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Monday Morning Quarterback: Salvation Lies Within


To get through this we must go through this.

One year ago, as the Dow Jones Industrial Average probed all-time highs, we offered the following thoughts:

"The structural imbalances, hidden risks, counter-party collateral exposure and embedded insecurities aren't one-and-done write-downs. That's not how the knitting is weaved with $500 trillion dollars of derivatives in play. In fact, one could argue that the inherent learning curve needed to unwind these interdependencies will allow the issues themselves to manifest.

The frightening part of these modern day sequels is that the same greed and reward-chasing behavior that was responsible for the universal acceptance of risk has again been so readily embraced. It is that story itself-the twisted tale of misguided agendas-that is the common thread of these seemingly disparate plots.

Trick or treat, my friends, and be wary of the bad apples. For when we bite into the forbidden fruit, we're liable to find the pin that pricks collective psychology and leaves us all howling at the moon."

Where Wolf? There Wolf!

We all know the monsters now. They look like derivatives, they smell like debt and they act like profiting is a privilege rather than a right. Admitting you have a problem is the first step towards recovery and the world has received the wake-up call.

Steps must be taken to stabilize the patient as the progression of debt destruction runs its natural course. Once this happens-make no mistake, it will-there will be profound opportunities for those who persevered the process and prepared in kind.

To be sure, the derivative and credit disease is bigger than the actual patient at this point. That leveraged volcano has been rumbling under the seemingly calm surface for years. Now that it erupted, we'll need to toss in some maidens to appease the Trading Gods and sacrifice a few for the greater good.

The professors have mused about what we would like to see (as well as the flaws of such an approach).

At the top of the list is the protection of all consumer deposits. If we're going to rebuild a sustainable foundation of recovery, it must start with credibility in the system and confidence that savers will be rewarded for doing the right thing.

There also needs to be culpability, which should be shouldered by those over-extended on credit, institutions responsible for financial engineering and policy makers complicit by acceptance. Existing equity in most financial institutions could conceivably be wiped out (replaced with taxpayer owned equity or warrants) but the pound of flesh must come from somewhere.

There are several other alternatives, game changers if you will, although none of them are particularly pleasant to discuss. They include dollar debasement (maximum pain for savers), Operation CDS Clean Sweep (wiping out speculators), shifting the rules of mark-to-market accounting, a comprehensive global nationalization process and programs to guarantee interbank lending.

We the people must remain calm as we chew through this process. None of this is something one would wish for but it's where we are and we must forge ahead. It will take tenacity, resolve and profound patience but if we're not part of the solution, we're part of the future problem.
Positions in WFT, RIG, OSX, QLD
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