Survival Football

Survival football has become a popular game over the past few years, particularly in the financial markets. Though there can be a slight variation in the rules the premise is simple: Put down a stake and pick an NFL team to win every Sunday. They must win. Losses and TIES lose. One loss and you lose your stake. If are the last person standing you win the stake (or share it). the largest pools have thousands of entries with payoffs in hundred of thousands of dollars.

The kicker, of course, is you can only pick each NFL team ONCE during the course of the season.

The key to this game isn't to map out who to pick each week in advance. Trying to figure out who to pick for week 13 is a LOSING PLAY.

The key in this game is to SURVIVE AND GET TO NEXT WEEK.

This is in effect what the Treasury and Federal Reserve have been doing over the past year and specifically over the past two weeks.

1. The conservatorship of Freddie Mac and Fannie Mae became necessary as a looming downgrade from rating agencies put the two primary buyers of US mortgages into capital difficulty. If Freddie and Fannie stopped buying mortgages the entire housing market would have effectively come to a screeching halt. Freddie and Fannie shares were trading under a dollar.

2. Lehman Brothers, unable to secure additional capital and in a disastrous miscalculation on the announcement of third quarter earnings and steps to be taken, does not get help and is forced to declare bankruptcy. This stuns the market as Treasury and the Fed do not step in to backstop Lehman debt and essentially allows Lehman to fail most likely judging that the financial system could survive Lehman going down. The market did not expect this as most thought the Bear Stearns bailout would have served as a model. This decision in retrospect was probably a mistake given subsequent events.

3. The US government takes up to 79.9% of the huge American insurer AIG in exchange for an emergency $85 billion bridge loan priced at a near usurious Libor + 800 bps rate for a two year period. AIG shares were under tremendous pressure as a downgrade looked imminent. A downgrade would have meant that AIG would have to ante up billions in additional collateral and potential trigger debt covenants. Treasury and the Fed judged in this case, unlike Lehman, that AIG could not be allowed to fall or declare bankruptcy as possibly tens of millions of drivers and homeowners could find themselves without insurance.

4. Treasury Secretary Paulson and Fed chair Bernanke announce a $700 billion plan to buy distressed mortgage and real estate assets. The plan gets at the core of the problem by buying loans that are weighing on banks' balance sheets. It would provide a buyer of last resort for distressed securities and stabilize the market by getting these assets off bank balance sheets and should also remove questions about assets that brought down Lehman Brothers.

5. SEC bans naked short selling for financial stocks. Philosophically anathema but provides a window of relief for harried financial shares. Effective, crude and philosophically vile but there are no atheists in foxholes and no libertarians in distressed markets.

One hopes here that we are now getting into the late innings of this game and a large enough fund would give the market confidence that a real backstop is in place and cut off speculation and panic that have gripped the financial system.