Tuesday, October 07, 2008

Who the hell is Bill Deagle?

He's a modern "prophet". One of only a few million now available from your nearest online connection.

Apparently, following the "blood sacrifice" represented by the $700 Billion Bailout, he's predicting a major financial event for Today - Tuesday 7 October 2008. An event whose consequences are going to begin a sequence of falling dominoes (mainly collapsing banks and other financial institutions) and leading - first - to the collapse of the global economy. Along the way we can expect a false flag nuclear attack on Los Angeles, followed by Martial Law in the US and a "pestilence" within 1 or 2 years.

Somewhere parallel to this timeline he foresees the blockade of the Middle East by the US, leading to an invasion of the Middle East by "Communist" China, leading, ultimately, to global destruction and the collapse of civilisation. Just in the next 12 months we can expect a hundred million people to starve to death. And somewhere in the mix we'll get human clones and "super-soldiers" though whether that's in the next couple of years or a few decades down the line isn't entirely clear.
(Download the mp3* - not for the faint hearted!)

Nothing too serious then; just the standard set of modern nightmares. What's new? Not a lot, though the timing is interesting.

Deagle has form. He's already recognised as one of the "wild men" of the 9-11 Truth Movement (where he shines in the face of considerable competition) so the most rational response to his latest "visions" would normally be to roll over and go back to sleep. The problem is that events are conspiring to support him and his ilk. Earth shattering financial events are now happening on an almost daily basis. It is actually LESS likely that we'll hear nothing today than we'll hear something which could appear to validate his dark visions. So if almost ANY serious financial event takes place today it is likely to give the Deagle story legs.

He and his supporters, however, even have a reasonable amount of wriggle room. Because today's event is only billed as the first domino, we might not spot it happening. Months down the line, they might be able to argue that it was Ben Bernanke's 10 minute delay in getting his first coffee of the day which will eventually be seen as that domino. Which butterfly would we blame for the hurricane?

If it is that trivial, almost no-one will take any notice. But if anything really significant does happen today, you can expect the Deagle prophesy to go viral. You have been warned.

Of course, as is appropriate in the circs, I have to hedge my bets against the small probability that a truly staggering financial event will indeed take place today. So momentous that it would be churlish to deny the apparent validity of Deagle's prescience. Can we set the bar at a reasonable height? What might qualify as a "hit" for Mr Deagle?

Well, if it's going to be that undeniable it's going to have to be even bigger than what we've already experienced in the last few weeks, (or else we could reasonably argue that the bigger event was the first domino). So it's got to be bigger than the nationalisation of Freddy and Fanny, bigger than the rush of European banks to guarantee bank deposits, bigger than Monday's stock market drop and bigger even than the unprecedented $700 billion bailout. Can we imagine what such an event might be?

Well yes we can. For me the most disturbing single incident in recent weeks has been the nationalisation of AIG - the biggest insurer on the planet. How on earth did that happen? Aren't the insurance industry the safest of all the gamblers because they're the bookmakers, the scientific risk assessors? The bookmakers ALWAYS win. Don't they? Not any more, if Daniel R. Amerman is to be believed.

If I understand his description correctly (and I wouldn't bet on that), AIG, and the insurance industry generally, has been taking on truly astronomical bets without the resources to pay out if they fail. By way of analogy imagine they've insured every ship against sinking. Statistically, there is - say - a 1% chance of any ship sinking in any given year. So if they charge an annual premium of 2%, they collect enough money to pay out on the few ships that do sink and still make a handsome profit.

What they haven't budgeted for is the possibility that 20% of the ships might sink in the same year. Not only does that produce a situation in which the shipowners are not compensated, but the insurers themselves are forced into bankruptcy because they can't afford to lose on that many bets.

This is the very real prospect now facing the global insurance industry which carries the risk for all those lenders who have been doling out the dosh to all those punters and businesses who either could never realistically have afforded to repay (and really shouldn't have been lent the money in the first place) or, less predictably, but just as seriously, those otherwise well run businesses or prudent punters who, through no fault of their own, now find themselves unable to pay because the accelerating global recession has reduced the values of their assets and/or income.

The sheer scale of the Insurers' credit swapping trade (ie. bets which now look very risky and are not even "mainly" covered by assets) is mind boggling. It dwarfs the Bailout. It is what the mathematicians call two magnitudes higher, i.e. not ten times as big but nearly 100 times as big. It's nominal value is actually greater than the nominal value of the entire global economy. We are talking about $62 TRILLION US Dollars (against the global economy value of "only" $54 Trillion). How people can "owe" or "own" a total value in excess of the global worth of the economy is beyond me and probably constitutes an important clue to why this bubble may well be about to burst. And your guess is as good as mine in regard to what proportion of that enormous sum is actually "at risk" but the impression I'm getting is that the vast majority of it is "exposed".

