Very Interesting - Indeed

Things are getting really interesting on several fronts. Let's start with talks about the U.S. raising its debt limit. Not there yet and odds are increasing they may not make it by the August 2 deadline. Obama walked out of a meeting today - one of the first smart moves in a while - and the proposals on the table aren't really jelling for most folks.

http://www.bloomberg.com/news/2011-07-12/mcconnell-said-to-propose-three-stage-process-for-raising-u-s-debt-limit.html

This is serious enough that credit rating agencies are watching and warning of downgrades to U.S. debt if action is not taken in time.

http://www.bloomberg.com/news/2011-07-13/u-s-debt-rating-placed-on-review-for-downgrade-by-moody-s-as-talks-stall.html

This is in addition to possible downgrades to thousands of municipalities. Indeed, this should be interesting.

Now let's move on to my favorite, the EU. Think about it, even saying EU, doesn't sound good or project confidence. It is the sound you make when entering a room with stench. It is perhaps appropriate at the moment as these PIIGS have a lot of stench. Greece is bankrupt and has been for years, but this fact is just now sinking in for the politicians with steel-toed shoes who have been kicking that can for a long time. Portugal is close behind. Obviously, more disturbing are Spain and Italy, with a default by either having major repercussions on banks, both in Europe and the U.S. The first wave will be European banks but we in the U.S. have many billions in indirect exposure through default protection we sold those European banks. And with trillions in such layers of protection circulating the globe, any default in Europe could take many years to unwind.

This blog began in part as I was fascinated how derivatives resembled reinsurance spirals I dealt with many years ago. One company buys the risk and then places a lot of it with another who then packages that with other risks and places them with another, who then does the same and so forth and so on to the extent where the first company eventually ends up with the risk coming back to it after spiraling through many other companies. It is the last company in this upward spiral who is usually the worst stuckee. With tens of trillions in such spirals now constructed, it should be interesting, very interesting indeed.

We lawyers will be mighty busy.

Disclosures: None.