How about we start with today’s market action explained at the Huff Po of all places and visit with Zachary Karabell:
The Greek debt crisis finally spilled over in full force to U.S. markets, aided and abetted by extreme statements emanating from such esteemed and prominent voices as Muhammed El-Erian of the large bond investor Pimco, who warned that Greece could be just the beginning of sovereign debt catastrophes. In the space of minutes, the major U.S. indices plunged more than 10%, fueled by the same programmatic electronic trades that were part of the battering in late 2008 into 2009. And then in the space of 15 minutes, they recovered, without — it’s fair to say — much human decision-making during that interval (and if an individual even tried trading during those 30 minutes, they would have found it difficult or impossible, as web sites such as schwab.com were completely overwhelmed with traffic).
Fair enough but the man’s conclusions past this point aren’t worth printing here on Slabbed. Program trading will be with us forever but it is not the culprit here despite the uninformed rantings of the author who is obviously long the market now most likely stuck (stuckholder in finance board parlance). For my part I sold in April and went away (a month ahead of time). That said I am not Carnac the Magnificent but besides staying at a Holiday Inn last night I also read Yves Smith over at Naked Capitalism.
To the extent the problems with Greek debt were hardly a secret Yves is not special among financial bloggers. What makes Yves special is the fact he understands the ramifications of the interconnectivity in global finance and in the case of Greek debt there is a special connection I’ll now share with the Slabbed Nation: AIG most likely will be on the hook for a decent chunk of Greek National debt should there be a default. In other words the United State’s taxpayers should get ready to grab our collective ankles again because the big one is coming as we again present another example of “insurance” that managed to escape state regulation and thus the watchful eyes of our diligent state insurance commissioners. (Don’t faint Jimbo I’m being sarcastic, you couldn’t regulate grade school kids my man let alone insurers):
London investment bankers name AIG as a further CDS-seller. That company had to be nationalized during the financial crisis due to its having written insolvency insurance on American mortgages. This debt-load would have led to the collapse of the world’s biggest insurer. Prior to the financial crisis AIG is said to have widely held State credit-risk. If yet-larger insurance positions on Greece exist, then the American government would have a strong interest in preventing that country’s insolvency.
Even if these are mere rumors about the Greek banks and AIG, this example makes clear the weakness of CDS markets. This protection is sold by banks or insurers who themselves have access only to limited capital resources. They have as a rule clearly lesser credit-worthiness than the states for which they are selling insolvency protection. Insurance by CDS could turn out to be just a bubble.
So here we have it again boys and girls where global financial service companies operate outside of any coherent regulatory framework. Why we insist on giving these global companies an anti trust exemption and no effective regulation both mystifies me and causes me to think most of Congress is either on the take or completely brain-dead (likely on the take IMHO). And when the bad bets come due and can’t be paid the same bunch in DC pulls open the treasury and gives money we don’t have away to these companies like a crack addict paying for his next fix.
What a sad time for capitalism, even the naked variety. Sup I wish I had emailed you yesterday.