Close Encounters of The Ponzi Kind
Getting to the bottom of the sub prime issue... Karl Case, an economics professor at Wellesley College:
"We had an aggressive home-mortgage industry trying to get people into homes they couldn't afford at a time when home prices were very high.
It turned out to be a house of cards... and we're in the early stages of the clean up."
And contrary to the mainstream medias parroting of Wall Street spin...
It also seems we are nowhere remotely near the start of a "clean up" in the debt market solvency crisis,
as Wall Street and the banks have taken a page from Charles Ponzi's book and pulled a three card monty.
The Nattering One senses that next weeks financial house quarterly reporting will contain more smoke and mirrors and Wall Street shenanigans. Why?
The recent bottom line results from Wall Street firms has been buoyed by "profits" from their "mark to market" losses. Say What! Nattering One?
As Nathan Jessup said: "You want the truth? You can't handle the truth." Only the brave should read on...
The WSJ reports:
"some investors remained concerned about earnings quality, in part, because the firms all benefited from a tumble in the value of their own debt.
Accounting rules require firms to take a gain on such declines if they are applying market values to some forms of debt or financial instruments.
At Bear Stearns, the already dismal quarter would have been even worse without about $225 million in such gains.
Morgan Stanley, which also had a rocky quarter, said it booked $390 million in such debt-related gains, while Goldman said it benefited from nearly $300 million in this way.
Lehman didn't specify its gains, but said they helped lower to $700 million the hit the firm took from markdowns on loans and securities."
Michael Panzner at Financial Armageddon in "Take A Walk on the Wild Side" ...
"Goldman Sachs said level 2 assets at the end of third quarter amounted to $494.6 billion." This ranks with B of A's $609 Million.
Worse yet...
"In other words, the value of 55% of Goldman's assets depends on "internal models" or "management assumptions," rather than market prices".
Which would be a large improvement over B of A's 81%. And it gets better...
"banks have pulled off a surprising feat: selling $30 billion of loans for leveraged buyouts by offering some unusual bargains.
They have offered only the highest-quality portions of the debt for sale, and that at a loss. (And we find out why later on...)
So far, what has been sold is a drop in the bucket. Now comes the hard part: what to do about the other 90% of the LBO loans in the pipeline."
Said 90% is another $300 to $400 Billion in "stuck loans". Mr. Panzner astutely observes:
"less than 10 percent of the LBO debt that is in the pipeline and clogging up banks' balance sheets has been sold off...
and a good chunk of that was traded away at a loss. Sure seems like things are back to normal, right?"
And if that wasn't enough, we get the 411 on the ponzi scheme that was created to dump the 10% in "Mr. Ponzi Would Have Been Proud":
Wall Streets latest machinations are a) a reshuffling of deck chairs on the Titanic; b) the boys in the Wall Street 'hood trying to keep dancing until the music stops; c) snake-oil salesmanship at its finest; or, d) all of the above.
Whatever the case, at least one legendary flim-flam man would have been proud.
Let’s see if we have this straight. Citigroup wants to sell off some of the leveraged loans it committed to before the credit crunch.
Many of those loans were made to private equity owned companies for leverage buyouts, including companies that KKR bought.
A fund managed by KKR is looking to buy the leveraged loans, which it believes are under-priced in the wake of the credit market turmoil.
But everyone knows KKR doesn’t buy anything with cash: it borrows the money. So now, according to the Financial Times...
Citigroup might lend money to KKR to buy Citigroup’s loans. This is very possibly the best story ever.
The only way it could get better is if KKR went on to buy the loans used to buy loans from Citigroup. And, of course, Citigroup lent it the money for that."
We then get a hint of extra terrestrials afoot in"Now this Acronym Makes Sense".
"Aside from the fact that values have not fully recovered their steep summertime losses,
much of the "improvement" seems to stem from Three-Card Monte-style machinations rather than buying by mainstream investors snapping up bargains."
And ET really phones home from FT Alphaville "The Real Deal: Beware the Banks UFO's":
"The bank holding the (LBO) loans teams up with a hedge fund, or a buy-out group.
Together, they create a UFO (Unidentified Financing Object) to buy selective loans at the current market discount, say 96 cents in the dollar, from themselves.
The bank, which owns the loans at par value, takes the write-off...
but gets to hold on to the better quality debt tranches, which it can carry at a much lower cost of capital.
The hedge fund/buyout group takes the highly-leveraged “first loss” or an equity slice of the UFO...
in the hope that it can make profit on the underlying loans when they return to par value at maturity or when the debt is refinanced.
The banks say these UFOs are a pure creative genius...
that they do the market a favour by creating liquidity where there is none, and help lift the secondary prices of the loans by demonstrating demand.
These UFOs are not a reflection of real demand driving improving leveraged loan prices.
It’s like selling your house and giving the buyer the financing. Have you really offloaded it, and is the price a real market price?
These new vehicles being created in a stagnant market are merely a stealthy way of financially-engineering the burden of costly risk away from the bank.
It all looks a bit like a close encounter with the wrong kind."
The Nattering One can hear... Wall Street and the Fed, chanting "mirror mirror on the wall"....
leveraging the overleveraged, creating an illusory warm and fuzzy feeling, using smoke and mirrors and three card monty's.
In the end, the reflection of a recession, plunging home values, reduced consumer spending and profits will mute and shatter the mirror.
