Submitted by: Francis Soyer
It is not very often I feel the need to post an aftermarket report in fact since I have been doing this letter I have not had to ever. Today is different and there is some news you should be aware of. After the close S&P cut credit ratings on 37 of the largest international banks. The consequences of these credit cuts will be similar to what happened prior to the liquidity freeze in the bond markets that led to the crash of 08.
If you remember these types of credit downgrades and their subsequent consequences were directly responsible for the down fall of AIG and the bailout that ensued with the major banks and the 700 billion Hank Paulson procured (black mailed) from the U.S. government.
The difference this time is that Uncle Sam does not have the cash flow to come to the rescue to these financial institutions. This is especially true when Uncle Sam needs to figure out how they are going to raise the debt ceiling by a minimum of 5 trillion just to get through FY 2012.
The specific risk that threatens global finance is because of the derivatives market in which these financial / banks participate in which represent hundreds of trillions of dollars. The counter party's to this derivative exposure held by all of the banks that have been downgraded by S&P will no doubt demand an increase collateral to preserve those positions. The problem is that these banks simply do not have it. Thus we should expect massive liquidations. Basically this is a margin call on the banking industry. The industry is in enough trouble already and this credit rating change could be the beginning of the end for many of the largest multinational banks. I expect carnage in the coming days.
The drill down article here:
http://www.zerohedge.com/news/standard-and-poors-downgrades-37-global-banks-among-which-bank-america-citi-wells-fargo-morgan-
In the after hours I am a buyer of SPXU the pro shares S&P ultra short ETF. This position is not to exceed 5% exposure.
