Some Analysis

AIG and the credit default swap.

Those seem to be at the core of the credit bubble that occurred in the past four years. I've been wondering: whence came all that credit? After all, it did not come from the Fed or the ECB or any other monetary authority. Money was rather tight.

I think the banks, hedge funds and AIG exploited a loophole in the banking regulations created after the 1990 recession and collapse of the savings and loans, commercial mortgage and junk bond markets. At that time capital requirements were increased for banks and insurance companies and re-written to be adjusted depending on presumed risk characteristics of the assets of those financial institutions.

Some assets had zero or near nil capital requirements, namely AAA/Aaa, AA/Aa and similar highly rated securities. I'd guess some regulator decided that having an insurance wrapper made even those bonds riskless. So what do the financial engineers do?

Find a way to "insure" financial assets. Enter AIG and the credit default swap..

AIG proceeds to write a huge unhedged book of credit default swaps for other financial institutions. Those institutions no longer need to hold capital against those assets, so can buy more assets. Where do they get the credit? From overnight repurchase agreements with other financial institutions. In other words, a daisy chain of overnight debt to fund supposedly riskless assets.

Which of course eventually collapsed. Who can insure a default on a AAA asset? No one except a government that can print the money. Any other institution is likely to be in trouble and unable to pay in a severe downturn. So AIG was a house of cards. As was and EVEN NOW IS the entire credit default swap market.

Why is the credit default swap allowed to exist? It is a fraud and a scam. Even a clearing house cannot provide the ability to pay off its insurance in a severe downturn, unless Treasury collateral is required. But we know that is not what Wall Street wants. That would eliminate the profits in that market.

Get rid of credit default swaps. NOW.

Other Frauds

From this morning's WSJ story, Madoff was apparently a fraud for over 20 years. Hmmm. And he helped loosen short sale rules. Which brings another matter to mind: Why isn't a strong short sale uptick rule in place?

Markets

The public and hedge funds are likely to continue selling until the near the end of March. I am being cautious, but plan to buy stocks in April with new money. Krypto Fund is severely underweight in stocks.

Futures are weak early, a poor sign.

Word of the Day

"Catholicon" - noun [$100]; a Mrs. B word.
Catholicon means a universal remedy, panacea.
Sentence: If there is a cathicon for the current severe downturn, it's not "investing" in green technologies. Almost all those are heavily subsidized pits for long term losses. However, a catholicon for avoiding another or even more financial market turmoil does exist: get rid of credit default swaps and regulate hedge funds.

Le Mot du Jour

"Haltère" - noun, masculine.
Haltère means weight, dumbell, barbell in context.
La Phrase: L'homme du bunker a font des haltères hier matin.
Sentence: Bunkerman lifted weights yesterday morning.