Day: December 12, 2007

Article: The Wages of Financial Sin


As hinted at weeks ago, the Fed today took action to inject more liquidity into the market in a desperate attempt to stave off the now inevitable recession (IMHO). It seems they are now driven by fear, like American politicians and consumers, only reacting to events… and reacting too late.

The Wages of Financial Sin

“The western world has embarked on a speculative journey for which all the historical precedents are ominous.”

Peter Warburton[i]

Make no mistake about it – if the Federal Reserve is holding back on interest rate cuts because of near-term inflation fears, it will be fiddling while Rome burns. The collapse of the structured finance edifice must be understood as a highly deflationary event. The sell-off in the equity and credit markets signify a severe loss of confidence in the benchmarks of value established by market gatekeepers such as rating agencies, underwriters and market makers. A failure of the Federal Reserve to demonstrate that it recognizes the systemic threat posed by the collapse of structured finance and the subprime mortgage market could send the markets into a full-blown tailspin.

Fortunately, Federal Reserve Vice Chairman Kohn, in a November 28 speech, made it clear that the Fed is getting ready to act. He acknowledged that a change in market conditions had occurred that posed a threat to economic activity, and stated that uncertainties about the economic outlook were “unusually high.” HCM expects a 50 basis point cut in both the Fed Funds rate and the Discount Rate at the December 11th meeting of the Federal Reserve’s Open Market Committee accompanied by a statement confirming that the central bank will endeavor to remain ahead of the curve.



Article: Credit markets face high price for sleight of hand


From the December 11 2007, Financial Times:

Insight: Credit markets face high price for sleight of hand
By Satyajit Das, risk consultant and author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives

Banks have been indulging in their version of the shell game – and this sleight of hand will have long-lasting implications for the credit markets.

To recap: the game requires three shells, under one of which is placed a small pea. The shells are shuffled around and bets are taken on the location of the pea.

“Risk transfer” is the shell game of the credit markets.


New York Times Book Review: The Fall of the House of Bush


From the December 7, 2007, New York Times:

Books of The Times
Under a Microscope, Bush and His Presidency


The Untold Story of How a Band of True Believers Seized the Executive Branch, Started the Iraq War, and Still Imperils America’s Future

By Craig Unger

437 pages. Scribner. $27 (less on
The story of how the Bush administration took the United States to war in Iraq is such a complicated tale with so many plots and subplots, so much misinformation and spin, so many missteps and outrageous misjudgments that reporters in countless newspaper and magazine articles, television documentaries and dozens of books have struggled to piece together the narrative. It is a continuing process, as more and more information comes to light and needs to be sifted and weighed and connected.