This Financial Crisis Too Shall Pass

In the last two weeks, we have seen the federal government take over Fannie Mae (FNM) and Freddie Mac (FRE) in a move to save the companies from completely going under. We've seen headhunting vultures perched outside of the Lehman Brothers Manhattan offices hours after the iconic firm declared bankruptcy.AIG (AIG) , a major global insurer, pleaded with the Federal Reserve for liquidity assistance. Meanwhile, Merrill Lynch (MER) was taken over by the Bank of America (BAC) powerhouse (who will soon indeed become the bank of America). And finally, the only two remaining powerhouse investment banks, Goldman (GS) and Morgan (MS), hung their investment banking hats up and then became traditional bank holding companies. A bloody September indeed.

The street reaction: on a sunny Monday morning, investors pulled out enough funds from the market to tank the indices over 500 points in one day, or down nearly 5%. The trading days that followed didn't provide much support. The only other thing that could tank the market in this fashion is the day two enormous planes flew into two skyscrapers, permanently affecting the Manhattan skyline (dramatic enough for you?).

What we are dealing with here is a major broad-based price correction in the markets. As serious as this may be, this is nothing more than a gross and long overdue price correction. As the Washington Post described earlier this week, we are in the midst of building a new architecture for the modern financial world. After years of record earnings and creative new methods of financing, the titans and powerhouses of Wall Street have to reckon with the reality that the financial sector they built has grown too large and is unsustainable given the amount of leveraging and debt usage they've incorporated. The economy is in danger due to incessant greed.

The regulators and the financial institutions themselves completely miscalculated the risks they were putting the economy and the country into. When wealth grows beyond sustainable levels - it will correct itself. The timeless mantra of Benjamin Graham and his disciples such as Warren Buffett and Phillip Fisher states that the natural law of time will indeed correct overpriced companies and simultaneously reward and correct underpriced valuations. We are well into correction phase.

When institutions dream up crafty new ways of building wealth in the markets, they are forgetting the fundamental rule of business - offering a quality product or service for the right price to the markets and monitoring competitive threats every step of the way. Instead of offering quality mortgage loans to the buyers/lenders/borrowers, crummy mortgage loans were offered and then repackaged. No matter how many times crummy mortgage loans are repackaged into clever packages (and then offered as bonds to the public), they are still crummy.

When markets need to correct - you generally see it gradually over several years. The good guys end up watching the bad guys suffer as earnings prove unsustainable, and vultures pick up the pieces left by companies falling part. But when there has been a gross and broad-based miscalculation by just about everyone, what we see is a dramatic series of midnight meetings, last minute bailouts, triple digit losses, and what looks like the entire American financial system crumbling in front of your eyes.

But I suggest to my readers - fear not. Keep the cash on the sidelines ready to pounce when the iron is hot. It will be gut wrenching, horrifying, tear jerking, and a bloody nightmare. But this correction does not mean meltdown. It simply is the path necessary to return to normalcy and rationalism.
This too, shall pass.

Disclosure: none.

Comments

[websmith:]

What we are seeing here is the aftermath of one of the largest scams in history. It helps that 24 of these banks are under investigation by the FBI. They intentionally made bad loans and then hid them in mortgage backed securities and sold them to investors. Congress enabled this with legislation and the Fed created the money. It will be interesting to find out if this was an attack on our economy by foreign enemies, now referred to as trading partners, who were allowed to have ownership in our banks.

Maybe, like rising fuel prices that are encouraging us to develop alternatives, this is a good thing and we will, with some miracle, move away from the major parties who have just given us the same for the last Century.

There is a plan B. ewebsmith.com/bus/taxp...

2008 Sep 24 01:01 PM

[williambanzai7:]

HANK'S RESTAURANT
(Arlo Guthrie--Alice's Restaurant)
Adapted by William Banzai7

This song is called Hank's Restaurant, and it's about Hank Paulson, and the
restaurant, but Hank's Restaurant is not the name of the restaurant,
that's just the name of the song, and that's why I called the song Hank's
Restaurant.

You can get anything you want at Hank's Bailout Restaurant
You can get anything you want at Hank's Bailout Restaurant
Walk right in it's around the back
Just a half a mile from the Federal Reserve Bank
You can get anything you want at Hank's bailout Restaurant

Now it all started Thanksgiving Day 2008- when my friend Warren and I went up to
visit Hank at the restaurant, but Hank doesn't sit in the there, he sits near a fella named Blank in Goldman Sachs
Wall Street office, in a big glass corporate tower. And being in a tower like that, they got a lot of
room downstairs. Havin' all that room, they decided that they didn't
have to take out their subprime garbage for a long time.

We got up there, we found all the toxic subprime garbage in there, and we decided it'd be
a friendly gesture for us to take the garbage down to the non-performing asset dump. So
Warren and I took the 700 billion tons of subprime garbage, put it in the back of a red Humvee
stretch limo, including CDSs and CDOs and other implements of mass financial destruction and headed
on toward the non-performng asset dump.

Well we got there and there was a big sign and a chain across across the
dump saying, "No Dumping on Thanksgiving." And we had never heard of a dump
closed on Thanksgiving before, and with tears in our eyes we drove off
into the sunset looking for another place to put the financial garbage.

