eclectic imaging
Where is all that money gone?
Posted by MadScientist (Düsseldorf, Germany) on 9 October 2008 in Plant & Nature and Portfolio.
A fellow photoblogger - cheers, Mike - asked me yesterday: 'where
is the money gone that was in that hole [where] Billions of pounds dollars, euros being pumped into the financial world'?
I only know very few facts about the financial system. I'm reading economy news just since a few months and most things of this strange world are still completely incomprehensible to me. But the web is big and many clever people are willing to share their knowledge with us. I've found an explanation that made sense to me. So: where is all that money gone?
Only a week ago the Fed made an amount of 900 billion dollars available to the market. A lot of money, but everybody still talks about the credit crunch. That's because the banks freezed the interbanking market: they stopped lending the money among themselves, despite that's what banks are supposed to do. Obviously the money sticks with the banks. But why?
Most likely they're stashing away the money because of the preparations for the Credit Default Swaps (CDS) that are coming due this week. These CDSs are another witches' brew that is used by banks that don't want to make provisions when they are lending money. Instead they are having sort of an agreement with another bank that will act as a stand-in in case of an unexpected failure in payment. (You might call this kind of an insurance.) That second bank might do so as well and seek another bank that will pay if the debitor can't pay. And so on; thus a whole chain of obligations came up, often even more complicated contructs were built with the result that it's impossible to determine who owes whom how much money.
Yesterday the payments for Freddie Mac and Fannie Mae were payable. Both were insured equally with a sum of 500 billion dollars (nobody knows the exact amount of money because of these obscure CDS relations). Because of their nationalization the total costs could be reduced, as a great part of the money could get mutually listed (many banks are now in public property, so a great part of Fannie's and Freddie's debt could get charged against the now public banks).
The Lehman affair is much more interesting, as the loans are really lost. There is talk of 400 - 500 billion dollars debt, again nobody knows this exactly. In contrary to Freddie and Fannie, Lehman had not been rescued, so a loss of 20 - 40 % of the nominal value is to be expected. Due date is October, 21 (perhaps already next Friday).
There is a total amount of 45.000 billion dollars in the CDS market! This system never has been really stressed before (a more prominent example was the bankruptcy of the car supplier Delphi). The casus Lehman will be the first real stress test of that system, this could explain partially the market's nervousness despite all the billions being spent in the last days.
(Image: Colletia cruciata)
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Canon EOS 300D
1/320 second
F/8.0
ISO 200
84 mm