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September 19, 2008

While you're all whining...

I'm endlessly amazed by the amount of bullshit floating on the right and left of the blogosphere when it comes to economic policy and financial markets.

Frankly, none of you seem to GET IT. I'm talking about those of you with advanced degrees. The rest of you mooks come across as little more than fucktards.

Here's the reality...

1) This BAD DEBT is not really BAD. BAD indicates complete non-performance and absolutely worthless collateral. Neither is the case, even in deep subprime portfolios overweighted with CA, specifically Inland Empire, mortgages. PERIOD. HOWEVER, it's all being priced as if none of the loans are paying and the collateral is all worthless. Which is entirely irrational. What's going to happen now is a cashflow analysis. And it's going to show I'm right. And people will finally start thinking again and acting from a position of confidence, not fear.

I LOVE mark to market accounting but in this case, people are using it as a rationale to drive stable, but wounded, companies over the edge. The reality is these loans aren't worthless. They're producing cashflow and the collateral has a lot more value than the market indicates.

2) Short selling ban is a FANTASTIC thing. Fuck your ideology, Darwinian sensibilities or other bent. Naked short selling, especially in an extraordinary market like this, is nothing more than an invitation for vultures to come in and start eating the living. This isn't a typical market... it's completely irrational and short selling is driving a lot of it. For those of you that don't know (which is the overwhelming majority in the sphere), here's how this works.

Company A has a decent but weakened balance sheet due to mark to market asset write-downs (the assets aren't necessarily worthless, they are still providing cash. But, because of accounting rules, because there is no liquid market for the securities, they have to be marked to zero). Still it has enough capital to meet it's covenants and counterparty commitments. Short B comes in and starts shorting the equity. Heavily. In one day it drags down the stock 5-10%. The next day when A goes to raise money in the capital markets (called funding, this money is the lifeblood of investment banks), the people lending are charging higher interest rates and requiring A up capital reserves because they are nervous due to the stock price. A coughs it up, artificially weakens their cash cushion and goes on with business. One of it's counterparties catches wind of the more expensive funding, puts that info together with the stock decline and decides it doesn't want to accept A's business anymore which means A can't put through trades for it's own book (a major profit center) or for it's customers (an even bigger profit center). Other counterparties catch wind of this and stop trading with A as well. Pretty soon, it can't conduct business because no one will take the other side of the trades. Then the funding dries up and suddenly A can't meet short term, revolving obligations. It's cash cushion declines precipitously, activating debt covenants and freezing still more capital. The shorts continue to pile on and soon the cash cushion is wiped out and the firm is forced to seek a buyer, help from the Feds or the sweet embrace of the US Bankruptcy Court in Manhattan.

Was it stupid for A to be levered so highly? Yes. However, none of the panic would have occurred if the shorts hadn't been allowed to pile on. In an ordinary environment, I love short selling. I've used it many times, not to mention selling calls into a rally I knew was unsustainable. However, what is going on now (and people are bemoaning the loss of) is the financial markets equivalent of yelling fire in a crowded theater. When people aren't acting rationally to begin with, it's stupid to allow people in the audience to start a panic.

That's just one aspect... what about the weak investment bank with a massive long position in one company that a short seller sees on their disclosures and decides to start shorting? As the short piles into the stock of the company, the investment bank's forced to liquidate it's holdings in the company, thereby driving the price lower, accelerating the selling by the shorts. At the end, the weak investment bank has lost millions and the ordinary shareholders who got trapped in the middle are just screwed. But the short sellers have made a killing.

Tell you what... I want to SEE what shorts are shorting. Specific companies, and specific positions. Let's level the playing field.

3) When does it stop? Why, when housing prices stop falling. When will housing prices stop falling? When there is financial liquidity back in the market and people can get loans to buy houses more easily. When will THAT happen?

WHEN THE MARKET STOPS TREATING ALL MORTGAGES LIKE RADWASTE.

That, in a nutshell, is THE deal. And that's what the Fed's are doing. And the people screaming about it are either delusional or stupid.

4) We shouldn't bail out people who make bad decisions. It introduces moral hazard.

Fuckall... I'm going to physically assault the next person who says this within earshot. Then I'm going to bend you over and assrape you. Seriously, THAT'S how motherfucking sick to death I am of hearing this. What, did you all wake up and think you were Bill Poole?!?!?

