Credit default swap :slashingtongue

Dubai expose : Lessons still not learned

Saturday, November 28th, 2009 at 6:19 pm  
Leave your comment

$60 billion. That is a drop in the bucket as compared to the $10 trillion we have. Yet the doom of Dubai, seemed to have echoed around that world and got the markets panicking. What we can tell you is that we have not learned our lessons yet and this demonstrates the power house economy that US really is.

$60 billion. That is more than you and I would ever make in our lifetimes. But as a corporation, it really is not that much. Microsoft is worth more than $200 billion, Apple are Google, each, are worth more than $150 billion; so how is it that a city state that owes the world $60 billion could shake the world like it did?

The answer : silly risk taking. What caused creditors to be so afraid was that lots of the debts that we see today would be increased many times over due to the manipulation of risk. Let me give you a very much simplified example.

Lets say Company A had some formula to turn water to Gold. Company A goes to Bank A to get a loan, and Bank A approved a loan of $10 million. Bank B does not believe that Company A’s plan. So it does something called a Credit Default Swap. They would give Bank A the money for the loan. Should Company A default on her payments to Bank A, Bank A would pay Bank B $100 million.

The example that I gave above is what I call a 10:1 (100 million to 10 million) bet scenario. There are other examples in real life with methods ranging from short selling to derivatives which have a 30 : 1 bet ratio. Now that is what the EU terms as casino banking.

The same thing happened with Dubai. Should Dubai not be able to pay her debts off, the amount lost by her creditors would not be $60 billion, but in the trillions. That is what the entire pandemonium and panic is all about.

When are we going to learn our lessons? Why can’t we go back to the tried and tested system of a bank putting in capital should they believe in the business plan that they receive. Why must there be what I call sucker capitalism? When are we going to end such practices? Would the next attack be too late to save America? America and the world must wake up to this problem or we would face lots of problems in the future.

Dubai goes $60 billion in the red, and the world panics. Does anybody realize that the world is not that bothered with the trillions of dollars worth of debt when it came to the debt of countries like US, Japan and the UK? This is because the world, as of today, is still very confident in these economies.

I really hope that Dubai bring back the attention of bad banking, as what the economic crash did. It is essential that we get this back in order…

Related articles by Zemanta
Enhanced by Zemanta

Michael Moore is wrong!

Thursday, September 24th, 2009 at 7:56 pm  
Leave your comment

Michael Moore has just released his new film Capitalism: A love story. We normally do not rate films, but this is something that I feel need to be addressed. Michael Moore is dead wrong about capitalism having failed and it needing to be removed. I am strongly against his statements and motives.

The late British Prime Minister once said that “Capitalism is the worst system, except for others.” It was true yesterday, today and would be in the future. It has been proven in history. The problem is that we do not have a definite explanation of what capitalism is. This is its definition according to Wikipedia

“Capitalism typically refers to an economic and social system in which the means of production (also known as capital) are privately controlled; labor, goods and capital are traded in a market; profits are distributed to owners or invested in new technologies and industries; and wages are paid to labor.”

However, there are many people that feel that capitalism is the completely laissez-faire approach and let businesses do whatever they want without any rules. In fact, there is a “feud” between a member of our staff and someone else on YouTube on whether FDR was a socialist / Communist with relations to this. I do not think that this form of capitalism is good at all.

The reason is that without the check on greed, it would run wild. It is human nature. We need greed, but we also need to control it. Without it, there would be chaos. There needs to be a referee at every game and every game needs rules.

E.g. Credit default swap is the practice of Bank A betting that the loan Bank B is giving to Customer of Bank B would fail. Should Bank A be right, Bank A would get receive a payout and Bank B would lose big. Else Bank A would just lose the bet that it wagered. Short selling is the borrowing of someone’s assets, selling it high, and buying it on a low for a profit.

How in the world are these practices legal in the first place? When was it ever good that we make money over a loser? We paid the price for not over seeing enough of all this with the economy tanking last year and the government bailing out the banks who took too much risk because they could .Imagine if there were no rules with regards to these kinds of laws?

I think that we need to get capitalism back to the basics. I define capitalism as bank loaning money to a company with good financial plan and company pays back with interest. It should be that simple! Stocks and bonds are okay, but practices that benefit over demise of others are not.

However, the general concept of private companies running the economy is good. It is the reason that makes America special. Isn’t the American dream based on Capitalism? Isn’t that the reason our country became great?

Michael Moore far left thinking is scary. He sensationalizes bits of facts here and there and make a good movie. That, however, does not make his message true. Why do you think Michael Moore makes the millions that he does? Do you think he would be making so much money if we were Communists? Please! Isn’t it ironic that he is making so much money from capitalism by spewing hate on it?

In the end of the day, we are what we are because we are capitalistic country. There are faults with it, but we need to fix it rather than scrap it.

Related articles by Zemanta
Enhanced by Zemanta