Financial Times used to have two banners on the top left and right of its front page. One read "Friend to the Investor", the other read, "Foe to the Speculator". Hard to believe these days.

Let me set my stall out: I am not against capitalism but I am allergic to untruths propogated by its anti-anythingelseaswell proponents. New companies with successful innovative products and services will always rocket in value, and long may that be the case. But with mature companies its a different story.

Taking figures since 1900 to the present day, hot off the press research by the London Business School for Credit Suisse has shown that, without dividends being reinvested, over long periods share prices do no better than Government gilts and sometimes worse. If, and only if, divis are re-invested in the same shares do shares do better as investments, but importantly this is not because of gains in the share price.

Moral of the story: in this period of share price "correction", expect to lose the share price gains that have been made in the last decade or so (Japan is now where it was 25 years ago, FTSE 100 down 28% on 10 years ago), and look at the dividend. Expect good solid companies which pay regular strong divis to do well.

An outbreak of common sense investment clarity in our speculative fog. Reckitt and Benckiser comes to mind.

Short video at:
http://www.ft.com/cms/bfba2c48-5588-11dc-b971-0000779fd2ac.html?_i_referralObject=1029042602&fromSearch=n

Apologies, Integrity and Restitution

Sorry may well be the hardest word.

But coming from a man whose leadership, acts and omissions led directly or indirectly to his own enrichment but led to the company he ran impoverishing many thousands around him and destabilising the society he lives in, it isn’t enough.

If I say “sorry” to you it is about feelings. Yours of hurt and anger, and mine of conscience and culpability. Saying sorry is good, and our society would be a good deal better if there were more of it. But it addresses feelings. It doesn’t change facts. And it isn’t a get out of jail free card.

To have integrity an apology must not just come from the mouth of a man, it must come from the whole of him, with a genuine sense of contrition and a willingness to offer whatever restitution he can. However much that will not undo the consequences of his failings.

A legal, rather than moral, obligation to make restitution can be triggered by two different types of causative event:

1. Wrongs
2. Unjust Enrichment

We have yet to see integrity from the bankers who keep offering apologies.

Until we do, we may feel justified in declining to accept their apologies and reserving our rights.

Telling it the Way it Is: Reasons to Be Cheerful

Am I being pessimistic about the way things will go economically? Well, maybe. But it seems to me the very structure of our financial system (see Synthetic Money below) has put us in what engineers call a negative feedback loop. I may be wrong, but if I am I’m in very good company, and company which is going to be spending your money soon.

Feb 10, Timothy Geithner, US Treasury Secretary. “The financial system is working against recovery, and that’s the dangerous dynamic we need to change,.. “Without credit, economies cannot grow, and right now, critical parts of our financial system are damaged.”

Feb 10, Tom McKillop, ex-RBS Chairman. "Securitisation was perceived as a stabilising influence in financial systems, distributing risk and making the whole system more stable. It didn't turn out that way, it turned out to be the absolute opposite of what was expected."

Feb 10, Ed Balls, UK, formerly a chief economic adviser to the Treasury. "The reality is that this is becoming the most serious global recession for, I'm sure, over 100 years as it will turn out." "I think this is a financial crisis more extreme and more serious than that of the 1930s."

And last week Gordon Brown, the UK Prime Minister said that the world was in a full-blown economic "depression", but his office quickly declared that comment a slip of the tongue.

There's no technically agreed definition of a depression, but two rules of thumb widely mooted are a 10% decline in real GDP or three years of recession. Its not like the "R" word where there is a definition and one can be declared. So don't worry, there won't be a Depression, not politically.

But a drop of 10% GDP from our already very high standards is hardly a reason to get depressed. Nor is three years of belt tightening the end of the world. Its probably the only way we were ever going to get CO2 emissions down and address ecologically damaging consumption growth, get house prices to a level that support life rather than drain our resources, and address the ideology that growth for growths sake is inherently good (the philosophy of a cancer cell). And maybe we'll even address the issue that GDP has become as a much a measure of consumption as production - heck, if we borrow and spend it all then UK GDP temporarily rises and its trebles all round, despite the mounting debt mountain. Shurely shome mishtake.

And so lets take all the "bad" news as a sign that our collective common sense and conscience is finally asserting itself. And the world will genuinely be a better place.

Governments are Scared. Really Scared.

The post below this one gives the background to why Governments are borrowing zillions to spend. They’re trying to stop economies declining too much, or too fast because the assumptions made about default rates on loans now underpin a huge amount what we call capital in banks, and potential liabilities for insurers. Governments are trying to slow down defaults on these shaky loans which, through the mechanism described, have become the capital base (and therefore lending base) of the banks.

