Now that shoes are dropping all over the market place, let's look at Phase 2 of any disaster - seeing if those  responsible will ride off into the sunset in their limos or in orange jumpsuits? The place to look first is that favorite response to Enron that was supposed to ensure that everyone's balance sheets weren't toyed with - Sarbanes-Oxley.

More formally known as Public Law 107-204 (107th Congress) Sarbanes-Oxley had a stated objective:

To protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws

I would say that was something the shareholders of Bear Stearns might want to discuss with the Board and the DA right about now, yes? So, looks like the problem - a balance sheet full of stuff that everyone admits:

is impossible to accurately value

might fall under the act.

So let's explore SarbOx below the fold:

Very short diary:

From the Over The Counter market:

Lehman Brothers bid $12 below Friday's closing price - closed $39.25 - off 30%

Goldmand Sachs bid $13 below Friday's closing price - closed $156 - off 8%

Lehman is looking like it fails this week. Wonder how much the Fed will need to pony up to prop them up?

I am part of the financial markets. I am proud of that. Over the past five years I have been involved in a number of groups raising money for green power and trading renewable energy. My latest is raising money to finance energy efficiency - spending money to cut consumption. All good. But I see similarities between the bad clients and the current primary race.

The first rule of dealing with someone developing a project is to get them to understand two simple truths - "It is better to have 15% of $50 million than it is to have 100% of 2 million" and "There is a cost to getting to where you want to be".

The comparisons below the fold:

The news came out yesterday that Carlyle was defaulting on over $15 billion in mortgage-backed assets ("MBA"). What wasn't really covered was:

1. Carlyle was carrying in excess of a 30 to 1 leverage. That means that Carlyle investors had less than $1 billion of their own money in the fund. (The original fund estimates were over $20 billion fund value).

2. That means that the banks (remember - the guys the Fed has been printing money to help save - tanking the dollar in the process) that lent them the money just got left holding a $15 billion dollar bag of steaming goodness in return for probably less than 7% of the cost in return.

3. The walk away won't hurt the ability of the parent to raise money - just probably means they will have to put more money at risk next time.

The Fed is really in a bind. Even the talking heads on CNBC and Bllomberg are now saying that any cuts by the Fed will tank the dollar, raise commodities and feed inflation.

The curtain is torn - the Fed (and the US economy) is screwed.

More below:

The Fed has opened the loan window for collateralizing loans with MBS (mortgage backed securities). There are three little hooks in this:

First: the statement said these MBS would be "appropriately" valued - the mess we are in is because even the banks couldn't appropriately value them. Are you telling me a bank examiner is going to be looking at these before they are accepted. In that case, expect first loans to occur in 2015.

Second: Freddie Mac chair came out today and said:

I expect we have only seen one third of the eventual drop in housing prices (my paraphrase)

So, what will happen to the MBS collateral as the market drops - the Fed will revalue and ask for more collateral?

Third: The amount of ARMs resetting every month through mid-2009 is over $40 BILLION per month. That means this $200 billion, at best, covers the next five months. Right up til just before the election.

This is a simple rant - again - against the Fed cutting interest rates to "support the economy". Here is the problem:

The US dollar tanks every time the Fed cuts rates - especially if the European Central Bank (ECB) does not. Let's suppose, as the market is projecting, the US dollar drops 5% next year.

I borrow money from a US bank at 6%. Money is fungible - I can take it anywhere. So I can lend it in the US or use it to fuel the European or Chinese economy. Math below the fold:

In case you missed it - Miami is without power. FPL had an oops - the substation near a nuke plant had a trip off on a hot day. The problem is that the system cascades in an event like this.

When a plant like Turkey Creek - two 700 MW plants - trips off, that drops the available power to the grid. Turkey Point is also right next to Miami (25 miles). This means that the power supply to Miami drops first. Since many electrical systems are damaged when the voltage drops, they drop off line. It is possible that more load drops off (because the voltage drop cascades) then the power plants. Now the system revs up with too much power supply ,causing the power plants to drop off line to protect themselves.

This can cause widespread blackouts:

The term "DK" is "Don't know" in trader parlance. To DK a trade is to deny it ever existed. The credit default issue seems to be spawning a lot of fear about who really owns the hot potato.

Unless the world has changed since I stepped off a Wall Street desk, the answer is all the people in the chain. This is an explanation of why everyone is worried about how big the dominoes are and why they could set off a chain reaction. let me explain.

There are two ways to get a contract "off your books" but only one way to get out of the contract. A lot of what is being talked about in the credit default issues confuses selling a risk from getting rid of the risk.

More below:

I just posted a comment over on bonddad's latest diary. Thinking about it made me realize there was a lot more to say about this matter.

Government bailouts are, in financial terms, a free option game. For those who haven't played in the options market here is a little background.

