THE RUSH TO RISK MONEY WITHOUT ANSWERING QUESTIONS
Floyd Norris was spot on, long ago (before Rabouni?).
The corporate credit market is vastly larger than the subprime market, and there are plenty of dubious loans outstanding that probably could not be refinanced in the current market. If some of those companies run into problems, defaults could soar and fears about C.L.O. valuations and C.D.S. defaults could spread long before there are large actual losses on loans.
There are other areas of potential weakness in 2008. Commercial real estate is one area where some see disaster looming. Others worry that some emerging markets could run into big problems because many borrowers there have taken out loans denominated in foreign currency and could be devastated if local currencies lose value.
So, how exactly does Bush-Paulson plan address the problems with CDS and CLOs?
Do they intend to buy the credit-default contracts from AIG?
That is not a "complexity" that is too hard to explain or something we ought not to know in advance.
Don't believe me? What happens to the valuation on all the CDS, if mortgage defaults continue to rise, even though the Treasury is holding onto the securities? AIG is going to have another round of write-downs, right?
Does the Treasury intend to go into commercial real-estate? Whole loans?
Given that all these other problems are on the hopper, why would believe for a minute that banks would loosen consumer credit terms, once they get their taxpayer supported capital injection? Does someone honestly believe that Wamu and BOA and others are going to loosen credit standards, just as soon as Paulson get's his slush fund?
