“The Big Takeover” by Matt Taibbi is probably the best article written to date explaining the financial crisis and how we got to where we are now. Taibbi’s necessarily lengthy article explains the problems, names the “poipetrators”, and exposes all of the conflicts of interest— absolutely a must read.

AIG, Goldman Sachs, and J. P. Morgan turn out to be the major players causing perhaps the greatest financial crisis in modern history— even if the pain is unlikely to get near Great Depression proportions, the dollar losses to individual investors have certainly gone as far.

JPM was the brewmeister of the CDO, a vat full of various kinds of income securities, determined to be less risky because the income on most would almost certainly keep flowing— kind of like the once popular junk bond fund that Wall Street insisted was not risky …

This is a comment that I wrote on http://club.ino.com/trading/2009/03/looking-back-we-called-the-market-top-can-we-now-call-a-bottom.

I wanted to post it here because its yet another example of why bailouts aren’t going to solve the problem

Don’t even get me started on derivative markets. Certainly options markets are reasonable and easy enough to understand, but other derivative markets are difficult to understand is because they’re bogus.

Let’s take a look at Credit Default Swaps.

A credit default swap (CDS) is a swap contract in which the buyer of the CDS makes a series of payments to the seller and, in exchange, receives a payoff if a credit instrument - typically a bond or loan - goes into default (fails to pay).

Now it doesn’t take much genius to read how a CDS work to understand the risk taken on by the CDS seller.

If a loan is made to an unqualified buyer, or if that buyer becomes financially distressed, the CDS buyer must

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What do your say to a hedge fund manager whose fund has just closed?I’ll have a Big Mac with Fries…We’re close to an important turning point for equities, at least near term. Many of the same financial commentators who were advising buying emerging markets for ‘decoupling’ and commodities and resource stocks for the ‘Supercycle’ six months ago are now running around babbling about economic depression. Nonsense. These so called financial ‘experts’ are so manifestly incompetent that in Law or Medicine they would be struck off for professional negligence or at least face an avalanche of malpractice suits. Being a smart investor isn’t just about having a CFA or MBA, it’s about the ability to manage your emotions, and most people I know in the industry are psychologically unfit to be let near money, particularly other people’s. Belatedly, the biggest banks are now imposing …

The weekend has brought us events that can only be described in large, over-the-top terms. The Fed agreeing to take equity on its balance sheet? How bad can things really be? Clearly much worse than most people thought last Friday. Moral Hazard has been re-introduced as Lehman is allowed to go down. I will admit to being surprised. I thought Paulson and Bernanke would put it in the too big too fail category. I think they did the right thing by refusing taxpayer money for a bailout, but it is clearly going to roil the credit markets for weeks and months. It will be interesting to see how long it lasts. I am in La Jolla today, working with my partners at Altegris, and looking over their shoulders while they monitor the performance of some of our managers. Interesting times. But ...

The stockmarket reaction to the US government bailouts of Fannie Mae and Freddie Mac was initially one of euphoria and hope that the Credit Crunch may be over. That lasted a couple of hours before the reality of a deeply troubled global financial system dawned on traders and investors.

Here’s one example of the fallout that is now rippling through the world’s financial markets.

The first to think about what the giant bailout meant were those who trade in the equally gigantic Credit Default Swaps (CDS) markets for derivatives over so-called agency bonds. This is where the buyers of bonds essentially take out insurance that the US government-mandated ”agency” issuing the bonds does not go broke. It it does the seller of the Swap has to buy back the bonds.

This market and the CDSs issued are reported to be worth US$1.4 trillion. That’s worth about 12 times New Zealand’s GDP.

If the agency did go “broke” then

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