Monthly Post Archive: February 2010

February 25 2010

From the New York Times...

Bets by some of the same banks that helped Greece shroud its mounting debts may actually now be pushing the nation closer to the brink of financial ruin.

Further to the post on this blog about the anti-selected use of Credit Default Swaps by Goldman Sachs, the New York Times now reports the latest destructive use of these instruments in betting that Greece will actually default on its debt. In doing so, the escalating price of CDS on Greek sovereign debt increases the likelyhood that this will indeed happen.

This story contains more than a shade of Warren Buffet's famous aphorism about derivatives being "Weapons of financial mass destruction." Except that CDS are not real derivatives. More like dodgy insurance products with an unreliable pricing model.

Fortunately, the US Fed and the Senate Banking Committee appear to have finally awoken to the risk

"We have a situation in which major financial institutions are amplifying a public crisis for what would appear to be for private gain," Dodd said.

Let's hope they've got the balls to actually do something to Goldman this time, rather than rolling over and playing dead as in the AIG debacle.

February 16 2010

Canadian Finance Minister Jim Flaherty finally decided he would have to do something that the Bank of Canada can't, or won't: tighten the availability of easy mortgage financing.

February 09 2010

Despite major Canadian banks urging caution, neither the Finance Minister nor the governor of the Bank Of Canada are willing to risk the public wrath of forcing property price declines by raising interest rates.

Of course by not doing so, they are deferring a much bigger financial and political problem for the future---precisely the behaviour that led to the global financial crisis in the first place.

February 09 2010

$3.5 Billion erased by buying at the top of the market in 2006 and walking away at the bottom in 2010.

From the Globe and Mail

It's a deal so big and so bad that one observer mused it was the city's worst property transaction since a group of Native Americans were swindled out of the island of Manhattan by Dutch settlers.

That means the investors who put up the original equity among them two California pension funds and the Church of England have seen their investments wiped out. Those who provided money for the mortgages, depending on the level of risk, will also take heavy, and in some cases total, losses. The owners defaulted on their loans, and at the end of January, said they would hand over the property to creditors rather than file for bankruptcy.

February 08 2010

In the days before the housing crisis, the idea of a bank foreclosure filled any homeowner's mind with dread and shame. Now, with so many Americans owing more on their homes than they're worth, some people are taking a whole new approach: essentially saying, "Foreclose on me, please." It's more technically known as a "strategic default."

February 07 2010

If AIG Financial Products had only employed the same simple technique as the rest of their storied organization for evaluating the quality of the risks they were taking on, their implosion could surely have been avoided.