Sunday, September 14, 2008


With the death of Lehman, the phagocytosis of Merrill by B of A, the panic selling and a newfound respect for the (once innocuous) phrase "counter-party risk", this is, or course, a wonderful investment environment where many fortunes will be made by displaying the foresight and courage required to sift assets amongst the wreckage and ride the volatility out.

But enough normative meandering...

Tomorrow will prove an incredible day. There are several developments that illustrate how far the Fed will go in order to create stability. Unfortunately, tomorrow this line in the sand will be more Maginot than Thermopylae.

The first development is the aforesaid liquidation of Lehman Brothers. Counter-party risk and their expansive prime-brokerage activities is already causing confusion and will require time to work out. Merrill found itself in the line entering the slaughterhouse and thought better. AIG will "accelerate" a restructuring announcement.

The second is the incredible news that the Fed will take equities as collateral in dealing with the Discount window, and possibly for other loan vehicles (the acronym attack of new instruments brought about by the credit crunch). This is unprecedented and the Fed has crossed the Rubicon - swapping equities for Treasuries and retaining the equities on its balance sheet is no small matter and not one I wish to discuss here. We ain't in Kansas anymore.

So now we will have spine-crushing amounts of volatility, silly proclamations by the SEC (expect further restrictions on short selling), politicians showing frustration but no understanding...and several very sophisticated players looking at the carnage and pouncing at opportunity.

Wall Street is dead. Long live Wall Street.

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