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NEW YORK (Reuters) - Private equity company Blackstone Group LP (BX.N) CEO Stephen Schwarzman said on Tuesday that up to 45 percent of the world's wealth has been destroyed by the global credit crisis.
"Between 40 and 45 percent of the world's wealth has been destroyed in little less than a year and a half," Schwarzman told an audience at the Japan Society. "This is absolutely unprecedented in our lifetime."
But the U.S. government is committed to the preservation of financial institutions, he said, and will do whatever it takes to restart the economy.
U.S. Treasury Secretary Timothy Geithner plans to unfreeze credit markets through a new program that will combine public and private capital in a fund that would buy bank toxic assets of up to $1 trillion.
"In all likelihood, that will have the private sector buy troubled assets to clean the banks out in terms of providing leverage ... so that we can get more money back into the banking system," Schwarzman said.
He expects the private sector to end up making "some good money doing that," but added there were complex issues on how to price toxic assets.
He put part of the blame for the financial crisis to credit rating agencies.
"What's pretty clear is that, if you were looking for one culprit out of the many, many, many culprits, you have to point your finger at the rating agencies," he said.
Rating companies have been the focus of intense criticism for their role in granting top "AAA" ratings for complex bonds that later plummeted in value, resulting in subsequent rating cuts, in many cases to junk status.
"Once you bought into ... the Triple A paper and it turned out to be paper that was in many situations going to end up defaulting, then you really had the makings of a global problem," he said.
Schwarzman said problems were then exacerbated by mark-to- market accounting rules. Those rules ask banks and other financial institutions to price assets at a value related to how they would be sold in the open market.
Blackstone reported a quarterly loss in February after writing down the value of its portfolio and eliminated its fourth-quarter dividend.
Asked where was a good place to invest, Schwarzman said it made sense to buy cyclical names, which are less exposed to the economic cycles.
He said investors also may find value in debt products, including "senior layers of certain securitizations," where investors can see 15 percent to 20 percent returns, he said.
Geographically, he said there were "pockets of strength" in China, which is committed to getting to an 8 percent growth level, and in India, where the economy is slowing but banks are in good shape
World economy was worth $1,600 Trillion (estimated). Now 45% wealth has been destroyed.
This means world economy has suffered losses of $750 Trillion.
If there has been loses, who has earned them?....
Sometimes economy collapses are good, because speculation or country´s wrong policys create unrealistic bubbles. The break of those bubbles turn everybody to the reality and is an oportunity to change or make adjustments for good.
Lets see what contry will be smart enough to take advantage of this situation by implementing and adjusting their economic policys. What countrys do now will determine their future economic role in the world.
The $750 Trillion was not deposited into worldwide banks because banks do not have $750 Trillion deposits.
The $750 Trillion was not invested into stock markets, real estate, gold and commodities.
The $750 Trillion was not invested into world GDP because world GDP is $50 Trillion to $100 Trillion (estimated).
So where did 45% wealth or $750 trillion go?. It has been destroyed.
According to phisic law, nothing is destroyed, only change....
Maybe $750 trillon never exists and was consequence of speculators?... lets say you have a house that real cost is 100k, but due to demand pressure spaculator sell you for 300k. and crisis come, so you cannot pay the house. They say that there is a 300 k lose, but is not true, coz real cost of the house is 100k and the house is still there. It has not evaporate in air and the payment you has done go to the bank that give you the loan or to the house former owner.
Another situation: many speculator has buy future oil at hig prices many time in the future, in the hope that due to scarce resourse price will climb indefinitely. Oil price went down and they "lose" a large amount of money. Who earned?... the oil seller, of course. The buyer will recive his oil 3 years in the future at asked price.
If you track every financial movment, you will see that nothing is "destroyed", just change hands.
The $750 Trillion was not deposited into worldwide banks because banks do not have $750 Trillion deposits.
The $750 Trillion was not invested into stock markets, real estate, gold and commodities.
The $750 Trillion was not invested into world GDP because world GDP is $50 Trillion to $100 Trillion (estimated).
So where did 45% wealth or $750 trillion go?. It has been destroyed.
fxnewbie knows more than you will know in a lifetime ..destroyed?...Just a paper notation,it is not wealth,wealth is having peace,roads,medical insurance for free,free schools,food at the table and a smile in your face forever,this is real wealth,not just accounting wealth..not just an accounting number on a paper or a computer,when the accounting says a 100 square meters house is worth the salary of a lifetime,the accounting is wrong,so,no wealth destroyed,just fake illusions...or ,even worse,fake attempts at promoting a fake lifestyle
When the market says a tulip bulb is worth a REAL house...you just skip the accounting,sell the tulip,buy the house ...When the market says a house is worth 50 years of salary,you sell he house,buy the tulip ..this is wealth,you are a fake,what is YOUR agenda ?...
In the article, the Private Equity CEO wants to blame the rating agencies for rating unidentifiable junk as AAA. He has a point. No one will seriously trust Moody's that what they rate means anything. Perhaps they should come up with a new rating, lets call it "XXX". This would stand for "a class of equities which do not have easily identifiable securities or which are composed of derivitives of other sercurities which cannot be directly accounted for." In other words, we have no idea what's in this so we can't rate it. This would at least be a truthful statement from them. Of course, no one is going to pay them to make such a rating, we can pretty much figure that out ourselves.
As to the point of discussion. If you say an asset is worth $1 million dollars, does that make it so? Only if someone buys it for that amount. But if you insist on listing this asset on your books as a $1 million asset, when you have no proof of its worth, then you're just playing games with numbers.
If your asset is derived from something else, then you have to know the value of the underlying assets in order to know the value of your derived asset. If your asset is based on 100's of other assets, some of whose value isn't known, then you don't have a quantifiable asset. You have a piece of paper whose value was fixed by guessing.
Later, when you try to sell this asset, you may find that your guess was wildly inaccurate, and your asset was ALWAYS worth far less than you thought. Therefore, no wealth was ever created or destroyed; it was never there to begin with. Of course, if you paid $1 million for a derivative that was really only worth $250,000, then you did indeed transfer $750,000 of your money to the kind-hearted broker who sold you the derivative. Lucky you!
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The greatest power is often simple patience.
Last edited by Toblerone2; 09-01-2009 at 06:46 PM.
Reason: typo
So...all you guys...if I understand you correctally...if a giant comet will hit planet earth tomorrow and completely destroy it...the remaining 55% of the wealth will get gone????????
Pava - your scenario is impossible. It violates the first law of Thermodynamics.
Of couse, the comet could change the amount of matter and energy present on the earth. This has the added benefit that all the world's lawyers, bankers and stockbrokers would probably be killed. Ok, most everyone would be killed. So in that case, those lucky few that remain would revert to a barter economy, or hunter/gatherer economy, and the value of everything would be self-evident. But what remained would still have value.
To put it another way - Mars has no life on it that we know of. But perhaps it still has wealth?
__________________
The greatest power is often simple patience.
If any of you watched "5th Element", "Deep Impact"..."The Day After Tomorrow"...and so on...All those movies have 1 thing in common...In all those movies the President of the United States of America is black...It is as if Hollywood tried to warn american public of a terrible event if they vote black president into the office...it is as if..you vote one of them in and the lows of thermodynamics will be bent...
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