In short, the basis of capitalism itself, capital, has been undermined by what has been set up in esoteric financial structures.

If individuals and companies default on paying loans at the rate currently predicted, Governments may not be able to fill the hole of all the AAA rated stuff becoming junk fast enough. Regulators will have to shut the banks down or nationalise them – or restructure the banking system entirely (good/bad bank). But because the banks are now so interconnected (see it like STDs passing around an unprotected sex orgy) this would simply have to be a world wide agreed solution – no country could go it alone.

Thats why govts are panicking and printing money and exchanging liquid government gilts/Treasury Bills for the banks worthless stuff. (As an aside, in the US the Federal reserve is refusing to say even to Congress what they, the Fed, have taken from whom in exchange for how much – what we do know is that operation, unvoted on by lawmakers, and with no public disclosure, has cost $8Trillion, more than four times TARP plus the current Obama stimulus package combined – freedom of information court cases pending (Bloomberg LP v. Board of Governors of the Federal Reserve System, 08-CV-9595, U.S. District Court, Southern District of New York (Manhattan). (If you are not a conspiracy theorist check out the history of the Fed on youtube).

We really do not want RBS nationalised because all these crap loans and synthetic instruments liabilities would then have to be guaranteed by us the taxpayer….the liabilities are potentially astronomical – no-one knows or can know what these liabilities are.

Which is why the banks now wont lend except to sure-fire real world good quality borrowers….they’ll need the money themselves… But if they don’t lend, companies will inevitably default on existing loans. Companies commonly borrow money on a “rolling” basis. Its like having a mortgage which you renew each year – you pay it back and a “new” loan for the same amount is made to you on newly renegotiated terms. You need the mortgage each year to live in your house.

But as these rolling agreements come up for renegotiating the banks are not relending. And there’s nowhere else to borrow. So the company simply can’t pay the loan back, and its bust. Even if they can re-borrow, it’s on high interest rates which makes them less profitable, and more likely to default. And try getting insurance on the loan! More expensive loans, and frightened lenders. There is no stopping this. This is why even the politicians are saying that the govt spending won’t fix the recession, but it will be a lot worse if they don’t. Its true. But the costs of preventing the worst will be paid for decades, and even then , we simply don’t know how bad it will be.

What we do know is that the “money” which was “created” to pay bonuses now isn’t there, that the capital the banks and regulators thought they had to lend on isn’t there, that lending shrinks by a double digit multiple of a banks capital base, and that the rate at which borrowers are likely to default is going through the roof, which further downgrades the “assets” when the credit rating agencies examine the books. Companies are losing a lot of money and are looking likely to default on the loans they have (triggering a synthetic market multiplier), and unemployment is soaring leading to further mortgage defaults.

That’s why with consumers and companies stopping spending, Obama/Brown et al have to focus on Govt spending to keep companies profitable (so they wont default and banks can lend to them), and keep people in jobs (so they wont default on their mortgages).

But Govt is losing the battle.

Its why ON TOP of Obamas stimulus package, he’s going to need even more money to fill the AAA rated holes which are already appearing at a frightening rate in banks as credit downgrades hit their capital base of wobbly loans. Everyones hanging on to their cash, not surprisingly, and Govt is all that’s left to fill the gap of spending, but the consensus is its too late and it just can’t be enough.

How will this end?

Well, this is the dramatic beginning to the end of the Anglo Saxon economic hegemony in the world. Even if the worst of a depression is avoided, the interest on debts the UK/US will be paying to China, other States (oil producers mainly), and a wealthy elite of bondholders, will be with us for a long, long time. We already spend more money paying interest in the UK than we do on Defence spending. This constitutes a massive drag on our capacity to recover from recession (lots of interest to pay every year), like Japan. We are moving closer to a position of third world countries who cannot generate enough revenue to ever pay off their debts and the interest wipes out a good deal of the profits they make from their work. If this seems exaggerated, this is from an LSE professor in the FT last week.

“I have spent a good part of my career as a professional economist working on developing countries and emerging markets - in South America, in Central and Eastern Europe and the former Soviet Union and in Asia…. as the recession deepens, and as discretionary fiscal measures in the US produce 12% to 14% of GDP general government financial deficits, [this produces] figures associated historically not even with most emerging markets, but just with the basket cases among them, and with banana republics.”

The UK, of course, is right up there.

That’s where we’re at with borrowing to pay for ameliorating the effects of this banking bonanza hangover.

We’re not going to be third world, but you get the drift.

