Sunday, February 22, 2009

Hitting the reset button

If you are trying to follow the financial news but are totally confused about what is going on and why, just read Billmon:
The broad story is well known, even to the cable TV pinheads: Housing Bubble + Subprime Mortgage Lending + Derivatives = Armageddon.. . .
But even now I’m not sure if many people fully understand just how insanely reckless the carnival was, to the point where future historians will speak of "structured finance" in much the same the way we talk about the bubonic plague.
The carriers (fleas and rats) of this particular epidemic were the bright young Wall Street things who invented the concept of securitized lending . . .
So here we are: The banks are sitting on paper originally valued at 100 cents on the dollar (or even more) which is now worth 20 or 10 or 0 cents. If they sell the stuff at those prices, most of the capital they’ve put behind those assets will be erased, leaving them insolvent, technically and perhaps literally – as in, unable to cover their current liabilities. On the other hand, if they don’t sell their pieces of Big Shitpile, all their capital (including what Uncle Sam has already thrown into the till) will remain frozen in place, blocking them from doing any new lending. Without new lending, they can’t earn the profits they need to make good the losses they are sitting on. Zombies. Night of the Living Dead Banks.
The banks know this, investors know this, Geithner and Co. know this. And everybody knows that the others know. So the only way to get private investors (many of whom have already lost a few pounds of their own flesh to the bear) to bid on Big Shitpile is to make them offers they can’t refuse – and I’m not talking about leaving a horse’s head in their beds, although I suppose it could come to that.
The Sunday talk shows seem to agree that the only way out now is for the US government to take over the banks.
Just reset everything to zero and start again. Well, that ought to go over well with Glenn Beck's viewers.

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