Random Thoughts on The City, Wall St & Capitalism

Well I did warn you.Just because BofA was taking this heap over the ride isn't finished.Unless you're a sovereign wealth fund, that is, easily duped with money to burn,you had ample opportunity over the last year to bail.Happy Days!

Euphemisms and acronyms.Wall St. and The City seems to be full of them.Years ago Morgan Stanley used have a product called 'OPALS'.Short for Optimized Asset Linked Securities.I can't remember if it was any good.Sure it was popular with clients.I'm assuming in reality it was a crummy product.After all excellent products aren't exactly at the top of an investment bank's list of must haves when you're trying to rip off,l mean ''service'' clients.

The new Resolution Trust Style bailout entity is described as 'TARP'.Troubled Asset Relief Programme.Surely it should be called Securitized Holdings Intervention Trust or 'SHIT'.Because if the Hank and Ben show get away with it the US will be in real 'SHIT'.

RB

I don't mean The Bailout,you know Resolution Trust 2,or Toxic Bank.Whatever you want to call it.The proposition itself is not new but why does Hank want his proposal/decisions to be outside the scope of judicial review? I was long dollar/Sterling up to 1.75.But given the extra dollars that will need to be injected,and the resulting increase in budget deficit both the US economy and the dollar are just plain doomed.Short dollars.I mean bail out.

RB

I wept when l heard the news.With laughter.If you didn't see this one coming you must be a real believer in the Blundering Herd.

I'm mulling over yesterday's events.I'm a bit annoyed.I was sure Merrill was going to Chapter 11.It was much worse run than anyone could dream of.I hadn't anticipated anyone could be stupid enough to take it over.But then Bank Of America came along.What's B of A trying to hide that it's buying up Merrill at a massive premium to it's Friday close price.I'm hoping after proper due diligence B of A will see the light and let it fail.It's an awful excuse for an Investment Bank.Oh yes,thumbs up to Thain.Good one.

RB

I haven't written anything for a while.There was nothing to write about.All that's happened in the last six months is that an investment bank went under,oil & gold reached new peaks,liquidity has dried up,market confidence is low,getting lower.Any fool could have predicted that,unless of course you run The Fed or The Bank of England.In which case,you're beyond help.None of these events were unpredictable.No black swans here.

I've been taking it easy since March.Watching the credit crunch unfold.It's been a source of much amusement.I like it when companies go under,especially financials.It's Darwinian,it's necessary,destructive capitalism at it's best.It's exhilirating.There are just too many people working in financial 'services' companies.They're fat from the bumper harvests of previous years,I don't have a clue what most of these people do.Do you? Now the slaughter house beckons.Bring on the savage cuts,let the blood run,the downturn spiral.

All the FSA managed to do was fine Woolworths for inaccurate accounting,while Rome burns.Good work.Go back to sleep.The regulators in the US have been busy too,banning naked short selling (just go synthetic short-it's less risky & probably cheaper these days).They've also been busy ''nationalising'' failing US regional banks.In the home of unbridled markets,very odd.Friedman would turn in his grave.

So Merrill has written down approximately 45 billion dollars to date,and another record quarter of losses.Another round of capital raising.The nice chaps at Temasek are lapping up more stock.It's a bargain $22.50.As if they hadn't lost enough on their initial stake (see earlier blog).The best thing about modern Sovereign Wealth Funds is that they have deep pockets and will believe anything you tell them.That's where investment banks come in and fleece them,l mean allow them to invest in their businesses that are ideally positioned for growth in the future.

Bizzarely the market marked up it's shares after it's latest balance sheet re-structuring exercise.It sold about 31 billion dollar's worth of 'risky' CDOs to Lone star for around 22 cents in the dollar compared to face value.An epiphany in this particular episode of Merrill 's history? A watershed.Now it's all clean and fine and shiny and disease free right? Wrong.Look at the deal again, Merrill lent Lone Star most of the money to finance the deal.Ok nothing wrong with that,but the net effect of the deal is that Merrill has capped any potential upside from it's CDO portfolio,and has taken all the downside risk.If the instruments continue to drop in value,it's all pretty much worthless.They could end up LOSING on the deal.So though it looks good on paper for now,this particular method of balance sheet clean up is actually very stupid in this envirionment.I have no idea who advised them on this deal.Looks like they advised themselves.

