Coming from the other side, one difference between now and January is that the SW and PE funds have anted up. They can now see what that has bought them.

Recent chatter suggests that they aren’t nearly as interested in taking that ride again — although AIG’s oversubscribed (?) funding would suggest the opposite. Which brings forth the question “Who recapitalizes these entities if the whole financial sector takes another leg down due to additional forced markdowns?”

As I suggested, it’s probably much cheaper to refund the insurers and have the ratings agencies continue to pretend that all is well.

So even if the monoline situation escalates, unless another crisis moves to the front burner, we are starting from a better underlying mood. Not that it is entirely warranted, mind you, but the psychology is much better. And there will also be a sense of “we’ve seen this movie before.”

However, I think all bets are off if we really see a downgrade. This will create very big disruptions in the CDS market, which is the other shoe waiting to drop.

We’ve also seen unintended consequences from the Fed’s other interventions. I am waiting for the realization to sink in that the overleverage problems are too big for even the Fed and the overextended US government to salvage (this is a huge pet peeve of mine. We are blowing our fire power in a reactive fashion. If we need fiscal stimulus to tide us through this, fine. I’d like to see that discussed explicitly rather than done via homeowner rescue bills, and I’d vastly prefer to have it go either to people who have a high propensity to spend, such as the lower income or out of work [that gives the biggest bang for the buck], or go to stuff that will enhance the competitiveness of the US, say infrastructure).

The problem with Ackman is that he would say that winding up MBIA wouldn’t affect the market’s much either as he is just talking his book.

I think the problem is exactly the same as it was in January. If Moody’s downgrades then there will be some forced sales as the insurance wrappers are what made a lot of toxic paper “AAA” to begin with.

My best guess is the short term solution is the same. The institutions with the most exposure are going to have to feed these guys a few billion more to prevent writing down much larger sums.

He says no. Since the fed has clearly demonstrated they will not let the system fail, I would have to agree to the extent of damage a downgrade would do.

Certainly all financials and IB’s stock prices will have to re-adjust to an ongoing phase of write-downs as a result.

Your thoughts?

PS: Looking forward to meeting you in SF in July for the RE Connect conference Yves!