Monday, September 15, 2008

Helter Skelter, 21st Century Style

We heard last night that Lehman Brothers, the Wall Street investment banker was getting ready to file for bankruptcy as soon as the ink was dry on the petition.  This was so because Uncle's wallet was not going to guarantee the purchase to any potential buyers.

To add to that, Merrill Lynch, the investment house,  is no longer bullish on America because Merrill Lynch for all intents and purposes has ceased to exist as a standalone entity. Henceforth, Merrill Lynch will be bullish on America if, and only if, the Bank of America allows it to be.

As if to demonstrate that bad stuff happens in triplicate, we also heard that AIG, the insurance company, has gone hat in hand to the G  looking for a handout and its future is in doubt if it does not get its hands on a bundle of Uncle's cash to avert a looming downgrade of its credit rating. 

The parlous state of AIG and the others are tied to-what else-shitty investment plays tied to the subprime mortgage market. 

In AIG's case the smoking gun is losses on credit default swaps that AIG bought to protect fixed income investors.

According to the usually reliable source a credit default swap is the following:
"A credit default swap (CDS) is a credit derivative contract between two counterparties, whereby the "buyer" or "fixed rate payer" pays periodic payments to the "seller" or "floating rate payer" in exchange for the right to a payoff if there is a default[1] or "credit event" in respect of a third party or "reference entity".

If a credit event occurs, the typical contract either settles by delivery by the buyer to the seller of a (usually defaulted) debt obligation of the reference entity against a payment by the seller of the par value ("physical settlement") or the seller pays the buyer the difference between the par value and the market price of a specified debt obligation, typically determined in an auction ("cash settlement")."

What that sounds like to me is Joe and Willie agree that Joe will give Willie a piece of his paycheck every week, with the understanding that if O'Malley the bartender stops paying his bills Willie delivers the keys to his house and his car to Joe.

And these people get how much in bonuses and golden parachutes for this kind of advice?


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