Nice read by Noland:
"Certainly, recent events recall the 1995 Mexican bailout and the October 1998 bailout of Long Term Capital Management. The issue then becomes whether the authorities have again managed to plug all the holes in the dike and rescue the Great Credit Bubble. If so, recent declines will likely mark major market trading lows. “Reliquefication” does appear possible, as the mortgage finance Bubble generally made it through this bout of financial tumult nearly unscathed. GSE balance sheet explosion will surely pump liquidity into the system, and it would appear that the banking system is keen to lend and repurchase shares. The way the financials stocks rallied the past few sessions, certainly many market participants believe “The Fix” is in, and that the stocks of the capital market participants can be bought with hope and the comfort of knowing it’s worked in the past.
But there’s a problem: “The Fix” just may not work this go round. While global stock markets may have finished the week seemingly showing some encouraging signs of life, problems elsewhere don’t appear as amenable. The dollar wobbles, Brazil teeters, and the U.S. Credit system appears immune to any sign of improvement. It looks broke and not easily fixed. We’ll stick with our analysis that the heart of the problem is an unfolding structural breakdown in the “risk” markets, with players scurrying to off-load Credit and market risk with few takers to be found. And with risk players impaired and their sophisticated models in tatters (what probability would Credit default models have calculated for WorldCom bonds to turn worthless?), it will remain a case of seeking opportunities to reduce exposure to risky Credits, whether it is Brazil, vulnerable U.S. corporations, or subprime American consumers. In the “old days” – back with the halcyon, bull market in derivatives, CDOs, “structured finance,” Credit default swaps, and other sophisticated risk instruments – a Mexican or LTCM bailout (in concert with lower interest rates) would be like opening the floodgates to marginal borrowers. While we expect the mortgage arena to continue to be inundated with Credit excess, this fascinating story’s plot now revolves around the drought and not the flood. "
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