Mad as Hell

I thought I was mad as hell a few weeks ago. That was after reading about the $200 Billion the Fed was going to offer to Hedge Funds or anyone else willing to take the money and buy consumer debt with it while the Fed automatically was willing to take a 10% "haircut" on the deal assuming it would be lost up front. There were many reasons why this pissed me off.

Now I am madder! Reading an article in the Wall Street Journal today made me so mad I am not even finished reading it yet and I had to write this post.

I just got finished reading an article on Bloomberg about the incompetent SEC and their blatant and pointed failure to investigate short sellers or otherwise enforce any of the rules on the books with respect to short selling for years. It appears anyone with half a brain in the industry will tell you the shorts drove Bear and Lehman out of business. I mean this game has been going on for over a century. The fines that were levied were by the NYSE or the AMEX and who got the largest fine since July 2006 from the NYSE? None other than J.P. Morgan Securities. This is all old school BS from the Blue Blood firms on Wall Street who have been putting their competitors out of business when the opportunity arises for over a century.

Yea, that article did not piss me off so much because I have been writing for years how incompetent the SEC is / was / and will be for to long to be surprised or pissed off by anything those num-nuts did or did not do.

But this WSJ article... That is a different story.

So we have this Geithner protégé of Paulson and his infinite wisdom of continuing the print money and bail out Wall Street mentality he was trained into talking about is brilliant scheme to pump over $1 Trillion of cash into the hands of hedge funds or whoever is willing to then buy debt with it. Yea, OK, so it is bad enough that the Treasury / Fed / Guaranteed debt program has practically BEEN the debt markets for going on 6 months now but now we are going to expand it for another 6-9 months only through the avenue of the unregulated markets.

Yea, that is what I said. We are asking the pigs in the unregulated markets to bail out the "shadow banking system" i.e.; the business model that you borrow money from the "markets" and lend it to consumers to buy shit when you are not a bank and are not regulated like the banking industry.

Side note: I remember back in 1989, during the last real estate / banking / S&L / junk debt market bubble imploded and my mother was taking money from investors and buying foreclosures with it and flipping them and she got a letter from the MD State Banking regulator inquiring whether she was acting as a bank, taking deposits and paying a rate of return. This was basically harassment instigated by a local bank that obviously was not pleased by the competition she may or may have not posed to the property developer owners of the bank. Needless to say, since then it seems any organization could raise money from just about anywhere and lend it out so long as they did not open "retail" branches.

OK, so the Obama Administration's stance on pay for the participants:

To encourage investor participation, the Treasury believes participants in the program shouldn't be subject to executive-pay rules imposed by Congress. The law authorizing the $700 billion bailout and a provision in the $787 billion stimulus package impose tough pay restrictions on firms that receive government funds, including limits on bonuses.

Of course not. These people are hurting. I mean I just got finished reading about Greenwich's "Rodeo Drive" and the impact of these hedge fund folks declining income levels. God forbid we subject an unregulated industry to some kind of cap on how much of the cash they can strip from the government handout. I mean, the government is already willing to take a 10% loss. Now if I were a smart hedge fund manager, I would be willing to jump in and buy assets now only if I thought 1) they have fallen so far there is little to no risk buying them and 2) with a 10% write-off by the government up front, I know I can take my cut because I can easily beat the pathetic odds a desperate bunch of rookies in Washington are willing to give away to play this game.

This is a good one:

Administration officials are hoping the public will draw a distinction between financial firms that receive a government rescue, such as AIG, and those such as hedge funds and private-equity firms that participate as investors in broad government programs.

Let me rephrase this for you. The Administration officials are hoping the public is just stupid enough to allow them to take taxpayer money and give it to a bunch of unregulated pigs who are directly responsible for much of the malign in the financial markets right now and differentiate between those pigs and the other ones that Paulson bailed out last fall when he gave AIG $80 Billion that promptly went into the accounts of his former firm who was made whole on the worthless paper they held from AIG while managing to make a fortune shorting the stock and on AIG CDS's bought from third parties. Goldman knew the contracts AIG sold them would bankrupt AIG as there was no way in hell any company could cough up the kind of collateral needed to cover the contracts AIG sold for pennies on the dollar that covered billions in debt.

