Can the Fed avoid the consequences of $45 Trillion in default derivative swaps?
*JSMineSet, by Jim Sinclair, April 8, 2008:
"The spin about the proper valuation of credit derivatives, which is
the meltdown process now called the sub-prime mortgage problem, is that
all is well and the problems ended with the Bear Stearns rescue.
The equity participants have signed on to this bogus line as
demonstrated by the demand for financial shares in the marketplace. The
risk in this overconfident spin of course is that it is blatantly wrong
and exposes investors to even higher risks. That risk exposure lies in
the almost unreported and not discussed Fitch downgrade of a
significant issuer of credit default derivatives involving municipal
bonds.
It does not take a brain surgeon to understand that the participants in
the credit default derivatives crisis cannot in any manner meet their
responsibilities should more than one significant failure take place.
Now that Fitch has made a major two-step downgrade, it puts tremendous
pressure on the other rating agencies as they maintain double and
triple AAA ratings for the debt of the remaining issuers of default
swap derivatives.
Yesterday the shares of Washington Mutual rallied following an
injection of $5 billion that was intended to dig them out of their
financial sinkhole. Today they needed $7 billion. The truth is that no
one really knows what anyone needed as the offending financial vehicle
has no market in real terms. Of course the silly stock buyers turned
around and became sellers.
The huge risk is in declaring the problem SOLVED while sitting atop a
keg of black powder while smoking a very large messy cigar. The
potential is that the SOLVED situation goes up in smoke.
Risks like this are not new. Last week, Iraqi cleric Muqtada al-Sadr
beat the pants off Iraq's military even when air strikes were called
in. That was not supposed to happen. The US was sure it would not
happen - but it happened. You can bury this super embarrassment but not
the $45 trillion in default derivative swaps that are looking like an
accident waiting to happen.
The better spin would have been telling the truth. Saying the problem
still exists but is being controlled for the present time raises false
hopes.
Tight rope walking might pass in a combat situation but is ill
considered when used in the financial world where there is no Patriot
Missile to save day. I see the danger has been heightened by the
extreme use of spin that we are seeing in the media. This time I feel
they are pushing a strategy that has reached its functional limit. That
may be the first major mistake in "Operation White Noise."
The system is in total disrepair and to spin it any differently creates
more danger. That does not protect investors but rather puts them is
harm's way.
This is a grandstand spin play that is creating over confidence and is
probably the most risky move yet by those involved.
We wish the Fed well. However CONSEQENCES are not being considered
which is extremely dangerous. Consequences cannot be avoided but they
can be accelerated.
Problems in the credit default derivative arena will occur. Then what?
This is it! Are you prepared?"
*This information is solely a highlight of the opinion of a third-party publication and is incomplete. Please subscribe to this publication for the full and timely opinion of the author and call a Monex Account Representative for any additional up-to-date information. This is not an offer to buy or sell precious metals. Investors should obtain advice based on their own individual circumstances and understand the risk before making any investment decision.
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