Bo Peng

This Recession Will Be Anything but Deep

Today's market has been somewhat puzzling. No reports of damage from Lehman settlement, which may mean the daily hedge and collateral adjustment may have worked better than many (me included) had expected or feared. Or it could mean just a delay -- the public won't see it until the next quarterly report.

The Fed's decision yesterday to inject $630B into money market funds was also puzzling, after reports showing a sizable inflow into them. Why did they decide it was necessary, ineptitude of the Fed or factors unseen by the public?

Synthetic CDOs are definitely affected by this settlement. But I don't understand why the big fuzz all of a sudden as if it's a huge surprise. Synthetic CDOs based on ABS certainly have taken their losses a long time (months) ago. Those involving Lehman may have their equity or mezzanine tranches wiped out or severely damaged. But these tranches are very narrow. And CDO issuers (big banks) usually hedge them, though may not perfectly. The ultimate losers in synthetic CDOs are the CDO investors in equity and mezzanine tranches, of which there aren't that many.

Regardless, I think we can say by now that the government bailouts have worked. Chain reaction has been stopped, at least for now. I expect Libor to continue dropping and the money pipes to continue opening up.

This Recession Will Be Anything but Deep

Pretzel Logic, I agree with most of what you said. But I also say the destruction of credit is close to an end -- some hedge funds, perhaps even another regional bank or two.

In addition, it's hard to argue what the gov has done to Fannie and Freddie, no matter how flawed, is not helping the housing market. And there'll be more and more such "help homeowner" legislation and policies going forward. Politicians will feel obliged to dish out handouts until the deflation is over. So housing market will be help by two sides: easy credit and homeowner support.

As to the psychological aversion to "easy credit", I don' think it'll last. We may have learned a lesson now. But we also forget. Instant gratification and greed triumphs over long-term discipline every time.

This Recession Will Be Anything but Deep

Talin, what we're witnessing is nothing less than the tragic failure of private capitalism AND democracy. This is a sad chapter in human history.

This Recession Will Be Anything but Deep

Deflation in the short term is expected, as banks and hedge funds deleverage and/or unwind. I was talking about inflation in the longer term, starting from at least a few months out, when money flows down the pipe and reaches Main St and takes effect in consumer credit, hiring, etc.