Business
See other Business Articles
Title: Cram Down the Ultimate $100 Trillion Bailout, U.S. Dollar Value Fast Meltdown Ahead
Source:
http://www.marketoracle.co.uk/Article23100.html
URL Source: http://MarketOracle.co.uk
Published: Sep 30, 2010
Author: Chris_Kitze
Post Date: 2010-09-30 12:24:30 by Capitalist Eric
Keywords: None
Views: 4435
Comments: 11
Let's say you bought 100 shares of XYZ Company and paid $10 per share. The company runs into trouble and is either going to raise new money or shut down. After a recapitalization or Cram Down, those shares might be worth $.01 per share -- the value of the old shares are set by the new money -- and your investment of $1000 ($10 x 100 shares) would now be worth $1. The new money gets to buy shares for 1/1000th the price you paid for yours, so they invest $1000 of their own money and if you don't, you will own 1/1000th of the percentage in the company that you used to own. These situations are always governed by the Golden Rule, those with the gold make the rules -- the party putting in the new money names the terms. People with a lot of this get to boss around those who don't have a lot of this. You might be able to buy some of the new shares at the new price, but the new money investors usually try to scoop up control of the entity, to enrich themselves even further and prevent future meddling by uppity shareholders, whose old shares are usually converted to “Common” shares -- for this reason, people who get crammed down usually aren't a happy bunch. Common shares are called common for a reason; they don't carry the protections and rights of the preferred shares and common shares fall at the end of the pecking order when a payout happens. Common shareholders are usually lucky to collect a penny when there are lots of preferred shares ahead of them. You're always better to be in the preferred nobility than a commoner in a Cram Down. In bankruptcy, whomever ponies up the “new money” or is favored by the judge receives the lion's share of the equity in the restructured company and everyone else is virtually wiped out or “crammed down”. In a bankruptcy, the judge has wide latitude to “cram down” various classes of debt and equity and involuntarily impose this over the objections of various classes. A recent example is the General Motors bankruptcy, where the bondholders were crammed down for the benefit of the unions, which went against 200 years of established bankruptcy law (normally the company's lenders get the majority of the equity, unions get a much more modest share for concessions). The golden rule applied here, too. The U.S. government put up the gold and ruled that the United Auto Workers should get the equity, not the widow and orphan GM bondholders. The bondholders investment of $27 billion of their cash wasn't worth as much in that Cram Down as the future votes of the United Auto Workers, who put in no cash and offered a modest discount to their company busting union contract. GM filed for bankruptcy protection June 1, 2009. Bondholders got 10% for their $27 billion, the U.S. government got 50% for their $50 billion invested and the United Auto Workers union got 40% for political connections. Elderly retirees lost a large part of their retirement savings in this Cram Down. Governments, companies and individuals around the world all have a mountain of debt they will never be able to repay; they are INSOLVENT. In the old days -- debt would be extinguished by repayment in gold or the loan would default and the lender would take over the collateral. What's special about gold? For 5,000 years, gold has been considered money without counter-party -- it's just you and a lump of gold -- you are not reliant on the good credit of another party. It's where the buck stopped, literally. Today, in the era of unlimited money printing, there is no gold repayment. We replaced gold repayment with money printing by the privately owned central banks. When a central bank issues money in excess, existing holders of that currency are “crammed down” by the new money coming into the system. Since 1913 when the Federal Reserve was created, over 95% of the value of a dollar has been crammed out of the pockets of savers and into the hands of bankers, politicians and the recipients of the new money. This slow motion Cram Down is called Inflation and it is the mortal enemy of the saver. As you are about to see, the motion is about to get a lot faster because there is a new, efficient tool being used to strip value away from savers known as the Bailout. The first dollar Cram Down took about 100 years to strip 95% of the value from savers. The next 95% devaluation will take just a handful of years. A number of commentators have estimated we are already into the bailouts to the tune of at least $14 trillion. This is in addition to last week's report in the UK Telegraph (covered in my column HERE) that a well connected banker estimated the next round of “Quantitative Easing” (or QE2 as they now call this round of bailouts) could reach $30 trillion, or about 50% of the world's GDP. Given that this money is, like all fiat currency, issued in the form of debt, how would that extra $30 trillion ever be paid back? When money is issued as debt, there is no end to the need for money to pay the interest on the existing debt (e.g.: if $100 is