Tuesday, September 23, 2008

L - E - V - E - R - A - G - E = root of Wall St. Financial Services crisis

In testimony today before the Senate banking committee, Secretary of the Treasury Paulson fails to state the word LEVERAGE; the crisis IS CAUSED by Wall St's extensive leverage of complex, illiquid mortgage backed securities, derivatives and insurance thereon. It's not just that these firms invested in mortgage securities - no matter how complex - it's the fact that they DECIDED to leverage investments in same! Why? To make even more money.

In the past 5 years NO ONE, I REPEAT NO ONE ON WALL ST, UPON RECEIVING A PAYCHECK OR A BONUS CHECK OR STOCK OPTION GRANT - raised their hand or voice to state; "Something's not right - my compensation is too high!!!" DID THEY?

Many Wall St firms aka the Financial services (FS) industry learned what hedge funds were doing; outperforming a benchmark by juicing performance with leverage, they imitated that behavior and added even more leverage, especially to securities related to an asset class that was black & white overvalued by ANY measure; real estate.

Wall St (FS) borrowed, also leveraged heavily against other asset backed securities including credit cards, auto loans, boat loans, aircraft loans, student loans and other exotic assets and cash flows - these assets were then securitized (another source of revenue) in various classes, traunches and to many different investors.

Further, credit enhancements on these "securities" so called default insurance, (in a further incarnation, credit default swaps) was underpriced; perhaps due to one particular player's (lacking true capacity) actions, market share gobbling, anti competitive behavior; often sanctioned / blessed by the "independent" credit ratings agencies. Can you spell AIG?

In the past Mr Paulson promised Congress that Bear Stearns rescue bail out was EXTRA ordinary, really?

Since then we've Fannie Mae, Freddie Mac, AIG, now it's just cash - now "we need the (tax payers) cash" to preserve the management of FS companies; to even consider that company management be allowed to continue to run these companies is imprudent and revolting.

  • Why should or would the US taxpayer let the decision makers of the past continue at the helm?

  • Where is the US Treasury's prudence - in selecting / allowing agents of better decision making on behalf of the US Taxpayer?

  • How does the judgment or process of the US Treasury lend example / teach the FS industry, or demonstrate a prudent fulfillment of its fiduciary duty to the US taxpayer?

Keeping it REAL

Markets ultimately exist to serve the people - it needs to be a real market - let the chips fall where they may - yes some companies will fail and restructure but the clearing price will signal to ALL that markets work - for better or worse. That's the risk / price / value of an asset or collection of assets or set of investment behaviors.

With a FS industry as concentrated as Paulson suggests we need to let that industry rise and fall ON ITS OWN - as the players (they all wear BIG BOY pants) have clamored for, pounded the table, kicked their heels, indeed demanded and lobbied for the past 25 years! To state that the industry is too interconnected and requires a bailout fails to appreciate that diversification, as in all other businesses and more importantly credit markets- is one thing; PRUDENT. Look it up!

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