16 September 2008

Crisis rivaling 1929, "This Is A Big One"

Fin Tel/ Ray reports...

Having foretold the current events, it is quite eerie to actually see them unfold. The time line starts with the Private Equity funds borrowing copious amounts and paying silly money for companies to the 0% credit cards handed out to people like crack cocaine. Next we had mortgages handed out, no questions asked, and a benign US government more interested in Sarbanes Oxley than the damage debt does to society. Along came an academic who knew all about the Great Depression and started to drop interest rates and watched the dollar collapse and piss off the arabs who retaliated and restricted oil production. The banks learned to lie about their illiquid asset backed securities, tucking them off balance sheet and passed them around like a hot potato. The credit rating agencies rubber stamped anything for a quick buck and we all relied on the ratings comfort blanket to keep us asleep at night.

We started to attack Bear Stearns and UBS because there was something fundamentally wrong with them. Bear levered up too much, and the Fed started down the slippery slope of market distortion and socialist tactics. JP Morgan bought a Prime Brokerage business for a couple of dollars and then we turned to AIG, Lehman and Merrills. Late last year (read the archives if you don't believe me) I started to fret over their viability.

Today, Lehman is gone and Bank of America is forced to pay for Merrills (and we know how that will end - BoA and Investment Banking? An oxymoron meez thinks). AIG is in free-fall and will be snapped up by Warren Buffet for he loves all things insurance.

Yesterday was unprecedented and today even more so. I have friends who came into work yesterday and went home knowing they will not be paid for some time; There are hedgies who failed to change Prime Brokers and their assets are frozen; The unsecured creditors to Lehman are mind boggling; but out the abyss will come opportunity and strangely it feels like this is it.

The markets will fall because letting Lehman fail means that its assets have to be repriced (many assets the other banks own too) and capital ratios will be challenged hard. As for the creditors, they will be fighting hard to get to the top of the line. PWC have a job on their hands and it will take years to sort this out. I wonder what will happen to the Refco / Lehman assets that are currently frozen? Look at the picture: the Chapter 11 form is not big enough to state the amounts owed. This is so big that it beggars belief that Lehman could have carried on for so long.

Of course the warning sign was when Erin Callan was let go. When a CFO is let go, it is because they know something. Was she gagged? Next we will have the lawyers suing the board for incompetence and fraud. If Lehman was trading insolvent, then handing out interim bonuses is fraud. Nasty. And so on.

And AIG is downgraded by a CRA. As usual the market reacts after the event. CRA's should be closed down immediately for they distort the markets and are the primary reason we are in this mess.

I am rambling because this is all so unprecedented. One upshot is my hit rate has gone through the roof. In times of distress, one needs to be comforted. Why they want FiNTAG to comfort them, is beyond me. Now where did I leave my copy of Living the Simple Life for Dummies?

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