Birds And Glass Doors

Have you ever seen a bird flying into its own reflection? For whatever reason, the impact of skull on glass does not seem to teach these otherwise brilliant (read: they can fly!) creatures not to keep doing the same thing over and over again.

Although Alan Greenspan has reluctantly admitted that perhaps he should have seen some of the potential impact of the excesses created in the real estate house of cards, those outside the Federal Reserve to seem to almost unanimously agree that it was Al's wall street-friendly interest rate policy that allowed so many borrowers, from private equity firms to subprime home owners, to spend too much for assets over the last five years, leading to the repricing which is at the root of the current credit debacle.

So as the global equity markets started to recognize the gravity of the challenges facing our economy over the weekend, and it looked like the most sophisticated investors in the world - U.S. equity markets investors - were starting to follow suit with the S&P500 trading down over 4% in the futures market this morning, what did the Fed do?

What else but slam its head into the glass door of loosey-goosey lending (yes that is a technical term) by cutting the federal funds rate 75bps before the market opened this morning?

Like Bush's proposed "bailout", this was a move to change the psychology of the market, and perhaps it had its intended impact as the market avoided major losses with the major indices ending the day virtually flat.

However, this does not change the basic reality that we live in a world where asset prices have been overly inflated by excess liquidity and as the reality of the obligations that people have incurred comes to roost ugly things will continue to happen.

Just today the SF Chronicle reported on a dramatic 421.2 percent increase in foreclosures in Cali for the fourth quarter of 2007.

I don't know about you, but I have become almost numb to the bad news coming out about the housing sector and not just because I have been paying attention for a long time. It has become as commonplace as the murder in the inner city, and it is not going away until we go through the healing process necessary to overcome the hangovers caused by the excesses of the recent past.

One of the greatest lessons that a parent can give a child in my opinion is to allow her to suffer the consequences for her actions, because someday in the real world, she will have to stand on her own two feet. For some reason, our Federal Reserve feels like it needs to baby those who made poor decisions in deploying capital over this last cycle with a bottomless basket of puts...but anyone who looks will see the glass door that we are banging our collective head into once again. Who knows, maybe if we close our eyes it will go away or better yet, maybe like the monster in Will Smith's recent flick Legend if we bang our head hard enough the glass will break.

The Fan

As the world markets plummet on MLK day here in the States, the worst-case scenario that I have worried about for a few years now seems like it may be starting to unfold.

For those who haven't spoken to me on the topic, the basic idea goes like this:

When people enter CDS contracts, most of the time they don't do much work on their counter-parties in terms of evaluating their credit. In other words, much like when you or I get flood insurance for our homes we don't ask our insurance company for its financial statements to make sure they will have the cash if we need to draw on it, people who bought default protection in the CDS market often did not evaluate the credit-worthiness of their counterparties.

Some suggested to me over the last few years that this was not necessary because the entities they were trading with were AAA rated, or that they were AAA rated subsidiaries of other entities.

As it turns out, there was counterparty credit risk in these contracts, and it is starting to materialize...and the repercussions may be massive as the counterparty is unable to make good on his side of the insurance contract (for more on CDS, see my earlier post here: Crazy Derivatives Stuff).

Doomsday happens if banks have to step in and make these contracts whole because they were market-makers in facilitating the trades. Haven't seen this piece of the pie emerge yet, so I am hopeful it does not. But being forthright about exposures has not been high on the list of qualities of U.S. financial institutions of late.


It appears that one institution alone, discussed here by Bloomberg, has more than $60B in CDS exposure that it just "can't pay". In other words, it is like you paid your insurance premiums on your flood insurance and then Katrina hit and Bam - they didn't pay...and not because it was "wind" damage ;-).

ACA Customers Allow More Time to Unwind Default Swaps

The problem with this is that we are only the the beginning of the default cycle and if there are already these kinds of issues, this may set off a waterfall effect as commercial real estate, credit card and autoloan ABS, and corporate loan defaults start ticking up.

In other words: we ain't seen nothin' yet.

Who Needs A Put, We Get Bail Outs!

It seems like the twilight zone when stepping back and surmising the last year from 50,000 feet.

