Massive Deleveraging Across All Classes

A: Oil is down 2%, Gold is down 2.5%, stocks are down and Lehman Brothers looks like they are seriously wounded and bleeding to death on the sidewalk. The big guns were used up to bail out Fannie/Freddie and it is VERY UNLIKELY that the fed/treasury will bail out any big bank or IB after what they just did to rescue the GSE's. We are entering a very serious phase of the unwind/deleverage cycle. As Jeff previously said, this is where we find out who has been swimming naked.

In September 2007, Jeff stated:

"SKINNY DIPPERS GET CAUGHT:

As the asset rolls over, the ripple effect of the tide going out starts. This is the part where you get to see "Whose Swimming Naked" and has hidden bets. It could be a hedge fund like Amaranth who was supposed to be diversified, but had a massive bet on Natural Gas prices so large regulators would have forbid it if they knew about it (but it was done through an online market outside their ken) or a European bank which was making big fees running an off-balance sheet conduit that borrows short, lends long and is leveraged....OUCH."

A real-time visual of LEHMAN trading as of right now is below. This is what I look at when I trade, and shows you the inside market. The stock is down about 30% on 82 million shares traded so far.

This is what happens. Capital raising talks fail, stock gets pummeled, crisis of confidence occurs, money is pulled from firm, and a very big problem is at hand. Washington Mutual is also getting very close to the danger zone. I highly doubt the fed/treasury will bail out a firm right after they pulled off the biggest bailout in the history of our country. This truly is a historic time that will be in all the history books when all is said and done.

On a side note:

US Treasury Credit Default Swaps Increase To Record (Across The Curve)

The cost of protecting against losses on Treasuries rose to a record on concern the U.S. government faces higher liabilities with its rescue of mortgage companies Fannie Mae and Freddie Mac, credit-default swaps show.
Contracts on U.S. government debt increased 2.5 basis points to 17 basis points, according to CMA Datavision prices for five-year credit-default swaps at 12:05 p.m. in London.

Central Banks At Risk of Sinking Along With Banks (via NakedCapitalism from Guardian)

A year into the global financial crisis, several key central banks remain extraordinarily exposed to their countries' shaky private financial sectors. So far, the strategy of maintaining banking systems on feeding tubes of taxpayer-guaranteed short-term credit has made sense. But eventually central banks must pull the plug. Otherwise they will end up in intensive care themselves as credit losses overwhelm their balance sheets.

The United States Federal Reserve, the European Central Bank, and the Bank of England are particularly exposed. Collectively, they have extended hundreds of billions of dollars in short-term loans to both traditional banks and complex, unregulated "investment banks"....

If central banks are faced with a massive hit to their balance sheets, it will not necessarily be the end of the world. It has happened before – for example, during the financial crises of the 1990s. But history suggests that fixing a central bank's balance sheet is never pleasant. Faced with credit losses, a central bank can either dig its way out through inflation or await recapitalisation by taxpayers. Both solutions are extremely traumatic.

Before you get excited about the Fannie/Freddie bailout lowering lending rates by 1/2 point, understand the reason WHY these firms had to be rescued by our government and the environment that we currently are in. The bailout was the lesser of two evils and had to be done to avoid a systemic financial crisis that would have come if no action was taken. It will be a VERY volatile few months ahead to say the least! Buckle up!

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