The Financial Tsunami: The Financial Foundations of the American Century

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http://www.globalresearch.ca/index.php?context=va&aid=7813

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http://news.yahoo.com/s/afp/20080117/wl_uk_afp/stockschinabritaincompanylse_080117081715

It's no mistake that the London Stock Exchange officially opened its office in Beijing precluding the huge crash that has occurred(1/21/08) -http://www.thisislondon.co.uk/news/article-23433407-details/Miserable+Monday%3A+Biggest+FTSE+crash+since+911+wipes+off+more+than+£75bn+in+shares/article.do

(and will continue tomorrow(1/22/08) in the U.S.)

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Interesting how on the heels of a global downturn in the stock markets on a U.S. holiday (1/21/08), the U.S. stock market indicators managed to gain close to 300 points. This is obvious a little dance done for the World Economic Forum being held in Davos Switzerland. The stock market is being revealed for what it is - a very controlled mechanism.

"Stocks Reverse Early Losses, Close Up 2.5%"

By TOM LAURICELLA and PETER A. MCKAY
January 24, 2008; Page A1
The nation's stock market did an about-face, rising nearly 600 points from its morning low to finish deep in positive territory, as investors put aside worries about struggling banks and declining profits and poured money into shares.

The rally, which followed two days in which anxious investors drove stocks sharply lower around the globe, culminated in a 30-minute buying frenzy that left the Dow Jones Industrial Average at 12270.17, up 298.98 points, or 2.5%. (Please see related article.)"

source: http://online.wsj.com/article/SB120113496995911803.html?mod=googlenews_wsj

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"DAVOS, Switzerland: The United States has filled various roles at the World Economic Forum over the past decade: dot-com dynamo, benevolent superpower, feared aggressor, and now, wounded giant.

On the first day of this conference, a parade of bankers, economists, and political officials expressed deep fears about the faltering American economy, peppered with blunt criticism of its institutions, chiefly the Federal Reserve, which some accused of sowing the seeds of today's crisis.

George Soros, the financier who made a fortune betting against the pound, went so far Wednesday as to say that the downturn would put an end to the long status of the dollar as the world's default currency.

"The current crisis is not only the bust that follows the housing boom," Soros said. "It's basically the end of a 60-year period of continuing credit expansion based on the dollar as the reserve currency."

http://www.iht.com/articles/2008/01/23/business/davos.php?page=1

"Amid collapsing stock prices worldwide, the billionaire investor George Soros has told an Austrian daily, the Standard, that the United States is threatened with recession and the world is facing the worst financial crisis in half a century. "The situation is much more serious than any other financial crisis since the end of World War II," Soros was quoted as saying."

source: http://www.thefirstpost.co.uk/people%2C601%2Csoros-predicts-worst-recession-for-50-years%2C13683

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Did Soros thump the market last week?
N Sundaresha Subramanian
Monday, January 21, 2008  03:04 IST
            

-Two basket-selling deals in Nifty — of 21 lakh  contracts on Friday, and 54 lakh contracts earlier in the week — hit the markets hard
-One entity said to be still short on 75 lakh Niftys
-Falling put-call ratio hints at bounceback

MUMBAI: Did George Soros short the Indian markets last week?

Over 15 years after he winningly shorted the British pound in September 1992 and earned a billion dollars, local market sources said one of his funds may have shorted the Nifty last week.

DNA Money could not independently confirm this, nor could it touch base with Soros’ operations in India.

But some senior marketmen, who did not wish to be named, said there were two cases of basket-selling last week which clearly was to break the market’s back.

“On Friday, this dealer shorted 21 lakh Nifty contracts triggering a late crash. The same entity had earlier shorted 54 lakh Niftys in the middle of last week,” one source said.

“What the entity doesn’t know is by shorting the Nifty it is trying to bring down heavyweights such as Reliance Industries, Larsen & Toubro and NTPC. This cannot go on. Right now, the entity is sitting on a short of 75 lakh Nifties. So further room for shorts is limited. There seems to be strong buying in Nifty at these levels too. That’s why you saw a premium on Nifty January futures,” the source added.

Nifty January futures closed at a premium of 25 points 5730.

A heavy open interest of over 4.5 crore shares on the Nifty near-month contract remains a cause for concern.