issued at 5% interest, another $5 of money must be created just to pay the interest, but there is interest on the interest, ad infinitum). As we explored last week, we're now beyond the point of ever paying back the CURRENT debt with anything resembling the value it had upon issuance. When debtors go deadbeat, they can't even pay the interest, let alone the principal and the U.S. Government might be approaching that point soon, according to B4IN contributor Karl Denninger: Here's the math. This fiscal year (2010) we have approximately $13 trillion outstanding in debt (including “intergovernmental borrowing”, that is, Social Security and Medicare.) Our total debt service is projected (it's not quite over!) to be 4.63% of the budget, or about $165 billion. That's approximately 7% of revenues, incidentally. That's an effective interest rate of about 1.27%. Yes, 1.27%. Now what happens if we take no more debt at all but rates normalize to 5%? That would be $672 billion, or about $500 billion more than it is today. Incidentally, that's fifty-two percent of all (personal and corporate) income taxes, up from today's thirteen percent. Of course the CBO says we will run about $1 trillion in deficits for the next ten years. Let's presume it's five years, and we'll give it the $1 trillion, although I think that's low - maybe by 25% or more. So let's add $5 trillion to the total, for $18.5 trillion, and apply a 5% rate to it. That comes to $925 billion, or dangerously close to all personal income taxes, which are $1.061 trillion. Got it folks? All personal income taxes, or if you prefer all FICA and Medicare taxes, will go only to pay interest. We won't get there. Before that day comes the world, which buys our debt as a “safe haven”, will discern this math and cut us off. It is a certainty. Look at what happened with Greece, where literally within days short-term interest rates went to 10% - a rate that, were it to happen here, would cause The United States to blow up monetarily and politically right here and now. Once you can't pay the interest on a debt, much less any principal, it's game over. The markets will eventually force the hands of the politicians and raise the interest rates, it's only a matter of time. But the Federal Reserve will use the money printing press for all it's worth, something Greece didn't have at its disposal because they had switched to the Euro, a currency they couldn't print themselves. That will only delay the outcome, which is not in doubt - the issuance of new money is a nearly perfect analog for the issuance of new shares by a distressed company. The Three Money Printers (from right Ben Bernanke, Federal Reserve chairman, President Barack Obama, Treasury Secretary Timothy Geithner). Last week, I did a thought experiment to see If the government and Federal Reserve could protect savers and other hard working citizens by issuing money to pay for a wind down of the welfare state (FDIC saver guarantees, Medicare, Social Security, etc) -- it would be a bailout of about $30 trillion, but that would be the end of it -- debt would be wiped out because all the new money would be issued directly from the government with zero interest payable. The unsustainable welfare state would be dismantled in an orderly fashion. As we discussed, the chances of that happening right now are zero, because the elimination of the welfare state is not in the best interests of the politicians, bankers or the rapidly growing number of those dependent on the system. It's not a pretty sight for people of any political persuasion to watch human suffering of this scale, but it might offer less suffering than that caused by the complete destruction of the currency. Don't underestimate class warfare, either. Savers are RICH, remember? With the present administration, it's guaranteed that savers will not get a bailout, but many other politically connected groups will: States - Meredith Whitney released a new 600 page report detailing this next $ trillion bailout. States, like everyone else need to remember that there is a price to everything and no free rides, but they really, really, really need the money. Pensions - States alone could have a $3 trillion shortfall. Union and corporate pensions have hundreds of billions more they are trying to stick with the taxpayer via the Pension Benefit Guarantee Corp. FDIC - According to problembanklist.com, the FDIC insures deposits at 7,932 banks with total assets of $13.2 trillion but now the FDIC has a negative reserve ratio, meaning they will also need a bailout in the future, as more banks continue to fail. There are over 800 banks on the “problem bank list” Financial Regulatory Reform Bill - Creates permanent bailouts of even more banks - bondholders and banks could need $10-14 trillion. Nuclear power - Now “dead” with the climate bill in the U.S. congress, you can expect this group to arrive on Capitol Hill with their hands out in the future. Everyone wants to get in on the bailout action. All the Green energy people will be right behind them. Foreign banks - The IMF and large foreign banks will no doubt be the beneficiaries of largesse. They received billions from the AIG bailout. Federal Budget Deficits - $2 trillion per year and counting. Social Security and Medicare - With $107 trillion in unfunded future liabilities, Social