It’s Simply a Gloomy Way to Start the New Week

By now you’ve read the headlines regarding the demise and dire straits of such organizations as Lehman Brothers, Merrill Lynch and AIG.  The main culprit to the problem at this stage most likely lies in the interrelationships between various Wall Street firms in financial transactions over the past and present.  Let’s call this counter party risk, where insolvency in one major player has major reverberations over the entire system.  Why didn’t this happen following the Bear Sterns debacle?...because they were bailed out.  The latest catalyst of negative contagion came from Lehman this time, where last week, the Fed mentioned that it would not bail out the organization.

As the Doc has been mentioning over the past couple of years, this so called Goldi-Locks economy was predicated on smoke and mirrors, where the underlying risk of the our system was vulnerable to significant downturns.  Perhaps it’s not the most polite thing to say, but, this should be no surprise to many, if they simply followed advice from well-established and credible analysts and economists.  This week’s financial market activities will most likely involve incredible levels of volatility across the spectrum of markets with the hope of maintaining liquidity and stable price action.  The bottom line…things will get much worse before they get better despite the bail out of Fannie and Freddie.  Remember, they were bailed out because there was a crack in the system.