solarbird | Oh, there we go

Oh, there we go - the other reason for the credit lockup and the money hoarding that's sending the dollar into a rally. There's a huge series of Credit Default Swap workouts coming up - a market test - and nobody knows how much any of any of these things are worth and how they're going to work out, and they total trillions and trillions of dollars and while it'll reduce in actual payout, nobody knows how far. So everyone's holding on to every dollar they can. And the CDS market is denominated almost entirely in US dollars, even tho' they're all over the globe, which is why the dollar can be in a rally.

And that hoarding will include this US$700B, by the way - just look at how much is on the table here:

The "auction season" starts tomorrow, when the International Swaps and Derivatives Association has scheduled an auction for Tembec, a Canadian forest products company. This is followed by Fannie Mae and Freddie Mac auctions on October 6. Then, Lehman is settled on October 10, and Washington Mutual is scheduled for October 23.

...

The amount of contracts outstanding that reference Fannie Mae and Freddie Mac alone is estimated to be up to $500bn. ... The CDS contract settlement could result in billions of dollars of losses for insurance companies and banks that offered credit insurance in recent months. ... Lehman's bonds have been trading between 15 and 19 cents on the dollar, meaning investors who wrote protection on a Lehman default will have to pay out between 81 and 85 cents on the dollar...

And that's why the "bailout" didn't look like it'd do a goddamn thing to free up the credit markets - because it won't. And wasn't meant to. It's for these auctions. It's why the Fed wasn't going to act for two weeks even if they'd gotten this power last Monday, because the auctions weren't happening for a couple of weeks. And it's why foreign banks and foreign assets had to be included.

I can't wait to see what they come up with next week.

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Here's something shocking in the NYT tonight -

The American International Group said on Friday that it had already drawn down $61 billion of the $85 billion emergency bridge loan it received from the Federal Reserve two weeks ago, an announcement that startled credit ratings agencies.

So how many weeks before we have to re-bailout AIG? And given that the government already has warrants for 79.9% of their stock, what do they have to give in return?

A fair amount of AIG's burn, according to a CNN/Money column (http://money.cnn.com/news/newsfeeds/articles/djf500/200810030940DOWJONESDJONLINE000500_FORTUNE5.htm), is due to the credit markets having frozen up, depriving them of any short-term borrowing ability.

It has done the same to almost everyone else, of course.

Actually it sounds to me like the majority of money has been to support risky derivatives. Sure, if the commercial paper market was in better shape they could have gotten money there, but that's probably money that's lost and would have had to be paid back somehow sometime anyway.

The insurance giant has already drawn down $61 billion of the amount, and about $53 billion or $54 billion of that has gone toward collateral calls on its derivatives business, Liddy said.

Now they're going to sell pieces of their business, but given they don't have much time to spare and that the markets are not good I suspect they'll get fire-sale prices that won't hold them aloft very long. I'm going to predict that we have to re-rescue AIG before the end of the year.

Most of their insurance business is good. Although agreed, it's not the best market to be selling in.

In the end, we may just have to take the hit and write the business off. Once they've dealt with their derivatives business, the impact on the rest of the economy will be much less.

Opps, didn't even take a week for this to come through. AIG gets another $38 billion loan from the Fed.

http://www.nytimes.com/2008/10/09/business/economy/09insure.html?hp

Well in a "free market" economic structure, the financial market should never require a bailout such as this. It is counter intuitive to over support in a dog eat dog system such as that. In the truest since of the word WE should thereby get a cut of the profit sharing when these big banks are back on top again hoarding money from the citizens again.

But, this is not a true "free market society, it's a capitalist one, one which is in favor of deregulations because they "inhibit the free flow of commerce." The regulations which where established to protect the citizenry. And in a lovely display of partisan politics, not unlike the fox guarding the hen house the draft for the bailout was drawn up by the very same bankers who desire the bill in the first place, ergo it will favor them as well.

It will not be interesting to see how this will play out. :/

display of partisan politics

Actually, it's the essence of "bipartisanship", as defined by the DC crowd, which is basically little more than a stick to beat the Democrats with when they don't roll over and do what the Republican leadership wants.

Actually, it looked to me like the Democrats rolled over initially, and the Republicans were the ones resisting.

I suppose the bill could be described as bipartisan in both sides had lots of folks who hated it.

which is why I said Republican leadership. It's Bush and Paulson who set up the framework and rigged this as a "must pass this now now now or everybody dies" situation.

I find it odd that the Democrats who ran against the Bush Administration essentially throw in the towel on almost everything when "national security" or "national emergency" are trotted out.

not that odd when you consider that "national security" and "national emergency" are the situations that most call for "bipartisanship"

Yes...but in retrospect, it seems fairly obvious that a lot of what it was claimed for was felderkarb.

I think it was mostly obvious at the time and not just in retrospect.

I knew I wanted to wait a bit longer before trying to get back into my gold+silver positions. Of course this'll probably turn out to be yet another head fake.

Oh, there we go

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taxpayers dollars?

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