``We are literally maybe days away from a complete meltdown of our financial system,'' NYTimes

Re: "were literally maybe days away from a complete meltdown of our financial system"

Why is Paulson in a hurry?

Oh.............Here's Why!

(from tbatst's "Timing" thread):

I was thinking more about the timing / Has anyone mentioned this yet??
=========================

Under the new accounting regime, the banks have to report their figures every quarter, and ADJUST VALUATIONS TO MARKET.

This means: within 10 days, all the banks will have to examine the market price of all their security holdings.
With Lehman and others, active in the market AS SELLERS, prices were getting market down, and there was likely to be
the need for huge writedowns by virtually all their banks down to the new (lower) market values determined by Lehman's
selloffs.

Thus, the whole banking sector was in danger of a massively bad quarter, a bloodbath of red ink. And this was bound to
happen within days. The writedowns might have meant many hundreds of billions to be written off across the banking sector.
Very possibly, this was the spectre of risk that Paulson painted fro Congress to get them to act.

Here's another point: Paulson has managed tradera, and he must have a traders instinct too.

Many people have commented that securitised debt is very cheap now- probably below its realisable value when the securities
get redeemed (remember there is real security, and real debt repayments backing up these securities.) If they are truly
cheap, then this may prove a good trade, at least in the short run. Assuming they are massively oversold, and the Fed's
huge cross-the-board buying interest (or "put" protection, anyway) is acknowledged by the market, then prices will rise back
to long term realisable values. And the Fed may in fact need to take on very very of these securities, since the banks will
want to hold onto them.

This was the sort of tactic that Paulson attempted a year ago, with the so-called "SuperFund" - remember that? It didnt work,
because The Fed wasnt coming up with the money, just acting as a catalyst. This is the real deal, with government money
to be at risk. The more I think about it, the more I realise that the tactic may work now, with the lower prevailing market
values. If so, then look for the stock market rally to continue, as the market realises that the Fed's hundreds of billions may
not all be used.

The problem is in the long run. If the dollar weakens, and oil prices shoot up, then suburban home values will continue under
pressure, especially in the distant suburbs, requirin a long commute (I call them the "stranded suburbs") If prices there continue
their slide for years to come, then the debt that those homes secure will be under the risk of continuing downwards price
pressure. So the critics of this plan may be very right long term, even there is a sizeable bounce in the months to come.

Mike

Announcement

``We are literally maybe days away from a complete meltdown of our financial system,'' NYTimes

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