Anything surprising or interesting to you about the way that things are unfolding?

Barry Riholz (sp?) over at Big Picture speculates that the Lehman settlement on Friday is a driver.

Actually, I am very unclear about what this "settlement" will do, or how it is papered.

BR quoted someone as saying that the holders of [?? dirivatives? I was not clear] would get "10 cents on the dollar"

actually, I was somewhat pleased with that because it is my understanding that the best policy approach is to put banks/brokers etc into bankruptcy where all the paper like credit default swaps can be squeezed into pennies on the dollar -- on the theory that these were the most abusive and damaging instruments.

Anyway, a penny for your thoughts

This is BIG. The level of the volatility index (VIX) reached 64.92, closing @ 63.92. In Asia right now, Japan is down fully 10% so far in its trading session. This takes us back to @ least 1937, if not 1932. Sure, unemployment has not hit 25%; however, anyone who has read THE AGONIST knows the real rate has been skating along @ around 10% since the #'s are jiggered. How long will it take before the wholesale layoffs we've seen in the Financial Services field gooses the real unemployment figures to 12-15%? Numerian is correct: this indeed presages a paradigm shift; there will be no "recovery". Those of us who maintained a top-notch investment portfolio, well-diversified and with our assets properly allocated, have taken and will shoulder substantial losses. Dividends will be cut as this spreads and all those securities will be 'dead money' for years. Assuming cash, FDIC-insured and Treasury bills, bonds, and notes hold their value, forget getting much of an income w/ interest rates south of 2%. Agonistas would be well-advised to stop and reflect, imagine, and connect the dots: this WILL NOT be over for years and the Sci-Fi like Armageddon that is unfolding in slow-motion could be just as dark as your worse thoughts. It may NOT get that intense, but it could. A rubber-band (spring-back) rally could have occured and may still happen, but it is also possible that on every minor rally desperate institutional money managers, pension funds, individuals, professionals, and life insurance companies will be selling into it with a passion. ANYTHING is possible at this stage, including the restoration of rationality, but don't count on it.

The Lehman settlement is the first real test of the credit derivatives default process. ISDA - the International Swap and Derivatives Association - which is the industry trade group for derivatives - is organizing a swaparama. They had a trial run a week ago for Fannie and Freddie, and auctioned off to banks and others the defaulted CDS and CDO securities. They managed to achieve loss recovery rates of 91% and higher, not surprising because Frannie are now the full faith and credit of the US government. Don't ask me why they didn't get 100%.

The same process will be applied to the Lehman derivatives. Only this time, estimates of what the market will say the loss is are very broad, with only 10% recovery being bandied about most frequently. This would result in hundreds of billions of dollars having to be paid out by CDS and CDO sellers. Of course, who has that amount of cash these days?

First of all, we should get our priorities straight. Whatever is decided by ISDA tomorrow, the important thing is to concentrate on the Troopergate findings coming out of Juneau or Anchorage or some place in Alaska. All other matters are inconsequential.

I would suggest, though, that the Federal Reserve and Treasury have a reasonable idea of what JP Morgan Chase - who is the only bank really on the hook here - will have to pay even if the default recovery is only 10%. If they don't, then we might as well put Mike Brown in charge of the Treasury.

On this assumption, either the amount is not life-threatening, or the Treasury is on hand to do a capital injection to JP Morgan Chase Bank One First Chicago Valley National First Indianapolis - sorry, I got carried away, but wouldn't it be interesting if we weren't dealing with just 3 gargantuan too big to fail banks in the US?

Since the Treasury has been talking a lot lately about their new-found powers to invest directly in banks, I suspect they are ready for a capital injection tomorrow if necessary. On the other hand, since only you and I and Barry Ritholz are paying any attention to this whole ISDA meeting, I suppose the market could be surprised that such a stalwart bank needs capital. Either way, we seem to be on the cusp of something exciting - finally finding out what is behind the door of this derivatives debacle.

There's always National Security Directive 51.

Feel better now?

A bunch of ugly old white men standing in a circle grinning at each other.

Each man stands on a plush carpet, the corners of which is the hands of the other men.

They are all trying to whip the carpet out from underneath the feet of the other, whilst attempting to remain standing themselves.

To them it is all a great game, they have already awarded themselves handsome bonuses that will keep them in comfort for their remaining years.

So now for them nothing but the Great Game matters, to bring their opponents low, even if they destroy millions of ordinary citizens wealth and health in the process.

paying all those NSA people to listen to tawdry sex calls.

Not like we needed regulators in the securities industry or anything.

I suspect Nouriel Roubini is a tad worried.

...

This disconnect between more and more aggressive policy actions and easings and greater and greater strains in financial market is scary. When Bear Stearns’ creditors were bailed out to the tune of $30 bn in March the rally in equity, money and credit markets lasted eight weeks; when in July the US Treasury announced legislation to bail out the mortgage giants Fannie and Freddie the rally lasted four weeks; when the actual $200 billion rescue of these firms was undertaken and their $6 trillion liabilities taken over by the US government the rally lasted one day and by the next day the panic has moved to Lehman’s collapse; when AIG was bailed out to the tune of $85 billion the market did not even rally for a day and instead fell 5%. Next when the $700 billion US rescue package was passed by the US Senate and House markets fell another 7% in two days as there was no confidence in this flawed plan and the authorities. Next as authorities in the US and abroad took even more radical policy actions between October 6th and October 9th (payment of interest on reserves, doubling of the liquidity support of banks, extension of credit to the seized corporate sector, guarantees of bank deposits, plans to recapitalize banks, coordinated monetary policy easing, etc.) the stock markets and the credit markets and the money markets fell further and further and at an accelerated rates day after day all week including another 7% fall in U.S. equities today.

When in markets that are clearly way oversold even the most radical policy actions don’t provide rallies or relief to market participants you know that you are one step away from a market crack and a systemic financial sector and corporate sector collapse. A vicious circle of deleveraging, asset collapses, margin calls, cascading falls in asset prices well below falling fundamentals and panic is now underway.

At this point severe damage is done and one cannot rule out a systemic collapse and a global depression. It will take a significant change in leadership of economic policy and very radical, coordinated policy actions among all advanced and emerging market economies to avoid this economic and financial disaster. Urgent and immediate necessary actions that need to be done globally (with some variants across countries depending on the severity of the problem and the overall resources available to the sovereigns) include:

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I did inhale.

A person knows when critical mass has been reached when his 87 year old mother recognizes that her small stock holding(20 shares Met Life) has lost 62% in value and is worried that her life insurance policy with Met will probably be worthless. She's been through one Great Depression and cannot believe she may experience another.

His Irrelevance, George W. Bush, is to address the nation tomorrow to "assure" Americans that every effort is being made to stabilize the financial markets.

Bush is expected to exhort Americans to "Stay Calm. All is Well." If this doesn't work, the White House has approached actor Kevin Bacon to reprise his role in Animal House, where he used the exact same words to still a panicky crowd.

opening off 9.5% This is clearly being driven by larger traders who know not to let the circuit breakers get tripped.

Where is the famous Plunge Protection Committee now?

Will the US stock market be closed today?

On Monday €-banks will receive as much short term money @3.75% as they can present collateral. Euribors are going down a little bit today.

Even if the risk for market reversal is high, it won't happen without a new government intervention in the USA. The TED-spread must start to melt simultaneously.

Usually the emergency speech of a president will contain only empty words. For background for his speech I recommend this: http://www.youtube.com/watch?v=ogG-n2FQcJ8

3cents in the dollar...