Sunday, July 13, 2008

Wall Street's new mantra

It used to be that mantra on the street that the Fed had certain banks and institutions back. Many were considered "Too Big to Fail."

Now, however, that the Fed has shrunk it's balance sheet with it's alphabet soup of programs, I'd suggest Wall Street adopt a different mantra: "Too Big to Bail."

I know Bernanke claims that all these operations have been "sterilized" and that the Fed hasn't "lost a penny" on it's Bear Stearns assets. (Oh that's right-It's a loan.)

So why doesn't the Fed just sell the loan?

Because everyone knows they are lying, and everyone knows the Fed is in the land of make believe, with the "mark to normal" trading.

In the WSJ, Bernanke said that the Fed hadn't talked about letting Fannie and Freddie use the discount window despite the rumours on the street. Last I checked, most mortgages are 30 years. What are they going to do with 28 or 90 day alphabet soup?

The Fed, cannot step in and guarantee the GSE's debt, because it would cause a run on the dollar, and our currency then would be a play on housing. So guarantees that are "explicit" remains XXX for the Fed, while their "implicit" guarantee is all the market is going to get. This train wreck needs to remain in slow motion, while the market wants to rubberneck the disaster tomorrow. So you'll get the PG version so people can play another day.

So in this case, the shareholders have to get nothing.

The Fed can't do nothing, but they cannot do what the market wants. The Fed in this case, can use their only option, which is to buy time. If the Bear Stearns paper that the Fed holds is worth every "penny" then the Fed can take some preferred of Fannie and Freddie.

Fannie's market cap is $10 billion, and Freddie's is $5 billion. So wipe out the shareholders again, and let the Fed take $15 billion of preferred to buy time, and teach your "moral lesson." Wall Street will buy it for a time, because the shareholder shorts will take the victory. And the banks, which own all their paper, will get a relief rally, that they hopefully will be able to lighten up into.

You can't put these "well capitalized" GSE's in a "conservator" status, because that would jack up interest rates, and then bondholders who have good paper will be treated differently than those who have the bad. And that the real "moral hazard" issue. What do we do with the paper that Citibank and JP Morgan hold? Protect it!

In real life, we have treatment centers for addicts. That's the treatment Wall Street is giving those with leverage. And it's not pretty.

Anyone see the 4.5% FDIC CD's IndyMac was offering last week before the FDIC stepped in with receivership? If you run your business like you are drunk or stoned, the Fed's will step in.
Why do you think Wachovia stopped their pick-a-pay mortgages?

The first step in detox is getting rid of the drugs. The next step is living without them.

So Wall Street is now going to take the next step in deleveraging, on their way to making money without the toxic leverage they have on their books, disguised as Level 3 assets.

The problems with addicts is that most only seek treatment when everyone already knows about their addiction.

And now, nobody believes the liars on Wall Street.

And their ain't enough beds for all the patients that need to be seen!

"Too big to fail?" "Too big to bail!"

So Wall Street deleverages their way out of rehab.

And who knows what they'll puke up next!

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