We didn't find one. Until we came to a side road, and off the side of the
side road there was another fifteen foot hole and at the bottom of the
hole there was a pile of Dot.com garbage, prospectuses, analyst reports etc. And we decided that one big pile
is better than two little piles, and rather than bring that one up we
decided to throw our's down.

That's what we did, and drove back to the restaurant, had a thanksgiving
dinner that couldn't be beat, went to sleep and didn't get up until the
next morning, when we got a phone call from Attorney General Cuomo. He said, "Kid,
we found your name on an offering circular at the bottom of a half a ton of
subprime garbage, and just wanted to know if you had any information about it." And
I said, "Yes, sir, Mr. Cuomo, I cannot tell a lie, I put that envelope
under that garbage."

After speaking to Cuomo for about fourty-five minutes on the telephone we
finally arrived at the truth of the matter and said that we had to go down
and pick up the subprime garbage, and also had to go down and speak to him at the
NY AG's office. So we got in the red Humvee Limo with the
CDOs and CDSs and implements of financial destruction and headed on toward the NY AGs office.

Now friends, there was only one or two things that Cuomo coulda done at
the AG's office, and the first was he could have given us a medal for
being so brave and honest on the telephone, which wasn't very likely, and
we didn't expect it, and the other thing was he could have bawled us out
and told us never to be see driving toxic asset backed garbage around the vicinity of Wall Street again,
which is what we expected, but when we got to the NY AG's office
there was a third possibility that we hadn't even counted upon, and we was
both immediately arrested. Handcuffed. And I said Andrew, I don't think I
can pick up the garbage with these handcuffs on." He said, "Shut up, kid.
Get in the back of the patrol car."

And that's what we did, sat in the back of the patrol car and drove to the
quote Scene of the Crime unquote. I want tell you about Wall Street, where this happened here, they got three Federal regulators, the SEC, the CFTC and the FBI, but when we got to the
Scene of the Crime there was all kinds of state and federal regulators running around, this
being the biggest financial crime of the last five years, and everybody wanted to
get in the newspaper story about it. And the FBI, they was using up all kinds of
equipment that they had hanging around the antiterrorist bureau.
They was taking plaster tire tracks, finger prints, dog smelling prints, and
they took twenty seven eight-by-ten colour glossy photographs with circles
and arrows and a paragraph on the back of each one explaining what each
one was to be used as evidence against us. Took pictures of the approach,
the getaway, the northwest corner the southwest corner and that's not to
mention the aerial photography.

After the ordeal, we went back to the jail. Cuomo said he was going to put
us in the cell. Said, "Kid, I'm going to put you in the cell, I want your
wallet and your belt." And I said, "I can understand you wanting my
wallet so I don't have any money to spend in the cell, but what do you
want my belt for?" And he said, "Kid, we don't want any hangings." I
said, "did you think I was going to hang myself for subprime fraud?"
Cuomo said he was making sure, and friends Cuomo was, cause he took out the
toilet seat so I couldn't hit myself over the head and drown, and he took
out the toilet paper so I couldn't bend the bars roll out the - roll the
toilet paper out the window, slide down the roll and have an escape. Cuomo
was making sure, and it was about four or five hours later that Hank
(remember Hank? It's a song about Hank), came by and with a few
nasty words to Cuomo on the side, Bailed us out using Federal taxpayer money, and we went back
to the restaurant, had a another thanksgiving dinner that couldn't be beat,
and didn't get up until the next morning, when we all had to go to court.

We walked in, sat down, Cuomo came in with the twenty seven eight-by-ten
colour glossy pictures with circles and arrows and a paragraph on the back
of each one, sat down. Man came in said, "All rise." We all stood up,
and Cuomo stood up with the twenty seven eight-by-ten colour glossy
pictures, and the judge walked in sat down with a seeing eye dog, and he
sat down, we sat down. Cuomo looked at the seeing eye dog, and then at the
twenty seven eight-by-ten colour glossy pictures with circles and arrows
and a paragraph on the back of each one, and looked at the seeing eye dog.
And then at twenty seven eight-by-ten colour glossy pictures with circles
and arrows and a paragraph on the back of each one and began to cry,
'cause Cuomo came to the realization that it was a typical case of American
blind justice, and there wasn't nothing he could do about it, and the
judge wasn't going to look at the twenty seven eight-by-ten colour glossy
pictures with the circles and arrows and a paragraph on the back of each
one explaining what each one was to be used as evidence against us. And
we was fined $50 and had to pick up the subprime garbage

You can get anything you want, at Hank's Bailout Restaurant
You can get anything you want, at Hank's Bailout Restaurant
Walk right in it's around the back
Just a half a mile from the Federal Reserve Bank
You can get anything you want, at Hank's Bailout Restaurant

2008 Sep 24 01:59 PM

[ali k:]

In due time we will see the light shine again. And as the dot-com crisis taught us to not buy into speculative companies with no earnings, perhaps this crisis will teach us that crummy mortgages and crummy loans are still crummy, no matter how many times you repackage them.

2008 Oct 13 06:48 PM