So a chunk of what we took for granted will go in terms of easy consuming lifestyle of goods, services and energy, as we live under the yoke of either increased taxes (to pay for govt interest payments) or devalued currency (through printing money to pay for govt interest payments). That’s the only way to pay our increased public debt interest (well, we could borrow more….).

It’ll take 2-3 more years to work through, and then there will be no upswing like a V, it’ll be like an L. Once the soufflé is flat it’ll just stay like that because of the amount of interest payments on debt and the strict rules on new lending that will be imposed.

So we’ll just live within our cash means. Less financing deals, less equity release, less credit card ease, less money to borrow to buy houses. So less easy money. Just what you’ve got in cash and savings. You want something, you’ll have to save for it. And it’ll be less easy to create surplus to save.

Not the end of the world. And life will always be fine for those at the Ritz. And not everyones in the same boat.

There’s a book called “The Second Great Depression” which predicted the downfall rather well. The writer was American and was asked what it would be like after it all fell down in the States. After a thought he said it would be like living in England; you mainly work for what you need, not what you want, and have cost free pleasures like walking. Sobering to get a perspective on our country.

Research shows that feelings of wealth are subjective (we compare to others) and as long as we’re fed, sheltered and safe, it ain’t money that makes us happy. Maybe something else can come through when all the clamour dies down.

In the meantime I recommend massaging and being massaged by partners and friends, home baking, making music together, lovely walks, sharing meals with friends and loved ones, a good book, and old fashioned fun and laughter.

Your neurochemistry can’t help but induce happiness if you smile. :-)

Synthetic Money Brings the House Down

Here's roughly whats got the banks and big insurers into trouble.

Underneath the lingo, the mechanisms are really, really simple. Thefigures below are just for explanation.

1. Lets say a bank has a portfolio of “sort of ok” loans, and statistics show that defaults on those loans over any 50 year period are about 10% (lets call the loans BBB rated). The first move is that bank sells off the risk of 10% of those loans defaulting - to other people. One way it does this is by using the existing interest payments on those loans to buy credit default insurance on that first 10% of the portfolio. So its first 10% loss on the portfolio is covered.

2. What that leaves the bank with is 90% of the portfolio of loans which, according to statistics and therefore the ratings agencies, will hardly ever go into default. The effect of this is to make 90% of the portfolio a much higher rating. Lets say that 90% is now AAA rated.

That’s it. How to make AAA silk purses out of sows ears.

Regulators, accountants and bank management didn’t look past the AAA rating. They assumed that AAA was AAA, and therefore (a) reduced their other forms of liquid capital and (b) paid themselves a handsome bonus for increasing the amount of AAA assets the bank had.

NEXT STEP

So now the bank has got this AAA rated stuff made out of BBB stuff, the next thing to do is to do the same trick within the AAA stuff itself. So the bank calls 90% of it the “Super Senior” tranche and sells off the risk of the remaining 10% defaulting.

Now, there’s no such thing as something higher than AAA rated. So insuring the default on the first 10% of losses on the AAA rated (but non Super Senior) tranche was cheap – its just the cost of default on a AAA rated security. Bonuses all round.

(Tea break if you like here – its not complicated this, really)

The first bank now has 90% of 90% of the original BBB stuff as “Super Senior” (that’s 81% of the original). This Super Senior stuff is considered SO safe that banks didn’t feel they needed to insure it.
They referred to it informally as quadruple A rated. (See Note 1 when you've read the rest of this).

The invention of the super-senior tranche, then, was a way of letting banks have their cake and eat it too. They could take a load of not very good debt onto their balance sheets, "fully" hedge (insure) it (with only the it-could-never-default tranche left over) and book all the remaining cashflow as pure profit with no credit risk.

And so the banks took billions of dollars of securities onto their books, and "fully" hedged them while not really hedging most of them at all. This is financial innovation. Bonuses all round.

So far so magical. Of a portfolio of "sort of ok” loans, 81% have now been made so safe there’s no need to insure them, in fact they’re as good as cash, and 9% of them were sold on and either considered as good as cash or insured at rates assuming they were AAA rated. And accountants, regulators, management booked it all as AAA rated, and insurers wrote the insurance etc etc

Now the magic works as long as your original 10% in every 50 year period default assumption was correct. But what happens if theres a likely 30 % default, as is effectively happening now (in large part due to the unprecedented historical levels of debt/corporate and personal made possible by these very structures, and all the other reasons the economies are slowing down).

