Manic Melon

Okay, so now you watched it. Sorry to have bummed you out. But, there's good news...

There is a solution

It's called our constitution. Find out how to vote for our future.

"You cannot help the poor by destroying the rich. You cannot strengthen the weak by weakening the strong. You cannot bring about prosperity by discouraging thrift. You cannot lift the wage earner up by pulling the wage payer down. You cannot further the brotherhood of man by inciting class hatred. You cannot build character and courage by taking away people’s initiative and independence. You cannot help people permanently by doing for them, what they could and should do for themselves." --Abraham Lincoln

The 12 Steps to Financial Disaster (from early 2008)

Professor Roubini recently laid out what he called the "12 steps to financial disaster." They're really complex... so Glenn Beck recently boiled down the final 5 steps:

DEFCONOMY FIVE

How you'll know we're here: The housing downturn turns into a free fall, making it the worst collapse in our country's history. That not only triggers massive numbers of foreclosures and lost household wealth, but it also sets off another large wave of bank write-downs.

Odds we get here: Roubini told me that it's "extremely likely, even unavoidable" that we hit this stage because "the excess supply of new homes in the market is like we've never seen before." Prices, he believes, "need to fall another 10 to 20 percent before that clears."

DEFCONOMY FOUR

How you'll know we're here: Americans upside-down on their mortgages and unable to pay their home equity loans begin defaulting on other debt, like credit cards, car loans and student loans. In addition, bond insurance companies lose their perfect credit ratings, forcing already troubled banks to write down another $150 billion.

Odds we get here: High. Roubini says that 8 million households are already upside-down on their mortgages and he thinks we could see that number go to between 16 million and 24 million by the end of 2009. A lot of those people, he believes, will simply walk away from their homes and send their keys back to the bank.

DEFCONOMY THREE

How you'll know we're here: Some banks begin to crack under the pressure of continuing write-downs and mounting defaults by consumers. A national or large regional bank finally collapses, triggering hedge fund failures and general chaos on Wall Street, potentially leading to a 1987-style market crash.

Odds we get here: Very good. Roubini says that we'll likely socialize the losses, "effectively nationalizing the mortgages or the banks." It would be, he told me, "like Northern Rock (the large bank in England that was recently taken over by the British government) times three." He thinks the stock market will head south throughout the year as fears about a severe recession are confirmed.

DEFCONOMY TWO

How you'll know we're here: Most forms of credit (both to consumers and businesses) become virtually nonexistent. That results in a "vicious circle" of additional write-downs, stock market losses, and bank collapses, which leads to even less credit being available.

Odds we get here: Good. Roubini says that credit conditions are becoming worse everyday across a variety of markets and won't be getting better anytime soon. Without extra credit available, people might have to actually (gasp!) live within their means.

Scared Yet? I know I AM

DEFCONOMY ONE

How you'll know we're here: Welcome back to 1929. A full economic meltdown results in a complete failure of the underlying financial system. What will be known to future generations as "The Greater Depression" has arrived.

Odds we get here: Not likely. Roubini believes that this will be a "very painful and severe recession" that could last for 18 months or more, but it will be more like 1981 than 1929. Families may be eating soup again, but at least it'll be in their own kitchens.

Was today's market turmoil the pretense to the fact that friday 10/10 the Lehman Brothers Credit Default Swaps settle out?

The Fannie and Freddie CDS settlements were between 91 and 95 cents on the dollar, but Lehman's settlements are likely to result in HUNDREDS OF BILLIONS in losses.

More: http://bigpicture.typepad.com/comments/2008/10/lehman-cds-unwi.html

Update from the WSJ:

NEW YORK -- The final result in the settlement of the credit default swaps on Lehman Brothers was even lower than a disappointing early estimate, which leaves dealer banks facing higher than expected payouts on multi-billion dollar insurance contracts.

The recovery rate on the bankrupt firm's senior debt was fixed at 8.625 cents on the dollar, just below the 9.75 cents published in the first estimate Friday. That means the sellers of insurance on these defaulted bonds are on the hook for the remaining 91.375 cents. That's well above the approximate 88 cents envisaged earlier this week, when increased demand for paper to present in return for compensation inflated the market price.

The low final rate qualifies this as one of the most expensive defaults ever in the credit derivatives market. Following the default of Italian food company Parmalat back in 2003, its debt was valued at just below 10 cents on the dollar.

The result nevertheless shouldn't come as a painful surprise for the sellers of protection on Lehman.

Since Lehman's Sept. 15 bankruptcy filing, there has been considerable anxiety that dealers who had underwritten some $400 billion of credit default swaps on the bank would be caught short in a massive payout.

But sharp market moves in the value of these insurance-like contracts would have obliged most sellers of these insurance-like contracts to post additional collateral to cover their potential losses. As a result, they should have sufficient funds set aside to handle their liabilities in this settlement.

"Worries over ex-broker-dealer exposures and their knock-on impact are misguided," said Tim Backshall, senior credit analyst with Credit Derivatives Research.

What's more, the result is to the benefit of those banks that were buyers of the CDS.

"Keep in mind that the extra few billion to be paid will wind up in the hands of lucky buyers, making it a zero-sum game in reality," said Tony Crescenzi, strategist at Miller, Tabak & Co.

Total Borrowings of Depository Institutions from the Federal Reserve

National Debt as a % of GDP

National Debt Update

The Gross National Debt

Learn more at http://en.wikipedia.org/wiki/Us_debt