Subprime Plot Thickens

I found out about Minyanville today, a website by investing guru Todd Harrison. He is hardly a progressive, but he writes with candour and wit, both rare commodities in the financial journals.

Part of a recent article of his is posted below; in it he covers the past few months of financial machinations connecting the dots and it is is well worth the read.

If you have any retirement whatsoever, READ IT.

As for me, I'm moving everything into cash and bonds (see Strategies for a Bear Market) until things shake out. It seems very clear that this going to be much worse than the dot.com bubble burst.

David Walker, the U.S. comptroller general, proclaimed that the U.S government was on a "burning platform of unsustainable policies with fiscal deficits, chronic health-care underfunding" and "chilling long-term stimulations" as he mapped the parallels between modern-day society and the fall of the Roman Empire.

These are not my words. They come from a nonpartisan figure in charge of the Government Accountability Office, which is often described as the investigative arm of the U.S. Congress.

"I'm trying to sound an alarm and issue a wakeup call," he said in the midst of his 15-year term, which began during the Clinton administration. "The U.S is on a path toward an explosion of debt."

Excerpt of the article by Todd Harrison:

NEW YORK -- They say that if you're playing poker and don't know who the sucker is, chances are it's you. For those currently holding trading cards, the stakes have never been higher.

Over the past few weeks, as risk chips stacked around the table, investors have been forced to call the bluffs of some of the savviest players in the global game.

The winners will walk away with a royal flush of profits, smiling all the way to the casino pool. The losers? They'll self-loathe and second-guess themselves on the hitchhike home, hungry for redemption and wanting for more.

Let's review the series of seemingly inconsistent hands we've been dealt during what was supposed to be a quiet stretch on the summer deck.

At the beginning of the summer, when "collateralized debt obligations" and "subprime mortgages" were first introduced into the mainstream vernacular, Treasury Secretary Hank Paulson was quick to assure us that the problems were "contained."

To be fair, Mr. Paulson wasn't alone. In fact, he was in very good company. See Minyanville article. San Francisco Fed President Janet Yellen, Federal Reserve Chairman Ben Bernanke, Dallas Fed President Richard Fisher and Federal Reserve Governor Fredric Mishkin were unanimous in their assuring voices that we had nothing to fear but fear itself.

Fast forward a few months. That's when things really started getting strange.

[...]

Two days after the FOMC meeting, BNP Paribas, France's largest bank, halted withdrawals from three funds because it couldn't fairly value holdings tied to the stateside subprime mess.

IKB Deutsche Bundesbank confirmed that it was holding special meetings to discuss
its "financial situation."

The U.K. issued a statement that its subprime crisis might be worse than the one in the U.S.

Those concerns, on the margin, were disconcerting. But as actions speak louder than words, the sequence of events that followed offered a more telling view that strange things were afoot at the Circle-K.

The European Central Bank, in an "unprecedented response to a sudden demand for cash," injected $130 billion into the financial machination. The U.S., Japan and Australia also stepped up to the plate with piles of dough, upping the ante to more than $300 billion.

Even Canada -- Canada! -- chimed in to "assure financial-market participants that it will provide liquidity to support the stability of the Canadian financial system and
the continued functioning of the financial markets."

MarketWatch: If the wheels fall of the financial wagon, you were warned