Last spring was one of the strongest bull markets in recent history, and the economy (and real estate market) was humming along with seemingly unbreakable speed.

Although the writing was on the wall for many of us, bringing profits in being ahead of the curve in shorting some of the worst offenders of the subprime crisis, most people thought we were doomsdayers and brushed us aside.

I remember vividly a number of conversations with friends who graduated from HBS in the Spring, which consisted of me trying to explain to them that we were headed into a seriously challenging economic situation and them nodding while their eyes said: "sure buddy...I'm off to my sweet consulting gig...you stay here and come up with more conspiracies".

Now, just 8 months later, the fact that we are heading into an economic downspiral is of such consensus that Bush and Pelosi are having friendly jabber about it.

What started as a "put" through continued rate cuts has now become a full on economic bailout as the President and the Congress are working hand in hand to come up with what they are terming an "economic stimulus" package.

It is discussed further in this article: Bush Nears Plan That Economists Say May Boost Growth

The punch line is this: we are going to try to deficit spend just a little more to somehow buy our way out of a leverage-induced economic cyclical downturn.

My take: this is election year politics at its finest. $150B is peanuts to this economy in the first place, not to mention the fact that at a fundamental level this is perpetuating the kind of overly-leveraged fiscal policy at the household and country level that got us into this mess.

We borrowed too much, can't pay our mortgages (and soon auto-loans, credit cards, commercial real estate loans, corporate loans, etc), so how do we fix this problem? Borrow more.

Unfortunately, I think something like this might be needed for psychological reasons (and on the campaign trail) if nothing else - we need to trick at least some people out there into thinking that things are going to be OK in the short run, as most of us are so myopic that long-run payoffs don't register.

For those of us paying attention, as I mentioned in my last post, there are starting to be some opportunities to invest in strong companies for the rebound. Not to mention all of the super-sweet stuff happening in the world of technology.

There is hope on the horizon...but in the foreground let's face the fact that there is more carnage to come.

Happy 2008!!!

Been awhile since my last post as I have been out of the country in Australia after a brief stop in Texas for the holidays.

Of course you all have noticed that the carnage has continued unabated and even those idiots who didn't want to admit that the problems in the credit market would spread beyond "subprime mortgages" have now had to face the hard truth that we are in for a challenging environment in the credit markets and capital markets in general for some time to come.

I must admit, though, that the pessimism in the equity markets over the first couple of weeks in the year has had the bullish side of my psyche drumming its fingers and looking for cheap buying opportunities. Even financial stocks like CFC's knight in shining armor BAC are starting to look somewhat interesting, as BAC is trading at over a 6% dividend yield right now and has just guaranteed itself the position of leading mortgage originator in the first half of the 21st century.

WAG has gotten so punished that it is trading at a reasonable ebitda multiple of just over 8x, and especially if you believe that our drug-addicted culture is going to produce fatter margins for complementary products sold in drug stores, as this dominant american franchise continues to have the prospect to enjoy the benefits one might start to take a closer look. I know I am.

Even the king of fake revenues through 0% financing and other shenanigans, GM, is so beat up that if one can get comfortable that GMAC is no worse than a zero (i.e. there is no liability there...I wish I knew more about this issue, but unfortunately, I don't) there might be something there. We have to believe that the largest auto manufacuturer in the U.S. can somehow benefit from a weak dollar. At least to the tune of greater than a $32B enterprise value. Remember. GM's revenues are over $180B. It should be able to convert SOME of that into profit. Assume 2% operating margins and you are less than 9x. Juice it up to 5% and you are less than 4x EV/EBITDA...Maybe I am just patriotic, but I am optimistic that in the long run, somehow, some way, american auto manufacturers will make money selling cars.

These are just a few of the nuggets that are starting to glisten in the duststorm of the markets out there. Tough to say that any of these have found a bottom yet, but at a certain price, even mud is worth buying if you think people will someday need bricks.

Enough optimism. There are sure clouds on the horizon. More on that later.

A Picture Is Worth (-)Trillons

Thanks to ML for this photo that shows graphically what is obvious to anyone paying attention - we have had a "slight" bubble in the real estate markets over the last coupla years.



