It is all a game of who owes who and who can pay(by mannfm11)

First of all, I think you need to get your eyes off subprime.This is a scapegoat and nothing else. It just happens to be the firstguy at the theoretical poker table I mentioned above to run out ofchips and they didn't bring more. Truth is these are some of the betterloans out there, not the worst. They just happen to be the worst of themortgages, but there is some collateral behind them and something toget in the end, even if it doesn't get close to 100%.

Whathappens in credit? First of all a paradoxical situation occurs. When acredit line is put into an account, both the bank and the borrower areliable. Lets say the bank gives the borrower $10,000 in his account.The bank owes the borrower and the borrower owes the bank. There reallyisn't any capital involved here, as it is additional liquidity, notcapital. The borrower might have put up collateral and that is thecapital, but it can only be liquidated, not turned into the loan. Oncethe borrower spends the money it enters other accounts. The bank is nowliable to some unnamed depositor or may in fact have to cash a check,which he pays by selling securities to the Fed. Again, we have 2entities liable to the depositor now. But, the bank is not only liable,but is owed an amount even greater than he is liable for. On a dailybasis, interest is added to the amount created out of thin air, makingthe amount due greater than the AMOUNT CREATED. Thus the entitiy that owes the debt is also owed the debt.

Whatreally transpires here on a short term basis and to a greater degree ona long term basis is the banks liabilities begin to look real. So do their assets, meaning this credit begins to take on some kind of net worth identity that it really doesn't possess. It really doesn't exist in sum, but is nothing more than liabilitiesshown as assets. The asset is the net worth of the bank and thecollateral, which at the end of a credit cycle is generally inflatedwell beyond real value. Thus it eventually comes down to the worth ofthe lender and at what point is that impacted.

I was onceexposed to a legal argument that a bank cannot lend its liabilities. Itwas backed up with one court case after another stating just that fact.So, in order to be lawful, a bank cannot make a loan in excess of itsnet worth. It cannot put out to any customer more than it canguarantee. If you look at the diagram I started out with, that the bankstarts out as debtor and creditor and continues to hold that spot untilthe money is repaid, the principal is clear that it must have enoughassets of its own to pay to the depositors any losses its lending mightsustain. This is the crux of the current problems that are so farbeyond what is being talked about here and so far misplaced insomething called subprime mortgages that few can see what is about totranspire.

Lets start out with what makes banking work andeventually fail, the no mathematical solution of banking. Banks aregenerally trying to expand their portfolio for good reason. It is theonly way over the long run they get their interest or acquire thedefault property instead. The older system was more elusive for bankersbecause people knew what the money was, the gold. But, the currentsystem is really no different than the older system, except 12USC95a,which was adopted by Roosevelt denies the depositor access to his goldor for that matter the currency. This trading with the enemy act, whichdeclared war on the US public standing in the way of banking, is nowthe basis of what many of us see as a facist arrangement between WallStreet, the Fed and the US government. It is an arrangement that isbound to enslave the people of the US and most likely the people of theentire world, if the reach can be extended.

In any case, thisact together with the no mathematical solution, has made bank creditthe money of the world today. This is as true in Europe, Japan, Chinaand the third world as it is in the US. Because the banks are lendingat interest what is considered money today, the borrower always owesmore than can be paid, as one balance grows exponentially and the otherjust sits there. You can bet on a given day without default that thebanking system is owed more money at the end of the day, net than atthe start of the day. It doesn't matter how much repayment is done on agiven day or how much lending, the fact is an amount multiplied by 1.08is greater than the same amount multiplied by 1.03. There are otherfactors here, but this is the main one.

But, what transpiresover time is the bank goes from owing this money in a round aboutmanner to the borrower who owes it back to the bank to owing the moneyto unnamed depositors who received the credit from the borrower. Hereis where the problem eventually comes back to bite the banks, theinitial holder of the credit and the eventual holder of the credit arenot the same people. The other problem is that if the borrower fails toget the deposits away from the eventual holders, they have no abilityto pay the bank. Thus, the bank becomes liable on its own or it has tocontinue the shell game the best it can,hoping when it is time to callthe pot, the hand has worked out.

What do the banks have forcollateral? Titles, that is what. Courthouses exist as much for bankingas anything else. We could do very well without county clerks if notfor liens. Of course the taxing authorities might have a problem. But,the titles only go so far, in part because in this stage of a creditcycle, the price of titles has been bid up so high by those that stillhave money on the books that their value is really elusive. But, thisescalating collateral value gives additional credit to a system thathas to have it and in some fashion, allows for higher prices for allassets. Remember, the bad debts are being rolled now in a game ofdouble or nothing where the dice are supposed to eventually bail outthe last bad bet.

