A sub-scholarly update to the common lexicon:

Title: “Liar, Liar, Pants of Fire.”

Webster: “Liar. One who tells lies.”

The cloud of smoke, and the stench, of burning high quality Zena wool has wafted from Wall Street, and combined with the Washington, DC conflagration of same, and has now reached what we call in California a “Wild Fire” status. Citizens across the nation are hereby forewarned as the winds are blowing from East to West, as usual, in what we used to call political chicanery now updated to political-national-world-wide-financial-deception-chicanery. There is a small, but welcome, humorous element to this new situation as we observers gain glimpses of the new “smoke filled rooms” loaded to the ceiling with liars lying to liars while the political liars attempt to negotiate a deal. Current case in point: Citi, Wells, Wachovia, Treasury, Fed, SEC, FDIC, and who knows whom, negotiations. Old and good principle of my mentor in business, George Quist: “Only do business with people you trust. It’s hard enough to do business with them.” In a normal business situation these “negotiators” wouldn’t have a chance, but hey, no skin off their backs, or money out of their pockets, they just take it out of our tax payers hide without so much as a blink of the eye. Reference: $38 billion “addition” to AIG bailout.

I had thought this little opus would cheer me up, but it has instead left me more depressed.

Earl L. Crockett
Santa Cruz, CA

FYI: The primary purpose of the Net Worth Certificate Program was to provide capital forbearance to institutions that were not performing well in the new, competitive, deregulated environment.The FDIC’s program was restricted to institutions with insufficient net worths; that had recurring losses that were not caused by mismanagement; that would agree to establishing a comprehensive, goal-oriented business plan; and that would consider reasonable merger opportunities. The FDIC “bought” net worth certificates (NWC) from participating institutions in exchange for FDIC promissory notes with terms (such as interest rate, amount, and maturity) identical to those of the net worth certificates.

Averaging of Liabilities. Thrift capitalization allowed for five-year averaging of liabilities. Although this capital requirement had been in place long before the thrift crisis, it had the unintended effect in the mid-1980s of allowing aggressive thrifts to grow without a commensurate infusion of capital. That lack of capitalization in conjunction with more lending and investment freedom resulted in increased risk to the FSLIC insurance fund. Easing capital requirements can be a useful tool in allowing financial institutions to remain open through temporary periods of operating difficulties.

FYI: The value of credit default swaps backed by defaulted Lehman Brothers bonds will be set on Friday, with protection sellers expected to face massive losses of around 90 percent of the insurance they sold.

Bondholders have seen their investments virtually wiped out by Lehman’s bankruptcy filing on September 15, with most of the defaulted bonds which will be used to settle the swaps trading in the area of 12-to-13 cents on the dollar, according to MarketAxess.

The auction to settle credit default swaps on this debt will likely be the second-largest settlement of the contracts in the $55 trillion market, following an auction to settle swaps on Fannie Mae and Freddie Mae on Monday.

Twenty-two dealers will participate in the auctions, which will determine how much protection sellers will recover after paying out the insurance. The timeline for the auctions follows, according to JPMorgan.

Precisely. It’s supply and demand. A lot of credit was lost by bad lending; so the supply is reduced and the price (real interest rate) should climb. The central banks are attempting to forestall this by lending their own reserves; but their reserves are less than the losses and so they can’t do it. Additional deposits of Treasury debt don’t help either (in aggregate credit) because the Treasury must borrow as much as it gives the central bank to lend. The market is failing because it’s used to setting most rates in relation to the central bank rates but now that those are fantasy numbers nobody knows what’s going on and the markets aren’t clearing.

http://www.bloomberg.com/apps/news?pid=20601109&sid=a6.wGKIe.RGg&refer=home

Late on Oct. 7, as U.S. stock indexes tumbled to their biggest annual declines since 1937, Axa Investment Managers, a unit of Paris-based Axa SA, sent out an updated list of acceptable counterparties to about 50 of the firm's most senior investors and traders.

The memo, obtained by Bloomberg News, barred all new trading with Royal Bank of Scotland Group Plc and ABN Amro Holding NV, even if the dealings were backed by collateral.

Money managers were also told to look for ways of cutting credit risk. Trading was also suspended “even on a collateralized basis'' with banks including Goldman Sachs Group Inc., Morgan Stanley, Merrill Lynch & Co., American Insurance Group Inc. and Macquarie Group Ltd.

Each Adhering Party agrees that the Cash Settlement Date or the Cash Settlement Date in respect
of the Lehman Portion, as applicable, is October 21, 2008 (the “Cash Settlement Date”).

One of the greatest tells is that Treasury has suggested to curb TIPS issuance (I belive it was Rubin who promoted their issuance as a way to save taxpayers money). That they want to curb them tells you what they think about inflation – not that CPI is any measure anyway