Friday, April 18, 2008

Captain Credit-Crunch

Look up in the sky
It’s a CDO!!
It’s an SIV!!
No It’s a bear market.

After sitting down to a nice hefty bowl of Captain Credit-Crunch cereal I thought Id take the time to discuss something other than the complexities of this bear market in the making. Just like a good Captain I have come to realize it was the tactical plans laid by those in command which sowed the seeds of the current crisis.

The tactics employed by various financial institutions are at best voodoo accounting practices; dropping doll-like charts and graphs before the audience, poking them with needles in hopes of eliciting a positive reaction from the market.

More subversive has been the shuffling of assets into "tiers" with varying explanations of what said tiers actually represent, while delaying at all costs reporting of asset rotation through various levels of accounting hari-kari.

Last March Alan Schwartz, Bear Sterns CEO uttered these now famous lines on CNBC “Bear Stearns' balance sheet, liquidity, and capital remain strong... Our liquidity position has not changed at all, our balance sheet has not changed at all” Bear Sterns would effectively declare bankruptcy by the end of that week. Such carefully crafted statements about an institution’s “strong” or "solid" balance sheet and healthy "capitalization" are dubious at best.

Ive looked these terms up in the dictionary and have no idea what constitutes a "solid" balance sheet. In high school my friends used to talk about the girls who were a “solid” 8 out of 10, good house parties were "solid" jams, and my favorite record had 15 tracks on it but 10 of them were "solid" tunes.20 years later, 20 pounds heavier and many hairs lighter, in the most sickening of rerun’s we are told by men in fine woolen suits that their bank’s balance sheets are "solid"?
I don’t know whether to buy more shares or chest-thump them over a cigarette along the butt-wall after gym class?

Granted I did look up "well capitalized" in the dictionary and it made perfect sense from a fiscal point of view. Certainly I never referred to girls or my mother's cooking as "well capitalized". Yet within this sound definition, I wondered why banks kept uttering this phrase. Why was being well capitalized so fantastic? Who needs sound capitalization if all is well? And why have banks grown gun-shy about lending to other “well capitalized” institutions with “sound” balance sheets?

Its sheer madness that black swan events are even being discussed, if one just happened 6 months ago, what are the odds of another so in 2008 right? Sorry was my mic on?

I would gladly surrender the prospect of double digit returns YOY just to hear a CEO of a major financial institution give this speech after the credit crisis:

"We believed a new paradigm of wealth was being created in which we earned double digit returns on triple A rated bond-like creatures that only MIT trained mathematicians understood.For years we enjoyed the upside but seemingly none of the risk, as blue-chip financial institutions, the vanguard of wealth creation in America, our stock was rising in double digits annually while still holding "conservative blue-chip" status. It was the very definition of a financial WIN-WIN.

Surprisingly our clients enjoyed the returns and blindly trusted us to keep risk parameters in check. In a sense we began drinking our own Kool-Aid when we spoke of safe returns, of "risk-adjusted" parameters, and sound money management.When the risk hit the fan we fired our "risk" analysts because they failed to do their job. In their place we hired the finest PR and consultants (our client’s money could buy) who could begin the delicate process of applying lipstick to the pig we placed on the market's stage.

For some time they made the pig dance, stocks resumed their upward rise, and our PR people averted a disaster, convincing the masses the worst was over. We lost upwards of %30-50 of our share price but the financial media still said our company was a buy. I mean, you can’t buy that kind of support, bless their hearts.

The lower prices went the more ways people came up with ways to keep the pig dancing, our stock became "cheap", a bargain. It was as if the credit-crisis was this external event that was hurt our share price, yet we maintained our stance of mere victims in this crisis that spread like cancer across the financial landscape. It was going on out there but in here we were fine, just fine, and we would weather the storm because of all these words that drummed up images of fortress like risk-aversion.

It was 2nd most popular definition of a financial WIN-WIN.We rehired our old risk-analysts to find out the odds of 2 WIN-WIN's happening to big banks in the same 12 month time-frame. they said the odds were so improbable, their mathematical models required 4 dimensional fractal combinatorics to express the exponential.

We slid down in our high-backed leather chairs sipping the most delicate of ancient single-malts, the saltiest of caviar's while cloaking our thievery in the softest of silken suits

The fiscal ship may have been sinking but the passengers were certainly not rushing for the life rafts. If anything the people were content with the first-mate's explanation that the ship was on a "well-charted" path.

I guess its true what they say about us….Captains of Industry."

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