God Bless America!

Latest news…

Apparently, the bailout of AIG (er… I mean bridge loan) may require fully ½ of the actual, liquid capital the U.S. government has on its books presently…

At the start of the year, the Fed had close to $800 billion on its balance sheet. Tony Crescenzi, bond analyst for Miller Tabak & Co, estimated that following the rescue of American International Group, the Fed may only have $195 billion left.

In other words, apparently, THE U.S. GOVERNMENT is now low on liquidity…

Thus more dollars must be printed and more treasuries must be sold – to sterilize those dollars – so that the bailout slash Nationalization of all these insolvent/POS firms (like AIG) that have been running secret hedge funds can continue unabated!  (There will no doubt be more -- and Mr. Stock Market knows it.)

For review, (yes, I know it's something of an oversimplification but it's accurate enough, based on net effect) these secret hedge funds within firms like AIG (god knows how many there really are at this point) have been driven, either directly or indirectly, at least until the gimmick collapsed, by the carry trade resulting from free (1% interest) Alan Greenspan money that essentially capitalized the housing/credit bubble.   It takes as much as 30-40x leverage to milk the carry trade arbitrage.  Much of this leverage has been collateralized by mortgage backed securities (MBS) then hedged through credit default swaps (CDS).  At AIG it was the CDS gamble that blew up as reserve requirements for insurance on hedged debt tied to increasingly worthless mortgages (ultimate writeoffs will utlimately exceed $1 TRILLION).  In short, the net effect is that credit losses and downgrades are so rampant that money (credit) - i.e. the buck as we know it -- has been broken.

For review, MBSes are becoming worthless because each day more and more homeowners walk (forcibly or willingly default) on low/no equity mortgages (even 20-30% equity holders are walking at this point in bubble markets like California and Nevada – Ed McMahon syndrome) because millions of homeowners finally understand that they never, ever will be made whole, investment-wise, at their inflated purchase prices and colossal jumbo loan sizes.

Thus no one will trade with anyone.  Defaults are soaring and CDS issuers like AIG face a Katrina like storm of bad bets.  Thus, virtually every liquid investment (equities) held by endangered firms is being liquidated as I write this.  And spreads, swaps, tranches -- i.e. financial derivatives of all shapes and sizes -- are simply blowing up (rate/spread-wise) as capital markets become illiquid.

In summary (gallows humor)…

I wonder if  this will affect interest rates – i.e. the ultimate value of U.S. currency?  (Though today flight to safety is causing the dollar and long treasuries to rise in value).

In summary (simple description of true economic reality America faces)…

Today, in technical terms, the U.S. economic scenario has changed yet again, having obviously become quite fluid.

Yesterday we were The Soviet Union of America (bailouts of rich people to privatize profits while socializing losses to poor people -- taxpayers).

Today, if our creditors – China, Europe, Japan, Russia, oil States, etc. – start balking at buying ever more U.S. paper we will embark on a path to become the next Weimar Republic.

Meanwhile, to try and put a tourniquet on the blood-letting, the uptick rule may be reinstated or shorting stocks will simply be made illegal.

God Bless America!  God Damn America!  Either way, the Pigs will always win and You, their serf/taxpayer, will always lose!