But a falling put-call ratio, analysts said, is a positive sign.

source: http://www.dnaindia.com/report.asp?newsid=1146424

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"The black box economy
Behind the recent bad news lurks a much deeper concern: The world economy is now being driven by a vast, secretive web of investments that might be out of anyone's control. . . .

"A lot of financial innovation is designed to get around regulation," says Richard Sylla, professor of economics and financial history at NYU's Stern School of Business. "The goal is to make more money, and you can make more money if you don't have to keep capital to back up your investments."

The hiding places for these financial instruments are called conduits. They go by various names - the SIV, or structured investment vehicle, is one that's been in the news a great deal the past few months. These conduits and the various esoteric investments they harbor constitute what Bill Gross, manager of the world's largest bond mutual fund, called a "Frankensteinian levered body of shadow banks" in his January newsletter.

"Our modern shadow banking system," Gross writes, "craftily dodges the reserve requirements of traditional institutions and promotes a chain letter, pyramid scheme of leverage, based in many cases on no reserve cushion whatsoever."

The mortgage-driven securities that have been making headlines are but the tip of a much larger iceberg. Far larger categories of investment have sprung up, with just as much secrecy, and even less clarity into who holds them and how much they are truly worth.

Many of these began as conventional instruments of finance. For instance, derivatives - the broad category of investments whose value is somehow based on other assets, whether a stock, commodity, debt, or currency - have been traded for more than a century as a form of insurance, helping stabilize otherwise volatile markets.

But today, increasingly, a new generation of derivatives doesn't trade on markets at all. These so-called over-the-counter derivatives are highly customized agreements struck in private between two parties. No one else necessarily knows about such investments because they exist off the books, and don't show up in the reports or balance sheets of the parties who signed them.

As the derivatives business has grown more complex, it has also ballooned in scale. Broadly speaking, Das - author of a leading textbook on derivatives and complex securities - estimates that investors worldwide hold more than $500 trillion worth of derivatives. This number now dwarfs the global GDP, which tops out around $60 trillion.

Essentially unregulated and all but invisible, over-the-counter derivatives comprise a huge web of bets, touching every sector of the world economy, that entangles a massive amount of money.. . . "

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link for above article

http://www.boston.com/bostonglobe/ideas/articles/2008/01/27/the_black_box_economy/

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full article: http://www.marketwatch.com/news/story/derivatives-new-ticking-time-bomb/story.aspx?guid=%7bB9E54A5D-4796-4D0D-AC9E-D9124B59D436%7d&print=true&dist=printTop

World's newest and biggest 'black market'

The fact is, derivatives have become the world's biggest "black market," exceeding the illicit traffic in stuff like arms, drugs, alcohol, gambling, cigarettes, stolen art and pirated movies.Why? Because like all black markets, derivatives are a perfect way of getting rich while avoiding taxes and government regulations. And in today's slowdown, plus a volatile global market, Wall Street knows derivatives remain a lucrative business.
Recently Pimco's bond fund king Bill Gross said "What we are witnessing is essentially the breakdown of our modern-day banking system, a complex of leveraged lending so hard to understand that Federal Reserve Chairman Ben Bernanke required a face-to-face refresher course from hedge fund managers in mid-August." In short, not only Warren Buffett, but Bond King Bill Gross, our Fed Chairman Ben Bernanke, the Treasury Secretary Henry Paulson and the rest of America's leaders can't "figure out" the world's $516 trillion derivatives.

Why? Gross says we are creating a new "shadow banking system." Derivatives are now not just risk management tools. As Gross and others see it, the real problem is that derivatives are now a new way of creating money outside the normal central bank liquidity rules. How? Because they're private contracts between two companies or institutions.

BIS is primarily a records-keeper, a toothless tiger that merely collects data giving a legitimacy and false sense of security to this chaotic "shadow banking system" that has become the world's biggest "black market."

That's crucial, folks. Why? Because central banks require reserves like stock brokers require margins, something backing up the transaction. Derivatives don't. They're not "real money." They're paper promises closer to "Monopoly" money than real U.S. dollars.

And it takes place outside normal business channels, out there in the "free market." That's the wonderful world of derivatives, and it's creating a massive bubble that could soon implode. . . "