Could Dubai be the trigger?

Warren Pollock points out that the real danger lies, not in Dubai possibly deciding to default on its sovereign debt, but in the credit default swaps surrounding the debt, which may magnify the problem by 10 - 100+ times. If some of these huge side bets are wild ones not adequately backed by the gamester's capital, off we go - and off Pollock goes, for his well-earned beer.

Incidentally, he gives a lovely description of a quantitative analyst: a schizophrenic with an IQ of 160 who belongs in a rubber room, but since he's working for a financial firm and "no-one understands him, what he's doing must be right". Only a brighter quant could spot his colleague's errors. Quis custodiet, eh?

The concrete life saver

We Brits are naive with money - we're so unused to having any - our Government has always looked after it for us. Perhaps this is why there are so few Brit blogs that help us understand finance.

Speaking of ruinous government help, Karl Denninger describes a trap that seems likely to bankrupt General Motors.

It seems that people who own GM's corporate bonds have an incentive to let the firm collapse: their losses will be made good by the equally-bankrupt former financial giant AIG, through Credit Default Swaps (CDS), which are insurances against default on loans. In its panicky attempt to keep the financial system functioning normally, the US Government has effectively become the guarantor for AIG's CDS contracts. So creditors of GM can expect 100% return of their capital.

Better still, once GM goes under, the bonds are unlikely to become entirely worthless. So GM bondholders will get 100% PLUS...

And this means that the Government's "help" is about to ruin a huge manufacturer and employer.

Financial white-water dead ahead

Jesse reports on an FT article from Wednesday, which suggests that the "hurry-up-and-give-us-$700bn" is to do with the need to renew credit default insurances on Fannie, Freddie and Lehman this month - the first two immediately after this weekend.

Maybe I was right, then, when I thought I saw panic in Hank Paulson's demeanour the other night, as he responded to Congress' rejection of the bailout proposals.

Oh, and London Banker reflects bleakly: "The crash in equities will still happen."

Credit default insurance and murky dealings

You have to have car insurance, it's a legal requirement. So it occurred to me a long time ago that you could make some money selling very low-cost car insurance that (when you looked at the fine print) promised nothing, thus making a safe profit for the company, fooling the regulators and satisfying the cheapskate customer, all at the same time. Fine, till the regulators find out.

According to Karl Denninger today, this is exactly what's happened in the case of UBS insuring one of its mortgage debt packages against default losses. The insurer, it's alleged, has totally inadequate capital for the insurance it's undertaken, but the insurance suited UBS because it permitted the stinking package to be left off the balance sheet.

Oh, to be a lawyer now.

The $1 trillion loss figure reappears

Thomas Tan thinks the addition of plausible losses in the credit default swap market to write-offs in other areas of banking, could bring the total hit on the US financial system to the $1 trillion mark.

Credit default swaps - a line of dominoes, one falls

Karl Denninger reports on the savage downgrading of a credit default insurer from "A" to "CCC" (junk) in one move - essentially a collapse in creditworthiness - and explains the implications for credit and investment markets. His conclusion is crystal clear:

If you're long stocks, bail now.