Of the original 100% loans, 30% will go bang entirely. But 90% were supposed to be AAA rated! Rock solid. Here’s why this pans out so badly: the first (non AAA) 10% of the loans were insured so an insurer takes the hit. That’s ok up to a point, because the risk was in the premium (or it was supposed to be). And so far, with the odd bailout of AIG, this has stood up. Banks in this phase are insured.

BUT HERE’S WHERE IT GETS NASTY…..

There’s another 20% to go….

Of that 20%, 9% were sold on. Either they will go phut in the future as the economy gets worse (so now no-one wants to buy them), or they have already gone phut (in which case a basket case insurer, AIG, is expected to pay). If there’s no insurance there’s an outright 100% loss of a so called AAA rated investment.

That’s the 9% the bank got rid of.

BUT 11% of the loans are still on the banks books as AAA rated but uninsured (because the super senior stuff was supposedly so safe. The banks kept it because to them there was no risk and it paid the interest rate of the original BBB loans.)

And this is the BIG issue.

In this example, 11% of the banks capital, capital it thought was ultra liquid and super safe, is now unsellable, probably worthless, and uninsured. This is not apparent until (a) either there are actual defaults to that level, or very, very importantly, until the ratings agencies decide to regrade it. And that is what is happening right now; things have deteriorated so that the super senior stuff is in for a reassessment. The lower the reassessment, the lower the percentage of it the bank can call as capital – and some of it is going straight to junk. And that re-rating is happening now. The numbers are big, but it gets worse, a lot worse….

Synthetic CDOs?

When bankers saw how much money was to be made by splicing up these loans in the way described above, they wanted to make more loans than were actually wanted in the real world. No matter. They looked at the market rates for credit default insurance and swaps etc and created new markets in those rates (a market in pure rates). A market mirroring the rates (and indeed the ratings), but not arising out of actual loans….a synthetic market.

And there was no theoretical limit to the size of that synthetic market.

Like betting on a particular horse in a horse race, the odds of that one horse winning are public and there’s no limit to the number of bets that can be placed on the horse, even though punters have no ownership or connection to the horse. The actual loans and insurances and swaps etc. were the horse. The synthetic market placed bets based on the odds.

And by the process of selling off 10% and re-rating what was left, they kept creating more and more AAA stuff, more super senior stuff, and effectively cash. And this happened over and over again. So when, in our example above, the bank “created” AAA assets, this effect of creating AAA assets was mirrored and multiplied when AAA assets were made out of the synthetic market, and the accountants, regulators, management booked it etc etc and everyone made a bonus.

Now at this point you might well ask "Were they allowed to do that?". And the answer was yes. At least after 2000, Prior to that it was illegal. (See note 2 below if your jaw isn't above anything sharp).

And in the same way as, in our example, the bank lost 11% of its super senior assets, there are now (synthetic) multiples of that paper that the bank called its capital….and some of it is facing being downgraded by ratings agencies, which is why banks will need to be recapitalised or nationalised – but no-one knows how much will be needed, or even if its doable.

The world was awash in AAA rated paper – and while the dance continued it was effectively cash (and other slightly lesser forms) – created by structures which took low rated stuff and made it into AAA rated stuff; a process multiplied by a synthetic secondary market in pure (flawed) risk, unrelated to real world lending - money conjured out of nothing. And now those markets have shut down all that “money” has simply evaporated in the same way as it was magicked into existence. It sits like a collapsed souffle, contracts which no-one wants to buy, will probably never want to buy and with risks no-one can assess, and with maturity dates for many, many years to come.

Apart from insurers and hapless investors of so called AAA rated bonds who have been and are being caned, this is the bed the banks made for themselves, and us.

(Note 1: A additional twist is that a proportion of the super senior tranches were insured (who knows how much), but the risk was considered so low there was trivial premium. Although right now the problem is that super senior stuff is being re-rated and that affects the capital base of banks, when defaults rise so the super senior tranche is actually affected, the insurers, mainly AIG, monolines and large invesors, will have to pay out. Ironically, this may (I say may because its all so opaque) put capital into the banks (albeit probably with taxpayer support to the insurer) as it would convert lower graded paper into cash. Further, the Special Investment Vehicles (in which many charities and councils are invested) are structured so that on the default of a few large companies the entire amount of their investment is returned to the bank triggering a huge transfer of wealth from mainly unsuspecting investors. The loss to the investors is massive, where the cash ends up is anyones guess because of the structures.)

(Note 2: In 2000 these activities were not only made legal for the first time (Commodity Futures Modernization Act) but in the same stroke were, believe it or not, actually prevented from being regulated by the authorities, a truly spectacular triumph of interest group lobbying and failure of Government. The legislation was 11,000 pages long and was never even debated by Congress. I think I feel faint.)