Friday, September 19, 2008

Doomsweek, continued

When historians look back at the history of financial markets and the general economy they will no doubt rank this week as one of the most extraordinary ever. I opened the week with this post and who knew on Monday the 15th of September 2008 where this roller coaster was going. Ranked, in my humble opinion, with the great crashes, recessions and depressions. It can not be underestimated how close we came to the brink. Take a look at this:

Ya, that is the alert blaring on the top of one of my brokerage accounts. Think about it. Our markets were so borked that the government had to change the rules of the game. Astounding. Now lets talk about the money. The numbers being floated, which have yet to be finalized, are being talked about denominated in "T", as in trillions of dollars.

CNBC: Breaking News (literally as I write this): GE may very well be added to the list of 799 stocks anointed by the SEC for government protection from short sellers.

So lets take stock of the situation:

-Pools of money loaned to people who couldn't pay for it.
-Financial Institutions bought and sold those credit instruments whose price was valued on a combination of underlying value and credit rating
-People who took money couldn't pay it back
-Valuation tanks, ratings tank
-Lending institutions, over leveraged (not enough real cash in the till), could not make payment on the debt they traded
-Insurance companies insuring those transactions could not cover their rate of default
-Ultimate back stop and the only entity with the power to make the bleeding stop is Uncle Sam, that's right - you and me.

Ultimately this had to happen or we were talking bank runs and bread lines. That's the dire straights that we faced going into this weekend. Ben Bernanke is perhaps the countries most accomplished student of the Great Depression. I have no doubt this guy saw the lines growing by the hour and felt compelled to act. The question became: Would the cost of a bail out now be more or less than the cost of a depression the likes of which we havent seen in 80 some odd years? Clearly, the answer was bailout.

When the rules change crazy things happen. I'm fairly certain every name on that SEC list is up today and up big. No? GE +8.75% ~$27/share just on the whisper that it will be added.

Interesting times, indeed!