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The Credit Card

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While debt is front and center as the issue at hand, credit of a different breed -- credibility -- has emerged as the issue at hand for markets at large.

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"All you have is your name and your word." --Ruby Peck

They say that if you're playing poker and don't know who the sucker is, chances are it's you. For those currently holding trading cards, the stakes have never been higher.

Over the last few weeks, as risk chips stacked around the table, investors have been forced to call the bluff of some of the savviest players in the global game.

The winners will walk away with a royal flush of profits, smiling all the way to the casino pool. The losers? They'll self-loathe and second-guess themselves on the hitch-hike home, hungry for redemption and wanting for more.

Let's review the series of seemingly inconsistent hands we've been dealt during what was supposed to be a quiet stretch on the summer deck.

At the beginning of the summer, when "CDO's" and "Sub-Prime Mortgages" were first introduced into the mainstream vernacular, Treasury Secretary Hank Paulson was quick to assure us that the problems were "contained."

To be fair, Mr. Paulson wasn't alone. In fact, he was in very good company. San Francisco Fed President Janet Yellen, Federal Reserve Chairman Ben Bernanke, Dallas Fed President Richard Fisher and Federal Reserve Governor Fredric Mishkin were unanimous in their assuring voices that we had nothing to fear but fear itself.

Fast forward a few months. This is when things really started getting strange.

The FOMC announced on August 7 that, while "markets were volatile" and "credit conditions tightened for some households and businesses," the economy "seemed likely to expand at a moderate pace in coming quarters, paced by solid growth in unemployment and incomes and a robust global economy."

Despite high-profile snafus at Bear Stearns (BSC), Goldman Sachs (GS) and American Home Mortgage (AHM), the Fed seemed intent on appeasing China and other holders of dollar-denominated securities. We chronicled that dilemma as it evolved but the price action at the time, as the ultimate arbiter of variant opinions, failed to validate concerns.

Two days after the FOMC meeting, BNP Paribas, France's largest bank, halted withdrawals from three funds because it couldn't fairly value holdings tied to the stateside sub-prime mess.

IKB Deutsche Bundesbank confirmed that they were holding special meetings to discuss their "financial situation."

The United Kingdom issued a statement that their sub-prime crisis might be worse than it is in the US.

Those concerns, on the margin, were disconcerting. But as actions speak louder than words, the sequence of events that followed offered a more telling strange things were afoot at the Circle-K.

The European Central Bank, in an "unprecedented response to a sudden demand for cash," injected $130 bln dollars into the financial machination.

The United States, Japan, and Australia also stepped up to the plate with piles of dough, upping the ante to over $300 bln.

Even Canada -- Canada! -- chimed in to "assure financial market participants that it will provide liquidity to support the stability of the Canadian financial system and the continued functioning of the financial markets."

We wondered aloud at the time: What do they see that we don't? Why, with the mainstay averages still up nicely for the year, was there a coordinated global agenda to calm investors and stabilize a system that we were told was strong, normalized and fluid?

The next day, Countrywide Financial (CFC), the biggest US mortgage lender, said it faced "unprecedented disruptions" in the operations. Was that the other shoe that investors were waiting to drop?

Not so fast Imelda, this story has only just to stretch her legs.

On August 14, as the price action in the financials continued to falter, UBS (UBS), Europe's largest bank, professed that "turbulent markets may cut into profits for the rest of the year."

Santander, the large Spanish bank, offered that they had upwards of $3 billion of exposure to high-risk loans in the US.

Australian mortgage lender Rams Loans Group, citing "unprecedented disruptions in credit markets," promptly took a 20% overnight haircut.

The ECB and the United States continued to pump liquidity into the marketplace as concerns continued to mount.

David Walker, the comptroller general of the US, proclaimed that the US government is on a "burning platform of unsustainable policies with fiscal deficits, chronic healthcare under-funding" and "chilling long-term stimulations" as he mapped the parallels between modern day society and the fall of the Roman Empire.

These are not my words. They come from a non-partisan figure in charge of the Government Accountability Office, which is often described as the investigative arm of the US Congress. "I'm trying to sound an alarm and issue a wake-up call," he said in the midst of his 15-year term that began during the Clinton Administration: "The US is on a path toward an explosion of debt."

The next session, as fate would have it, was Redemption Day for funds with a 45-day advance notice redemption window. As the smartest money on the street, including Goldman Sachs' mighty Alpha fund, took it on the chin, investors were given a chance to leave the dance.

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