The font is too small to read so let me translate: greatest bubble in the past - scaled to 125%. Today - scaled to 200%.

Let's just say I am not being paranoid (for once) when I say this will take a little while to come back to reality.

Let The Backlash Begin

To be honest, I was kinda bummed to see my former employer's name mentioned in the first major headline on this topic, but I can be certain that they will not be the last. I will be absolutely shocked if we don't see certain rating agencies among all of the largest creaters of these instruments in future similar headlines.

Sorting through the mess that is only beginning to be borne by the purchasers of this junk is going to take years and lots of effort. For an entrepreneurial attorney, becoming an expert in this area will likely reap rewards over the next few years:

Lehman faces legal threat over CDO deals

Lehman Brothers faces the threat of legal action by municipal councils in Australia over the sale of high-risk collateralised debt obligations by the Wall Street bank’s local subsidiary, Grange Securities.

Why Is the Bad So Bad

Thanks to SK for forwarding this article from the Fool walking through the nuts and bolts of why the Bush "bail out" is so bad. If you have a few minutes and are interested in a quick summary of some of the implications of the current attempt at putting a band-aid on a compound fracture to save some face on wall street, I would take a look.

Bush's Bailout Bait-and-Switch

One note though: I think stopping the wave of ARMs is not a bad idea, I just don't know why this can't be done through private sector action. Why can't the holders just re-negotiate terms with homeowners en-masse if necessary? I know there are challenges of collective action among other things, but if these financial institutions are sophisticated enough to tranche up and price a CDO^3, can't they pick up the phone and talk to a homeowner who is about to be pushed off a cliff?

"Put" Is An Understatement

Things have surely turned dark quickly. It was just three months ago that the concept of a "put" to the government was somewhat in question as I discussed in September.

With three consecutive rate cuts not sufficing to convince the market that the put is strong enough (the market fell 250 points in less than 2 hours yesterday after the 25bps cut was announced), the central banks decided to pump some liquidity directly into the economy as discussed in the following article:
Banks act on meltdown fear

The Bank of England joined four other big central banks around the world yesterday in emergency action designed to prevent the worsening credit crunch derailing the world economy.

These moves coupled with the response to the government's recent bailout attempt in the subprime market have only done more to stoke the fears that the worst is only yet to come: Bush's Subprime Mortgage Freeze Stymies Bond Market

I wish that I could say that my sentiments were improving or that somehow these bail out attempts seem to have hope of preventing the onslaught of massive defaults that we are beginning to see emerge, but at this point, the spiral only seems to darken, and even continued attempts at bail out seem doomed.

Yale Continues The Progressive Strategy

This is a great sign. It looks like Yale already followed Harvard's lead in dropping tuitions. Hopefully the tide will swell...

Yale to Join Harvard in Easing Student Cost, Schools May Follow

Yale University next month plans to announce a student aid plan that could rival Harvard's initiative to ease costs for ``middle-income'' families.

Again what impresses me about this is both the moral fiber that these schools are showing by doing the right thing, but it can also be seen as a private market solution to the problem of increasing costs in higher education. This, among other factors, has been a major burden for the middle class. It is exciting and reassuring when powerful actors do the right thing to help solve the problems of the marketplace.

Harvard Leading the Way

This is a really cool article about Harvard's new policy regarding financial aid. It not only shows how progressive leading universities are now getting with regard to making a real commitment to socially-mobile education policy, it also shows that private sector reform can lead the way to education reform with the right leadership. I hope this is a sign of future reform in this direction as education truly is the most important piece of the puzzle.

Harvard Targets Middle Class With Student Cost Cuts

Harvard University will cut the costs of attending the Ivy League school by as much as 50 percent for families that earn $120,000 to $180,000 a year, making access easier for ``middle-income'' students.

These families will pay 10 percent of their yearly earnings to send a child to Harvard, the Cambridge, Massachusetts, university said today. The payments decline on a sliding scale, with those making less than $60,000 attending for free. The school also eliminated student loans, saying they will be replaced by grants as needed.

Case in point: if we had a better public education system, perhaps people buying homes at the peak of the real estate cycle with adjustable rate mortgages might have anticipated that this was not an ideal situation for the family budget.

