Remember CDOs? They’re Baaaack!

Like Poltergeist II, prepare for CDOs II.

poltergeistII

(Here is Poltergeist II trailer –  https://www.youtube.com/watch?v=rH-B6A04iK0 )

Remember those financial instruments known as Collateralized Debt Obligations that caused the 2008 Great Recession?  Well they never went away.  In fact they are baaack.

The Financial Crisis Inquiry Commission concluded that CDOs were one of the major causes of the 2008 Great Recession as shown at this website.

http://fcic-static.law.stanford.edu/cdn_media/fcic-reports/fcic_final_report_conclusions.pdf

For 2014, global CDO Issuance is back to 2004 levels valued at about $135 billion.

Collateralized loan obligations (CLOs) are CDOs based on bank loans. Many of the subprime loans have been packaged and sold as CLOs.

The following chart shows that Collateralized Loan Obligations (CLOs) in 2014 have reached the same level as 2007 or $35 billion.  Total outstanding CLOs in the US amount to $300 billion.

clo_banks

Though the large financial institutions have backed away from collateralizing mortgages, they are now doing it for commodities such as gold, silver and oil.  Here is one example.

https://www.google.com/search?q=jpmorgan+precious+metals+as+collateral&ie=utf-8&oe=utf-8

 

http://theeconomiccollapseblog.com/archives/plummeting-oil-prices-destroy-banks-holding-trillions-commodity-derivatives

 

Another problem is not the collateral but the reselling of the same assets. In 2007 one financial firm sold 610 out of 3,400 CDOs more than once. That is nearly 18%.  Let me repeat.  More than once.

Because buyers are dealing with paper not physical assets, how do they know they are trading real, actual commodities? If the markets started to go down and everyone wanted their physical commodities such as gold, what if there was not enough gold to meet all the obligations?  Would there be an international panic?

Update
Evidently CDOs were not selling as well as desired.  So the banks have renamed them “bespoke tranche opportunities.”

BTOs are slightly different, as explained in this website.

http://thinkprogress.org/economy/2015/02/05/3619325/bespoke-tranche-opportunities-are-your-god-now-america/?utm_source=newsletter&utm_medium=email&utm_campaign=tptop3

Thanks

 

What Is Wrong With Capitalism?

Sure capitalism is not perfect.  Is anything?  Let’s examine the problems.

pickpocket

THE FIRST PROBLEM

As long as the minimum wage is below the poverty level, our society will be amoral.

The poverty level is defined as annual wages below $28,450 for a family of 4.  Divided by 2,000 hours in a year, you get a poverty level hourly wage of $14.225 per hour (or less) for a family of 4.

Currently the national minimum wage is $7.25 and has not changed since 2009.

People trying to claw their way out of poverty will become pickpockets, blame co-workers for mistakes, cheat on time cards and steal supplies at work.  Is that the kind of society we want to live in?

THE FIRST SOLUTION

Raising the minimum wage would help $27.8 million people.

Here is why we should raise the minimum wage according to a small business owner.

http://www.slate.com/articles/business/moneybox/2014/04/a_small_business_owner_s_case_for_raising_the_minimum_wage_better_living.html

Spoiler alert:  He thinks it will grow his business.

THE SECOND PROBLEM

This problem involves cheating on taxes and tax loopholes. In other words, giving priority to me, myself and I.  As long as the tax system is overly complicated, humans are going to try to get away with something to get ahead of their neighbors.  This mess, of course, was created by Congress.

THE SECOND SOLUTION

What can we do?  We can plug the tax loopholes as proposed by Eric Schmidt. Google’s Chairman told angry British politicians last year: “plug the holes if you want more tax revenues”.

The result will be a reduction of our $18 trillion national debt.

THE THIRD PROBLEM

As long as you allow average national CEO pay to increase many times faster than inflation, you will have an amoral society.  Average national CEO pay increased to $15.2 million in 2013.

The CEO to worker compensation ratio is 296 to 1 today versus 20 to 1 in 1965.

pickpocket_wealthy

The result is the current wage inequality.

In order to keep up their fast rising salaries, CEOs and executives of financial institutions and other companies are taking huge risks with company and customer stock under the guise of pro-growth mergers and acquisitions using huge sums of leveraged loans.

Richard Baker, chief executive, along with his investment firm, NRDC Equity Partners, relied heavily on borrowed money. Of the $1.2 billion that it paid for Lord & Taylor, only $25 million came in the form of equity [2%], with the remainder made up of debt financing, secured by the department store estate. [The New York Times]

When was the last time you bought something with only a 2% down payment?

THE THIRD SOLUTION

Create annual Top Ten lists of Most Narcissistic CEOs and Highest Paid CEOs.

Maybe this will get us back to a more equitable ratio.  1965 was a pretty good year even though the ratio was only 20 to 1.

CONCLUSION

Capitalism is fraught with greed but it doesn’t have to be.

As the Google IPO started out saying, “Don’t be evil.”  Better than that, let’s not be amoral.  Thus reform needs to start with each of us.

We should be thinking more about the people around us or, even better, the world around us.  The Mormons pledge 10% of their income.  So why shouldn’t everyone, that can afford it, give just 1%? 

Google stated in its “Letter from the Founders” as part of its original IPO paperwork, “We intend to contribute significant resources to the [Google] foundation, including employee time and approximately 1% of Google’s equity and profits in some form.”

In addition, let’s raise the minimum wage and try to close the gap between workers and CEOs.

Here are 7 suggestions to close the gap.

http://www.marketwatch.com/story/7-ways-to-help-the-middle-class-without-soaking-the-rich-2015-02-05?page=1.

~~~~o~~~~

WHAT IS AMORALITY

Here is a great article about Silicon Valley Amorality.  But amorality can be found everywhere there is capitalism.

https://www.linkedin.com/today/post/article/20141123194522-529261-silicon-valley-s-culture-of-amorality-water-will-find-its-way

AMORAL APP

There is an app to see how corrupt aka amoral you are. At least in Indonesia.

http://www.usatoday.com/story/tech/2014/11/25/corruption-indonesia-app/70086430/?csp=tech

LEVERAGED LOANS COULD CAUSE CRASH

https://michaelekelley.com/2014/12/20/leveraged-loans-predict-crash/

Thanks.  Have a great day.