YES, some stupid people who took too much risk are going to bailed out in all this. However, it's not the ultra rich shareholders who will profit... it'll ultimately be the Government. The shareholder's equity has been wiped out in the case of Bear. And AIG. And Fannie. And Freddie. And Lehman (I got a ringside seat to this one!). SOME of the bondholders may end up with something, but even that's questionable. The only thing certain is that taxpayers are going to make off like bandits.

Company 1 has $300bn in assets and $200bn in debt. Suddenly, the market seizes up for some of the securities 1 holds in assets. The value, according to mark to market, drops to zero even though the assets are still performing and have cashflow. Still, they follow accounting rules and write down the assets, taking a $120 bn hit to assets. Which means they now have $180 bn in assets floating $200bn in debt. Which means equity is negative $20 bn and 1 is insolvent. The Feds step in, wipe out the shareholders, agree to cover the debt service with the income earned by the assets and hold the assets to term, if needed. The market, eventually, stabilizes, becomes rational and realizes "Hey. That shit really IS worth something" and the market returns. The Feds sell the assets for $250bn and settles the debts for $190 bn, realizing $60bn in the process.

Simplistic? You betcha. The mechanisms and actual workings are far more complex. However, that's HOW it will look. And the taxpayers will be better for it... not to mention the fact that they won't have to live through an economic depression.

5) But McBlogger, our debt (and the dollar) will be worthless. Bullshit. We're all so interdependent that the central banks around the world will be thrilled to death that we're getting a handle on the problem so the market can stabilize. THAT'S reality... MOST central banks, especially those not under the control of UoC Friedmanite ideologues, crave stability. And they'll pay a hefty premium for it.

6) Now we're a banana republic. Fuck. This one came from Sean-Paul at the Agonist. We've had our differences before but for the most part I tend to agree with him. Still, on this, he's retarded. Banana Republics lever up far over GDP. We haven't. We're not even close. We're also not turning into a socialist system. This is an asset work through. Don't try to glamorize it.

7) Oh, the government will just deval the dollar and pay the debt with worthless money. Nope. Not. Gonna. Happen. Either. For one thing, the actual cost of all this is going to be FAR less than many talking heads anticipate. For another, if Obama wins deficits are going to start declining. Dramatically through a combination of mechanisms. Which will strengthen the dollar and the value of federal debt. The Government will more than likely end up making money on all this.

8) We really need more regulation. ABSOLUTELY. But what we also need a lot of is ENFORCEMENT. We've had to jump in and save things because people became irrational. What we need now are mechanisms that will make irrationality very expensive.

9) What about the poor homeowners who got hoodwinked into subprime? Cry me a fucking river. Yes, there were a minority of consumers that got screwed and were taken advantage of. However, the vast majority just wanted the house, consequences be damned. They made the decision and willfully ignored the consequences of their actions. Did it ever occur to them that people who made $4000 per month might have issues paying a $3200/month mortgage? Sure, I can blame the banks for THEIR poor decision making, but most of the consumers who took these loans out made an irrational decision.

Even still, many of them are making payments and will be able to refinance. How do I know? Because I'm aggregating the damn loans. Daily. I see them come through one after another. It's happening so stop worrying about the little old lady losing her home.

10) What about efficient markets? Well, they never were efficient. It was always a stupid idea. Market's appear efficient, but that appearance is deceiving. Markets are made up of human beings who act irrationally at times. There's nothing efficient about irrationality.

Frankly, you all need to take a step back, suck in a deep breathe and chill the hell out. All your whining about whatever your particular problem with this is makes you look stupid because you fail to realize that the alternative is FAR worse. The Hoover moment, as another blogger put it, is to do nothing. And look how well that worked for Hoover the first time.

And just so you all know, I DID lose money on LEH. However, it wasn't just a huge amount (it was less than $30k) and most of my other holdings are doing well. This ain't coming from a place of "I got hurt"; I knew the risk when I tried to catch the falling knife. However, I also know that LEH's failure was a market breakdown, an irrational decision by the market to throw the baby out with the bathwater. Which is why, even now, the vultures are circling the corpse of LEH.

Posted by mcblogger at September 19, 2008 01:53 PM

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Comments

I heart you a little more for this post. Finally, someone making sense. I knew all the freaking out was not helping and was mostly bullshit, but I admit that this is not my area of expertise.

Next time me and anna are in your town you need to school us on this investing game for real. I like money, but have never been that good at actually making any.

And just remember that after assraping a person Miss Manners recommends sending flowers and a nice "Thanks for the memories" note, hand written of course.

Posted by: just another vet at September 23, 2008 06:12 PM

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