Yes, we are fucked because of esoteric bullshit that *you* don't understand.

By no one else, do you mean you and your circle of friends? Because plenty of people are talking about it.

What attributions do you want? How about this:

Equity markets are controlled at this point by fear, because nobody trusts anybody. If that 500 point jump on Friday made you feel better, how do you feel today?

http://finance.yahoo.com/q?s=%5EDJI

Pretty scary, huh? Maybe that's because 1 trillion dollars disappeared from the economy in less than a week last week, and if you haven't heard, there are no independent investment banks left on Wall Street.

http://www.ft.com/cms/s/0/97a410b6-884a-11dd-b114-0000779fd18c.html

So what? I hear you cry. Let all the greedy fatcats burn in their own greedy greed they deserve to go down in flames because they're greedy! Down with greed!

When the CEO of Bank of America was asked how many of the 8,100 commercial banks would make it through this crisis, he responded, "About half."

http://www.mcclatchydc.com/homepage/story/52822.html

Maybe he's full of chicken little bullshit too, just like me? He's the most powerful banker in the world but I bet he doesn't know shit. You're way smarter.

So, let's see, so far we have Leahman Brothers, AIG (I'll be generous and call it a bank, even though it's not), Merrill Lynch, and pretty soon we'll have Wachovia added on to the pile. I think the CEO of Bank of America knows what he's talking about. So, let's see, so far we have had 3, let's make that 4, bank failures out of a few thousand that may still be coming. And look what effect that has had.

Because we're not just talking about home prices going down, and foreclosures, which would be bad enough by themselves,(they're down 20 percent from peak so far and most think there's still a way to go before we see a bottom in this market, for reasons that would take a texbook to explain)

http://money.cnn.com/2008/08/26/real_estate/Case_Shiller_home_price_report/index.htm?postversion=2008082611

We're talking about the asset-backed securities you've all been hearing about that were derived from pools of these mortgages (actually they are looked at as pooled cash flows). Most are at least a little familiar with ABS and know a bit about these toxic derivatives even if they aren't quants who know the math (yes I am currently taking a doctorate level class in derivatives so shove that up your ass).

So yeah, these have blown up. And because they are highly leveraged, they have cost many times more than the original underlying asset. And because they are mixed in with other mortgages that are actually good, it looks like these sucker bets are messing up price signals in the whole market, as nobody knows what any of the investments are worth (for many complicated reasons). Basically, the rotten apples are spoiling the whole bunch.

So maybe we can ride that out. And a few investment banks burn. Boo hoo. So what?

Well, if that was all there was, that would be fine. But now we have some rapidly cascading effects...first of all, many of these investment banks who were selling these subprime investments to the commercial paper market were leveraged at a rate of up to 30:1, so in order to hedge that credit risk (coupled with a maturity risk because CP usually has a 6 month to one year maturity and mortgages have a 15-30 or more year maturity), banks took out among other things CDOs (Collaterized Debt Obligations). What these do is act as insurance on cash flows from mortgages. If some of the morgages underlying the investments go bad, the seller must pay part of the cash flows which are due to investors who hold commercial paper from those banks. Otherwise, the bank pays a premium for these CDO contracts.

AIG was one of the world's leading issuers of these CDO's, and the market was huge...

www.sifma.org/research/pdf/SIFMA_CDOIssuanceData2008.pdf

Trillions of dollars of VERY highly leveraged bets on these mortgages, basically insuring debt with debt. Finance geeks and clueless assholes who criticize me should read this article which gives some insight on how CDO markets work

www.banque-france.fr/gb/publications/telechar/rsf/2005/etud1_0605.pdf -

These loans weren't risky and would actually serve to smooth cash flows and efficiently distribute risk AS LONG AS information about the risk profile of these asset backed securities was correct. We all know how that turned out.

Once these banks started defaulting, a wave of claims was starting to swamp AIG. AIG had capital, but not enough to pay out on a systematic failure. So basically it was a modern version of an old fasioned bank run. And since nobody trusted AIG because it was so highly leveraged in these complex derivatives, nobody wanted to give it the capital. So the Fed stepped in and opened up new channels that made it possible for AIG to accept FED loans, which confirmed market fears, which just accelerated everything. Next thing you know they're taking 85 billion from the US Fed at 11 point something percent interest (it's LIBOR plus some ridiculously high premium). And those outstanding CDO contracts? Well, we don't know how those will get paid.

Because we don't know, Lehman and all these other banks that are trying to collect on these payments can't get money, and are already completely out of capital themselves, and can't borrow anything because everyone knows they're teetering on the brink of failure, which means they can't pay back investors holding even the safest grade of CP, which means nobody is buying on the CP market anymore. It's basically shut down.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a9cmb_Gl5Drs&refer=home

So what do you care about CP investors? Here's what you care...most corporations and medium sized businesses used to get funding from the CP market because it was cheap, low rate financing. Banks aren't lending to each other, the credit spreads are the highest they've been in decades, and nobody's willing to invest much in anything, as shown by the price of gold and especially by the interest rate of the 3 year T bill...

http://investmenttools.com/thefed/3_month_t_bill_rate.htm

What does this mean? This is generally considered the safest investment on the market, as the US government has a low chance of defaulting and 3 months is the shortest time period available. Notice how people are basically willing to give the government their money for free, or even less than free, because they don't trust the markets to preserve the value of their capital. Last week this rate reached the lowest point since the early 1940's and we know how great the economy was then...

Here's where you give a shit. There is no more credit. Have you read in the papers when it says that credit markets are FROZEN? Many many businesses finance themselves with as high of a debt to equity ratio as they can get away with, because debt is cheaper than equity and there's a tax shelter for interest payments. But now, sources of credit aren't only becoming prohibitively expensive, they are becoming really difficult to find at all.

This means that businesses won't invest in projects unless they are incredibly profitable, because there is neither debt nor equity financing readily available on capital markets.

This means that many businesses will die. All over the world...which means less jobs...which means poor retail sales...even less jobs...inflation might come about (but might not, reasonable economists disagree) from pumping trillions of dollars into the economy...poor countries in Africa that you don't think can get any poorer? They will. Not to mention the price paid in future living standards, government programs, defense (I hate it as much as you do but we do need it). Everything will get a lot shittier if we don't do something.

The problem is not me being chicken little, the problem is you having your head up your ass and thinking the markets are stable and things are fine. That's just stupid.