Traderbill’s Financial Markets Weblog

Bloomberg Quote of the Day: “When you get to the end of your rope, tie a knot and hang on.” - Franklin Delano Roosevelt (President)…old FDR knew a lot about reaching the end of the rope!

(A friend who knows Christopher Cox wrote to say TB gave him a bad rap. So TB researched and found out one thing. While the uptick rule was abolished the SEC vowed to police ‘naked shorts’ better and that could solve the problem…but since they investigated the problem they have not done too well and given too much leeway in terms of days to borrow the underlying stock. So perhaps it was a stretch to say he might be the worst, but the SEC has been anything but small investor friendly since the GOP has been in control…IMHO. TB)

…the SIV is one of the mind-boggling developments of the 21st century. Designed for European Banks so they could invest in collateralized debt securities (CDS), yet still keep them off balance sheet (kind of like the US did with Social Security at one time). Commercial paper was issued by the banks with the CDS as collateral. After the August blowup however the commercial paper could not be ‘rolled’ and so the banks had to fund the collateral themselves. It was this that caused at least two to be merged in Germany, one failure in France, as they were as much as 100% of the banks capital (remember that Goldie’s Level III assets are 200% of their capital).

So not to be outdone and to prove their financial engineering virtue, the big banks with the encouragement of Treasury Secretary and former Goldman Sachs, ‘coincidentally’ the former Chairman and CEO, they tried the Super SIV which would take in the collateral as a consortium of dealers including BofA, Citi, JPMorgan Chase, and others. It flopped because the buyers of commercial paper are short term funds that cannot ‘break the buck,’ so a premium of 100 basis points over prime commercial paper doesn’t interest them…they could lose more than they earn let alone the premium.

The problems with Sec Hank’s new plan are even worse: he wants the lenders to renegotiate the loans, yet it is hedge funds that hold the CDS which are in turn backed by the loans. TB has pointed out that they would all have to sign off on that and it isn’t going to happen…unless they are bought back at par or something attractive to them. So this may turn into a bigger fiasco than the Super SIV…but the stock market is buying it! …sort of! …or is it? Couldn’t believe CNBC had Countrywide’s Angelo Mozillo on who was saying that the problem is ending…not for him the way investigations are going.

Stock people know nothing of bonds…it isn’t their forte or their passion. Yet they see this as all built in as if the credit crisis will end tomorrow (if it does it will end badly). They believe that a series of Fed easings will solve the problem but it won’t…some even see the dollar improving with it (did anyone notice what is happening to banks profit margins?…lower rates imply lower spreads, simple as that and with all those subprime teaser rates…$330 billion resetting this quarter and over a billion next year…where will the replacement revenues come from? Yesterday, the Bank of Canada eased and the the C$ which had traded as high as $1.08 fell below parity for the first time in 10 weeks. That is what will happen to the US dollar…and that wouldn’t be so bad IF we produced anything…but we are a service economy if you recall…this was much heralded when it happened as it would be the end to the business cycle. Financial engineering (wherein the sum of the parts exceeds the value of the whole) is proving that wrong….and as Nouriel Roumini said: in one year the street is giving back a quarter of a century of earnings due to financial engineering. If you think this is a good thing for stocks, think again.

TB believes, and can’t see how we can’t avoid reversing more than two decades of living on borrowed money. It was fine so long as the standard of living was rising but it is now and has been recently in decline…a decline that has been camouflaged by an enormous ‘wealth gap.’ But if stocks follow real estate, then even the wealthiest will feel the pain and that will not be hidden. Happy days are here…at least that is what Kudlow acolyte, Brian Wesbury said…he says economy is healthy…and in fact was screaming that everyone else was wrong…a pity…TB used to like reading him before he followed suit.

Dollar stronger overnight due to the third straight decline in overnight borrowing rates…Euro Libor fell 11 basis points to 3.86% while Dollar Libor fell 4 basis points to 4.7%. But it is the rate over the turn that we need to watch…yesterday, we heard that the rates are normal but TB would say he hasn’t seen premiums like this since the 1987-94 period, 1998 ahead of the Big Bang (Euro), and 1999 Y2k. This is the fear of a lack of liquidity for yearend window dressing and how fast after it falls will be telling.

Some good news as an ex-Morgan Stanley VP and her husband, a former ING analyst, were sentenced to 18 months in prison despite a ‘touching’ plea that she be allowed free to care for her infant…too bad! The judge denounced their ‘pure greed.’ Good for him!

Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and in no way reflect the views of anyone other than himself. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. No fee…nothing to sell…merely observations of events in the marketplace offering a non-mainstream viewpoint  …sometimes…usually? Hope you find it useful.
Copyright TBD Capital LLC December 5, 2007