First, a disclaimer. I am not a banker. I am not a financial advisor. I'm just a Realtor. Please ignore anything that I say.
Update 12-1-07: I want to make the concept of SIVs more clear.
- Bank has $1 Billion making 5%
- Bank figures they can start a fake company (which is not reported to shareholders, and off all books) and "Lend" the fake company/subsidiary the $1B in order to buy riskier portfolios and sell them for 8%, but with a "this is backed by an A grade company."
- Newly added 12-5-07 bank lever the business 14 to 1.
- Pocket the 3%, and that makes them $30 Million a year (levered at $420M?)
- DO it with $10Billion and they make $300 Million (levered at $4.2 Billion?)
- Bank gets RICH.
- Do you get that? The buyers of the 8% notes get Grade A security (normally paying 5%) because it is "guaranteed" by a Grade A bank (somehow the name of the bank isn't shown publically).
- Bank never thought "what if these 8% securities go down and we have to back them up with cash"
- Then the 8% money becomes worth 2%. Bank has to bail them out...
- Everything crumbled like a house of cards.
- Then $10 Billion is wiped out.
- If it was levered 14 to 1. That is $140 Billion
- But it doesn't stop at $140 Billion since NOBODY KNOWS SINCE IT LEGALLY IS OFF THE BOOKS!
Moody's estimate there are $400 Billion in SIVs, but it could be more since they are off the books. The Savings and Loan crisis was $150 Billion.
Have you ever heard of a SIV? You will soon. Just imagine Enron practices, and apply them to most major banks. (see WSJ article)
After a scary lunch with a bank friend of mine, I actually looked into buying Gold (see the the new GLD, basically gold, but in the form of an easy to buy "tracking stock" or EFT, kinda like the US dollar 35 years ago which was backed by gold).
So, now I'm doing research to better understand this stuff through other sources. I figured rather than keep all of this information to myself, I would share it, and maybe together we can get our virtual hands around it.
A SIV is a Structured Investment Vehicle (see Wiki definition). Here comes the important Enron part: they are kept OFF BALANCE SHEET. Through some legal trickery, ala Enron, they can keep these subcompanies (funds) off of their balance sheets, so nobody really knows how much loss, or gains, or exposure these banks have. And in the world of leverage, your dozens of Billions of dollars can vanish overnight.
Have you heard of the Super Fund SIV bailout proposal? Reading from a few blog and articles, it is essentially banks bailing each other out, and finding a way to profit from it. But essentially it is moving money from a smaller shirt pocket to a larger pant pocket.
Individuals might think that they are fine and the government can bail them out? FDIC insured right? Technically maybe, but if the US just prints more money to make up for it, there are international ramifications. We can't do things in a vacuum. The US is not the world. The dollar can collapse against foreign currencies, just like Mexico's currency collapsed in 1994.
Also let's stop blaming the press. We blamed them when everything was skyrocketing, accusing them of wanting to sell advertising to builders. Otherwise, if this collapse occurs, we will blame the press for not telling us about it. Also to say that the press causes fear, and fear causes collapse is absurb. Banks doing Enron-type off banks trickery is the cause, not the press that expose them. If anything the press makes things pop FASTER, and thus making for a LESS severe fall.
I know it sounds like doomsday stuff. I was born to Cuban parents that had everything taken away, so I hear these things and I know they can happen. The question is how likely is it? Under 1% 10%? Under .00001.
Or as Lawrence Yun put it "Close to Zero" (regarding the chances of the DC market going down after 2005)
This stuff could be REALLY bad.
- Written by Frank Borges LL0SA- Virginia Broker FranklyRealty.com
Related stuff to read: http://activerain.com/blogsview/252212/Peter-Schiff-Was-Exactly
and CNN's The next credit scandal
CNBC 14 to 1 Leveraged