One analyst has pointed out that Merrill is losing 52 million dollars a day.I'm surprised it's as low as that.Worse is to come.Can't wait.

RB

The US stock market rallied today.Mostly on the back of Ambac retaining it's triple A rating,and MBIA being taken off the downgrade sick list.Ambac's trying to raise 3$ billion to bolster it's capital base.

Phew,panic over then,things can return to normal.No more write downs,and the credit market will return to normality very soon.

Nah just kidding.Here's the problem.Ratings agencies earn their revenues from the bond issuers.They get a fee to provide the the rating from the issuer.This is called conflict of interest.Let me illustrate you how this might be a problem.Remember Enron? Weeks before it went bankrupt these very same ratings agencies were assigning them healthy credit ratings.

I suspect they will have to downgrade the monolines,it's just a matter of when.

Oh dear.The Fed lowers growth forecasts,predicts increased unemployment,and oil also jumps to 101$ on supply concerns.It's the 70s all over again,and this time not just disco.Stagflation writ large.What should the Fed do? Here's the problem.It doesn't know and even if it did it's too late.

Question:who really controls the US economy now? Answer the US consumer,unfortunately he's broke at the moment.Who then if not the US consumer? It's the Sovereign Investment Funds of the Middle East silly.They've bought into the financial infrastructure of the US via Wall Street.Now OPEC will start cutting oil output.They are also probably behind the hedge funds which are taking positions in the oil market now.As the price of crude goes up,this will inject enormous inflation into the US economy and become a huge drag on growth.If you thought a recession risk was 50:50,it's probably wise to reconsider.

In a serious downturn who do you think will be buying up America's prized assets on the cheap?You guessed it.Sovereign Investment Funds.The real change after this recession will be the fact generations of American workers yet to be born will be in effective bondage to the wealth funds of the developing world.

The US in it's hunger to consume now has mortgaged away it's future.It's just another overleveraged bet that went wrong.Dump US stocks.

The big news isn't the Northern Rock nationalisation.I predicted that a while back in an earlier blog.The really big news is on the other side of the pond.You'll miss it if you blink.

Last Friday FGIC,one of the large bond insurers put forward proposals to split itself in two.Monoline to Duoline it were.It proposes to house the low risk municipal bond insurance piece in one entity,leaving the now worthless credit-default swaps insurance trash in the other.A perfectly good idea actually.

The municipal bond insurance piece then will have a higher credit rating,presumably triple A.Why does this matter.Well think about it,the the remaing piece (the writer of the risky stuff)then can be downgraded or even file for insolvency or chapter 11.

If this bifurcation process into two companies occurs and AMBAC,MBIA and others follow suit,it will result in the end game for some investment banks.The instruments they have have insured will have to be written down on the investment banks' balance sheets to zero.The G7 ministers agreed that about 400$bn of writedowns will result from sub-prime.Yet we are only half way there,if that.Maybe once monolines split,then we can see who's been fiddling their balance sheet reporting.Naughty Bankers.

Of course l believe,and sincerely hope Merrill will be on this shit list.

RB

We expect very little of our public servants.So we get what we deserve.The re-appointment of Mr King is not good news.

Ahmass Fakahany Resigns (According to CNBC)

I did tell you this would happen.My earlier blog of 29 Nov 2007 entitled,Merrill Lynch:You don't have to be in-thain to work here,but it helps,explains why.Wonder what the severance will be for the worst risk manager in the world.My guess around 20$ million cash & stock.Sounds about right for tanking a FORTUNE 500 bank.See below.Is Greg next?

RB