Trader Talk

Credit, NOT Spitzer Is Street's Problem Today

While theNew York Times story on Eliot Spitzeris generating enormous email traffic on Wall Street, it is not the cause of the market's problems today. Stocks are again near the lows for the day, again on the same worries about credit, but here the problems are a bit more specific: they revolve around worries on margin calls and counterparty risks.

It's public information that big firms like Thornburg and Carlyle have had margin calls recently, and have been forced to sell assets. These forced sales generate new prices for paper, which in turn generate additional margin calls. This "vicious cycle" is one of the main problems facing the market, and the brokers are right in the middle of it.

There is an additional problem: counterparty risk. If I as a firm go out and buy protection in the form of a credit default swap, who is the counterparty and are they strong enough in the event I need them? This was never an issue until recently, but now buyers are regularly asking who the counterparty is. In many cases, it is brokerage firms, and queasiness about that is putting additional pressure on them.

Questions?  Comments?