If you fill a room with the culprits that got us in this mess (a very large room indeed) you would need to most certainly have the major rating agencies in it. After all, these were the companies that generated nice fees for themselves by giving top marks to $3.2 trillion in toxic subprime backed securities. I am not saying that the conflict of interest had anything to do with these lala ratings but . . .. These rating agencies also, by the way, maintained AAA ratings on mono-line insurers MBIA and Ambac long after both companies no longer deserved them. Indeed, a plausible argument exists that any company that is reliant on its triple A rating to survive does not truly deserve a triple A rating in the first place. But hey, what do I know. All things considered, however, they have not shown a great deal of ability to accurately rate anything.
Any hoot, helicopter Ben is relying on these same rating agencies to tell him what debt is safe to lend against. Go ahead and feel free to reread that last sentence slowly to let it sink in. Jaw dropping, isn't it!
If I were a cynic, I might start thinking something nefarious was happening. You know, like Ben going through the steps of getting bogus ratings so he can appease the public and Congress about the quality of the junk he is accepting, all the while knowing it is a load of crap, but he needs to get this crap off the bank books of banks to help out his buds. Naaa, not Ben. He would never do that, would he?
On a connected point, I have not seen anyone talking about this too much, so let me throw it out there to see if it makes sense. The various facilities set up by the Fed for the most part simply provide loans to the financial institutions and take on these toxic securities as collateral. If these financial institutions do survive - which we seem hell bent on making sure they do - then they need to repay the loans eventually and take the toxic debt back. Exactly how on Earth does this help them?
It may give them time but it does not really give them liquidity.
Think about it. They really cannot loan out the money they have from the Fed as they know at some point, a point that they hope is far away but they cannot guarantee, they will have to repay it. Their business model is not working too well right now, so they cannot assume they will generate new cash to repay the hundreds of billions (I believe over $600 billion) in loans they have taken on. And if they do survive they get the wonderful benefit of taking these toxic assets back from the Fed. So all it really does is buy them time to try to devise some new ridiculous scheme to make money.
Oh,I forgot, they already have the new plan in place. They call it TARP and it works quite well for them. They do nothing and are given money by their other friend Paulson with no strings attached. Now this money does not need to be repayed, so they are free to lend it. But who can they lend it to. Certainly not any of the other characters that drank at Uncle Ben's trough. They have all that debt to the Fed too and will be getting toxic securities back. Can't lend much to corporate America as we are in a recession and too many companies are on the brink. Guess they just have to spend it on acquisitions to make sure they are too big for Uncle Sam to let them fail. It is so nice having a couple of rich uncles around in these times of trouble.
Long story short, the day will come when the survivors do indeed have to repay the Fed and by then the collateral will undoubtedly be close to worthless. They may beg and plead then to have the debt forgiven, but let's not go there. Meanwhile the money we loaned to them really cannot be used by them for much more than insuring their own solvency because they continue to lose money. Some of them are undoubtedly already insolvent, but can mask that fact with the loan proceeds. Just kicking the can down the road in my opinion.
http://www.bloomberg.com/apps/news?pid=20601109&sid=af32G4ayfLQY&refer=home
X Rated
While we are on the topic of credit agencies, it does seem they are not hesitating to downgrade some companies. GE was put on negative watch today, which some say caused the market drop, and Citigroup's debt was lowered two grades by Moody's. In the process Moody's said Citigroup will not generate significant retained earnings through 2010. Kinda makes it hard for them to pay back the loans from the Fed, don't it. Of course Citigroup retorted noting its "strong" cash box. I didn't know they kept it in a box. Whose bed is that under?
http://www.bloomberg.com/apps/news?pid=20601087&sid=av3u3ANbl5nY&refer=home
We Are Definitely In Trouble Now
Greenspan says financial markets will rebound in the next six to twelve months as housing bottoms and confidence rebounds. Guess Alan has not been reading my blog. And here I thought he might be my one Follower, Loose Tool. Darn!
Well if you read what I have to say and think it makes sense, do you think Greenspan's estimate is correct? Don' hesitate here, I can take it. Just what I thought. Thanks for the support. Let's list a few reasons why he may be just a tad off:
- If you look at the blog entries above, that is a nice start. With loads of debt and bad assets, why would confidence restore any time soon?
- Housing ain't going to bottom in six months. Sorry Charlie, er, I mean Alan, but adjustable ARMs are about to hit the proverbial fan and I am getting out of the way. Builders are cutting way back, which will help, but foreclosure sales will continue to push down prices well beyond six months from now.