Read this:

Targeting mortgages that banks no longer want to hold, the Treasury and the FDIC will provide financing to buyers. The FDIC will auction off pools of loans that a bank wants to sell and will become a co-owner by forming a partnership with the highest bidder.

The partnership will then raise FDIC-guaranteed debt to finance a portion of the purchase price, with the Treasury willing to kick in between 50% and 80% of the equity needed to buy the assets. The Treasury will be an equal investor in the partnerships.

Why the F*** are they bothering with the private industry at all? Because the government is trying desperately to figure out how to make their buddies "whole" again. I mean, when the dot com crash hit shortly after dragging some long established companies in the toilet with them (along with the telecom industry, the Enrons' etc.) what a better way to dole out big fat government checks then to have a war?

Well the peace-nic administration is up to its eyeballs in war, debt, bankruptcies and the like. So how in the hell are they going to keep the artificial free market economy with it's consolidated global financial industry (not to mention almost total consolidation of every other GD industry in the US) afloat? Print money! Yea. And don't forget, include the unregulated financial markets, and don't forget, take the vast majority of the risk for further write downs or financial collapse, and don't forget, we are all partners here:-) Smiles for everyone. Back to Greenwich and "Rodeo Drive".

Oh don't forget:

Lastly, the government will expand the Fed's Term Asset-Backed Securities Loan Facility, or TALF, to help absorb risky assets dating back several years.

Yea, ingenious.

Lastly I am absolutely dumfounded pissed at the insistence of calling the s*** the banks bought over the past few years "assets".

In an op-ed piece in Monday's Wall Street Journal, Mr. Geithner wrote that the efforts will help tackle the glut of assets clogging bank balance sheets and will help provide some kind of normal price for these assets, which the Treasury believes are currently undervalued.

God Damnit, the stuff is worthless paper. Get over it. It is gone, lost, worthless. Write the S*** off and if you go under so be it. There are plenty of folks out of a job from the financial sector who are perfectly capable of opening a fricken retail bank to serve the rest of us lowly servant citizens...

Madagascar’s president steps down

I have been lightly following the turmoil in Madagascar through the FT over the past couple weeks and I would love for someone to do a dissertation on the island country. Economically speaking, they seem to have quit a wealth of natural and land resources and as usual a tiny elite exploiting the resources while most live on about $1.00 equivalent per day.

This quote from the latest FT article is fitting:

While a business elite – of whom Mr Ravalomanana is among the most successful – has grown rich through agriculture and other ventures, the average Malagasy survives on about $330 a year. They have yet to see much benefit from the arrival of foreign investment in biofuels, bitumen and titanium.

The collapse of the vanilla market, and, as the tensions spilled over into violence, the tourist trade, only added to resentment stoked by a agreement last year to lease half the country’s arable land to a conglomerate planning to use it to feed South Korea. That the deal was subsequently halted did not assuage the outrage the Mr Rajoelina was able to harness.

You know, I feel very strongly that this dynamic has been strongly applied to the developed world over the past 10-25 years (depending on when you start the cycle) by private equity and hedge funds who's main objective is to do everything possible to harness all productive capacity and resource production with the use of high degrees of leverage and suck as much of the profit as humanly possible from the enterprises regardless of the plight of the citizens of the planet they squander.

I agree this is nothing new in our short and pathetic experiment with "free economic" models. But I have said and will continue to say, with 6 billion people on a very interconnected planet there simply no longer exist any positive value to trillions of dollars sloshing around in the hands of a few in unregulated markets trading anything and everything to suck as much wealth out of the "economic system" as humanly possible without respect to the plight of the population of the planet.

Credit Default Swaps on US Government Debt

OK, correct me if I am wrong but the US currently has over $7 Trillion in debt floating around out there. Now, those are no small potatoes.

Correct me also if I am wrong, but our current financial mess, including the bailout of AIG, greatly owes it’s thanks to the CDS market.

A quick Wikipedia definition is in order here:

A credit default swap (CDS) is a swap contract in which the buyer of the CDS makes a series of payments to the seller and, in exchange, receives a payoff if a credit instrument - typically a bond or loan - goes into default (fails to pay). Less commonly, the credit event that triggers the payoff can be a company undergoing restructuring, bankruptcy or even just having its credit rating downgraded. Credit Default Swaps can be bought by any (relatively sophisticated) investor; it is not necessary for the buyer to own the underlying credit instrument.

