Why did markets do that thing they did today?

Today was also the day for the Fannie/Freddie CDS auction and prices are final as of now. Looks like Lehman is up on Friday the 10th and WaMu is the 23rd. I know you've said you're looking into the whole CDS market, but have been sidetracked with other things. Do you have any thoughts on how this process is weighing on the markets and/or how it will turn out?

My random thoughts on this:

We really haven't heard anything about how the triggering event for the "house of cards" nature of the global markets debt equity situation could have been oil (and to a lesser extent every other commodity) skyrocketing in price to untenable and unsustainable highs.

I think there's an argument to be made somewhere/somehow that the cascading effects of these price shocks traveling through the system precipitated increased calls on debts to pay for commodities which in turn led to the realization of just how over-leveraged everyone was.

Running a high leverage operation only works as long as there are no sudden shocks that cause you to need extra liquidity RIGHT NOW. Which is precisely what the quick and massive commodity price increases did. So oil (and other commodities) dropping may have a significantly greater calming effect that anticipated. As long as it doesn't just jump right back up of course.

Also, thanks for the posting, apparently that explanation has been copiously copied and is being emailed around the internets. Now I just need to figure out how to collect my virtual internet millions without going into that room with the "chocolate rain" guy like Butters did with his YouTube video.

Sean,

If what you say is correct, then the solution to our credit markets is 3 fold:

1) Engage in every ruthless tactic possible to kill the cost of oil and other commodities to dirt cheap levels.

2) Provide jobs to the unemployed in the effort to do so.

3) Recapitalize banks directly by cash infusion and indirectly by backing loans which permit killing the cost to oil to come true.

It seems to me if I understand this correctly that a large portion of this problem with mortage securites are the credit swaps that were sold with them to suppossedly protect the investements that companies made were virtually worthless since no companies set aside the captial necessary if the claims were put it. I think companies such as aig and lehman should go down to pay for such corporate incompetance. If I was running a business and I made decisions like the CEO's of large financial firms would I gain assistance, of course not. These people put their shareholders at risk to gain additional profitablity with no thouight of the downside of this exposure. Now the government has to inject tremendous sums of money into credit markets because bank are hoarding money since they are all at risk of not having enough capital. I wish I could see the light at the end of tunnel but it seems very dark currently. I am the manager of an automobile dealership and a with ninteen years in retail I have never seen the car sales market in such shables.

Ah, maybe, just maybe, run an analysis of the time of the rise in the market against where the orders came from, and you'll once again see the hand of the good old boyz, the same crew that have been making sure the dead cat keeps bouncing for the last 8 years, the PPT. They don't even have to hide anymore. You must recall, "the presidents working group....blah blah." Please run some photos of the crowd on Wall street carring the "Jump" signs as a message to the CEO's of the investment banks.

Basically kids, from the memory of the 29 crash, the bottom line, is not that " we've made terribe mistakes, let's never do that again, but: "Boyz, we've got to make it so that we NEVER have to jump again. And if we have to jump, make sure there's lots of little people to soften the landing.
The best defination of insanity is doing the same thing, and expecting different results. Same people, same style, same results. Hail the Naked Emperor.

As bad as it has been, it is actually moderate pain compared to the amount of excess we have experienced.

There is just too much:

1. Over priced junk carried on the books of ourfinancial institutions.

2. Federal borrowing and spending.

3. Outstanding consumer credit.

4. Leverage overhanging the languishing hedge fund industry.

5. Contingent CDS liability waiting to rear its ugly head.

6. Scared baby boomer retirement wealth being pulled to safety.

6. Stupidity in thinking the EU can beat its way out of a financial paper bag.

Voilas!

THOSE WERE THE DAYS MY FRIEND
(to the melody of the song)
WilliamBanzai7

It was just a few blocks North of Fraunces Tavern
That we sold stale foies gras to investor fools
Remember how we laughed away the hours,
Think of all the great scams we used to do

Those were the days, my friend
We thought our greed ccould never end
We'd sing and dance forever and a trading day
We conned whoever we'd chose
We'd slight and never lose
For we were dumb but sure to have our way

La La La La La La
La La La La La La
La La La La La La La La La La

Then, the busy years went rushing by us
We lost our seedy stash along the way
If, by chance, I'd see you near the tavern,
We'd smile at one another and we'd say

Those were the days, my friend
We thought our greed could never end
We'd sing and dance forever and a trading day
We conned whoever we'd chose
We'd slight and never lose
Those were the days, oh yes, those were the days

La La La La La La
La La La La La La
La La La La La La La La La La

Just tonight, I stood before the tavern
Nothing seemed the way it used to be on the Street
In the glass, I saw a strange reflection
Was that lonely banker really me?

Those were the days, my friend
We thought cheap credit never end
We'd sing and dance forever and a trading day
We conned whoever life we chose
We'd slight and never lose
Those were the days, oh yes, those were the days

You've read NNT, but you still fall for the narrative fallacy. Why can't you break free? It's mind-bottleing!

I guess you default to these "explanations" because you can't think of anything else to write about?

@Scott Stewart: No, silly. Read the post again. I defaulted to the explanations because I want to remain employed (that is, my editors asked me to).

Late post on this but Justin..fatal logic flaw in this list

"Oh, and as for that big comeback in the last hour of trading: Maybe it had something to do with the price of oil dropping to $87.81 a barrel."

reading rule 1, you need to come up with analysis as to why oil dropped. (on a personal take - this is bad news, oil would drop because expected usage is going to drop, because of..a slowing economy/people not able to afford heating, which should be bad news for stocks..not good news).

Justin - thanks for the answer. I bet your editors will blame your readers, so please pass this up: I'd rather read almost anything other than after the fact explanations. I know it's the standard in financial reporting, but can't you guys think up something more interesting?

The simplest way to explain what is happening is the genie in the bottle. Forces beyond rational formulation have been released from the bottle. Yes the market truly is a complex adaptive system.

You can make an endless list of causes.