Posted on 10/09/2008 12:05:59 PM PDT by pissant
8995. Wow, I'm impressed how well socialism has helped the markets.
No, it is scared crapless that they don’t know what the counterparty liabilities are in the credit default swap markets. Socialism vs. capitalism has nothing to do with this. Only people who think that politics rules everything are worried about such piddling details right now.
The CDS instruments have the power to take banks under. Big banks - like Citigroup.
If Citigroup goes under, the US banking system and indeed, the entire economy, is done until such time as a replacement is found.
The repeal of Glass-Steagal allowed Citi and AIG to be grown into a monsters so big, that they can individually cause HUGE disruptions in the financial markets.
In this environment, it is now plausible that not only one, but both AIG and Citi go down in flames. The recent extra infusion of money into AIG was made necessary by CDS counterparty requirements.
Buffett was not exaggerating when he said that derivatives were instruments of mass financial destruction. You’re seeing exactly what he meant, and that he wasn’t kidding.
If you have family and/or community then start talking with each other about contingency plans. You don't want to be discussing those things two weeks from now...
Laz!!!! Laz is free!!
Piddling details between socialism and capitalism? IN the US economy? ROFL. You were probably pushing for the bailout too.
Paulson’s plan to get banks to break the short-term lending deadlock by buying crap paper is, without question a failure. People who had experience with banking failures called it a failure before it was passed.
That’s why you’re now seeing Paulson exercise the previously unrecognized clause in the legislation that allows the Treasury to inject capital into banks and take an ownership stake in return - because Paulson now knows that his “let’s just buy crap paper” plan is simply not going to solve the problem out there.
Have you looked at the 3-month OIS since the market closed? It’s now sitting at 1.21. The tiny trickle getting through the credit markets is about to have its last gasp.
What are credit market indicators? And what’s going on with them? Just trying to learn. Thanks!
More baloney.
...his “let’s just buy crap paper” plan is simply not going to solve the problem out there.
When did Paulson suggest that we needed to do only that one thing? He's using all the tools, there's no need to do only one thing at a time.
I listen to Roy Masters radio show at night.. I don’t agree with him on everything, but he does put things in perspective and is comforting.. Security is Never Secure..
A couple of panics stopped on October 10th (tomorrow).
I closed my short fund yesterday — got too nervous. That’s OK though, can’t complain.
Yea, I’m rolling on the floor, laughing my ass off at these simplistic ideas of how the world works.
Here’s a history lesson, bub:
The generations-long (NB the PLURAL) shift to socialism in the US from 1933 to 1980 was brought about because the banks were allowed to fail and take down the US economy in 1932 and 1933. The Depression broke out of the ag sector (which was 30% of the US economy in the 30’s) when the banking system failed. After that, FDR’s ideas on “how to recover the economy” went from fascism in the ag sector in 1933 to wide-spread socialism by 1935.
If you want to prevent socialism in this country, you need to make sure that the economy doesn’t get sucked down the sinkhole of bank failures. And right now, the economy is being sucked down the banks’ rathole.
All these idiotic attempts to solve this situation by taking crap paper off the financial sector (either by the Treasury in the recently passed TARP) or by the Fed with the TAF, PDCF, etc, etc programs — aren’t working. Flat out are not working. That’s why the market continues to go downhill.
In this case, the vaunted “free market” has failed. Completely. If you want a completely free market, you need look no further than the CDS market. It is completely unregulated. It isn’t even reported to the Fed or government. No one really knows how large the whole market is, who all the counterparties are, what all the terms on the contracts are, who does and doesn’t have enough capital to honor their side of the contract - none of this is known. It is the wild, wild west of finance, and now it is taking the US banking system down in flames around it. It was what took down AIG and Lehman.
I was pushing for a plan that would work. Paulson’s plan won’t work, it clearly isn’t working. I was pushing for direct injections of capital into the banks, with exactly the same terms that Buffett got from Goldman: senior preferred at a fixed 10% yield, warrants at a nice discount, a 10% buy-back clause on the warrants, etc. Buffett knows how to spot value.
Paulson’s plan is the work of a mental midget or some tool looking to bail out his buddies in the former investment banks. With Paulson, I vote for the latter.
The two that I watch the closest right now are the TED Spread and the LIBOR/OIS Spread.
The Ted Spread can be calculated by taking the current 3-month LIBOR rate which can be found here and subtracting the current yield on 3-month U.S. Treasury bills which can be found here. Take the resulting number and multiply it by 100 to get the number of "basis points".
The TED Spread in a healthy economy is usually around 20 basis points. Higher number indicate that credit is not circulating through our economy. The TED Spread from this morning was at 401 basis points (REALLY bad).
The LIBOR/OIS Spread measures the "willingness" of banks to lend to each other at the currently stated LIBOR rate.
The LIBOR/OIS can be calculated by taking the current 3-month LIBOR rate (found in the link above) and subtracting the current 3-month OIS (Overnight Index Swap) rate which can be found here. Multiply the difference by 100 to get the number of "basis points".
The LIBOR/OIS Spread is considered "normal" at about 8 basis points. This morning it was at 346 basis points (EXTREMELY bad news).
I hope these help as you follow the market. Forget about the Dow for now. The credit market is what matters.
I agree with the others. This is either a reaction to Obama leading in the MSM polls, or this is despite the bailout, not a result of the bailout.
Did you watch the hearings where Paulson and Bernanke laid out their ideas on bailouts?
That’s where he suggested that was his only MO. That’s what they were pushing for in the first “three page” plan, and Bernanke spent time discussing how the crap paper would be valued, coming up with this really silly idea of “hold to maturity” valuation.
If we’re going to buy billions of crap paper, then we should be buying at at (or near) market value - which is 20 to 30 cents on the dollar. Trouble is, Bernanke thinks that this doesn’t inject sufficient capital into the banks - which is why he’s talking about this “hold to maturity” valuation on the paper - which is in the range of 70 cents on the dollar.
If the banks need capital, then let’s inject capital. The banks have two options: raise more capital on their own, or take a hard deal from the government - let’s remember Bagehot’s dictum for the lender of last resort here: “Lend freely, at punitive rates.” This way, the banks learn that having to resort to taking government money carries a financial sting - and the faster they pay back the government money, the faster that
Let’s not waste time debating just how much this crap paper is worth - either now, or to maturity. The market for that paper is broken, which is what is causing the problems with the mark-to-market rules of bringing that paper onto balance sheets. There are more mortgage defaults on the way, and unless the Treasury low-balls the offers on the paper, it is very probable that we, the taxpayers, are going to take a bath.
So let’s not take a bath. We step up to help the banks straight away. But we make them pay, and pay dearly, for the certainty and safety of a government backstop.
Thank you very much! Do these numbers indicate how tight the credit is between banks? And right now the credit is extremely tight, thus freezing up the money flow between banks?
If the dang DJIA keeps going down I am really going to have to think about significantly increasing the amounts I invest in my 401K...sometime soon, when the market bottoms out, will be a great time to begin buying more stock.
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