by John Galt
March 20, 2008
There is a time when everything in a moment of history coalesces or intersects as I have stated in the past. For purposes of discussion of the U.S. financial system and much of the markets, I think we have arrived or on the precipice of another such moment. The American financial system has been the subject of jolt after jolt, shock after shock and now a final retreat from another phony rally, thanks to more suspect data points which did nothing but confirm the suspicions of the investing public, and by public I mean the rest of the world (most American sheeple just “trust” their 401K plan adviser at work), finally say “the hell with it” and walk away. The data released this month might finally have convinced darned near everyone to just leave in disgust. Why and how is this moment upon us and quite possibly exploding on the scene today or over the next couple of weeks? Let’s take a tour of perception versus reality with a chart or two and the impact of the law of gravity on an airplane or a bird when the wings are removed.
“There’s a sucker born every minute”
If old P.T. were alive today he would not have to look far to find freaks, frauds and funny business. Thus I theorize he would return as a hedge fund manager or partner with one of the CEO’s who have elected to implode their corporations for personal gain. He knew how to round up everyone, get their attention, and keep the people focused on total nonsense and coax them into paying for it. Hey, that sounds a lot like CNBC doesn’t it! The current stock market conditions were a creation of one Mr. Alan Greenspan who might well be old P.T. re-incarnated if we did not know any better. The collapse of the dot-com bubble in the late 1990’s and early 2000’s created a need for a new bubble, one that the “common” man could feel and recognize as opposed to the vague and mysterious workings of Wall Street and those funky numbers streaming across the bottom of a screen. After all, let’s be friends and admit it; the first time any of us tried to figure out what all those symbols and numbers meant it was quite intimidating. But a house, ah yes, that’s something you can feel. You can touch. And the average schmuck can be convinced that it’s not a tool or implement but an “investment” and that the more house you buy, the richer you will feel. Good old P.T. Greenspan figured out that if he convinced the bankster community to create an entirely new wave of investing instruments and hedge funds then it’s no big deal for him to lower interest rates and encourage them to profit off the fees and the Treasury spread. If someone wanted to make some real money then all they had to do was to securitize those mortgages in large bundles and it was a safe bet in the minds of these power brokers that it would be no big deal to get AAA ratings because after all, it’s the banksters who paid the fees to the ratings agencies and made sure they explained just how these new securities would work so the ratings agencies could wink, nod, sleep and feel immune from any problems provided the models created by the firms on their superduper computers were programmed by the best and brightest in America.
Ok, so maybe the programmers were not Americans and this wasn’t the brightest idea in our history. But hey the models have been reliable since the Great Depression and so the updates with the new mortgage problems would be no big deal because after 9-11 we needed a boom and who cared if it meant fudging a line of code here or there. So to create a market for these new securities RMBS (Residential Mortgage Backed Securities) and CMBS (Commercial Mortgage Backed Securities) a pricing structure to create demand had to be created. This was a piece of cake as literally thousands of new hedge funds sprung up over night and with that pesky Glass-Steagall thing out of the way nothing could stop the banks or brokerages from saving America by plunging us deeply into debt by some $500,000,000,000,000.00 plus in derivatives. So just how did the banksters price this junk? Well you take a variety of mortgages, get them rated, come up with a really creative and “safe” sounding name like:
Bear Stearns Asset Backed Securities I Trust 2007-HE3
(yes, that’s a real name with AAA ratings from the MarkIt ABX-HE-AAA 07-2 Series)
Sounds safe to me. Heck sounds secure to me. In fact to create a demand for it a brokerage or investment bankster might place a phone call down to it’s Cayman Island hedge fund and the conversation might go something like this:
Investment Banker(IB): “Come on answer the phone, I just saw you at your cubicle a second ago”
Hedge Fund(HF): “Cayman Islands Super Duper Safety Hedge Fund, this is Mike, can I help you”
IB: “Hi Mike, I have a new securitized bond that needs a buyer. It has a AAA rating with insurance and we think it would suit your fund perfectly.”
HF: “Well, we’re the Fund for that. What’s the asking price?”
IB: “I’m offering it at $2.00″
HF: “Wow, that’s a steep price, I should get manager’s approval first. Never mind, I see you’re on the phone with me, ok, we’ll buy it.”
IB: “Thanks. And you have a buyer for it also I assume?”
HF: “Of course, I’m going to package it with five other bonds and create a new investment fund called the Grand Cayman U2Dumbtolive Fund and sell it in Shanghai at 8 pm tonight”
IB: “Good work! But that name concerns me”
HF: “Have no fear, in Chinese that translates to ‘dog is yummy fund’ and they love those names!”
