SW Richmond

CDS Industry: Zero Sum Game or Ponzi Scheme?

CDS are madness, just madness.

From a piece by Antal Fekete:

"‘Progressive’ banks were free to heap debt upon debt in the asset column of the balance sheet without any regard to reserve ratios, in a mad chase of illusory paper profits. If the balance sheet was not big enough, why, they could simply go ‘off balance sheet’ to add more debt."

"You cannot hedge these risks through owning more debt ― the liability of someone else. A hedge that is subject to exactly the same risks would not diminish but magnify risks."

"For a true hedge, you need an ultimate asset that is not the liability of anyone."

The world is coming to terms with what the phrase "counterparty risk" really means. If counterparties were solvent and fully capable of meeting their CDS obligations, there'd be no need for keeping AIG et alia out of BK court, would there?

Research Zeitgeist: Bank Capitalization Concerns Heat Up

Reinko, thanks for the links...

It seems the banks are able to take their radioactive paper to the TSLF and exchange it for Treasuries, then take these Treasuries to the Discount Window, TAF, or PDCF and get cash. This way they can meet reserve requirements AND get bad paper off their books while bringing good paper onto their books, making them appear to be adequately capitalized. Pretty sweet deal. Until one realizes what it means about the banking system.

The Stock Market: Searching for Signs of Intelligent Life

Paradigms. Youthful investors (30's and 40's) have grown up in an environment where stocks always went up. Sometimes they briefly corrected, but they always resumed going up. Corrections were ALL buying opportunities, since everything always resumed going up. When the Fed has got your back, buy stocks with both hands, always.

It's easy to be a stock legend when stocks just go up. Investors are behaving as if their expectation of ever-increasing stock prices are reasonable. That is what they learned: never bet against the Fed.

Fundamentals like "earnings" don't matter to them; the only fundamental they understand is that stocks always go up. Like you, I believe that they have a learning experience headed their way. The Fed is halfway through its balance sheet, and there's another $5 Trillion in Level 3 that FASB wants to put on the books.

Bankruptcy or printing press? Time to choose.