Crash and Burn on Wall Street

Almost remote from Main Street and just as remote from the American public, the pillars of the US financial system are in a struggle for life or death. Bear Sterns is absorbed by Morgan, Lehman is entering liquidation and Merrill is absorbed by Bank of America. Their real failure cannot be contemplated. But we are looking at a contraction in the supply of available credit. This means massive financial losses throughout the global economy, however well sheltered. Today AIG asked the Fed for help.

A crisis in confidence is visibly shrinking the economy and forcing premature liquidation and scaring sound money from coming to the table.

CNBC: Warren Buffett No Longer In Talks With AIG

Posted By:Alex Crippen

Topics:Warren Buffett

Sectors:Insurance

Companies:American International Group Inc Berkshire Hathaway Inc.

Don't count on Warren Buffett to "rescue" AIG.

A few minutes ago, CNBC's David Faber reported on the air that Buffett is "no longer" in talks with the insurer "about an investment or anything else."

AIG is desparetely trying to sell assets and raise new capital to avoid what would be a disastrous downgrade of its debt by the credit rating agencies.

Faber reports that people familiar with the situation tell him that talks between Buffett's Berkshire Hathaway and AIG did take place last Friday and Saturday, but there's been nothing since then and nothing is happening now on that front.

Faber says AIG is focusing its attention on getting billions in bridge financing from the Federal Reserve, to allow for massive asset sales.

This is forced liquidation and it is not the liquidation of AIG itself that is troubling, it is the idea that such liquidation is thought possible in the first place. This is the domino liquidation scenario that is impossible to execute in a crumbling credit market. Again it will be necessary for the fed to step in and bridge every piece of script out there in order to stop the collapse.

And do not get it wrong. A collapse means a collapse in available credit for everyone and a collapse in the value of real assets to match that of the great depression. The ensuing economic collapse will then be driven by a lack of financial liquidity.

Right now this financial disaster is having babies, but the damage so far has been contained to the smart money crowd who are supposed to know better.

There is still time to end this rolling disaster by going to the mark to market strategy partially outlined in earlier posts.

I have been reticent on what I have been saying about the current credit situation for fear of adding gasoline to a forest fire. Right now, I fail to see how it could get any hotter.

A full disclosure of real exposure by all participants is needed followed by a mark to market exit strategy promulgated by the fed and backed by the fed’s guarantee. Right now there is no such strategy and no clarity as to where this will all end. The result is that one failure is feeding the next failure.

This can continue like a string of dominos until every mortgage is made almost worthless and every house selling at a fraction of its cost to manufacture. The objective of the fed is to stop this process, and so far they have been bailing like crazy and every event is a surprise.

The next few short days should tell the story as far as the equity side is concerned. I suspect that another 1500 points of decline is possible. We lost 500 today.

It will then take months for the money managers to get everything rebalanced and count the damage.
In the meantime, oil is heading for $65 to help offset this shock.

Perhaps this spring the public can reenter the housing market and clean up the inventory at double speed and get the big boys off the hook.

We are living through an historic credit contraction, once again brought about by pure negligence. Reckless lending always has champions and naïve lawmakers to play along. Putting armies of financial industry executives may keep them sober for a couple of generations.

Take note that I do not blame greed. That is a constant. What in hell were they thinking when they bought mortgages not guaranteed and managed by a local bank? An acceptable loss ratio for a bank portfolio is half a percent. With no local management you would need an impossible zero percent. It is as if the fix was in and the mafia was running the show laying the paper off onto whoever they could bag.