The pivot

I just finished reading The game is up from The Economist.

If these securities are now downgraded, banks could be forced to
offload lots of illiquid instruments into a falling market—one of the
fastest ways to lose money yet devised. But if there are no buyers,
banks may have to sell something else to shore up their balance sheets.

Undoubtedly, it’s a hell of a good description of the markets’
situation, it tells us what’s happened in the recent couple of weeks.
In short, there are no buyers for some highly leveraged and
sophisticated credit instruments: CDOs, credit swaps, and the like.

It’s quite evident by now, that the subprime mortgage defaults
carried their losses well into the portfolios of hedge funds, the worse
tiers of the bunch unexpectedly hurt the performance of the companies
included in the better rated trenches…

Notwithstanding the credit rating agencies conflicting interests…
which is another saga in itself… hedge funds are bleeding… and the
banks involved with their leveraged loans are either taking a loss with
their clients or asking for some quick reassessment of collaterals…
which, in turn, is pushing hedge funds further into trouble… they
have to sell and there are are no buyers…

Fortunately, the cavalry is not far away, and with the best general
one could find to lead the charge, under these circumstances, Ben
Bernanke. The Fed chairman has a life dedicated to the study of the
30’s depression. So far, he has coordinated with the European central
banks, and injected gazillions in cash… As this didn’t work, he
reconvened an emergency meeting and the Fed committee lowered the
discount rate 50 basis points.

Will this be enough?

I don’t know, and I don’ care… I shouldn’t.

There is nothing certain in the outcome of these antagonizing
forces… We should always be looking for tests –that’s Jesse
Livermore’s greatest lesson.

Interstate_fire_lg

First Interstate Bank Fire. May 4, 1988

I’m inclined to believe that Mr. Bernanke’s efforts will not be
enough… The fact that loans were insured against defaults, through
credit risk instruments, allowed liquidity to grow at an alarming rate
into unchartered territory…

I’m certain that CBs are no longer capable of arresting and controlling credit markets. No CB fireman knows the extent of the gasoline deposits housed inside this
burning credit edifice, built on unending bank lending and hedge fund
leveraging, and borne from unquestionable confidence in credit
insurance.

We’re in a pivot point… I suggest a little patience.. to follow our orders with the new course of the markets.

BTW, keep an eye on copper…

19 August, 2007:

Reading Brad Setser’s take and Yves Smith blog, I found this very illuminating article in the FT, which gives thorough details of the credit crunch undoing.