Now can someone explain to me exactly WHO has the ability to guarantee or pay off $10 Million in US Government debt (the usual denomination for a CDS) multiplied by millions if the US Government actually defaulted on it’s debt?

Isn’t this what got us into much of the mess we are in? Idiots actually sold Credit Default Swap contracts on debt securities backed by garbage mortgages, car loans, credit card loans, personal loans, loans for leveraged buyout firms, loans to hedge funds and others taken out to buy yet more debt securities in a kind of vicious circle / pyramid scheme, loans issues by banks to firms they created to buy their own garbage securities so they would not exist on their over-leveraged balance sheets…

Come on now. Help me out. Why in the Hell hasn’t the CDS market been shut down? I am completely baffled by the fact that anyone is crazy enough to issue, buy or trade CDS’s right now since it has become painfully clear that the sellers of the shit have for years not had the collateral to back their issuance and this has been proven over and over again. These are “insurance” products that require no regulated capital to guarantee payment in case the debt they are written against actually defaults.

So why is this stuff floating around guaranteeing US Government debt? And why in the HELL is Geithner calling on the unregulated Hedge Fund industry to take $1 Trillion in new government money to buy more garbage debt from the defunct credit markets? Help me out here? I read an article this week that claimed the price of insuring $10 Million in US Debt had risen to $90,000 per year. Brilliant. Now who in the hell is going to pay the $10 Million if or when the US Government defaults? Isn’t the idea that there ended up layers of these “insurance” products valued at something like $70 Trillion that contributed greatly to the “credit crises” we now face? The idiots who originated the “insurance” products bankrupt their companies and to this day, the US Government is bailing out institutions like AIG with tax payer money so they can continue shoveling the cash to the counterparties of these instruments.

On top of that, the firms and the government agencies involved in the bailouts refuse to tell us who those counterparties are or why they don’t just force a settlement of these contracts and for all parties to take their losses and walk. Instead, our future tax dollars (cause none of this is today’s money, it is all being borrowed for us to pay tomorrow) are going directly into the coffers of God knows whose buddies and they are getting downright rich off of it.

I have completely had it. Our legislators are ignorant impotent pushovers. The people running the treasury are bailing out their buddies and the Fed is going to go bankrupt trying to “be” the credit market. The dollar, or the confidence in it, is in real long-term trouble. What in the hell is going on here?

If the Chinese were worried about US Government debt a year ago they should have bought ALL the CDS’s people were ignorant enough to write. Hell they could have bought US Government protection for $40,000 per $10 Million and be cashing out here at over 100% profit on the CDS contracts alone not to mention still collecting interest on the underlying debt.

Have I said enough? Shut down the CDS markets. Force settlements of all outstanding contracts and regulate the hedge fund industry TODAY.

Thank you Bernie

Driving and listening to NPR this evening I heard two guests talking about the Bernie Madoff guilty plea. One guest had, at best, a trailer park knowledge of the workings of the investment world and continuously refered to "her sources" an could do no more than focus on the few million dollars Bernie and his wife managed to squirrel away in her name. Listening to this woman was worse than listening to a bunch of impotent Senators talk about Wall Street bonuses. The more I listen to the "news" and "news shows" with supposed "knowledgeable" reporters and other industry appointed "experts" the more incensed I get with the ignorance being blatantly displayed about the world of international finance and the workings of unregulated funds.

Every time I hear "the SEC 'investigated' Madoff's business" and gave him a clean bill of health my eyes roll. Since when in the last 20 years did the SEC do a damn thing? Anyone who has known me for a while will remember my outrage when Eliot Spitser had to do their job for them for 5 years and the how pissed off I was when he came to DC to sit in front of our spineless, impotent government while being sneered at by the SEC for making them look like the complete fools there were.

So the media saying "the SEC did nothing to stop Bernie Madoff" is like saying its hard to light a match when it is raining. Duh. The SEC did nothing for 20 years.

Then I hear people suggesting the SEC is responsible for them loosing money with Madoff. Well this is just as comical. Madoff operated his "fund" like a "hedge fund" and from what I know, they are not regulated. The SEC only looked into his clearing operations, not his "fund". They apparently had him register as an advisor, but about that time, the SEC had started a program requiring certain Hedge Funds to register with the SEC. However, the Hedge Fund industry sued and had that requirement overturned. So if (and I don't know if this is the case in Madoff's fund) Madoff was required to register under the then "new" SEC requirement, he could have withdrawn his registration like many Hedge Funds did after the overturning of the rule in court.

