Of Hats and Rabbits, 1

1. Moose and Squirrel

"Hey Rocky, watch me pull a rabbit out of my hat."

"Again?"

Six months ago the U.S. Federal Reserve put the Bear Stearns rabbit into JP Morgan Chase's top hat by insuring the purchaser against possible loss on 97 percent of the Bear Stearns' book-- positions, obligations, outstanding trades-- in mortgage back securities.

At the same time, the Fed opened a brand new window, the Primary Dealer Credit Facility, intending it to function in parallel to the Fed's discount window to its member banks. Overnight loans at the NY Fed's prime rate would be made available to the investment banks which were designated primary dealers in US Treasury securities. Collateral requirements were loosened to accept investment grade corporate securities, municipal securities, and mortgage and asset backed securities that could be priced by the dealer's clearing bank.

That last bit was the dicey part. After years of "marking to market," of steering their jolly pirate ship/party boat, the USS Leviathan, with an invisible hand across the green span of the world's oceans, the lusty free marketeers of America had precisely no market for these mortgage backed securities and thus no way of pricing the items they most wanted to unload at the port of New York Fed.

With no way to price the securities that represented both asset and debt, there was no way within or without the Fed to refinance the debt. There was no way to recirculate the values that once were. And without circulation, there's nothing. Finance is nothing. Refinance is everything.

The notational values existing only in the book entries of the investment banks could not be passed on. The buck had stopped all right. With that, the book was being closed. And burnt.

Meanwhile....meanwhile who didn't, who couldn't, experience a shiver of pleasure, of glee, of schadenfreude, viewing the pictures in the New York Times, the Financial Times, the Wall Street Journal, of the hundreds of thirty-something year old, bullet headed, over tailored, investment bankers stumbling out of their offices in Canary Wharf, in midtown, downtown, sans their company issued Blackberrys--your service has been discontinued-- carrying their personal histories of pillage in cardboard boxes that read Iron Mountain?

Now, just maybe, now it will be possible to eat in a restaurant in Manhattan on a Saturday night without hearing them bellow like moose in the rut or chatter like squirrels amped on steroids, about their deals, their positions, their bosses, their companies.

Yesterday's sharks just so much chum in today's waters.


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