Sunday, October 21, 2007

The Super SIV? Will it work or are there one too many holes in the dike.

The Super SIV appears to be on it's way to sanitize all the sub-prime CDOs.

Will it work?

Probably Not... Why?

Hole in the Dike #1:

The Chinese and the Japanese aren't buying it anymore as outflows of capital show:

Asian Investors Dumping Treasuries

Asian investors dumped $52bn worth of US Treasury bonds alone, led by Japan ($23bn), China ($14.2bn) and Taiwan ($5bn). It is the first time since 1998 that foreigners have, on balance, sold Treasuries.

Mr Ostwald warned that US bond yields could start to rise again unless the outflows reverse quickly. "Woe betide US Treasuries if inflation does not remain benign," he said.

See that chart above? That's the August data, before they lowered rates!

Hole in the Dike #2:

The worst isn't even here yet! See below for a timeline of when rate resets are going to hit. It starts in January 2007.

No foreigners want to buy our debt and there are going to be a ton of people defaulting on their mortgages in the coming months. So all that debt, wherever they hide it is going to be worth WHAT Now?? The U.S financial system has suffered an epic mortal blow. The blow is to the credibility of the system is now totally shot. Bernanke is a smart guy and a well trained economist but I don't think he realizes that we are operating in a vastly different economic climate than 20 even 10 years ago where suddenly the U.S isn't the only place to invest anymore. The world has caught up to the U.S in many ways but we aren't anymore cautious.


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