The likely hood of a major market event grows exponentially by the day. And we would not be shocked to see it sooner, rather than later.
"We had an aggressive home-mortgage industry trying to get people into homes they couldn't afford at a time when home prices were very high.
It turned out to be a house of cards... and we're in the early stages of the clean up."
And contrary to the mainstream medias parroting of Wall Street spin...
It also seems we are nowhere remotely near the start of a "clean up" in the debt market solvency crisis,
as Wall Street and the banks have taken a page from Charles Ponzi's book and pulled a three card monty.
The Nattering One senses that next weeks financial house quarterly reporting will contain more smoke and mirrors and Wall Street shenanigans. Why?
The recent bottom line results from Wall Street firms has been buoyed by "profits" from their "mark to market" losses. Say What! Nattering One?
As Nathan Jessup said: "You want the truth? You can't handle the truth." Only the brave should read on...
The WSJ reports:
"some investors remained concerned about earnings quality, in part, because the firms all benefited from a tumble in the value of their own debt.
Accounting rules require firms to take a gain on such declines if they are applying market values to some forms of debt or financial instruments.
At Bear Stearns, the already dismal quarter would have been even worse without about $225 million in such gains.
Morgan Stanley, which also had a rocky quarter, said it booked $390 million in such debt-related gains, while Goldman said it benefited from nearly $300 million in this way.
Lehman didn't specify its gains, but said they helped lower to $700 million the hit the firm took from markdowns on loans and securities."
Michael Panzner at Financial Armageddon in "Take A Walk on the Wild Side" ...
"Goldman Sachs said level 2 assets at the end of third quarter amounted to $494.6 billion." This ranks with B of A's $609 Million.
Worse yet...
"In other words, the value of 55% of Goldman's assets depends on "internal models" or "management assumptions," rather than market prices".
Which would be a large improvement over B of A's 81%. And it gets better...
"banks have pulled off a surprising feat: selling $30 billion of loans for leveraged buyouts by offering some unusual bargains.
They have offered only the highest-quality portions of the debt for sale, and that at a loss. (And we find out why later on...)
So far, what has been sold is a drop in the bucket. Now comes the hard part: what to do about the other 90% of the LBO loans in the pipeline."
Said 90% is another $300 to $400 Billion in "stuck loans". Mr. Panzner astutely observes:
"less than 10 percent of the LBO debt that is in the pipeline and clogging up banks' balance sheets has been sold off...
and a good chunk of that was traded away at a loss. Sure seems like things are back to normal, right?"
And if that wasn't enough, we get the 411 on the ponzi scheme that was created to dump the 10% in "Mr. Ponzi Would Have Been Proud":
Wall Streets latest machinations are a) a reshuffling of deck chairs on the Titanic; b) the boys in the Wall Street 'hood trying to keep dancing until the music stops; c) snake-oil salesmanship at its finest; or, d) all of the above.
Whatever the case, at least one legendary flim-flam man would have been proud.
Let’s see if we have this straight. Citigroup wants to sell off some of the leveraged loans it committed to before the credit crunch.
Many of those loans were made to private equity owned companies for leverage buyouts, including companies that KKR bought.
A fund managed by KKR is looking to buy the leveraged loans, which it believes are under-priced in the wake of the credit market turmoil.
But everyone knows KKR doesn’t buy anything with cash: it borrows the money. So now, according to the Financial Times...
Citigroup might lend money to KKR to buy Citigroup’s loans. This is very possibly the best story ever.
The only way it could get better is if KKR went on to buy the loans used to buy loans from Citigroup. And, of course, Citigroup lent it the money for that."
We then get a hint of extra terrestrials afoot in"Now this Acronym Makes Sense".
"Aside from the fact that values have not fully recovered their steep summertime losses,
much of the "improvement" seems to stem from Three-Card Monte-style machinations rather than buying by mainstream investors snapping up bargains."
And ET really phones home from FT Alphaville "The Real Deal: Beware the Banks UFO's":
"The bank holding the (LBO) loans teams up with a hedge fund, or a buy-out group.
Together, they create a UFO (Unidentified Financing Object) to buy selective loans at the current market discount, say 96 cents in the dollar, from themselves.
The bank, which owns the loans at par value, takes the write-off...
but gets to hold on to the better quality debt tranches, which it can carry at a much lower cost of capital.
The hedge fund/buyout group takes the highly-leveraged “first loss” or an equity slice of the UFO...
in the hope that it can make profit on the underlying loans when they return to par value at maturity or when the debt is refinanced.
The banks say these UFOs are a pure creative genius...
that they do the market a favour by creating liquidity where there is none, and help lift the secondary prices of the loans by demonstrating demand.
These UFOs are not a reflection of real demand driving improving leveraged loan prices.
It’s like selling your house and giving the buyer the financing. Have you really offloaded it, and is the price a real market price?
These new vehicles being created in a stagnant market are merely a stealthy way of financially-engineering the burden of costly risk away from the bank.
It all looks a bit like a close encounter with the wrong kind."
The Nattering One can hear... Wall Street and the Fed, chanting "mirror mirror on the wall"....
leveraging the overleveraged, creating an illusory warm and fuzzy feeling, using smoke and mirrors and three card monty's.
In the end, the reflection of a recession, plunging home values, reduced consumer spending and profits will mute and shatter the mirror.
The likely hood of a major market event grows exponentially by the day. And we would not be shocked to see it sooner, rather than later.
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