Friday, October 24, 2008

"Mr. Paulson, tear down this structure!"


I have to say that this note is worrisome, because I do not understand why these fully synthetic structures have not been "targeted" to be unwound, dismantled. Perhaps no one has the legal right to initiate the process by which the structure is terminated?

Whatever the case, there is no cash asset tied up in these structures, legally (they are built on reference only to other instruments). To me, that means that they can and ought to be unwound. Maybe a lot of them have been ...

The prospect that regulators would let a multi-billion dollar, off balance-sheet, Damocles sword hang over the capital of banks, in a way that is now an obvious, self-fulfilling danger is ludicrous. They should act and act soon. This is a kind of low-hanging deleveraging, right?

If there is more to dismantling the synthetic mountain of cards than just calculating the net NPV required to 'unwind' the "legs" of the trade, please let me know. Otherwise, the right people have to get on the phone and these particular assets ... need to end, for a time, I think. (That's quite a lot different than "nuking" all CDS contracts, etc.).


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