Neighborhood on Fire

If Fannie Mae and Freddie Mac were a house of cards, it's safe to say a week later the whole neighborhood is up in flames and everyone is taking some damage. This is the Chicago fire equivalent in our current financial markets. It is truly incredible. Work isn't supposed to be personal, but this is pretty frightening.

AIG just got rescued by the Federal Government. Probably necessary to maintain order but also necessary from a policy standpoint, which is also a political standpoint. If you let Lehman fail, who loses? Lehman employees, investors, people Main Street doesn't feel connected to enough to save. But with AIG it is a different story. The general public is at risk. Picture the headline of someone losing their house in Texas to hurricane Ike and two weeks later not getting an insurance settlement because they did their insurance through AIG. The government doesn't want that on their hands. In my opinion, that is why the government stepped in. They say AIG is more connected but I don't know about that. Bigger balance sheet yet. But larger counterparty exposure risk? Suspect to me...Lehman was THE bond house.

Again, work is just off the wall right now. Weekends, late nights, hours that are not only long but very intense. The whole world is trying to figure out where and how they are exposed to AIG, Lehman, Merrill, Bank of America, Washington Mutual, etc. It is one of those times you really have to put the rest of your life on hold. I'm going in at 5:30am tomorrow morning to be around for clients. I'll be in early the rest of the week. Some people have been coming in at 4am and leaving at night. I admire my colleagues continued commitment. Pride. These are the times we need to push ourselves and make a difference in the world. I try to encourage the discouraged employees to see the big picture.

I'm sure others are experiencing this right now, but I just can't sleep though I really want to because I have an EARLY morning tomorrow. There's a lot on my mind keeping me up at night, namely systemic risk. One of our Managing Directors said it best last week, "You don't make up at 2 in the morning worrying about the fat right tail." Guess he's right, this is the left tail, and in contrast to FNM and FRE's government bailout, this is truly a black swan.

The unthinkable has become reality.

In other news, the Fed held rates today. We are of the opinion the statement is way off the mark with concern to inflation. The Fed can't use the word deflation, but that's the real problem. Not sure I understand how cutting rates would help that, but I definitely agree the statement was way detached from reality.

I got a new phone. Blackberry. It's nice.