Wow!

I wrote a top post poll around Sep. 25 asking readers how dire the current financial crisis is. What a difference a couple of weeks makes!

Since that time, the Dow has tanked 2000 points! That's 18%! To make it a round 20% you only have to go back about a month from today.

The Dow is down 36% from it's high. To put a little math perspective on the current situation realize this: A 2000 point drop from 14000 is a 15% drop. The same 2000 point drop from today's close of 9258 would be a 22% drop.

And for all you venerable (and wise) S&P followers: Ten years ago if you invested one dollar in the S&P today you'd have. . .one dollar.

I believe I was pessimistic in that poll and said by one year from now I thought we'd be closer to a Dow of 9000 given a choice (8000 being the most pessimistic choice available) and we're already there! At the time I thought 8000 was ridiculously pessimistic but not anymore.

And so where's the bottom?

I figure 8500 unless of course we get there in the next two weeks.

What's your pick?

the Mint says they've run out of gold till sometime next year.

Interesting,

in real estate...hasn't happened yet. I don't know how much real estate affects the index but you can bet that if we don't correct now it will only foster another bubble.

Frankly I see the needed correction as bit larger than 60% my guess is that it is over 70%.

jo

I don't think another bubble would come about. There are a few incredible lenders out there still doing no docs and "creative financing" which is at the heart of this bubble burst but I think there will be some pretty draconian guidlines enforced returning us to the pre-2000 appreciation days (after we fully digest this mess).

I think CDSs and toxic CDOs will be history.

So having said that, The Great Depression saw a Dow at its lowest being about one fifth that of its pre-crash high.

You think we're headed there?

I don't see CDSs as being inherently a problem, but I do have an issue with them being used as a pure gambling play as opposed to actually hedging risk.

To me, one of the big issues was the lack of transparency -- there was no meaningful disclosure of the magnitude of the exposure being assumed by the financial institutions.

While I do think we have often gone too far in the direction of deregulation in recent years, I am not one who sees regulation as any panacea either. But I tend to be more enthusiastic about regulations that require disclosure than about regulations that require or prohibit certain transactions.

is less important than the day. D-Day is Friday, when the CDS market on Lehman reference assets settles. Banks have reserved (or not, we'll see) billions to pay out those who bought protection. I just don't see there being a large, sustainable market bump before that asset class is resolved.

Surprisingly little reported fact is that there is, currently, a widely-used system of electronic confirmations sponsored by DTCC called Deriv-Serv. It handles CDS, CDX, Equity and Interest Rate swaps. Most major dealers (though not all) use the system. It provides an audit trail, and same day (or at least next day) documentation. The system came about a few years ago when the Federal Reserve Board of New York threatened to regulate the derivative market unless the dealers updated their records.

Bottom line -- for a long time now, the extent has been, largely, knowable. But knowing what it is, and reserving for it, are two different things. Having an audit trail and having regulators checking to assure the reserves are sufficient, are two more things. The dots ain't so hard to connect, but no one wanted to take the reserve hit. Duh.

ew.

RM: I tend to be more enthusiastic about regulations that require disclosure than about regulations that require or prohibit certain transactions.

Didn't they just waive the requirement that banks mark to market their mortgages?

The lack of disclosure certainly causes a lack of trust and prevents a recovery in the market. Seems like they can't disclose; that's why the taxpayer is buying these crappy mortgages.

I have read that (re revoking the mark to market rule) but do not know for a fact that it is the case -- if so, that seems to be a step the wrong direction.

I might be willing to allow banks to (temporarily) disregard certain writedowns to market for purposes of establishing their capacity to make additional loans, but it should at a minimum still be disclosed. I don't see how pretending it ain't so is ever a good tactic.

I am a CPA but it has been many years since I was involved in audits in the banking industry and I do not pretend to be fully informed on current rules. Too bad, because I see there being lots of high-paying job opportunities there right now.

With CDSs acting as insurance (or better yet, "insurance") on bad loans and many lender/investors taking out ten times the loan value in insurance via CDSs. . .Friday will be interesting (a $5 trillion housing market being the cornerstone for a $50 trillion CDS "insurance" market--gulp).

that's settling. It's only those single-name CDS and CDX where people were buying and selling insurance as against the probability that particular bonds or obligations of Lehman's would default.

Where Lehman was a counterparty you were facing, you get to look to your documents first; and to God next.