IB: “Great. I’ll wire the money to your account to buy this and complete the transaction. Are you free for tennis tonight?”
HF: “Sure, I just have to grab some dinner, meet you at the club at 8.”
While that story sounds far-fetched, that’s essentially how this has been worked out for some, oh, five plus years now. There is no giant strip of shiny office buildings in the Cayman’s with thousands of investment banksters or hedge fund managers working there. Just like there isn’t thousands of “banks” buying the Treasury Paper each month and saving it in vaults in these islands. This was the safest scheme ever concocted because every aspect of the creation, securitization, rating and pricing mechanism was controlled by the orignator. Of course it could never fail as long as there was another sucker born every minute or two in China, the Middle East, or India(Japan told us to pound Saki after the dot-com bust). Once the Chinese or whoever purchased these instruments the promises of steady income with the same perceived level of safety as a U.S. Treasury were no longer traded but stored as a reserve with the valuations given to them by the hedge fund or investment banksters who resold them. This nonsense permeated not just into foreign holdings but into the domestic U.S. markets as P.T. Greenspan continued to encourage “diversification” and pension funds, 401K’s, IRA’s and mutual funds bought these instruments under the assumption that they could not fail. After all, an illegal alien would never walk away from a half million dollar home they purchased with a no-doc loan would they?
Models of Monumental Stupidity
In this writer’s opinion, there is nothing more dangerous in this world than a drunk driver, an infant playing with garbage bags, George W. Bush in charge of the military, or a bankster feeling they can act with impunity. In 2005, while doing what I enjoyed doing, reading articles from newspapers from around the internet, I came across this article (plus others) titled Banking on illegal immigrants from CNN.com and of course another one about an illegal getting a $750,000 home in Denver. The banksters were all giddy about this “untapped” resource (their words, not mine) for expanding the “American dream” in the hopes this boom would continue. I knew this boom was over in 2004 when I saw a condo conversion down in my area flip seven contracts in one day for a two bedroom one bath, but these articles just confirmed my worst fear:
We’ve lost our ever lovin’ freaking minds.
The banksters didn’t care because the concept of “responsible lending practices” went out the window when they were not going to get stuck with the paper and Wang Ho Dung would buy shares of it when he took a second mortgage out on his home in Beijing between working five jobs and fathering three hundred boys for the People’s Liberation Army. The coming crash in China has already been commented on by this writer but let me warn you now, it will cause headaches for the U.S. banksters who have lost their ever lovin’ freaking minds. So the variety of insane plans: no doc, Alt-A, subprime, no-doc jumbo, no-doc Alt-A, no-doc doc doc doc and my favorite the “psst, hey buddy, wanna buy a home” loans were created and anyone and everyone who could fog a mirror tried to get a home. To make matters worse the mortgage brokerage industry expanded so they could make a buck and that overwhelmed not just the banksters who had to order more “APPROVED” rubber stamps but the entire system of permitting, appraisal, inspection, etc. became somewhat suspect as everyone just wanted to “move” the home and get bodies in and out of contracts, be they legal citizens or not.
The issues that these excesses to the other extreme in the lending and securities industry of course created a problem that nobody wanted to acknowledge. Like that pesky little geek at Chernobyl who said “I wouldn’t push that button if I were you” the models were ignored and from what I understand the variances created by the overwhelming input did nothing to indicate that there would be a series of cascading failures due to the large number of mortgages written nor who they were issued to. Of course the problem with models, as in all computer programs is the old theory “garbage in, garbage out” and thus why there was no accurate mathematical model that could include “common sense” as part of the equation. The common sense aspect was just brushed over as for over sixty years the commercial banks served that role by insuring they got to know their customers and actually validate the information gathered before approving five hundred thousand dollar loans for people with forty thousand dollar per year incomes and no money down. Thus the theory of the infallibility of the models is now obvious and we need to fire those Indian programmers and blame our education system for the shortfalls of not producing enough engineers. The entire problem could have been avoided thus, if we had just given the NEA twenty trillion bucks to educate our youngun. Or better yet, actually regulate the industries that we are supposed to be regulating instead of “trusting” their word as good enough and rubber stamping paper work, year after year.
Needless to say, that brings us to today, March 20, 2008.
Wile E. Coyote meet Gravity
The collapse of Bear Stearns last week was not hard to predict, foresee or wonder about. If you look at the one year chart of the stock price and can’t figure that out, then you could have a problem with vertigo or need to quit binge drinking with American Idol contestants.
