Posted by
Andy Zarowny on Friday, October 10, 2008 11:40:15 PM
Today may mark the beginning
of the end. Not sure of what
yet? The financial meltdown?
Or Capitalism?
As the Dow Jones rocked and
rolled all over the map, two
other events occured of note
worthiness. The U.S. Treasury
auctioned off some $400 Billion
dollars worth of CDS holdings
from the now-defunked Lehman
Brothers. Credit Default Swaps
are a form of insurance policy
investors take out should the
bonds they buy default. It
is estimated that Lehman's
CDS's covered somewhere
around $2 TRILLION dollars
worth of assets.
The CDS's sold at auction for
an average price of 8.625 cents
on a dollar! What does this
mean? Well, to put it bluntly,
it means that such invest-
ments may only have a street
value of less than 9%! There
are some $60 TRILLION dollars
worth of CDS's out there in the
world's investment and hedge
fund firms!
Insurance giant, A.I.G. was one
of the major underwriters of
Lehman's CDS's. One of the
reason the U.S. government
moved in to bail out AIG was
to prevent a collapse of this
market mechanism. Some
$123 Billion dollars has been
issued to shore up AIG. It
was hoped that today's auc-
tion would net more than what
it did.
The second event of the day
was Treasury Secretary Hank
Paulson announcing that the
U.S. Treasury would begin
buying positions in major
banks. It is hoped that this
will cushion more blows in
the future and unfreeze the
credit markets. England
began doing the same last
week with several of it's
larger banks. Today, the
streets of London were
filled with angry protestors
who oppose the action.
Likewise, in Washington,
a large rally of free market
supporters, Americans for
Prosperity, gathered in more
peaceful, but vocal demonstra-
tions. They are unhappy about
the recent actions of the U.S.
government to socialize banks
and other financial markets.
AFP president Tim Phillips
told the Washington Times
that they see the current
problems as the result of
government policies and not
the fault of free markets.
Meanwhile, the financial
ministers of the G7 nations
are meeting in WDC to dis-
cuss solutions to the crisis.
The entire world is now reel-
ing from the fall out of the
subprime mortgage collapse.
Iceland is on the brink of going
bankrupt! The tiny country
had enjoyed great prosperity
for many years, issuing bonds
with attractive, high interest
rates. England, where a large
portion of the bonds are held,
is demanding that Iceland
honor their bond commitments
and raise taxes immediately!
So, in a nutshell, events of
today could be interpeted one
of two ways. On the one hand,
we may now have some idea
where the bottom lies in all
of this mess... at 8.625%! If
that's the case, then hold on
to your hats, cause we've still
got a long ride down!
On the other hand, we may
now see some extraordinary
measures being taken by
world governments to get a
grip on the situation. The
nationalization of the market-
place could just be the begin-
ning. Deep budget cuts and
higher tax rates soon to follow.
If nations holding the notes on
America's national debt start
screaming, demanding imme-
diate compensation, things
will get very ugly, very fast!