Can the Fed avoid the consequences of $45 Trillion in default derivative swaps?
"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?"