5 key points to keep in mind (BY Rainmaker)

(1) IB's and hedge funds are holding a pile of toxic / junk credit that no-one can sensibly value; (2)No-one wants to have this credit sensibly valued, because doing sowould lead to massive writedowns / losses across the board. If youdon't value it, there are no losses. The wonders of mark-to-market, ala Enron; (3) No-one, at present, aside from the occasional sidedeal (Citadel/Sowood) is willing to buy this credit at any price(meaning in effect its value is zero in the current marketplace). Theholders of this credit are refusing to accept this as reasonable andbelieve that eventually 'normality' will return. This concerns me,because it may not. (4) There is an extensive OTC market in creditderivatives (CDO's, CLO's etc etc) that are priced and traded based onthe underlying debt. As the underlying debt cannot be valued, neithercan the derivatives. Just how big the losses are in these instruments,and who bears the bulk of these losses, is the big guessing game fornow. Its a tangled web that the IB's don't really want to unravel -mainly because they're not sure what they'll find. Sometimes pulling ona single thread can unravel the whole jumper ... (5) The marketcould, in its current frame of mind, run to a place where the Fed isforced to bail them out (beyond supplying repo / discount windowliquidity, they may have to cut the overnight rate. FYI, the Fed Fundsand Eurodollar futures have already priced in the assumption that thiswill happen. As is typical with markets, they've priced in the endgamewell before the whistle is blown. source