Needless to say the collapse of a Prime Dealer was viewed with great alarm by the Federal Reserve which is why they plunged head first into the problem and did what they had to to “stabilize” the market. But the Federal Reserve does have a limit to it’s budget; they have expended about sixty percent of their balance sheet bailing out Wall Street under the Benron Bernanke “Inflate or Die” banner. This illustrates the problem. The school marm who is in charge of the largest central bank in the world has no real world experience to how the banking system functions nor the real business world. Those of us who saw this problem coming in 2003 prayed Greenspan would live until he was 150 and would create another fantastic yet disastrous solution to all our problems in 2005. Instead old PT thought it was more important to travel the world with his reporterette wife and left us with, ugh, Bernanke. He’s a nice guy I’m sure but in way over his head. He was supposed to be the Fed Chariman best equipped intellectually to cope with the threat of an economic depression. That would be wonderful if it were 1929 and we needed a replacement for Roy A. Young, but it’s not 1929, there is no internet boom and P.T. Greenspan just handed the keys to him and said “I’ll stab you in the back later, when it really matters” to which Benron thought “I wonder what he meant by that comment?”
Now that moment, that potential implosion is upon us. On Tuesday a faux rally was engineered one more time on the idea this Fed Funds rate cut would be the one to finally bail us out. In reality, the market internals said otherwise. They called “nonsense” on this rally and the earnings reports on Goldman Sachs and Lehman Brothers were celebrated by Bubblevision (CNBC) and proclaimed to be the savior of our economy, again, for the 318th time, and that the sun would come up tomorrow.
Well, the sun came up on Wednesday, March 19, 2008. It was hot down here in Florida. But it was hotter in the financial centers around the world. The story (Bloomberg: Goldman, Morgan Stanley Use Fed’s Wall Street Window) of Goldman Sachs and Lehman going to the discount window the minute after they reported on Tuesday to get $2 BILLION each (that’s “B” as in BILLION) have persisted for twenty four hours now and begs the question: If earnings are so great, then why beg for a loan???Add in the damning evidence of a massive capital flight to quality and safety as illustrated below in the charts of the 1 Month Treasury, 3 month Treasury and 2 year Treasury and you start to get the idea…..
Yields do not CRASH like this unless there is a massive flight to quality. Add in the events of tonight as I finish penning this and the crash in China I’ve warned about appears to be under way. For those that do not understand what I mean, well, here:
The first chart is a weekly chart through the end of last week, the second chart as of approximately 2230 EDT on 3/19 (3/20 Shanghai time). It’s down 5% plus. It’s cratering. They are scared and have never been exposed to the gyrations of food shortages, energy shortages and a financial crisis under a capitalist system. The problem is it’s not a pure capitalist system so panic will rule the day if the Communists can not use their 50% plus control of all the stocks to stop the slide. The problem? There are margin calls impacting U.S. companies which started earlier in the day and appear to be accelerating again, just like last week. Thus why we could be at that moment where Wile. E. Coyote looks down and realizes he’s not a bird and that gravity still works. The lack of any ability to raise cash, to cover margin calls, could crater this market later today. There’s nothing much left to sell. They sold gold. They sold oil futures. They sold grains, metals, speculative paper, you name it, if it could be sold, it was today. The last strong sector, the commodities and materials sector was sold off hard today. This means the bear market is now almost in full swing. The activities and games played by the big boys to kill the shorts took that money out of the markets. The fallacy of a “real estate bailout” has everyone from the Century 21 office down the street from me (she looks more and more like the Maytag repair guy from the old commercials) to the average schmuck laughing out loud at the concept that the government will buy up all the bad paper in this country to save the day. Congress, as usual, will address the problem after their in depth investigative committee returns from seeing the real estate crisis first hand in Monaco and do something to make matters worse. In the history of bear markets when there are no buyers, that leaves sellers and going into a long weekend that could be a most dangerous formula for those that wish to be the tall blade of grass and do something foolish. When everything is being sold except for the safest of Treasuries, then you have to be concerned that we are heading into a major move. Yields do not drop to 0.30% on a 3 month T-Bill unless there is a whiff of panic in the air.
I smell panic. The rumors are flying like smoke from a forest fire. Where there is smoke, there is fire. I would advise against trying to play the role of smoke jumper now unless you have a clue as to what you are doing or a professional investment adviser who is not just another CNBC salesman type.
Today could just be another day.
Or it could be historic.
Either way, after so many people have been warning about this for so many years now, you can not say you have not been warned.