Security now takes in less in taxes than it spends. The biggies....the dark pool of unregulated derivatives... Naked Credit Default Swaps - credit default swaps are insurance on bonds against the possibility of default. If AIG could get a bailout, this $36 trillion market (at the end of 2009) would make the AIG bailout look like pocket change. At some point, there will be a failure and these will be Too Big to Bailout (TBTB). Could the U.S. “print” the $100 trillion to bail this out? Sure, it's just another few zeros in a computer, but at that point virtual money has no value. Even paper money will have more value than electronic foo-foo dollars. Another scenario that could bring this to a head rapidly is a currency crisis involving the euro or U.S. dollar, a run on the credit default swaps, a major bank failure or some other calamity that involves lots of bad decisions which are about to leave a private company's balance sheet and become the public's problem. Because everything in the financial world is now interconnected via complex hedging, contractual relationships and derivatives, when one bank fails, it could take out another 10, 20, 100 banks and even jeopardize the entire financial system. There have been a number of near misses, such as Long Term Capital, the crisis of 2008 and so on. The fiat money solution has always been to PUMP. When the world ran on a gold standard, those who over-leveraged and couldn't pay back their debts on demand are wiped out in the blink of an eye. That used to be called “a run on the bank”, when the depositors (creditors under the law) of a bank demanded repayment of their deposits and the bank didn't have enough money to satisfy these demands. The bank president's personal possessions would be sold on their front lawn to satisfy the creditors. Those who were prudent and saved for a rainy day got to pick over the carcasses of the bankrupt for pennies on the dollar. There is something to be said for this kind of economic justice. However, the rules of engagement have changed in today's amoral climate. In today's universe of fiat currency, the central bankers just “print” more money, lend it out to the banks in need and avert the liquidity crisis, at least temporarily. That was the original purpose of the Federal Reserve and some argue it's worked pretty well up till now (others beg to differ). Ultimately, this lands at the feet of We The People in the form of a currency crisis. So much money will need to be issued to maintain the system that the currency diminishes in value very quickly. Those who saved and played by the rules are the “current shareholders” who will become destitute. The new money will own the whole joint. This is in fact a Cram Down. Because a Cram Down changes the ownership structure of a company, this one will change the ownership of the U.S. Never underestimate the politicians and bankers taking the easy way out. Printing money and kicking a bigger can down the road is always easier than facing the reality of your debts. When everyone figures out what's going on -- readers of B4IN are some of the first to understand -- people will dump U.S. dollars around the world in a matter of days and weeks. Like any Cram Down, there are winners and losers: Winners - The Preferred Nobility: Banks, Government transfer payment recipients, Government vendors and employees, Big Politically Connected Business, Friendly foreign governments, Unions Losers - Commoners: People who pay taxes (the little people), Small Business, Investors, Savers, People on a fixed income unable to hedge the currency The executive branch of the U.S. Government, the Treasury Department and the Federal Reserve Bank will be directing the Cram Down action and they will all be trading for their accounts. It's not hard to imagine what the rest of this Cram Down will look like in the hands of the Obama administration. If you were a GM bondholder, you already know how this will go. Like any Cram Down, you won't want to put a penny of your own money in the next round until the entire management team has been fired. They were the people who put the car in the ditch and you have to take away the keys. Let's see who gets fired in the next election. One other bit of advice worth sharing; an elderly man on the Mexico City subway kindly pointed out a gang of pickpockets entering the car and said: “Watch Your Pockets!”. Source: http://beforeitsnews.com/story/195/968/Ultimate_Bailout:_The_100_Trillion_Cram_Down.html By Chris Kitze Cram Down the Ultimate $100 Trillion Bailout, U.S. Dollar Value Fast Meltdown Ahead
If you've never heard of a “Cram Down”, you are about to get a first hand lesson on the receiving end of the biggest one in history. The words “Cram Down” used to be reserved for companies in bankruptcy or smaller venture backed companies that run out of cash and are recapitalized by “cramming down” the equity held by existing shareholders. The only other alternative to closing the doors is to reorganize the ownership structure to attract new capital and keep it in business. Those who don't have the money to play in the next round -- i.e. don't have a money printing press -- will get wiped out . Having personally experienced a number of these unpleasant affairs in various businesses, you are definitely better off giving than receiving a Cram Down. 