But what Amerman explains - albeit a bit too sotto voce for my taste - is exactly how the insane risk taking was allowed to happen. This isn't a case of "bad luck". It is a clear case of systemic corruption.

The short version is that brokers get commission for selling a policy. They get that commission up front, the day the policy is signed. AND THEY DON'T HAVE TO REPAY IT IF THE BET GOES BAD. (They also get annual bonuses based on short term profits rather than long term performance.) What this means is that the brokers themselves take no risks but nevertheless have the authority - and incentives - to sign deals which mean their employers are taking ludicrous risks.

The major bunch of insane risks that began to unravel last year were the subprime loans; mortgages assigned to people who had a far higher risk of failure than normal. Usually even that might not have mattered. If a bank recognises a credit risk, it can factor that into the loan in a few ways. It can, for example, raise the interest rate to ensure that, across the piece, even though more borrowers will default, it will still make a profit on a "basket" of such loans. It can choose to lend only a fraction of the asset value for which the loan is issued. It can take on the risk and then insure against it.

If it does any of these things, and the borrower defaults, the bank continues to receive premium rates from the rest of the basket, gets the house and/or makes a claim on the insurance to cover what ought to be trivial losses. Yes, we'll see the collapse of the house owner and their family, but no danger to the sacred money market.

It seems that the market has deliberately conspired to circumvent all such means of protection. First, instead of lending at a premium rate which would deter most subprime candidates, they routinely sucked them in with very low rates which only climbed to the premium level after a year or two. Second, instead of lending only a fraction of the asset value, banks lent not just the full value, but in many cases MORE than the full value. And third, recognising, to some extent, the additional risks they were taking, they took out insurance, but the insurance turns out to be worth less than the paper it's written on. And THAT is - in my view - the real scandal which has yet to be fully aired.

According to Amerman, the inherent corruption created by upfront non refundable commissions and bonuses have produced a "free market" in which brokers outbid the competition by deliberately understating the risks (often with the help of 3rd party "expert" Risk Assessment agencies) thus enabling them to get the business by demanding smaller premiums.

Hence, for example, whereas a real subprime mortgage is about - say - 20% likely to default, the insurance premiums were actually based on a notional 1% risk. Meaning that the insurers collected only 5% of what was necessary to cover the real risk and that the vast majority of subprime defaults are, therefore, effectively uninsured; meaning, in turn, that the lenders are going to have take the money out of their own reserves. And their reserves aint that big. So they haven't got money to loan to new borrowers and when they approach other banks, who would normally have lent them "wholesale" money, they find that their former lenders no longer trust even the banks to be able to repay their loans. That's what triggered the first wave of the ongoing epidemic.

But the effects of the corruption don't stop there. In order to hide the weakness of their risk protection, the various agencies have conspired to invent a wide array of "instruments" designed to make risky debts look like routine reasonably safe ones. They bundled high risk debts with medium and low risk debts into "Credit Default Swaps", "Structured Investment Vehicles" and other such jargon camouflaged snake oil "derivatives" and sold each other packages of scented ordure. Somehow (and this will need to be thoroughly investigated as well) these high risk packages were given so called "Triple A" credit ratings (meaning "as safe as the Bank of England" or thereabouts), which meant that all the major institutions were happy to buy and sell them, falsely believing that the credit rating meant that there was no significant risk.

And at each "swap" the brokers picked up more of their non refundable commissions.

The corruption appears to be almost global. However, although no countries have made such fraudulent risk trading impossible, some, most notably France, are at least insulated from the effects on personal banking and credit. There, even a standard credit card doesn't offer you actual credit. It's more accurately described as a debit card. If you don't already have funds on the card, you can't spend the money. And you can't get a mortgage of more than 80% of the asset value. The French been criticised, in the past, for their conservatism, but it looks like they may well have the last laugh, although even they will not escape the fallout if the global insurance industry falls over, effectively nullifying all the protection we think we've prudently provided for.

I have no idea what consequences might follow if the $62 Trillion dollar global insurance industry were to collapse and no idea what might push it over the edge, or how close we may already be to such an event. It has to be significant that the Americans leapt so quickly into the breach, with an $85 billion nationalisation with almost no debate and no significant protest. They obviously realise how serious such a collapse would be.

But given the panic that has so far already ensued over less than one Trillion dollars worth of debts, it doesn't take too much imagination to see that a $62 Trillion dollar collapse might well justify even Deagle's most disturbing predictions.

You have been warned.

*thanks to Alana13, one of my Stumbling friends for sending me the mp3.

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