Tuesday, October 27, 2009

Mother of all "Too-Big-to-Fail" institutions

This week, the U.S. government is pushing for a fix on "too big to fail" institutions so that the next time one of these entities were to collapse again, it will not bring down the entire financial system and therefore government will not need to step in to rescue the entity.


The irony is: the U.S. treasury department itself is a "too big to fail" institution in that it has owed the world so much debts that should the treasury-bond market and/or the U.S. dollar itself faces a sudden plunge (let alone collapse), the world economy will suffer exponentially.


Talk about being held ransom.

Wednesday, October 7, 2009

The Mother of all Lehman Siblings and her Mega Bonds

Despite the crunching time over the past 12 months that saw the U.S. housing bubbles bursting and Financial Institutions owning up, accounting for and relinquishing their exposures to various financial derivatives and securitised instruments, the ONE big Collateralised Debt Obligations has yet to meet its fate of reckoning. The U.S. Dollar.

Ever since the abolishment of the Bretton Woods System in the 1970s as President Nixon terminated the convertibility of dollars to physical gold, the USD has become perpetual CDOs to its holders. That is, by holding on to the USD or purchasing the US treasuries, the savers or investors are indulging the issuers, i.e. the U.S. government, and its people in their spending habits.

In other words, the World is financing the U.S. budget and current account deficits (somebody have to foot the bills and it might as well be the World). In return, the World is promised that the green-coloured papers that they call USD is fully guaranteed by the Uni-Super Power on Earth and are implicitly collateralised by the abilities of the innovative and enterprising U.S. people to create wealth and pay their taxes.

Further, because USD is the de facto international reserve and transactional currency, the holders of the fiat currency may tender at will in exchange for goods and services with ease. It is therefore a good alternative as store of value, the World is told.

Not unlike the pushing tactics of Mini Bonds by way of engaging a reputable rating agency, the World is informed that holding the USD is a risk-free endeavors- for instance, in models generated by the economists (you guessed it, they are mostly Americans) and printed on all major economic textbooks in the past decades, the yields on U.S. treasuries are the default risk-free benchmarks.

And it works. Since the Second World War, the World has been buying and holding on to more and more of this CDO. Until recently, it has served us well, just like the mini bonds that has paid handsome dividends to early investors in the early phase of the tenures. USD served as an anchor currency to the world economy and finance and facilitated easy trading of goods and services among countries. But just like the issuers of CDOs, U.S. has gotten carried away by the benefits as sole operator of the printing press of the de facto world currency.

As the press works overtime, figuratively speaking, to satisfying the hunger of the twin-deficit monster with increasing appetite, one wonders if the Lehman-Brothers Mini Bond saga will again be played out. Only, this time, the waves will certainly be MEGA. One should have reserved the term 'Tsunami' and not have used it to describe the mini(bond)-saga of 2008.