The Difference Between Winners and Losers in the 'Era of Ponzi Finance'

by: Michael Panzner

Two recent reports illustrate a key difference between the winners and the losers in the era of Ponzi finance -- the former know that things will end badly, while the latter assume the good times will never end.

In "Subprime Losers Blame Bear, Credit Suisse, JPM, Morgan Stanley," Bloomberg sheds a bit of light on those who didn't quite figure out what the game was all about.

When Buck Meyer thinks about the $300,000 he lost after he bought a subprime mortgage lender's bonds, he doesn't hesitate to denounce financial titans Bear Stearns Cos., Credit Suisse Group, JPMorgan Chase & Co. and Morgan Stanley.

Like the thousands of people who snapped up American Business Financial Services Inc.'s notes yielding 10 times the going rate on Treasury bills, Meyer had no idea that the company was on the verge of bankruptcy. He wondered how something so celebrated as "a kitchen-table startup" by the Philadelphia Business Journal and so lucrative that it paid $50 million in fees to the four firms for its burgeoning credit, could default on his money.

"At what point did it become a Wall Street Ponzi scheme?" said the 52-year-old Meyer, who almost wiped out the nest egg he received from selling his home in Doylestown, Pennsylvania, six years ago.

Whether Wall Street's best and brightest were reckless in their pursuit of profits and somehow responsible for the consequences will be decided in a Philadelphia court. That's where the four top brands of finance are accused of creating an "illusion" that American Business was a safe investment, according to a lawsuit filed on behalf of Meyer and more than 20,000 other individuals who held about $600 million of the company's bonds when it went bankrupt in 2005.

"The market needs to do a better job of policing than it has to date," said David Hendler, head of the group that analyzes the debt of financial services companies at CreditSights Inc. in New York.

High Yields

American Business was offering 13-month notes with a yield of 12.99 percent and an "uninsured money market note" with a yield of 6.05 percent three months before seeking bankruptcy, according to a filing with the U.S. Securities and Exchange Commission.

Bear Stearns, the largest underwriter of mortgage bonds last year, Zurich-based Credit Suisse, JPMorgan, the third- biggest bank, and Morgan Stanley, the No. 2 securities firm based on market capitalization, collected about $50 million in fees by lending money to American Business and repackaging home loans from the Philadelphia-based company into $3.6 billion of mortgage-backed bonds between 2000 and 2003, a period during which the suit says the company was insolvent.

Meyer, who has two children, planned to use the interest payments from the American Business bonds to cover the mortgage payments on his new home outside Chattanooga, Tennessee.

Meanwhile, a Reuters report, "LBO Players Say Debt Boom Won't Go Forever," makes it clear that at least some of those who've been riding the gravy train understand the time will soon come to jump off.

"I still think it is an accident waiting to happen," Rattner said. "Of all the bubbles, the bubble in the credit market today is one of the greatest -- it is beyond any rational measure.

"Frankly, we are all feasting off the imprudence of our lenders. They are subsidizing our transactions and are allowing us to make deals that wouldn't have made any sense."...

The expanding ability of the debt markets to absorb the junk bonds required to finance many buyouts helped the value of all announced global M&A reach a record $4.06 trillion in 2006. Private equity firms were involved in $737.4 billion of those deals, also an all-time high.

Asked how long such conditions could continue, Scott Sperling, co-president at Thomas H. Lee Partners, told the Reuters summit: "I don't know. I'm surprised that it has gone on for as long as it has."

If the bubble does burst, Quadrangle's Rattner said today's deeper capital markets will mean the losses will be spread out wider than before.

"The pain will be spread out more broadly," said Rattner. "The probability of this spilling over and affecting the broader economy is a little bit less. The amount of money people will lose won't change -- it will just be more spread out."

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