Thursday, October 09, 2008

Such Big Days Looming Before Us and Nobody Knows

Friday, October 10th and Monday, October 13th will be interesting days. Friday is the day of the Lehman Brother credit default swap auction, when we all find out whether the American economy gets to live or die. At best, tens of billions of dollars of stock will be liquidated to pay off all the unregulated insurance policies bought by investors hedging their bets that Lehman wouldn't go belly up. Of course, it did, so now it's time to pay the piper. At worse, Monday could be a Very Bad Day on the Dow Jones, and it would be a Very Bad Day to be a member of the Investor Class.

By the way, here's a link to a little primer from 60 Minutes on what a credit default swap (CDS) is... and why they are responsible for the worst of our economic travails.

When Washington Mutual has their own CDS auction 10 days later, more stuff will hit the fan. Hopefully, there will still be stuff available.

According to published reports, the Treasury is now considering the possibility of nationalizing portions of the American banking industry.

My advice: Have some cash on hand. If nothing becomes of all this, put it back in the bank.

Update: As you can see by the chart posted above, hardly two hours after posting this, the Dow Jones took a nose dive to finish the day on Thursday, Oct. 9th. Looks like the great liquidation has begun in anticipation of major cash needs to pay off debts on Friday... Also, GMAC is deep into the CDS quick-sand.

Another Update: When all the books were opened up, Lehman Bros. was still in the black... by about $0.09 on the dollar, and all the credit default swaps betting on Lehman's solvency were covered (to the tune of $400 billion or so) without any more banks going belly up. Happy days are [soon] here again?


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