Post Comment Private Reply Ignore Thread
Top • Page Up • Full Thread • Page Down • Bottom/Latest
#1. To: Capitalist Eric (#0)
Frankly, we stopped right there, very much disgusted that we have been proven correct yet again when we asked rhetorically if "Bill Gross just confirmed on live TV that he has an "advance look" at non-public fed data?". Now we know how it is that Bill Gross knew all too well that the Fed would lower its GDP expectations to 2% three weeks ahead of the minutes release. It also explains why PIMCO is ever so precise in going on margin in purchasing either bonds or MBS. Fuck it. This is beyond disgusting, but that is to what this bullshit country has devolved: leaking the most important decisions made on "behalf of the middle class" so that a few multi-billionaires can make a few extra soon to be worthless dollars. I been kick off a couple of sites for tsaying the Game's rigged for the Top 50 000. 8D by B9K9 on Thu, 09/30/2010 - 13:33 #616138 I think that it comes as a surprise to many, even those who are well versed in the failings of man-made institutions, that our government is at the center of an organized criminal syndicate. It is now not a question of if, but of when; the whole thing is coming down. Frankly, the insiders are probably amazed that it has lasted this long. Credit control of essential mass media and expert manipulation of key psychological triggers. The bigger question that remains is much the same as posed to the dog who finally catches the car: ok, so now what are supposed to do? * Login or register to post comments by Cognitive Dissonance on Thu, 09/30/2010 - 13:49 #616201 I think that it comes as a surprise to many, even those who are well versed in the failings of man-made institutions, that our government is at the center of an organized criminal syndicate. Our social and political programming runs very very deep. Most of us have no idea how ingrained it is into our very fabric, this indoctrination which starts with our parents proudly teaching us what they were programed to believe. It then progresses through the 12 primary grades and out into society. For those among us who need or want extra lessons, there's always college and grad school, where we directly pay for our programming. And all of this is reinforced through our mass media and "free" press. For myself, the realization came when my son turned 12 and I suddenly realized that I had crippled him for life simply by being a "good" father. I had taught him to be a good and industrious slave. That was the straw that broke this camels back. No longer did I wish to inflict my conditioning upon anyone else. This was where I vowed to wake up and never turn back. We must all get to the point where we become willing, no desperate, to erase everything we think we know before we can begin to learn the things we need to know. The pain we feel during this process is not the learning but the un-learning. It's never easy to tear apart of very belief system.
Good stuff James.
Wrong. The people who elected these losers into office are the ones who are responsible. The PEOPLE voted themselves unheard of pork and government hand-outs. The people are too blame. Not all of them, but the majority are. As ye sow, so shall ye reap.
Clinton and Cuomo are the true bandits who lit the fuse to this economic crisis we're now in. All in the name of getting more minorities in houses: http://libertysflame.com/cgi-bin/readart.cgi?ArtNum=12554
You contradict him, and then go on to spout off the conditions that make the government a true mafia. He's not wrong, you're just adding detail to the picture. Don't mistake my point- I agree with both of your statements. They are both indicative of the repugnant history of politics, going back thousands of years... Ironic, when you think about it... For all of our technology, our so- called "advanced" civilization...? We (collectively) haven't learned a God- damned THING... Nebbie, while you and I vehemently disagree on what'll happen on the economy, I think we can easily agree upon this observation. As to what'll happen next with the economy, I lean towards the hyperinflationary side, you lean on the deflationary side... While we are (and will continue to) experience deflationary indications for a while, I simply look at human history, and analyze what they did... Which was to somehow devalue the money in the peoples' hands, to save themselves for just a tiny bit longer than the populace... Of course, the end result is the same... But throughout history- without fail- the decision-makers in government always throw the citizens under the bus, even if it only buys them a few days (or weeks) longer than the citizens who will suffer far more... GOD knows, I wish it weren't so... I would happily eat an extra-large serving of "crow," to be proven wrong... But history- while it may not encompass all the dynamics of our current situation- is a barometer of what elitists do, when they're backed into a corner. We'll see.... SOON. Regards,
The current members of the "You're a worthless sack of shit" list includes WAR, lucysmom (empty-headed bimbo), calcon, e_type_jack-off, mad-dog (more like rabidly stupid), ibluafartsky and the fascism-shill no gnu taxes (aka 400 bucks, happyfunball, 50yardline, etc, etc.) If you're on the list, don't bother writing, 'cause you're a waste of flesh.