On an unrelated note...
I just read an awesome piece on the credit crisis by Bridgewater. Will try to post about it later. But the punch line is this:

Just because I have been silent on increasing problems in the credit cycle over the last couple of weeks does not mean I feel they are dissipating. Bridgewater agrees, and although slightly more optimistic than me, they are only slightly - and probably ten times more specific in their fears.

CDS = Crazy Derivatives Stuff

Although this blog post is somewhat sensational (even more than me):
CDS Phantom Menace
It did have some pretty sweet pictures of how big the CDS market is getting.

For those who don't know, basically a Credit Default Swap (CDS) is like an insurance contract. In principle, it lets someone who wants to own a company's bonds but doesn't want to risk the company defaulting buy insurance from someone else, who is willing to pay the buyer of CDS protection the face value of the bond if a default happens. In theory, these contracts are used for hedging purposes and are great for isolating the "default" risk of a credit instrument from other risks like the risk of interest rate changes.

In practice, as you can see from the below graphs, the CDS market has become an area where people can either hedge entire portfolios of securities by buying a portfolio-based CDS. Or it allows people to speculate on the implosion of other companies by basically "shorting" the bonds (i.e. if you buy CDS protection and the company goes kaput, you get paid much in the same way that if you short a company's stock, you get paid if they go belly-up).




What makes the above graphs scariest for me is what is referred to as counter-party credit risk. Basically this concept is why people like to put their money in FDIC-insured banks - if you enter a trade with the bank (i.e. I give you my money, you give it back when I need it with maybe a little interest), you don't want to worry about them renegging on the deal.

Well in the wild world of CDS-trading, not all counterparties are as credit worthy as the FDIC. In fact, according to a structured derivatives expert I spoke with yesterday, and as discussed in this oldie-but goodie article: Buyers and sellers of CDSs not all sellers are created equally. In other words, there is a chance that the person writing your insurance won't be there if the fan really gets hit.

Given the current conditions of the market, such a scenario does not seem that far afield. Let's just hope I am just being paranoid.

But if a recent blog post regarding CDS exposure in insurance cos is any indication, there are major cracks in this market already beginning to form.

Larry Summers Says: Wake Up

Lawrence Summers, former Chief Economist of the World Bank Secretary of the Treasury and President of Harvard, wrote an OpEd this weekend in the Financial Times that echos much of what you have read on this blog. The full article is linked here: Wake Up to the Dangers of a Deepening Crisis

Several streams of data indicate how much more serious the situation is than was clear a few months ago. First, forward-looking indicators suggest that the housing sector may be in free-fall from what felt like the basement levels of a few months ago. Single family home construction may be down over the next year by as much as half from previous peak levels. There are forecasts implied by at least one property derivatives market indicating that nationwide house prices could fall from their previous peaks by as much as 25 per cent over the next several years.

...

Second, it is now clear that only a small part of the financial distress that must be worked through has yet been faced. On even the most optimistic estimates, the rate of foreclosure will more than double over the next year as rates reset on subprime mortgages and home values fall. Estimates vary, but there is nearly universal agreement that – if all assets were marked to market valuations – total losses in the American financial sector would be several times the $50bn or so in write-downs that have already been announced by big financial institutions.

...

Third, the capacity of the financial system to provide credit in support of new investment on the scale necessary to maintain economic expansion is in increasing doubt. The extent of the flight to quality and its expected persistence was powerfully demonstrated last week when the yield on the two-year Treasury bond dropped below 3 per cent for the first time in years. Banks and other financial intermediaries will inevitably curtail new lending as they are hit by a perfect storm of declining capital due to mark-to-market losses, involuntary balance sheet expansion as various backstop facilities are called, and greatly reduced confidence in the creditworthiness of traditional borrowers as the economy turns downwards and asset prices fall.

Thankful To Avoid Landmines

I am glad to be in school right now so that I don't have to face the pragmatic consequences of the largest train wreck in history that we have been watching since June.

Another land mine was revealed recently when it Citi and others acknowledged that they basically wrote put options on CDO liquidity. For those who aren't options savvy, in English this means they agreed to bail out up to $25B of CDO's to the extent they run out of money.

