Yikes!
Marta [fixed income strategist at RBC Capital] notes that the big wild card for the credit markets is the ocean of derivative securities held by investment funds that are highly leveraged. Lending institutions are starting to demand cash on the money they loaned to these funds, which is driving them to liquidate their bond holdings. In a note to clients last week, JPMorgan Chase described the situation as a "systemic margin call."
"We're starting to see bid lists come around the street that are very obviously evidence of banks liquidating on hedge funds," says Marta. "The question is whether we can wind down this carnival of derivatives gambling that created an alternate universe without crushing the financial system that would intermediate real economic transactions." -thestreetdotcom
Let's hope that this is not true and just a bit of positioning for further Fed moves. But still, massive unwinding is kinda the worst rumor possible in the world, right?
If these knock-on effects materialize in the context of rising input prices, today's laughs will seem almost unconscionable in a year's time.
(p.s. Humor should be accurate, to avoid a pool of problems: maybe 1% of all sub-prime loans went to first-time homebuyers. By far the majority of homeowners will fail to meet payments because of almost userous hikes in interest due. Get the facts, avoid the GOP koolaid.)
