This sounds serious

For those of you that know me for a long time, you know that when it comes to pressure situations, and the necessity of dealing  with risk situations, I am good. It’s not easy to scare me. I was an O T C  trader on Wall Street, in the wild and wooly “old  days”  before computers were utilized in market making. I began my career using the pink sheets and at any given time, was a primary market maker in upwards of 100 different stocks, and carried positions close to 1,000,000. In those days, that was a lot of money.

 I sat at a trading desk with a headphone, 10-15 incoming land lines, and close to 75 direct lines to trading/ board rooms all over the world. In an active market, that was the ultimate high pressure, nerve racking job. I was good at it, and I did not rattle easily. I remember one day in particular when 5  Ivy League attorneys , representing the SEC, told me to get out of their office because I was an  “Obtuse” witness. I considered it a badge of honor regarding my unflappability.

This being said, I have just read  an article on MSN that has me somewhat frightened. Not being active in those circles anymore, I have not paid close attention to these items, but am sophisticated enough to understand them…and they scare the S–t out of me.

First of all, lets call a spade a spade.  Sub prime lending crisis, is just another / innocuous way of saying, less than “good credit worthy”, Or…more risky loan.These became the norm, and loans were extended for mortgages and way beyond, including risky credit cards, auto loans, boat loans etc.

How were all these major financial institutions, like Citi Bank, Merrill Lynch, Ban kof America et al, able to take such risky loans. After all these are some of the most rock solid institutions in the world.

I just read one of the major answers. It is something called a C D S  or Credit Default Swap. This is a way for bond holders(in this case lenders to corporations of dubious credit standing.) to lend risky money at high interest rates, therefore  showing higher profits. The CDS is a method for lenders to buy insurance against companies defaulting on their debt.

These risky high yield bonds are called Junk Bonds, and they come by their name honestly. When times are good, they pay,But  as recession and a  slowing economy arrives, the junk becomes JUNK.

No problem , you say,. we are insured by the CDS reinsurance  companies.

Reality check….There is somewhere around $20 trillion of this type insurance,and there is not 5% coverage  , in case of defaults…

This is a worldwide problem, and judging by the reluctant admissions by the banks of how much was lost in the 4th 1/4 of 07, tye numbers are staggering, and have global implications.

Hold on to your hat!!!! This is just the tip of the iceburg, with a lot more turmoil to come.

Sorry, I wish I could be more optimistic, maybe check back with me in 09 or early 2010, depending upon the quality of our leaders and politicians….Boy are we in trouble…

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