Now comes this idea that risk is gone. Ikeep harping on this in the stock market when some ass brings up theidea of buying stocks. I get this crap that I don't trade, but if Inever traded, I wouldn't be here. If I didn't understand somethingabout risk and return I wouldn't be here, but be posting on some bullboard some pollyanna news. The idea that risk doesn't exist is behindstocks. We never saw a 3% dividend at any point in 2002. In fact, itbarely reached 2%. Never in history had the dividend rate on stocksfallen below 3% without some kind of reprecussive move against theholders value. Here it is in our 12th year of uninterrupted dividendyields under 3%, something that had never been sustained for more than2 months straight at any time previous. The risk is seen as inflation,so the return on a portfolio of stocks can now be accepted to be underthe return on treasuries. Everyone is betting on inflation to destroythe value of bonds and keep raising the price of stocks. They forgetthat corporations can go broke in hordes.

Then we come up withthese financing models. Well, the whole damn world has adopted them.What do they mean? Well, they mean that the smart money has gotten onthe same side of the trade everywhere, meaning the dumb money is leftto bail them out. The risk they have avoided is now in their corner andthey are all huddled together as academic geniuses with viciouscreatures locked in the room with them. They hold all the positions, sothey now hold all the risk. It was okay when this type game was theexception, but the entire industry has adopted it and the risk that wasshifted for a fee is now FULLY OWNED. There has been no onepaying the fiddler and we are now seeing people laughing at him, likehe don't have a 44 magnum in his case that he is about to brandish anddemand payment. The party goers spent all their money on booze andgoodies and now the fiddler is going to be paid, probably with Rolexwatches and diamonds.

The losses have been going on. The moredeposits created, the more losses in the pile somewhere. The moreassets are bid up, the more a few people decide to take their cash andget on the sideline. The more cash that resides on the sidelines, themore the debtors are deprived or should I say in a better sense, deniedaccess to what they need to extinguish the debt. Remember the bank actsas surety and also is the true debtor. What is the bank holding?

Doughas done such a fantastic job adding to the knowledge I alreadypossessed and the more I have read of what he writes, the more I find Idon't know. I hear things like the carry trade, but the carry trade canbe hedged and doesn't need to be unwound. I don't see Doug write muchabout that. What I see him doing is drawing a picture of this old weststyle of lending that seems to go on without hesitation. What I dounderstand is finance and accounting and compound values, which historyhas proven cannot be sustained (take 1.01 to the 2000th power and seewhat you get and take 1% of that figure. That is how much a penny wouldhave compounded to since the birth of Christ. Ask yourself where it allwent?). I also understand that the borrowers and the depositors in abank are not the same and that the value of collateral is fleeting.

Thereare some arrogant people here. One was talking about buying a $900Khouse for $300K when it gets there. There is the delusion that we arethe ones that are going to have money left to pick this stuff up. Ifthe populace shifts to gold, bet is the bank credit not only holds upin value, but increases relative to all assets. This is an uncertaintythat anyone who has a clue what they are facing knows they don't know.Few realize how big a role the dollar and all this lending has playedin liquifying credit around the world and what a collapse in bankingand lending in the US would do around the world. I think the action ofthe past week has already shown the weakest links aren't in the US, butin Europe, where they have their own real estate bubble and subprimemess, not to mention a lot of croney capitalism and funny EasternEurope deals.

I read it somewhere, but we are about to findout who is broke. I think the names are going to shock the generalpublic and a lot of people on this board. Wall Street is likely to holda lot of casualties and the big 3 US banks are going to have to eitherhold on by the skin of their teeth, operate in insolvency under secretpermission of the government, ala Japan or go broke. The fed fundliabiities of Citicorp as reported by Doug were in the stratasphere.This means they are among the biggest credit crammers and holders ofuncollectables. It also means they are going to impact the entirebanking system. I think BOA and JPM are both in the tank. These 3 makeup a good part of the American credit machine. Lets see how smart theUS is in solving their Japan type problem here and if the politicianshave the guts to close their handlers? As far as Wall Street? Who havebeen the high flyers? GS, Merrill, Bear Stearns? The biggest flyers areprobably the ones up to their necks in alligators. I am watching theprices on the Dow, with 20 point fluctuations round trip in maybe 90seconds. These guys have a weak grip on the wheel this time and a paniccould wipe some of them out overnight. I played some wild markets in1998, but I didn't see the 2 or 3 second changes in the Dow quotes I amseeing here. Sure if they were headed into a certain direction like theramps into the close, there were some big changes, but these 4 to 8point clicks in no determined direction weren't going on. These guysare attempting to shake this market to their advantage and I think theyare wounded. They are talking about these outfits selling at lowmultiples to forward earnings. The idiots on CNBC are trying to letthese guys sell their options, as there may not be earnings, but hugelosses. The current picture throughout the banking and financial systemcan be compared to Enron situation, where what has been hidden in thecloset is about to come out. Didn't Enron report fantastic profitsright up to the last quarter?

It is all a game of who owes whoand who can pay? We are about to deflate and it will take more than theFed providing funds for us to inflate. Easy credit is about to go outthe window and someone on the political scene is going to be blamed forwhat is about to happen. What is about to happen is a house of cards isabout to fall around the world, the boy has his finger in the dike andit is drown or pull it out and drown.