Reply #101: My favourite financial blog says "The game is over"

[GliderGuider]

The Automatic Earth is a newcomer to the financial blog scene, but they are hitting all the right notes (disclaimer: the authors are friends of mine). Here's what they have to say about the meaning of this story:

Late yesterday, I added the following article to the Debt Rattle, and put in bold letters above it: The Game Is Over! It might be a good idea to explain that.

JPM states that Wall Street banks are facing a "systemic margin call", in other words a margin call that will pervade through the system. The banks will have to cough up $325 billion, and fast, when called upon., or its assets will be sold off for whatever the creditor can get for it.

The only way the banks can do this is by calling in their own loans. That means urgent phone calls to smaller banks, hedge funds, and any other funds and businesses, first those that depend heavily on borrowed money to fulfill oblgations. These parties then need to do the same: call in what is owed to them. Down the line, that means you may get a phone call to pay up for your loan or lose your home. It doesn’t matter if you are a good client, pay in time, have a great job. The banks and lenders need to call up everyting they can, just to stay alive.

You would, and will, do the same: if someone holds a gun to your head, and tells you to pay up, you go to those who owe you money, and demand your cash. Same thing.

We already have seen what this whole picture entails: the selling off of large amounts of assets. Since this happens in a market where buyers are rare, prices drop. Well, imagine that, multiplied a thousand times. And there’s still no buyers. It’s obvious where prices are headed, for all assets, including precious metals. And especially real estate. All assets will be marked to market, in a market without buyers. Pennies on the dollar is poised to become the next household term added to out vocabulary. It will be brutal. That means your home will lose value very fast, and that in turn will make that dreaded phone call come even sooner.

Remember that Wall Street has so far written off about $150 billion. Many banks have had to sell parts of themselves to foreign funds in order to stay liquid. Of course, the first $150 billion was hard, but it was also the easiest part. Now they have to come up with over twice as much on top of that, and probably with far more time pressure. There will be -many- banks who don’t succeed. But before giving up, they will ravage the entire financial system, all the way down to your mortgage, car loan and all other debt. If there’s a way to get their hands on it, they will do so. They must.

Hedge funds will fail en masse. Many institutional investors, like pension plans, will also be killed. Anyone with leveraged investments in non-100% liquid investments will be caught under the wheels of the oncoming steamroller. All businesses have credit lines, all levels of government do too. Get the picture?

This is why the game is over.

I've joined the flight to safety - cash is king right now.