As Jim Cramer would say Booya....or is it Boohoo? Really Jimbob, that was one of the worst calls of all time. Things aren't as bad as the seem they are worse!
This is no doubt a historic weekend. Merrill sold (at an amazing price), Lehman folds, AIG begging for Fed access. This is the bottom right?.....Wrong! And here is why.
The problems caused by Lehman folding are going to cause a massive ripple (more like a tidal wave ) of problems. Namely, counter party exposure to CDS. That is the real bear. Read the post I put up a few weeks ago. The exposure is massive. Trillions of dollars underwritten by firms with only billions of capital.
This weekend all hands were on deck trying to figure out their real exposure to the melt down. By that I mean, the firms who were smart enough to hedge with CDS are trying to figure out if their hedges are going to provide them with the downside protection they were counting on. The probable answer is NO. Why not? Because if you entered into a contract that pays you if a default happens (since you are long the bonds of the company you are worried about) but the guy (for this example lets say LEH issued you the CDS) now cannot pay you what he owes you ....you are effectively long again.
This is not good news folks and the implications are extraordinary. This domino falling is going to cause the next which will likely cause the next 3 which will cause more to fall...you get the idea.
There are 450 trillion dollars of global CDS outstanding and now it is going to start unwinding. When you consider that the GDP us the USA is only about 16 trillion it is a really big number. Who knows where the pain will stop but to be sure everyone is going to feel it.
If you think sub_prime was painful you haven't seen anything yet. If you think I am happy about it...I am not. Scared to death is more like it. I think there will a massive flight to quality the only problem is what is quality? Honestly, I don't know but I am buying Gold! Batten down the hatches folks its going to be a rough one.
