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Sunday, September 14, 2008


gross sees 'immediate tsumani'; fed to accept stocks as collateral

thru reuters:

"It appears that Lehman will file for bankruptcy and the risk of an immediate tsunami is related to the unwind of derivative and swap-related positions worldwide in the dealer, hedge fund, and buyside universe," Gross, the chief investment officer of Pacific Investment Management Co (Pimco), told reporters.

"The extraordinary trading session held today to facilitate a partial unwind of these positions saw very little trading -- perhaps $1 billion total -- but at much wider spread levels for corporate bonds," Gross said.

the comments of john jansen sum up my thoughts.

There is some historic climax to this series of crisis lurking just around the corner. At every twist and turn in this year long saga the result which has ensued has always been the worst case scenario. We are ,I believe, headed for a very very ugly end to this story.

Government has not been able to hold bank the forces which have taken down financial giant after financial giant. Capitalism demands pain. Good risk is rewarded and imprudent risk is punished. We were engaged in an orgy of imprudent risk taking for nearly a decade and now a heavy price will be paid for the violation of so many simple and common sense precepts of trading.

I truly fear for our economy and our system the next several days.

the fed is watching the stock futures -- it's hard to know how else to explain this.

The Federal Reserve is expected to expand its lending facilities in the wake of the likely demise of Lehman Brothers, taking a wider array of securities, including equities, as collateral for its loans, say people familiar with the matter.

the obvious intention would be to prevent wholesale stock liquidations to raise capital. says yves:

We no longer have functioning trading markets, at least in terms of serving their alleged purpose of giving companies access to capital. The Fed is no longer the lender of the last resort. It is increasingly becoming not merely a lender, but by adding equities to its list of acceptable collateral, has become the funding source of the only resort.

this really looks to be the de facto nationalization of the banking system.

UPDATE: felix salmon notes (as confused yves) that the equity-discount idea is just a rumor at this point. but alea notes that the fed's release does confirm equities can be taken to the discount window -- it's just that it doesn't say so explicitly.

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