This article discusses the details, but to me this is just one more in a chain of events suggesting that the full brunt of the credit unwinding that we are currently in the midst of will not be known for at least a year and maybe longer:

The $25bn Citi CDO liquidity put - and who else has one

Happy Thanksgiving!

Gphone = G reat

Google rox. As the blogosphere has been buzzing about they are pushing - not a phone - but an open source type alliance for building the next generation of cell-phone operating systems and software.

Here is a video that will make you smile from the Official Google scoop on the matter:

A New Website For Predatory Lenders

This site is really funny:

Predatory Lending Association

A nice source for all the know-how you need to be an awesome predatory lender.

A Gem From 2005

I just stumbled on this gem of a press release from S&P in April 2005:

S&P Comments On Risk In Newer Mortgage Products, As Discussed At Industry Event

There are really a lot of good quotes in here for a one page article, but here is a good one from a research analyst discussing Zero Amortization Subprime loans:

"Despite these risks, there isn't any performance information available on any of these products just yet because they are still very new to the subprime market. Due to the time lag associated with delinquencies and losses in RMBS pools, and the nature of these risks, it will be several years before the product performance is tested. It is anticipated that all risks associated with these loans have been adequately covered."

Well...I guess they have been "tested" now. So much for adequate coverage.

Brutality Continued

Well it is official for anyone who ever had any doubt - the biggest distressed cycle in history is underway.

Remember the ABX charts I first posted in June? Take a look at them now. From high to low, these are BBB, A, AA and AAA (yes, TRIPLE A) Asset-backed security indices.

This is really insane and so much worse than the worst part of the summer it is scary:





What these mean in English is that even previously A rated securities are almost worthless. This surely has to be a technical factor - there is no "bid" for the massive glut of CDO-related junk that is being unloaded, and the SIV-fake bid apparatus is apparently too little too late.

Next steps - increasing defaults in completely "unrelated" asset classes like credit-card receivables, auto-loan receivables, corporate bonds and others. Things will unfortunately get much uglier before this is over.

My biggest hope is that it can be spread over a few years rather than a snowball at once. I can't believe it but I am actually a bit supportive of the interventionist tendencies at this point.

Unfortunately, I am not sure even a fake bid will convince anyone that the house of cards is still standing.

Psychology Of Great Investors

I saw a speech last week by a guy named Mark Sellers, the principal and founder of a small hedge fund called Sellers Capital. While the guy may not be a "household name" he was an impressive speaker and really stood out among the many great speakers I have seen in my time here at this institution.

What stood out in his talk were what he called "the most important personality traits of great investors" that he has observed in investors that he follows and studies.

He thinks that these are hard-wired...so if you don't have them, too bad. Not sure if I agree about that point, but here they are in no particular order from my notes:

1) The ability to buy stocks while others panic and sell when others are euphoric.

2) Being obsessive about playing the game and wanting to win. First thing they think about when they wake up is a stock or risk in the portfolio. They have a hard time in personal relationships...their head is always in the clouds.

3) Willingness to learn from mistakes. Intense desire to learn from mistakes to avoid repeating them.

4) Inherent sense of risk based on common sense. For instance, in Long-Term Capital a great investor would have stepped back and said "hey…we are over-levered". The greatest risk control is common sense, and people ignore common sense.

5) Confidence in their convictions and stick with them even when people criticize them. This is why he focuses on large concentrated bets.

6) Important to have both sides of your brain working. Need inventive ways to solve problems. The goal here is to use creativity to be an entrepreneurial investor. Of course you need to perform calculations and have a logical thesis, but you need to be able to step back. And most importantly – you must be a good writer. Almost always a fund blows up because of quants.

7) Ability to live through volatility without changing your thought process. It is hard to average down. Few investors can handle the volatility. People irrationally equate short term volatility with risk. Short term volatility is NOT a risk. Just don’t sell.

The Best Headline Ever

This is really the coolest headline I have seen in awhile...

Nintendo to sell Wii in China

It represents the future: growth in China + growth in wicked-cool content distribution channels.

I went to a talk last week with the new manager of Fidelity's famous Magellan fund. He said he is not worried about global growth even with a domestic slowdown primarily because of China's unstoppable expansion.

