Yesterday, 10/20/11, the tax payers just got placed on the hook for another buyout. This one makes the billion dollars given to Solyndra to funnel into the pockets of the Obama campaign fundraiser billionaire, George Kaiser look like pocket change.
As you may or may not know, derivatives are complex contracts entered into for speculation or to hedge risks linked to a wide variety of other (derivative) financial instruments such as currencies, commodities, interest rates, bonds, etc. The financial crash of 2008 where the national govnernment bailed out (aka: gave away billions of taxpayer dollars to) AIG was because of derivatives. Derivatives allow a financial institution to bundle risky loans and such and sell them to other parties so that if the loan defaults the other party pays off the balance. Sort of like mortgage insurance. The problem is that the risks have been bundled and sold back and forth and intertwined so many times to so many other financial institutions that when something crashes,the derivatives holders find that the folks that they thought would pay off the risk are not able to. Like when a hurricaine hits and the insurance company that covers that area can’t come close to paying off all the claims.
Had the government not propped up AIG, hundreds of financial institutions would have failed. It would haveg triggered a finacial collapse of the US economy that would have taken years to try to recover from.
Warren Buffet characterized derivatives as potentially “disruptive to the whole financial system” and called the risks therin “virtually unmanageable”. This is what happened with Bank of America, which got a credit downgrade last month. They have been on shaky ground since as their costs of doing business have suddenly skyrocketed. In order to try to stabilize the company and to not go bankrupt, yesterday they moved a large quantity of derivatives from their Merrill Lynch unit(the one that the government told them they had to buy) to a different subsidiary.
The amount of derivative money liability moved was $75 trillion. To put that in perspective, all of the printed and coined money that currently exists in the world is about $65 trillion. Fortunately for Bank of America, their subsidiary that took this hit is FDIC insured. Unlike Merrill Lynch. And, no, they don’t cap the funds for institutions like they do for individuals at $250,000. American taxpayers are now suddenly on the hook for the whole $75 trillion.
At first the FDIC said “no way” at the prospect of assuming this degree of risk. Because their “trust fund” is pretty well depleted already with all of the bailouts and crashes they have already taken care of. But our friend running the Fed, Ben Bernanke told them they had to and that they would be backed up by the US Treasury. Which is true, because if they didn’t, the whole economic system of the USA would have collapsed. Yesterday. Again. And hundreds and hundreds of financial instituions, like banks, trading companies, insurance companies, and all of the stuff that they play with like credit cards, stocks, 401ks, checking and savings accounts, ATMs, etc. would have come to an unfunctioning halt.
It’s still 2008.
We just missed armagedden. Again. By that much.
Closer this time. Sleep well.