- The economy is in a deep recession that I expect to last a long time. Job losses are mounting and will continue to do so through 2009 and beyond, and that does not bode well for housing.
- The business base of these financial institutions is not going back to what it was. Let's see, no loans, no M&A, limited brokerage, no securitizations, etc. Their business model is broken and they will perhaps never return to the unsupported profit levels of the past few years. Add this to all the toxic mess on their books and I don't see confidence returning too soon.
- As noted here last week, financial insitutions are adding hundreds of billions of assets to Level 3. Remeber my Lala Land post and what I said there? Increasing Level 3 - rather drastically - kills confidence and trust, not the other way around, and this will not change back quickly.
I have more reasons, but this is enough to chew on right now. If you want more, leave a comment and I will be happy to oblige.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aJ0kdydwOmVc&refer=home
Just The Facts, Ma'am
Any Dragnet fans here. For those college level followers, and I know there is at least one (hat tip Cody), it was a TV show way way back in the days when TV broadcasts were in black and white. The black-out here in New Hampshire harked me back to simpler times. I started telling my five year old daughter about all the things we did not have when I was her age, like color TV, computers, DVD players, microwaves, digital cameras, etc. etc. She asked me if we had "arms." She is such a little smarty and I knew she was teasing me. I also know she was not talking about adjustable rate mortgages.
This is not about a big retro thing, however, as I am cluing you into my investment philosophy. This year I have really looked far and wide for facts. Sure I like the discussion blogs that make sense of these facts, but the facts are critical. For example, knowing that a very significant number of adjustable rate mortgages are resetting next year is a nice fact to know if you are trying to judge when housing will bottom or foreclosure rates will slow down. Knowing that financial institutions just moved over $600 billion of assets to Level 3 is a nice fact to know too. Knowing that even when their business models start to recover the financial institutions still have a bunch of debt to repay, is a good fact to know. And most of these facts have relatively obvious consequences.
Two plus two equals four. In matters financial, I have found that it does not always equal four. Sometimes it might migrate up to five or five and a half or down to three or two and a half, but eventually it migrates back to the right answer, as in reversion to mean.
So what I do in trying to anticipate what is happening on a macro level is read a lot and collect together as many pertinent facts as possible. I then try to make sense of them or find someone who does that for me. And if I am happy with what I have found, I try to pass it on here. Truly, knowledge is power. It does not take an MBA to understand some of two plus two situations. For some of them it helps, but I try to bring you those that I can understand, so I suspect anyone can.
Radio Silence
I am leaving Saturday for vacation for a week. I likely will try to do a post or two but I will be in a place where I very well may have no available internet connection. I will definitely be hyperventilating a bit, but probably a good thing.
Slowly We Creap, Step-By-StepI have been posting for all of, I believe, 52 days, and today I should reach the 1000 page impressions level (I am at 995 right now). No, not per day, but total. Still I think that is respectable. Whether it is or not I am happy with it and thank you for your support.
Did I Mention Greed
I am not going to summarize this as it is too disgusting to give it short shrift. Please read it yourself. It is about how the financial institution officers and head people looted their companies and shareholders, as well as taxpayers. This is revolting and it still continues. I truly hope these people get sued for every cent they have and hopefully get put in jail. They have caused more harm and pain to so many in this country that they should all be in jail. Few have done as much harm to so many in our country's history - all in the name of greed.
The original article was forwarded to me earlier today and is in the New York Times (hat tip Chris) but I like Yves' expansion on the original piece better. This is closely related to a topic I have not seen mentioned lately, which is moral hazard. When these idiots get saved by the government and are allowed to keep their jobs, we the people are simply supporting their idiotic and potentially illegal ways. They now have government incentives - as do others who might immulate them - to continue this short term bonus, risky, looting behavior. This is why, for the first time in a long time, I wrote my Senators and Congress people imploring them to vote against the TARP. Some did and some did not. One that did leaves office next year, so I get some satisfaction.
Any event, this has me upset enough that I am having a hard time keeping this post PG. Folks, if you are not mad, stop reading and go elsewhere. Then again, read the attached and then come back. Then, if you are not outraged you are welcome to go elsewhere. And think about how we are throwing money at these #%^holes to keep them in business.
Okay, I need to try to calm down and get to bed so I need to stop now. You know where I stand.
Disclosures: None
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