Do you realize how long you've been predicting both the collapse of the dollar and a resurgence of inflation?
Wrong. The people who elected these losers into office are the ones who are responsible. No. And that's one of your problems, neb. Blaming the victim. Note the 'lack of choices for your 'electorate'. And how no matter how wrong certain folks are, they stay in power. But others make one mistake and not only are they immediately removed. They're suicided.
With Empire the Collapse of the currency is impossible w/o collapse of that same Empire. Housing crashes another 60% now.
I think that it comes as a surprise to many, even those who are well versed in the failings of man-made institutions, that our government is at the center of an organized criminal syndicate. It is now not a question of if, but of when; the whole thing is coming down. Frankly, the insiders are probably amazed that it has lasted this long. Credit control of essential mass media and expert manipulation of key psychological triggers. The bigger question that remains is much the same as posed to the dog who finally catches the car: ok, so now what are supposed to do? * Login or register to post comments by Cognitive Dissonance on Thu, 09/30/2010 - 13:49 #616201 I just saw that the stock market had it's best Sep since 1939. Which tells you exactly how far ahead the Top 50 000 are now looking. # Å8; # Molotov–Ribbentrop Pact - Wikipedia, the free encyclopedia David Low's cartoon, published in the Evening Standard on 20 September 1939, shows Hitler greeting Stalin, following their joint invasion of Poland, ... en.wikipedia.org/wiki/Molotov–Ribbentrop_Pact - Cached - Similar Class War is Over. It's the Real Thing now.
The PEOPLE voted themselves unheard of pork and government hand-outs. The people are too blame. Yep. Democracy will cease to exist when you take away from those who are willing to work and give to those who would not. - Thomas Jefferson
Typical idiocy for dwarf. Had the government stayed out of the way, the collapse would most likely have happened late-2007/early-2008. The rapid collapse of several large banks, would have started the panic. Of course, it's all been smoke and mirrors, but the reality is that nothing has changed, except the debt is worse. Of course, dwarf will spout the typical lines (as a government shill), and say that ALL is well. He's a fucking idiot.
Getting tired of the bozoed calcon following me around on the 'net, wanting to discuss "tossing salad." Sorry, you sick rump-ranger. NOT interested.
the Top 50 000 are wealthier.
http://www.zerohedge.com/article/here-how-worlds-biggest-bond-funds-and-others-just-not-you-get-advance-notice-what-fed-about
#2. To: mcgowanjm (#1)
For myself, the realization came when my son turned 12 and I suddenly realized that I had crippled him for life simply by being a "good" father. I had taught him to be a good and industrious slave.
#3. To: mcgowanjm (#1)
that our government is at the center of an organized criminal syndicate.
#4. To: Nebuchadnezzar (#3)
Mad dog gets
"calibrated..."
#5. To: Capitalist Eric (#4)
#6. To: Nebuchadnezzar (#3)
that our government is at the center of an organized criminal syndicate.
#7. To: war (#5)
Do you realize how long you've been predicting both the collapse of the dollar and a resurgence of inflation?
#8. To: All (#7)
#9. To: Nebuchadnezzar (#3)
The people who elected these losers into office are the ones who are responsible.
democracy will cease to exist when you take away from those who are willing to work and give to those who would not -- Thomas Jefferson
#10. To: mcgowanjm (#7)
To: war Do you realize how long you've been predicting both the collapse of the dollar and a resurgence of inflation?
#11. To: Capitalist Eric (#10)
Of course, it's all been smoke and mirrors, but the reality is that nothing has changed, except the debt is worse.
Top • Page Up • Full Thread • Page Down • Bottom/Latest
[Home] [Headlines] [Latest Articles] [Latest Comments] [Post] [Mail] [Sign-in] [Setup] [Help] [Register]