I kinda agree...the future is gonna be cool.

The Schism Continues

I didn't realize when I posted Calling Another Top that we would shortly head into a few consecutive bloody weeks. But I guess I continue to underestimate how much people really have faced the fact that we are entering a prolonged period of a credit cycle.
Thankfully...I believe the technology side of the economy is going to continue to perform and will keep us booming ahead.

There was great news after-hours today when Microsoft beat earnings, only a day after investing in Facebook at a $15B valuation. Both of these things are signs of a strong and agressive tech sector. Not to mention the fact that lifecasting on www.justin.tv and other recent developments show that innovation is continuing at a rapid pace.

I am sure all of you saw the Merrill Lynch write down yesterday (biggest in history) and there was another article in the Journal today about CDO's and how they are to blame...yada yada. I feel like that horse is so dead and beaten that everyone can see it rotting. But then again, I thought everyone could see the house of cards last year.

I think we may start to see some positive movement again in the equity markets (and my PA will for sure with MSFT and JMBA, who also beat revenue estimates after hours...plus NTDOY raised their forecast again). But I am not sure that I am gonna cover my financial shorts. Still more ugly to come. And people don't want to face it.

P.S. Bank of America apparently is shutting down their I-banking group or scaling it back significantly. More to come? I don't see how there can't be. No liquidity - no balance sheets - no pitches - no deals - no fees - no bankers.

Oh, and check out www.twitter.com if you haven't yet. People are obsessed.

Its Raining Outside

The fall is officially here in Cambridge and the darkness outside is mirroring the hammering that the stock market is taking today. The financials are getting pummelled in the wake of continuing write-offs and the recognition that people like me are not just doomsdayers for no good reason. In addition, if the stock price is any indication it looks like people are predicting the worst for IMB (one of the largest remaining mortgage brokers) - for what it's worth, I think the jury is still out on this one.

It is not just me who thinks that the bailout agreed to earlier this week is a bad idea. Apparently Mr. Greenspan thinks that this is significantly different from the LTCM bail out and that what it amounts to is an attempt at creating liquidity in a market where it doesn't exist. I see it as creating a false "bid" where there are no buyers, but this could be the same thing - i.e. making a "market-maker" where noone wants to be caught holding the hot potato.

And for good reason. Apparently one of the "SIV's" that the fund is supposed to bail out is now in default. This one has only about $6b worth of assets, but I could imagine it is the first of many that are on the brink: Cheyne Finance SIV Defaults on Commercial Paper

Here is the article discussing Greenspan's critique: Greenspan criticises ‘superfund’

Bailout Murmurs

As expected the banks announced yesterday that they are banding together to execute the bailout of their structured credit vehicle holding cells (referred to as SIV's).

This article does a good job walking through the implications step by step (thanks to WLH):

Enron, Subprime and the Derivative Disease

Led by names like Citigroup (NYSE:C) and JPMorgan (NYSE:JPM), the supposed "super conduit" seeks to make attractive assets which now seem dead orphans. A number of banks and other dealers are increasingly illiquid and face losses on supposedly off-balance sheet conduits or structured investment vehicles ("SIV"), losses that in extreme cases could damage their solvency.

To be fair, it looks like the Treasury is already responding to the swipes that people have taken (similar to the sentiments expressed on this blog and in articles like this: Paulson Credit Push Earns Jeers From Free-Marketers) that this bail out is not the best medicine for bad behavior.

Paulson Plans to Review Off-Balance Sheet Bank Units

At the same time, in the same speech he mentioned the obvious fact that many of us have known for quite some time, to which the markets reacted with a downturn over the last few days:

``The ongoing housing correction is not ending as quickly as it might have appeared late last year,'' Paulson said. ``It now looks like it will continue to adversely impact our economy, our capital markets and many homeowners for some time yet.''

And headines like these, dont look like they are going anywhere anytime soon:

Southern Calif. home sales plunge 30 pct in Sept

Another Big Bailout

The poor underwriting standards of lending institutions look like they are about to get another bailout...and this time it isn't in the form of a Fed rate cut.

It now looks like the banks who have been scrambling to figure out a way to refinance special interest vehicles that have suffered substantial losses and still face large exposures to subprime mortgages are now banding together in coordination with the Treasury department to create a special fund for the sole purpose of holding their toxic securities.

There are tons of articles floating around on Bloomberg and the cover of WSJ, but here is a good one:Banks May Pool Billions to Stop Securities Sell-off

As the WSJ says:

The proposal echoes the 1998 bailout of the hedge fund Long Term Capital Management, when a group of big banks came together to prevent the fund from collapsing after it made a series of bad bets. And the current round of crisis-driven collaboration illustrates the heightened level of concern among both government and financial players.

I have been talking about the remaining challenges in the CP and bond markets for awhile, but surprisingly the equity markets have been resilient even while these banks have been working directly with the Federal government on this massive bailout. It seems a bit insincere for the powers-that-be to continue to tout a "strong economy" over the last few weeks while working behind the scenes on staving off a further crisis in our capital markets. These seem to be inconsistent phenomena.

And the fundamentals continue to get worse...and at least one rating agency is finally calling off the formality of putting CDO's on a watch list before continuing to tell the truth about how bad things are getting:

Moody's may accelerate CDO rating cuts after review

We Are Not Out Of The Woods

True, the equity markets have rebounded in reaction to the Fed's cut

True, banks have priced and sold a few chunks of High Yield bonds

True, the headlines of the economy sound merrier than they did in August

Nevertheless, all of these facts do not imply that the massive glut of over-liquidity has finished its impact on the system.

Just today the WSJ spelled out the fact that the remaining high yield bond overhang is massive. And coupling this with the fact that GS today reported that its holdings in CDO's and CLO's fell by over 50% last quarter (whether in volume or price it has the same impact) and the fact that Bond investors have openly stated (as noted in an earlier post) that they are not seeing an end to the cycle and you start to get another picture.

Adding to this the fact that GS today disclosed that it has even more assets that "trade so infrequently that there is virtually no reliable market price for them" and strange headlines about CDS traders like: Calyon Trader Fired for Losses Says He's No Rogue and the fact that the real estate market is still in a downward spiral and clouds start to grumble on the horizon.

Maybe I am grumpy just because it is now raining and the summer is over, or maybe it really is getting dark again.

Politics As Usual

I normally refrain from political discussion both out of my disdain for the two-party system and out of acknowledgement of the fact that most people are more rabid with their political views than a dog with a porterhouse...

But after seeing all of the ridiculous dialogue in the press about how the GOP's recent predictions that Hillary is inevitably going to beat Obama in the primaries mandates her victory, I had to chime in.

This article is a great example of what I am talking about: Hillary: More Inevitable Than You Think

How many times did Sen. Hillary Clinton's name come up during Wednesday's Republican debate in Michigan? Twelve.

How many times did Sen. Barack Obama's name come up? Zero.

The bulk of the mentions came from Rudolph Giuliani, who many believe is using Clinton's perceived inevitability to his advantage by declaring himself the Republican candidate best suited to defeat the New York senator in a general election.

Did anyone consider this would be a brilliant strategy to pick the easiest candidate to defeat in a general election - deny the possibility that her foes even have a shot?

Once again the Machiavellian nature of the GOP seems to be leaving the Dems grasping for straws...well, at least those who care about a healthy independent competitive presidential election.

I am sure the dynasty-minded are twiddling their fingers with glee.

The Worst Is Yet To Come

Although they are laggards, the credit rating agencies, as a following indicator, give us a peak into what we can expect to materialize over the coming six months to a year. When the rating agencies first started to downgrade CDO's and other asset backed securities this summer, it portended the beginning of a volatile and dark period in the credit markets generally.

Now, as they have publicly recognized that 2007 vintage subprime mortgages are the worst of any to date, the markets will likely not be as surprised with this new wave of downgrades, although it may suggest that there is more carnage yet to be uncovered as the older vintages "mature" and the wave of ARM's on the right side of this page start to have a greater impact on homeowners.

This article discusses the not-so-pretty rating's outlook: Subprime Delinquencies Accelerating, Moody's Says

Pessimism

Credit Suisse's Dougan Says Mortgage Turmoil May Last

Credit Suisse Group Chief Executive Officer Brady Dougan said the market for mortgage credit will be ``problematic'' for as long as 18 months.

Bernanke Spoke With Rubin as Credit Crisis Worsened

The Federal Reserve's Aug. 7 decision to keep interest rates unchanged set off a chain of high-level discussions with Wall Street executives, money managers and cabinet officials that culminated in Chairman Ben S. Bernanke's public about-face 10 days later, according to records of his schedule.

Starting with a phone call from former Treasury Secretary Robert Rubin the day after the August rate meeting, Bernanke's appointments included Lewis Ranieri, founder of Hyperion Capital Management Inc., and Raymond Dalio, president of Bridgewater Associates.

With that kind of access I think I might be more comfortable predicting a put too. Must be nice to be able to move those multi-billion dollar funds in confidence that your conversations have predictive power.

Optimism

Credit crunches and buildings fall. The world turns upside down and things we used to count on become the dreams we wish we still had. The sounds of happiness and laughter drift into sounds of yelling and despair and all that we used to hope for gets trapped in dissonance and angst. Call it a bill and obligation or a future hoped for in vain. All these images arise across a country of golden ambers aflame in overzealous pursuit of the dream. I keep hoping we will wake up and see daisies and lilies and sunshine. I think we can.

Message From Someone In Need

I got this message today from a friend here at school. Please read this note.

Hello,



My name is Avi Kremer. Three years ago I was a normal, healthy 29-year old. Then I was diagnosed with ALS, also known as Lou Gehrig’s disease. Now I am confined to a wheelchair, and I can barely use my hands. ALS is rapidly destroying all of my physical functions. The disease is fatal and there is no cure. Unless we find one, I will die within three years.



Last year I joined forces with friends and top researchers in the field to found Prize4Life, an innovative non-profit organization that is already removing the obstacles that stand in the way of a cure. But we need your help. We are asking you to give $1 at www.dollar4life.org and to spread the word about our unique campaign. It is your support more than your money that is important – we aim to demonstrate how a large number of small donations can result in meaningful impact. The power of one, times a million, can help us find a cure.



If you choose to give $1 and to tell your friends about the Dollar4Life campaign, if you put the information on your blog and on your website, if people see it and they give and tell people too, then that $1 will quickly become $100 and then $1,000 and eventually $1 million. That $1 million could save my life and the lives of the 500,000 people around the world who have ALS.

Please go to www.dollar4life.org to make your donation. Each donation will light up a pixel in the portrait gallery of ALS patients on the website. We hope that with your help we will light up one million pixels and brighten the life prospects of ALS patients everywhere.



To learn more about the Dollar4Life campaign and Prize4Life*, the organization that will receive the full amount of every donation, please visit www.dollar4life.org. If you would like to contribute with a check, please make it payable to Prize4Life, Inc. and address it to P.O. Box 381708, Cambridge, MA 02238-1708.



Thank you,

Avi

The Understatement of The Year

Greenspan Sees `Rethinking' on CDOs After Losses

Although the equity markets regained their footing and have now surpassed the peak set this summer, the credit markets continue to be in difficult shape, highlighted by Citigroup's announcement yesterday that they will take a huge loss based on writing down some of their credit assets.

I try not to be a cynic, but the more I think about this, the more it looks like the froth in the equity markets is benefitting the have's (i.e. the slice of American's who can afford to have a piece of this pie), while the have-nots are continuing to be left in the dust of a crumbling real estate market with their dollars depreciating against not only currencies of countries they may never visit, but also against stuff like oil, wheat, and platinum.

If this is true it comports with the concept of the rich having power over Washington and through that power the Fed...

But it also comports with the idea that the increased leverage in the system makes the equity markets more volatile - on both the upside and the downside - so that what we are seeing now is a volatile move in reaction to the base stimulus provided by the Fed.

I have never claimed to be able to predict the next move in something like the Dow or Nasdaq, so I won't start yet...I just think if Greenspan is only now acknowledging CDO's may have to be revised, we have a long time until the system digests just how bad things got in the credit markets. Some big investors tend to agree: Fed Fails to Restore Creditor Confidence, Pimco Says