So what is the moral of this story and why am I thanking Bernie? It is because as far as I am concerned, Bernie may have done more harm to the reputations of unregistered pools of cash burning every asset class on the planet then any impotent SEC or government body possibly could have. And, until unregulated pools of capital and their wrath of unregulated insurance products and the like are completely removed from the global financial system, we are going to have serious problems.

Thank you Bernie. You are scum. But the Banks, Wall Street firms, Insurance companies, and other "financial firms" that have been allowed to become "regulated banks" who have all taken taxpayer money and cannot or will not explain where it went are all the same right now. They take taxpayer money, put in a pool of cash and pay out others with it. What is the Fricken difference?

All the pigs became ridiculously over leveraged and lost the capacity to segregate any aspects of their Enron structured, far fledged, business. All of them have done everything possible, including stealing from their clients funds, instituting ridicules arbitrary fees, charging for services that were supposed to be free or included in certain types of accounts, raising interest rates or any other scheme they could think of to stay afloat.

I have personally witnessed each of these in my bank, investment and credit cards in the past 9 months. Just ask me and I will give you an example of each one listed above.

Blackstone Numbers

I just looked over the Blackstone numbers and although I am no genius in understanding their business model, it looks like they took some hits in their portfolio values and more will come in 2009. This is how the FT presented the story:

Blackstone reveals $827m quarterly loss
By Henny Sender in New York, Published: February 28 2009 02:00 | Last updated: February 28 2009 02:00

Blackstone yesterday revealed a fourth-quarter loss of $827m, reflecting extensive markdowns in the value of its private equity and real estate investments, and told investors it would not pay them a dividend for the quarter...

"Last year was the year investment banks and hedge funds were undressed," says the co-founder of one of Blackstone's peers. "This year, it is the turn of private equity."

Blackstone said its corporate portfolio lost almost $4bn in value for the year, a 29 per cent decline. The value of its property holdings plunged 40 per cent.
Neither the earnings announcement nor remarks on conference calls gave investors reason to believe that earnings growth was likely to pick up soon, given the dramatic downturn in the global economy.

Tony James, Blackstone president, referred to current economic conditions as a depression.

Fascinating to me is Blackstone is a "manager" of the assets they bought hence, their "fee" income will decline if those "assets" they have in their portfolio fail to perform but Blackstone itself seems to have structured itself as a fee earning company while all of the "assets" are off the Blackstone balance sheet.

So, if I have it correctly, Blackstone gets investors together, does a major leveraged buyout (when money was available), pays itself handsome transaction fees, might put a little skin in the game up front, then does a "management contract" with the entity they arranged the buyout of, thus earning more fees, but allows the bought asset to operate "off the books" of Blackstone. I guess it is kind of like the hotel model. Some investors put up some cash and borrow more money and build a hotel then hire a "brand" company to come in and manage the property. The "brand" in this case is Blackstone, carrying a management fee for managing the bought business (hiring CEO and upper management etc.) but the "investors" are "holding" the asset off the Blackstone books.

I am more than fuzzy on where the now $94 billion of assets under management reside. They took something like over $4 billion in write-downs in the 4th quarter with total assets under management declining like $8 billion for the year. But where are these assets?

Interestingly, "fee earning assets" increased by nearly the same amount. So how does this figure? In addition, it looks to me like the "partners" of Blackstone pulled nearly all of their own equity out of their real estate portfolio so Limited Partner Capital Deployed fell from nearly $15 billion to about $5.5 billion.

Well during the buyout hey day I wrote about how these "private equity" funds were literally robbing the banks of the corporate entities they took over, stealing all the cash through all kinds of "fee" transactions, bizarre payouts, "commissions", funding payouts etc. all the while leveraging them to the hilt. I had no idea they were so creative in removing these entities from any liability of Blackstone itself. So, I guess if there are bankruptcies in their assets under management they will figure out how to earn "fees" managing the bankruptcy, financing the bankruptcy, taking huge chunks of assets for pennies and eventually making a killing again when / if the companies emerge from bankruptcy and get floated back on the market. Gotta hand it to these guys.