In many cases this results in a trebling - or more - of reserve requirements and those requirements come in the form of actual cash.
Bluntly - nobody has it, and so everyone is walking around with a big smile on their face hoping that nobody calls them on the fact that these "swaps" in fact have a zero
probability of being paid if and when the defaults occur.In other words the entire foundation upon which the claim that are financial institutions are "well-capitalized" rests is a lie.
Warren Buffett "gets it", in that he has repeatedly called these unregulated OTC contracts "financial weapons of mass destruction." He's right, but so far we have the near-entirety of the equity marketplace whistling past the graveyard, hoping that the actual defaults do not rise to a level that exposes reality - the credit quality claimed on these institution's books is in fact almost entirely fictional.
Here's the truth for you - so when, not if, it blows up you can direct your ire in the proper place - all of the regulators, including but not limited to The Fed, OTS and OCC, know this to be the case. Yet none of them are forcing these institutions to mark their credit exposure and reserve against it as if the wraps do not exist unless those institutions can prove their counterparties can pay.
The fact is that none of the counterparties can in fact pay even a small percentage of the potential claims against them.WHEN
(not if) this blows up in everyone's face make sure you direct your pitchfork and torch brigade at the correct targets.It is notthe investment banks you need to be angry with - it is our bought and paid for government that is responsible for allowing this pervasive and pernicious fraud to both occur and continue, even though they are, as they admitted when Bear Stearns went down, aware of the problem.
If you're one of those people who is allegedly "smart money" and aren't pulling your cash out of harm's way you're not smart at all.
You are in fact an idiot and that whistle in your ear is in fact an approaching train.
Nonetheless the market this morning doesn't seem to care, rallying significantly in big-cap Tech. Huh? Pull the other one fools. You've got a clear recession underway and yet the Nasdaq 100 is up 1.5% this morning, with lots of 3-5% moves? Who are you trying to fool here?
Oh, the Dollar? You better hope that isn't a symmetric triangle that just broke downward, because if it is, well, we're headed straight for a currency crisis.
Why is that happening? No, its not "too easy money."It is happening because our regulators refuse to do their damn job and the foreign exchange markets, along with the "real money" behind them, are well aware of the pernicious and pervasive fraud that our lack of regulatory supervision have enabled.In addition, you, dear Reader, have refused (in the aggregate) to speak up and get your neighbors to do so as well, and as a consequence the market is driving up the cost of your gasoline, heating fuel, electricity, milk, cheese, meat and rice.
The target on that triangle break? Potentially as low as 62, if the "staff" on that pennant is in play, a devaluation over the next month or so of another 15%.
Enjoy the "rally" today, and go back to swilling 'yer beer.
Its much easier to pay $4/gallon for gasoline than to call your Senators and Reps and insist that all these complex derivatives be either proven to be backstopped by their writers with sufficient capital to insure performance or
declared as the worthless paper that they are.
How much did you say that phone call would have cost you again?
If we get a Depression out of this don't say you weren't warned.