An option is a right but not an obligation to buy or sell. The option on the right to sell is a "put"; an option on the right to buy is a "call". The study of options in real life - as opposed to financial markets - is the study of real options.

Real options are everywhere - the worst trader of real options in the world is the government.

More below the fold:

Very simple point - I support based on candidates. I will not donate a dime to Hillary's campaign if she wins based on super delegates. I will not donate a dime to a super delegate from Colorado who votes against Obama (he won here). I would not donate to a New York super delegate who voted against Hillary (sorry, Obama fans, I don't go proportional on super delegates).

Ok, I will make an exception - if a House member super delegate's congressional district went one way versus the state vote I can see that alignment (they represent their voters). But that is the exception.

Why?

I am one of those people in the dkos community that always feels like a duck out of water - a Republican who has refused to leave the party but acted to support progressive candidates of both parties (yes, there are progressive Republicans out there - especially at the state level). I have always argued that Democrats have had a disadvantage in the past because they thought that politics was about concepts, not power.

Well, that has changed. The reality is that the diaries in this site (especially today's "I'm voting for McCain because your candidate has boogers" variety) have proven that Democrats do understand power.

More below:

Ok, the Fed has rolled over and committed itself to turning the US dollar into the next trash currency. The 1/2 percent basis cut today was actually defended by the Fed Board on the basis - as the CNBC crawl stated - an

expectation of inflation to moderate in coming quarters

And the crude market moved up 75 cents in the half hour after the cut, the US dollar drop almost a half a percent in the same time. And traders talked about "inflating ourselves out of this recession."

WTF? More below:

In less than twenty four hours (more like 18 hours now) I anticipate that the Federal reserve Bank will formally announce that it has decided to change its governance structure and seat the CEOs of Morgan Stanley, Goldman Sachs, Societe General, Deutsche Bank and several other major banks as the arbiters of monetary policy for the US. Well, they will do the next best thing:

They will cut US interest rates another 50 basis points.

This is flat ridiculous. And worse, it is destroying the US economy.

More below:

I spend a couple hours every Sunday evening watching the Bloomberg and CNBC Asian desk reporting. I found it fascinating that they were speaking very bluntly about their view of the fed reserve - one that the MSM, in my opinion, is not giving adequate coverage.

The Asian markets - and currency markets - have now explicitly stated that the Fed is Wall Street's bitch. They discussed their expectation for this week's trading in exactly those terms.

More below:

The talking heads (and writers) in the financial world are starting to admit Ben got punked. The melt down wasn't the US economy, it was the unwinding of a $7 billion fraud. oops - but the press is great to read.

From the Dow Jones Newswire:

One market professional who went on the record about the likelihood of
Chairman Bernanke's having been euchred into a rate cut by Societe Generale's
one-off fire sale told The Wall Street Journal:

 "I think Mr. Bernanke is clearly a very bright guy but he lacks the market
savvy" that former Fed head Paul Volcker had, said Jeff Saut, head of
investment strategy at Raymond James.

More below:

Ok, the D Congress has decided on throwing money at the problem. And, once again, they are buying the neo-con meme - let's spend our way out. Here is the story that should be made:

The American consumer is afraid that their financial security - their jobs, their investment and their future - is riding on the roulette wheel of some CEOs whim. The mutualization of risk that defined benefit pensions, American production capacity and unions represented is deteriorating. And your solution is a $300 spending spree? Get real.

Let's talk about how we make the American consumer more secure and help the economy at the same time - it's called S-Chip.

More below:

Seems the China National Offshore Oil Company reported earnings today their time (now yesterday). One interesting little item says a lot about the way businesses (remember how US business loves China) are treated in China.

CNOOC will pay a total of $936 million to the government in windfall taxes on oil sales. (That is for 2007 only - pretax profit was just over $7 billion - my parenthetical).

The tax, which kicks in at $40 per barrel, is calculated each month and paid each quarter.

The National Development and Reform Commission, China's economic planning agency, said last month it expects more than $7 billion in oil windfall profit tax to be paid to the government this year.

snip

The tax applies not only to China's state oil companies but also to foreign oil firms..

Officials have used the tax revenue to subsidize low-income groups and industries hurt by rising oil prices, such as transportation and farming.

Dow Jones News Wire

This leads to a couple observations:

I am active in the futures markets for customers of mine. I read the industry blogs, do technical analysis and all the fun things. But it still amazes me how many people - including the New York Mercantile Exchange (NYMEX) - like to still believe these are the good old local markets where farmers look to reduce their production risks.

Then, every once in a while, a gem pops up that clarifies it a little better. In this case, it was the discussion about raising the daily trading limits on the Chicago Board of Trade (CBOT), where much of the world's food prices for grains, meat and oils are set.
More below: