More words on Bank's multiple plays

Note to sent to my Senators:

Dear Senator,

I have written you a select few letters with respect to finance, the mortgage industry and the ineffective job being done by Mr. Paulson over at the Treasury.

This note is a follow up and a call to reform and or revise our current laws governing banks and brokerage activity. Much attention has been placed on the activities these firms are allowed to partake in with respect to the individual investor but even though our laws recognize other firms as “individuals” legally, the laws on the books are not being enforced with respect to how these firms deal with their corporate clients.

We now have a meltdown in various credit markets as a result of their recent activities, which I might add, were tacitly approved by our former Federal Reserve Chairman, Allen Greenspan even though many of their current activities were disallowed or stringently regulated in laws passed nearly ¾ a century ago.

This paragraph taken from a Bloomberg article today from a statement by Merrill Lynch about their upcoming earnings sums it up entirely with respect to the mortgage mess we now have.

“Merrill is at risk of losses from sub prime defaults because it participates as an investor, lender, counter party and guarantor in markets tied to mortgages. They include CDO underwriting, other structured credit products and leveraged finance, the firm said in the filing.”

You can apply the above paragraph to the leverage buyout frenzy that has taken Wall Street over the past few years as well. Thus not only have these banks have been participating in EVERY aspect of each transaction, they have taken equity stakes in their deals and follow up by creating various esoteric derivative products which they price and hawk to the same funds they are lending to buy them.

There is no doubt that the approximately $300 billion in loan obligations they have on their books right now to finance corporate buyouts are going to cause them headaches. More importantly, their highly leveraged clients no longer have the equity or wherewithal to buy the debt off their books. What they do over the next three months remains to be seen but I fear the collapse of one or more of these private equity buyout firms due to the weight of their debt loads and the inability to refinance them will lead to the same kind of collapse we have seen in the mortgage industry.

This would have far more serious repercussions than anything we have seen in the mortgage industry and bears close watching and preemptive action now to alter the practices of these firms in the future.

Sincerely,

PS; It is important you act right now to stop Wall Street firms form demanding mortgage companies that have had to cease lending operations from wrestling away their servicing business. This threatens homeowners escrow accounts and will cause unnecessary problems you will soon hear about if you have not already. One of the companies causing problems is Freddie Mac. They need to be stopped. See article with respect to this issue here: http://online.wsj.com/article/SB118955540976824460.html

The greedy pigs are in deep...

I have been harping for a few years now (since the latest merger mania on Wall Street) that the Wall Street banks are in to deep in their deals. All you have to do is read their quarterly earnings over the past 2-3 years and have some common sense to see that when they are Advising on deals, Brokering the deals, Financing the deals, Participating in taking Equity in the deals and Creating Derivatives based on the debt associated with the deals, they have found a way to profit in every aspect of the deals. They have also found a way to LOOSE in every aspect of the deals if they go bad.

Hence this blurb from Bloomberg today. Note the bold paragraph. These guys deserve to be hammered and the idiots on Capital Hill should enforce some of the laws on the books with respect to conflicts of interest and if they must, write more. The home owner is getting punished but any idiot can see Wall Street got damn greedy and F----- up what was just a few years ago a sound industry.

Merrill Says Fair Value Adjustments Made for Subprime (Update1)

By Erik Schatzker

Sept. 14 (Bloomberg) -- Merrill Lynch & Co., the biggest underwriter of collateralized debt obligations, said it made ``requisite fair value adjustments'' for the impact of rising defaults on subprime mortgages and they'll be reflected in the firm's third-quarter earnings.

The New York-based firm said in a regulatory filing today that credit-market conditions ``have continued to remain challenging in the third quarter.''

Merrill is at risk of losses from subprime defaults because it participates as an investor, lender, counterparty and guarantor in markets tied to mortgages. They include CDO underwriting, other structured credit products and leveraged finance, the firm said in the filing.

While Merrill reiterated previous disclosure that ``significant risk remains that could adversely impact these exposures and results of operations,'' the filing included no estimates for how the fair value adjustments may affect earnings.

Merrill fell $1.34, or 1.8 percent, to $73.80 in 9:59 a.m. composite trading on the New York Stock Exchange. The shares are down 21 percent for the year.

Analysts predict that Merrill will report a decline in third-quarter profit next month in part because the firm needs to mark down the value of certain investments and financing commitments.

``Investors will be looking for transparency with respect to the manner in which brokers approach the mark-down process and specific disclosures around the current exposures and write-downs related to key areas of concern such as LBO loan commitments, CDO holdings and other mortgage-related assets,'' Lehman Brothers Holdings Inc. analyst Roger Freeman wrote in an Aug. 30 report.

Last Updated: September 14, 2007 10:07 EDT

China Inflation?

I read an article published on Bloomberg.com today you can also read here:
http://www.bloomberg.com/apps/news?pid=
20601039&sid=aWHH.9qAjPf8&refer=home

This is my response to this article and the many other's like it after China published their latest inflation numbers.

Hello Mr. Pesek,

I am a little confused about your assertion that China needs desperate action to tame it's inflation. The confusion arises when I see China's inflation quoted including very volatile recent changes in food prices with no reference to energy.

The Fed and economist in the US have made the gross error over the past 5 years with respect to calculating our inflation by taking out food and energy when giving what they consider "core" inflation. Removing a "volatile" component from the index is OK when it is "volatile" but when it is consistently moving higher, tripling in fact, over the period as energy prices have, is disingenuous and dangerous to economic policy initiatives.

Now back to China. It is clear that lesser nations have paid heavy prices for pegging their currency while ignoring domestic price and market pressures and China may one day pay for their misguided policy, but for now I smell a rat. There seems to be an assertion that China's inflation should be quoted in total without stripping out volatile price components that are truly volatile in order to justify the need for dramatic increases in their interest rates and of course, added pressure to do the one thing Washington and Wall Street (with billions of dollars riding on the prospect) wants to see China do: Dramatically revalue their currency or let it float altogether.

So in the future, perhaps you may want to give the headline inflation number coming from China the same kind of scrutiny the headline number gets in the US regardless of the political will to do otherwise.

Sincerely,

What happens next in this market?

Nail biting time for markets. Selling not done in my opinion. The bounce after touching a 10% correction a couple weeks ago was simply the hedge funds all programmed to buy at a 10% correction. Amazing what a few hundred billion dollars in program trades can do to turn a market on a dime.

Smart shorts did not blink. I blinked 50% covered some shorts, sold some puts etc. However, with the quick rally to 13,400 I was back in short mode. This market must close in the 12,000 range on the Dow for me to even think we are finished with the selling. More like it would be a 1987 type of rout. If we see this happen then some scales will tip, some real money lost, some of these complete idiots leveraging 20 to 1 to buy debt instruments will go away and some normality can return.

However, I fear no quick recovery in real estate, continued attempts to bail out funds and credit markets and a slow painful spiral down over many months that will begin to erode the savings of many soon to be retired boomers. The bail out attempts of course will have the same effect as the attempt to bail out the Ruble in the 90's. Send a few billion here and a few billion there and it works through the system quickly covering the losses of the most well connected and the banks. The rest are left to fend for themselves. The only question is, how do you make money in this scenario?

And the FT chimes in on "Bailout" as I suggested...

The article published in the FT below suggests the same kind of solution I included as one of my solutions to the mortgage crises: (Note the use of the term "pyramid scheme" as I have suggested in the past with respect to "financial products" based on debt and highly leveraged.)


Banks should form a bail-out vehicle to ease the credit crisis
By Cambiz Alikhani, a partner at Arundel Iveagh Investment Management
Published: September 5 2007 18:50 Last updated: September 5 2007 18:50

Over the past few months, a modern day pyramid scheme of colossal proportions has begun to unwind. The sheer scale of it is clogging up the arteries of the financial system and has led to major disequilibrium within global credit markets.

Markets face a credit crunch that continues to manifest itself in the money markets and this can have pronounced effects on the real economy as the lending system becomes dysfunctional. This credit crunch could be alleviated by removing from the system the debt that created the problem in the first place.

In an ideal world, the process for such removal is one in which a new set of economic agents, unaffected by the problems that have beset the financial system and with access to long-term capital, step in to the buy the debt at attractive prices.

As that occurs, confidence and risk appetite should return to the system and markets return to a state of equilibrium.

However, the scale of debt involved in the current crisis is of such magnitude that demand from opportunistic investors alone may not be sufficient to remove the problem. In addition, much of this paper is difficult to price, further exacerbating the situation.

It may therefore be appropriate for a core group of leading financial institutions to consider the idea of a “bail-out” vehicle that would be capitalised with the purpose of providing both pricing for the market and a source of demand for paper that cannot find another home.

The fact that such a vehicle is funded by financial institutions rather than governments would not only shield regulators from the accusation of “moral hazard” but could actually involve them in a very pro-active way.

They could play an important role in providing transparency with regards to the scale of the problem and with regards to the different pricing mechanisms used by different banks for exactly the same type of paper.

Thus regulators such as the Securities and Exchange Commission in the US and the Financial Services Authority in the UK could play the pivotal role of referee, while central banks provide the appropriate level of liquidity that the system needs in the meantime.

History has shown that there are examples analogous to what is being proposed above that have proved to be a success.

The bail-out of Long Term Capital Management in 1998 by a consortium of investment banks (and brokered by the New York Fed) is an example. Prior to that, the early 1990s saw the creation of a “bad bank” in Sweden as part of measures to keep the banking system solvent when it became overburdened with bad debt.

The savings and loan bail-out of the late 1980s in the US is another example. In fact, one may also argue that the lack of such a measure in Japan in the 1990s exacerbated deflation in that country as the government instead chose continuously to recapitalise banks that still held bad debt on their balance sheets. This bad-debt overhang reduced their willingness to lend to anyone other than the government, leading to significant overvaluation of the government debt market.

Although the structure and details of a new bail-out vehicle to alleviate the current crisis would be extremely complex, this is exactly what banks should be good at.

They have a long history of successfully negotiating work-outs and restructurings. In this instance, they are all in it together as it is their balance sheets that are being put to work to act as lenders of last resort. Thus a common solution towards removing “bad” or “unwanted” debt from the system would be beneficial to all.

The measure being discussed above would not only play a critical role in finding an equilibrium price for “bad” or unwanted debt but would also create a vehicle which such paper could be sold into, thereby unclogging the arteries of the financial system.