Are Things Spinning Out of Control?
Feb 24, 2009
Posted by Jody Eisenman | Filed under Uncategorized
There is growing sentiment throughout Wall Street and Main Street that the economy and the markets are heading south faster than anyone can imagine. Two people today asked me if they thought we could actually get to martial law in this country. Business is declining rapidly. The average person in this country had three main sources of wealth: their job, their portfolio and their home. Unemployment is rising., stock and bond accounts are devastated (including retirement accounts) and real estate prices are plunging. I hate to say this, but I’m beginning to see some signs of panic in certain sectors.
Wall Street is rapidly becoming a nightmare. I don’t think there is 1 person out of a million who could have foreseen the devastation to stock prices. Today’s action was more of the same. After the market rose initially on the news that the government will take a 40% stake in Citi, the DJIA quickly reverted to form and fell 250 points by the close. Although the financials were generally stable ( C and BAC closed up for the day), JP Morgan announced they were slashing their dividend 87%. In more stunning news, AIG, which has already received over $150 billion, announced that they are in discussions to secure even more. According to CNBC, AIG is scheduled to announce a loss of perhaps $60 billion on Monday. If this happens, it would be the single largest loss in US corporate history. The government already owns 80% of the company, and I can’t see them letting the company go under. However, it is highly possible that these losses could trigger debt covenant defaults. If AIG cannot secure funding, bankruptcy is still possible. Now, remember that the trigger to AIG’s financial crisis last year was the Lehman bankruptcy, when AIG was on the hook for some massive CDS payments. It is widely believed that AIG has underwritten hundreds of billions, if not trillions more in CDS paper. If AIG goes under, what happens to this paper? If the CDS are no longer honored, it would have a disastrous effect on the marketplace, in my opinion. This would be one more step in lessening the confidence of the public in financial institutions.
